World Bank must stop en­cour­ag­ing harm­ful tax com­pe­ti­tion

The Star Malaysia - StarBiz - - Viewpoint - By JOMO KWAME SUNDARAM and ANIS CHOWD­HURY

ONE of the 11 ar­eas that the World Bank’s Do­ing Busi­ness (DB) re­port in­cludes in rank­ing a coun­try’s busi­ness en­vi­ron­ment is pay­ing taxes.

The back­ground study for DB 2017, Pay­ing Taxes 2016 claims that its em­pha­sis is “on ef­fi­cient tax com­pli­ance and straight­for­ward tax regimes”.

Its os­ten­si­ble aim is to aid de­vel­op­ing coun­tries in en­hanc­ing the ad­min­is­tra­tive ca­pac­i­ties of tax au­thor­i­ties as well as re­duc­ing in­for­mal eco­nomic ac­tiv­i­ties and cor­rup­tion, while pro­mot­ing growth and in­vest­ment. All well and good, un­til we get into the de­tails.

First, the re­port ad­vo­cates not only ad­min­is­tra­tive ef­fi­ciency, but also lower tax rates. Any coun­try that re­duces tax rates, or raises the thresh­old for tax­able in­come, or pro­vides ex­emp­tions, gets ap­proval.

Sec­ond, it ex­ag­ger­ates the tax bur­den by in­clud­ing, for ex­am­ple, em­ploy­ees’ health in­sur­ance and pen­sions and charges for pub­lic ser­vices like waste col­lec­tion and in­fra­struc­ture or en­vi­ron­men­tal levies that the busi­nesses must pay. The IMF’s Gov­ern­ment Fi­nan­cial Statis­tics Man­ual cor­rectly treats these sep­a­rately from gen­eral tax rev­enues.

Third, by favourably view­ing coun­tries that lower cor­po­rate tax rates (or in­crease thresh­old and ex­emp­tions) and neg­a­tively con­sid­er­ing those that in­tro­duce new taxes, DB is es­sen­tially en­cour­ag­ing tax com­pe­ti­tion among de­vel­op­ing coun­tries.

Thus, the bank is ig­nor­ing re­search at the OECD and IMF which has not found any con­vinc­ing ev­i­dence that lower cor­po­rate tax rates or other fis­cal con­ces­sions have any pos­i­tive im­pact on for­eign di­rect in­vest­ment.

In­stead, they found net ad­verse im­pacts of tax con­ces­sions and fis­cal in­cen­tives on gov­ern­ment rev­enues. Ac­cord­ing to the re­search, fac­tors such as the avail­abil­ity and qual­ity of in­fra­struc­ture and hu­man re­sources were more im­por­tant for in­vest­ment de­ci­sions than taxes.

More­over, the World Bank’s en­ter­prise sur­veys do not find pay­ing taxes to be high on the list of fac­tors that en­ter­prise own­ers per­ceive as im­por­tant bar­ri­ers to in­vest­ment.

For ex­am­ple, the En­ter­prise Sur­vey for the Mid­dle East and North Africa found po­lit­i­cal in­sta­bil­ity, cor­rup­tion, un­re­li­able elec­tric­ity sup­ply, and in­ad­e­quate ac­cess to fi­nance to be im­por­tant con­sid­er­a­tions; pay­ing taxes or tax rates were not.

Yet, the World Bank has been pro­mot­ing tax cuts and tax com­pe­ti­tion as magic bul­lets to boost in­vest­ment. Not sur­pris­ingly, thanks to its still con­sid­er­able in­flu­ence, tax rev­enues in de­vel­op­ing coun­tries are not ris­ing enough, or worse, con­tinue to fall. Ac­cord­ing to some es­ti­mates, be­tween 1990 and 2001, re­duc­tion in cor­po­rate taxes low­ered coun­tries’ tax rev­enue by nearly 20%.

In­stead of en­cour­ag­ing tax com­pe­ti­tion, there­fore, the World Bank should help de­vel­op­ing coun­tries im­prove tax ad­min­is­tra­tion to en­hance col­lec­tion and com­pli­ance, and to re­duce eva­sion and avoid­ance.

Ac­cord­ing to OECD Sec­re­tary-Gen­eral An­gel Gur­ria, “de­vel­op­ing coun­tries are es­ti­mated to lose to tax havens al­most three times what they get from de­vel­oped coun­tries in aid”.

Global Fi­nan­cial In­tegrity has es­ti­mated that il­licit fi­nan­cial flows of po­ten­tially tax­able re­sources out of de­vel­op­ing coun­tries was US$7.85 tril­lion dur­ing 2004-2013 and US$1.1 tril­lion in 2013 alone!

But the bank’s Pay­ing Taxes and DB re­ports do lit­tle to strengthen de­vel­op­ing coun­tries’ tax rev­enues. This should come as no sur­prise as its part­ner for the for­mer study is Price­wa­ter­house Cooper (PwC), one of the “Big Four” lead­ing in­ter­na­tional ac­count­ing and con­sul­tancy firms. PwC com­petes with KPMG, Ernst & Young and Deloitte for the lu­cra­tive busi­ness of help­ing clients min­i­mize their tax li­a­bil­i­ties. PwC as­sisted its clients in ob­tain­ing at least 548 tax rul­ings in Lux­em­bourg be­tween 2002 and 2010, en­abling them to avoid cor­po­rate in­come tax else­where.

How are de­vel­op­ing coun­tries ex­pected to fi­nance their in­fra­struc­ture in­vest­ment needs, in­crease so­cial pro­tec­tion cov­er­age, or re­pair their dam­aged en­vi­ron­ments? In­stead of help­ing, the bank’s most in­flu­en­tial re­port urges them to cut cor­po­rate tax rates and so­cial con­tri­bu­tions to im­prove their DB rank­ing, con­trary to what then bank chief econ­o­mist Kaushik Basu ob­served: “Rais­ing [tax] al­lows de­vel­op­ing coun­tries to in­vest in ed­u­ca­tion, health and in­fra­struc­ture, and, hence, in pro­mot­ing growth.”

How are they sup­posed to achieve the in­ter­na­tion­ally agreed Agenda 2030 for the Sus­tain­able De­vel­op­ment Goals in the face of dwin­dling for­eign aid. Af­ter all, only a few donor coun­tries have ful­filled their aid com­mit­ment of 0.7% of GNI, agreed to al­most half a cen­tury ago. Since the 2008 fi­nan­cial cri­sis, over­seas de­vel­op­ment as­sis­tance has been hard hit by fis­cal aus­ter­ity cuts in OECD economies ex­cept in the UK un­der Cameron.

The Bank would prob­a­bly rec­om­mend pub­lic-pri­vate part­ner­ships (PPPs) and bor­row­ing from it. Coun­tries starved of their own funds would have to bor­row from the Bank, but loans need to be re­paid.

Gov­ern­ments lack­ing their own re­sources are be­ing ad­vised to rely on PPPs, de­spite pre­dictable wel­fare out­comes – for ex­am­ple re­duced eq­uity and ac­cess due to higher user fees – and higher gov­ern­ment con­tin­gent fis­cal li­a­bil­i­ties due to rev­enue guar­an­tees and im­plicit sub­si­dies.

Fi­nan­cially starved gov­ern­ments boost bank lend­ing while PPPs in­crease the role of its In­ter­na­tional Fi­nance Cor­po­ra­tion in pro­mot­ing pri­vate sec­tor busi­ness.

Re­al­is­ing the bank’s con­flict of in­ter­est, many mid­dle-in­come coun­tries ig­nore bank ad­vice and seek to fi­nance their in­vest­ments and other ac­tiv­i­ties by other means. Thus, there are now grow­ing de­mands that the bank stop pro­mot­ing tax com­pe­ti­tion, dereg­u­la­tion and the rest of the Wash­ing­ton Con­sen­sus agenda.

How­ever, noth­ing guar­an­tees that the bank will act ac­cord­ingly. It has al­ready ig­nored the rec­om­men­da­tion of its in­de­pen­dent panel to stop its mis­lead­ing DB coun­try rank­ings.

While giv­ing lip ser­vice to the In­ter­na­tional Labour Or­gan­i­sa­tion and oth­ers who have asked it to stop rank­ing coun­tries by labour mar­ket flex­i­bil­ity, the Bank con­tin­ues to pro­mote labour mar­ket dereg­u­la­tion by other means.

If the bank is se­ri­ous about be­ing a part­ner in achiev­ing Agenda 2030, it should align its work ac­cord­ingly, and sup­port UN lead­er­ship on in­ter­na­tional tax co­op­er­a­tion be­sides en­hanc­ing gov­ern­ments’ abil­ity to tax ad­e­quately, ef­fi­ciently and eq­ui­tably. In the mean­time, the best op­tion for de­vel­op­ing coun­tries is to ig­nore the bank’s DB and Pay­ing Taxes re­ports. — IPS Jomo Kwame Sundaram, a for­mer eco­nom­ics pro­fes­sor, was United Na­tions As­sis­tant Sec­re­tary-Gen­eral for Eco­nomic De­vel­op­ment. Anis Chowd­hury, a for­mer pro­fes­sor of eco­nom­ics at the Uni­ver­sity of West­ern Syd­ney, held se­nior United Na­tions po­si­tions dur­ing 2008– 2015 in New York and Bangkok.

Newspapers in English

Newspapers from Malaysia

© PressReader. All rights reserved.