Lilianne Ploumen :
Next week, the UN financing conference in Addis Ababa will take decisions that will have a profound impact on the global community over the next 15 years and beyond. Tax collection in developing countries will determine whether the sustainable development goals can rival the success of the millennium development goals, which expire this year.
For most developing countries, tax revenue lies somewhere between 10% and 15% of gross domestic product. That’s low compared with an average of about 35% for developed countries. In historical terms, however, it’s not that low. Throughout the 19th century, in all western countries tax revenue was below 10%. In his book, Capital in the Twenty-First Century, Thomas Piketty shows us that it was only after 1910 that tax revenue slowly started rising.
Low tax revenues meant that governments were able to fund only the most basic services, such as policing, the courts and the armed forces. Universal access to healthcare or education, infrastructure and a social safety net – in short, the foundations for decent, prosperous lives – call for much higher tax revenues.
This goal can be achieved, perhaps sooner than many of us ever dared dream. Success in the fight against hunger and poverty, under the banner of the MDGs, has changed our perception of what is possible. Now, the world’s bold new ambition is to leave no one behind.
To achieve this, we will have to, at last, realise the full potential of developing countries. This is known as domestic resource mobilisation, and it all starts with higher rates of tax revenue collection.
In order to be able to finance their share of the SDGs, developing countries will have to increase tax revenue collection to about 20% of GDP, according to the UN. I see three main areas for action.
First, ensure fair taxation. The urgency here is overwhelming. The UN Conference on Trade and Development (Unctad) estimates that multinationals avoid $100bn worth of corporation tax in developing countries. Governments and international institutions now have to make good on promises to fight tax avoidance and tax evasion.
Second, strengthen tax inspectors. Developing countries need support to broaden their tax base and build tax collection capacity. Two years ago, the Netherlands started giving technical assistance to developing countries, and we now plan to double our current contribution. Today, we are active in 10 countries and we are starting an initiative to generate extra resources for building tax collection capacity.
I believe this is a good investment, because internationally the rate of return on such support is way over a factor of 10. We plan to launch this initiative at the Addis summit.
Countries that want to use these extra resources will need to express the political will to reform their tax systems. In developing countries, tax systems often have a regressive effect because they tend to rely heavily on consumption taxes, like VAT and excise duty, or on import levies. The poor end up paying a relatively high amount of tax because they spend all their income on goods subject to VAT, such as groceries and phone credit. And they pay import levies on their mobiles. There is no tax-free shopping for the poor.
Third, broaden the tax base. Developing countries need more capacity to administer and collect more complex forms of tax, like income and wealth taxes. Apart from VAT, countries need a progressive income tax regime. Because the poor are often hit harder by income tax too.
In Zambia, for instance, the sugar picker and the woman with a market stall pay more tax than the sugar factory itself. Businesses can use smart tax arrangements – tax avoidance tactics, in other words – to ensure they pay less than 1% in tax. While the market seller has to pay four times that rate on the couple of dollars she earns. That is not only wrong from a gender perspective; it’s completely unfair.
That’s why I am delighted that we have already agreed with five countries to revise our tax treaties. We have signed a new treaty with Malawi, and signed an amendment with Ethiopia, and we are holding discussions with seven other countries on updating treaties.
In total, we are looking to revise our treaties with 23 countries. Anti-abuse provisions – defining which companies get access to the treaty benefits – will ensure that the Netherlands is no longer an attractive option for companies that use tax avoidance tactics. Theirs is the kind of business we would rather do without.
These anti-abuse provisions are meant to exclude companies that only establish themselves in a third state to benefit from tax treaty advantages through that country, without having any other activities in that third state.
Finally, we regularly urge developing countries to be more discerning when awarding tax exemptions. The Netherlands is now putting its money where its mouth is. Along with other countries, we are prepared to forgo tax exemptions on goods and services that fall under official development assistance.
The task before us is daunting. The leap from the billions we needed for the MDGs to the trillions we will need to make the SDGs a success is a big one. But just consider what we’ve achieved already.
Ending hunger is within the grasp of this generation – a feat that seemed inconceivable only a generation ago. We must redouble our efforts if we want to do the same with poverty. It is possible to make the billions we provide in official development assistance spark the trillions that we need in private sector resources.
Above all, I see ways for developing countries to increase their tax revenues. That will enable them to unleash their full potential at last.
(Lilianne Ploumen is the Dutch minister for foreign trade and development cooperation)
