Tax Havens: Depriving the developing world? – PwC

The Organisation for Economic Co-Operation and Development (OECD) Forum on Tax Administration (FTA) held their fifth meeting in Paris last year. The focus of this meeting was the global economic crisis and the key role that revenue bodies play in finding sustainable ways for governments to finance the loss of tax revenues in the current economic downturn.

South Africa’s finance minister, Pravin Gordhan, in his then capacity as chairperson of the FTA, said that tax plays a fundamental role in development through mobilising revenue, promoting growth, reducing inequalities and reinforcing governments’ legitimacy, as well as achieving a fair sharing of the costs and benefits of globalisation.

According to Elsabe Kriel, tax consultant from PricewaterhouseCoopers (PwC), Mr Gordhan’s comment builds on one of the FTA’s key objectives which are to encourage developed countries to help emerging economies to improve their tax-collecting capacity and efficiency. Kriel says, “Work is also being done through an African Tax Administration Forum to develop an international tax centre on the African continent and to build African tax policy.”

Two reports were issued at the FTA’s meeting which further set the tone for future global tax co-operation and emphasise the importance of greater international information sharing and co-operation.

1. Building Transparent Tax Compliance by Banks

Banks utilise complex transaction structures for their clients. These structures may contain elements of aggressive tax planning. Revenue authorities do not always understand these products and therefore cannot identify instances where tax risks are involved.

2. Engaging with High Net Worth Individuals on Tax Compliance

These individuals are sometimes involved in complex transactions. Their contribution to revenue can be substantial but they also have the means to engage in aggressive tax planning schemes.

Focus on the developing world

The G20 has claimed that the exchange of information and transparency in the tax environment are the trademarks of a good international citizen. The converse of such good citizenship has many adverse effects.

Firstly, there is an element of unfairness because some individuals and companies escape the tax laws while others are diligently complying. Another adverse effect is that international investment is distorted when decisions are based on desired tax benefits rather than sound commercial considerations.

Kriel continues, “The effect of a loss of tax revenue is especially damaging in the developing world. The building of much needed schools, hospitals, public transport and other infrastructure are hampered by the erosion of the tax base in these countries.”

The Secretary General of the OECD, Angel Gurría has stated that the tax systems of the developing world must be improved to be efficient and fair in order to collect taxes from a wide range of sources. The revenue base should not be eroded by dollars travelling to tax havens instead of staying in the country to finance development. Through developing the systems whereby tax is collected, revenue streams can be increased which is especially important in the current global economic environment.

Tax revenues do not only provide governments with the finance to develop infrastructure, it also enhances good governance and increases governments’ accountability. Consistency of tax treatment and efficient administration of the tax function sets the scene for international trade and much needed foreign investment into the developing world.

Progress made by the OECD

The OECD’s Global Forum on Taxation has since 2000 made good progress on encouraging countries to commit to the OECD’s internationally agreed tax standard. The standard provides for the full exchange of information upon request from other revenue authorities in relevant tax matters. Safeguards are implemented to provide for the protection of the confidentiality of the information exchanged. The standard also prohibits fishing expeditions.

In conclusion Kriel says, “All 84 countries covered in the Global Forum’s assessments have now agreed to implement the standard. Unfortunately the implementation takes time and after the initial commitment some countries are tardy in the actual implementation. For a jurisdiction to progress to a level where it is considered to have substantially implemented the standard, a jurisdiction is required to commit to twelve agreements on the exchange of information with other jurisdictions.”