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MEMO/10/146
Brussels, 21 April 2010
Tax and development: promoting good governance
in taxation as part of development cooperation
Why do we need a Communication on Tax and Development?
Supporting developing countries in mobilising domestic revenues and in fighting tax
evasion is key in efforts to eradicate poverty as measured by the Millennium
Development Goals. Increasing domestic revenue enables these countries to spend
more on sustainable public services needed to achieve these goals. Efficient, fair
and sustainable tax systems are also critical for state building and promoting
democracy and improved economic governance.
The EU is committed to tackling the issue of tax governance in developing countries,
and to drawing attention at the international level to the considerable impact that
taxes have on development.
Taxation has global consequences - all over the world, governments lose billions in
revenue every year because of harmful tax practices – both developed and
developing countries are affected. According to a Norwegian government
commission illegal money flows from developing countries were at least seven times
higher than official development assistance. Plugging these tax "leaks" requires
International tax cooperation and making developing countries benefit from
international initiatives.
Why is it so important right now?
Developing countries have been big loosers in the economic crisis. Supporting them
to increase their own revenues will help them improve the situation.
There are important reasons for sending a strong signal now:
Firstly, the United Nations MDG High Level Event to review progress on the
Millenium Development Goals will be held in New York in September 2010. This
provides an opportunity to take stock of progress so far on the MDGs with a view to
clarifying direction up to 2015, the deadline for the MDG initiative. For this landmark
event, the EU needs to have a position on the global dimensions of taxation and how
it affects countries.
This Communication will feed into the preparation of a common EU position for the
September event; it is part of a wider package of thematic papers on other MDG
issues – food security, health, education, gender, as well as the 2010 Spring
development package which will highlight progress so far towards the MDGs.
Secondly, in Monterrey in 2002 and Doha in 2008, the international community
committed to stepping up its efforts to enhance tax revenues through modernized tax
systems, and to combat tax evasion. To that end, in spring 2009, the Council invited
the Commission to propose concrete EU action "on dialogue with, and assistance to,
developing countries on promoting Good Governance in tax matters and more
effective national tax systems in order to achieve development goals". This is also a
key priority of G8 and G20.
The Lisbon Treaty provides the opportunity for the European Commission to take
initiatives to promote coordination on development cooperation. This Communication
reflects this new environment.
Why the EU?
Tackling poverty in general and issues affecting poverty is something no one country
can achieve alone. These are global challenges, and need a global response.
The EU is by far the largest aid donor in the world, accounting for over half of all
official development assistance worldwide. The EU is also the world's largest trading
partner, giving it influence on the world stage.
The EU model is respected, and is based on solidarity and partnership.
What is the main focus of the Communication?
This document follows on from the April 2009 Communication on Promoting Good
Governance in Tax Matters1.The latter presented concrete actions that could be
taken to better promote the principles of good governance in the tax area,
transparency, exchange of information and fair tax competition.
This Communication aims to improve synergies between tax and development
polices, to make them more effective. It identifies the difficulties encountered by
developing countries in the mobilisation of revenue through taxation, including
domestic and international factors. It suggests ways in which the EU can do more
and make better use of its existing funds and instruments. For example, in 2009 the
Commission disbursed € 117 million and committed an additional € 49 million to
support public financial management, including tax policy and administration, in
developing countries. The Communication sets out a consistent approach to provide
enhanced support in building efficient, fair and sustainable tax systems and
administrations and in introducing tax reforms.
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COM (2009) 201.
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What actions does the Communication propose?
The Communication proposes the introduction of a more comprehensive and
consistent policy approach to all aspects of taxation, taking into account the local
economic situation and international environment, and the broader governance and
public finance management context.
A number of actions to assist developing countries are set out, such as supporting
multilateral and regional initiatives, strengthening public finance management,
deepening regional integration, improving donor coordination, and encouraging
participation of developing countries in relevant international fora. The following are
among the main ones:
- Making more effective the EU's support to developing partners' capacity to
increase domestic revenue, and provide technical assistance to partner
governments where necessary
- Make the best use of its relevant dialogue and assessment tools in monitoring of
domestic revenue issues and good governance commitments, and better
integrate tax issues into budget support programmes
- Increase support to international capacity development initiatives, particularly
when developing international standards of tax cooperation
- Improve regional integration and cross-border links between developing
countries, and strengthen monitoring capacities in the fight against illicit financial
outflows
- Include, as appropriate, a specific reference to strengthening tax systems and to
the principles of good governance in all future development cooperation
agreements with third countries
- Support the adoption and implementation of the OECD transfer pricing
guidelines in developing countries, and the ongoing research on a country-bycountry reporting requirements as part of a reporting standard for multinational
corporations, notably in the extractive industry.
What are the next steps?
The Development configuration of the Foreign Affairs Council of 10-11 May should
discuss and endorse the proposal.
The paper should guide the EU position on taxation issues in development
cooperation at the UN Summit in New York from 22-24 September 2010.
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