Download Tax Justice and Development

Dar Policy Forum Tax Training
Workshop
Kunduchi Beach Hotel
Dar es Salaam
Tanzania
6 -7th of August, 2012
Tax Justice Network - Africa
The link between Tax Justice and Development.
By
Vitus Adaboo Azeem
Ghana Integrity Initiative
The Budget, taxes and development
• The national budget is plan of how to generate
resources and how to spend those resources in the
interest of the country;
• It is an instrument that the government uses to
direct the lives of the citizens by deciding what
sources of revenues to explore and how to expend
the resources so obtained
The Budget as a Policy Tool
• The budget is the most important economic policy
tool for any government and provides a
comprehensive statement of the priorities of the
nation.
• It is, therefore, important that every country
develops a people-centered budget that addresses
the needs of the majority of its citizens: how to
mobilize the needed resources; unduly penalising
the citizens and how to use these resources.
• In other words, budgets must ensure social justice,
including tax justice and equitable development.
The Budget, taxes and development
• The budget also uses the tax system to direct
investment and socio-economic development and
growth.
• The budget does this by providing tax incentives,
concessions, exemptions to encourage certain
industries but could bring about undue suffering to
certain categories of citizens and corporate bodies
• It can also use the tax system to discourage the
growth and consumption of certain products.
• It can also bring about a redistribution of the income
and national resources – good and bad?
Development
• Budget s are ,therefore, aimed at bringing about
the desired development to a country
• Development generally refers to any progressive
change primarily in the economic sphere.
• If the change is quantitative, we refer to it as
economic growth.
• If it is a qualitative change we look at the structural
changes or changes in content development,
improvement in the standards of living or an
economic system with new features.
Development
• This means we may not just look at purely
economic characteristics such Gross Domestic
product but also the social dimensions of
development;
• Development always involves a certain goal or
several goals determined by the purpose or
purposes of the system.
• If this direction is positive, then we speak of
progress, if negative, of regression, or degradation.
Socio-economic development
• Socio-economic development includes aspects such
as:
• Increased production and income;
• Positive changes in the institutional, social and
administrative structures of society;
• Positive changes in the public consciousness;
• Positive changes in the traditions and habits of
the people.
Socio-economic development
• Economic development generally refers to the
sustained, concerted actions of policy makers and
communities that promote the living standards
and economic health of a specific area.
• Economic development can also be referred to as
the quantitative and qualitative changes in the
economy.
Importance of Taxation
• Whatever definition we give to development, it
cannot take place without funds or resources;
• The issue then is; How do we get the resources to
undertake the development, without bringing
undue hardship on all or some categories of citizens
• There are various ways of generating the resources
for the development agenda of the country but
each way has its benefits and disadvantages
Source of Government Revenues
• Foreign aid and grants
• External and domestic borrowing
• Divestiture of state-owned enterprises and sale of
other state assets
• Printing of currency - should be supported by
national assets such as bullion and gold reserves
• Dividends from state-owned enterprises
• Miscellaneous levies, fines and other charges for
services
The Most Important Source - Tax
• A Tax is defined as a compulsory charge levied by an
organ of government to fund public expenditure.
• Thus, the imposition of a tax is aimed at raising
funds for government to provide goods and services
that private enterprise or individual citizens cannot
or will not provide or that are better provided by
the state.
• Taxation can also be used to redistribute
income/wealth, control the economy and/or social
behaviour.
• Note that taxes may have unintended consequences
– tax justice
Tax Justice and development
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How much do we need in taxes?
What taxes to levy?
How much tax to levy?
Whom to levy the taxes on?
How to go about collecting the taxes?
How much can we realistically collect from our
citizens (both individual and corporate citizens)
• What measures can we put in place to get what we
need?
• At the end of the day – is there justice in our tax
The Four Canons/Principles of Taxation
• Equity – a tax should be proportional to people’s
income and based on ability to pay progressive.
• Certainty – the amount of tax to be paid must be
certain – abuse of discretion
• Convenience – It should be convenient to pay taxes
– time, place and cost of paying the tax
• Economy – the cost of collection should form only a
small proportion of the amount to be collected or
raised.
• These are the principles that one would look at
when assessing a tax system – justice?
Tax Policy versus Tax Administration
• The Tax Policy unit of a government addresses some
of these issues such as what areas to tax, what
rates, concessions, exemptions, etc.
• The Tax Administration has the responsibility to
collect the taxes as determined by the policy unit
and approved by the Legislature
• Both units need to work together to ensure tax
justice or avoid injustice in the tax system.
What is Tax Policy?
• Tax Policy is the business of government concerned
with due diligence study of various kinds of taxes or the
combinations and alternatives of these taxes which are
constantly under review for new openings.
• Such a review will focus on individual and corporate
taxes, increases on individual incomes, dividends and
other income payments.
• In the area of excise, the review is on sales taxes at the
various levels of manufacture, wholesale or retail taxes
over the entire range of production and distribution,
looking at turnover and value added taxes;
• What taxes to levy on special pursuits such as mining,
or special products, such as luxuries, etc. – justice?
What is Tax Policy?
• The variety of taxes seems endless, but each must be
considered in the light of particular fact situation within
fiscal and economic goals;
• Any particular consideration must be competitively
analysed against the others.
• When a decision is finally taken, the chosen tax must be
imposed at the appropriate level of rates and scope of
application,
• In many occasions, non-economic and political
considerations may also come into play.
• Other areas are tax incentives for economic
development and the use of tax techniques to spur
production, or consumption, or investment, or saving.
• These areas are the preserve of Tax Policy – Justice?
Tax Policy
• Deepening tax bases does not necessarily mean
increasing tax rates;
We can apply taxes to different economic activities,
from the extraction industries to personal income,
• We may also consider abolishing free zones regime
which offer tax holidays, leading to a shrinking in
the tax base and to further complication of the tax
administration and are a major cause of revenue
loss and leakage from the taxed economy
• We can systematically eliminate tax exemptions and
unnecessary tax concessions,
What is tax Administration?
• Tax administration is the instrument for carrying out
the decisions of any government in power with
regards to mobilising revenues for economic
development.
• A capable and effective tax administration must be
neutral, its job is not to determine tax policy.
• The tax administrator does not seek to encourage
or discourage certain public behaviour, such as
saving, investing, consuming luxury importations,
drinking, smoking or gambling, or make decisions as
to who should or not pay tax.
What is Tax Administration?
• However, we need an effective administrative
machinery to implement tax policy decisions. Tax
administration is important for the attainment of
the goals of tax policy
• Tax policy seeks additional taxes and new sources of
revenue but the successful tax administration of
some existing taxes would provide a considerable
part of the needed additional revenue.
• The diligent execution of existing taxes may well
make unnecessary, or at least reduce, the
multiplication of taxes in the search for revenue.
Tax Administration
• We need to create a highly qualified, well-paid, and
honest tax administration elite to make sure that
the state can collect the financial resources it needs
to pay for development programmes".
• We can give the revenue authorities a free hand to
carry out their mandate and avoid political
interference
• Computerisation of the tax system reduces human
contact and the opportunities for corruption.
•
Tax Administration
• A tax administration reform must also create a
modern system based on voluntary
compliance by taxpayers, backed by risk-based
selective audits to enforce compliance
• Make tax systems relatively simple and
transparent, easy for taxpayers to understand
and payment procedures for taxpayers
simplified.
Tax Administration
• Raising additional tax revenue is further constrained
by weak state legitimacy, as taxes have often not
translated into improvements in public service
delivery.
• People want to see what their tax monies are used
for and so transparency and accountability are a
necessary part of tax justice
• This is the physical and fiscal linkage between tax
justice and development
A duty to pay taxes
• Every citizen has a duty to contribute to the
national development agenda through the
payment of taxes
• However, this duty binds or should bind only those
who can afford to pay
• When the two combine, we can talk of Tax Justice
and is very important and highly linked to
development, especially for poor countries like
ours..
A Right to levy taxes
• A basic characteristic of a sovereign state is its
ability and right to levy taxes for its
development.
• In the absence of the opportunity to acquire
financial resources, a country would not be
able to offer collective benefits to or
redistribute income between its citizens.
• This is clearly why tax justice is a basic
ingredient to development.
A Right to levy taxes
• International law grants a country the right to tax a
taxpayer either on a personal and economic level.
• For example, a country has a right to tax all its
citizens regardless of where they reside and where
their income is earned.
• Secondly, a country has a right to tax persons
resident within its country even of they are not
citizens of that country. The reasons are obvious –
they benefit from the infrastructure and other
facilities in that country.
A failure to levy taxes
• Yet in many poor countries, there is a common
threat to political progress, sustainable economic
development and to poverty eradication
• This is often because of their inability to take
advantage of these opportunities and hence are
unable to mobilise enough taxes for its
development agenda.
• This is often due to unacceptable domestic and
international obstacles to effective taxation for
development.
A duty to pay taxes
• Tax evasion by both citizens and noncitizens
through various illegal means;
• Tax avoidance though various leakages in the tax
laws to either completely avoid paying taxes or pay
minimal taxes. Multi-national companies have the
capacity and other advantages to do this;
• There are basically three basic tax avoidance
schemes that most multinational companies take
advantage of:
Tax Avoidance
• Tax avoidance is a mechanism whereby potential
tax payers take advantage of weaknesses in tax laws
to either not pay taxes or pay minimal taxes
• Thin capitalisation
• Income splitting/ Profit shifting
• Transfer pricing - multilateral companies transfer
corporate profits to low tax countries through the
pricing of intra-group transactions.
Tax havens
• The use of tax havens is another way of avoiding
taxes. It is a mechanism where potential taxpayers
shift their incomes to jurisdictions where taxes are
not payable or are paid at very low rates
• There are certain jurisdictions that either do not
levy taxes or levy minimal taxes, attracting persons
who do not want to pay taxes
• The main structures which characterize tax havens
have to do with taxation of international companies
and capital movements
• .
Tax havens
• There is also lack of access to information
about financial institutions and markets.
• These secrecy rules allow anonymity for
investors from tax authorities. Tax havens
change investor behavior and thereby
increase the difference between socioeconomic and private returns
Tax Competition
• Economic integration has made it possible to avoid
taxation by moving mobile taxable objects to
countries where tax terms are more favourable.
• The exploitation of Africa’s natural resources
require huge investments that most of these
countries cannot afford on their own;
• There is usually a competition to attract investment
by each country reducing taxes or granting tax
concessions to potential investors.
• A race to the bottom!
Double taxation agreements
• Another worrying trend is the compulsion of
poor countries to enter into double tax
agreements with the advanced and rich
countries;
• These agreements tend to benefit a lot more
of the advanced and then rch countries than
the poor countries
Collection.
• The overall goal of tax procedure is collection of the
tax.
• When a tax agency is described as ineffective, it is
because of the presence of very large delinquent taxes;
• Most tax defaulters act on the belief that after all the
administrative machinery is ineffective;
• Effective tax collection is one aspect of the larger
problem of providing adequate penalties to serve
always as reference points.
• However, tax collection has its own special procedural
aspects for proper techniques and routines to be
strictly observed, such as in a collection manual.
Use of Sanctions
• Tax collection demands firmness, or the resort to
sanctions when necessary, e.g. the imposition of
liens on real property or garnishment of wages and
salaries and/or the use of the tax clearance
provision.
• Nonpayment must be a costly event for the
taxpayer as it would otherwise be an interest free
loan from government.
• Sanctions in Ghana include automatic penalty for
late filing of returns, interest for a tax paid late and
estimated tax penalty.
Use of Sanctions
• There are also criminal penalties for the following:
– Failure to comply with tax law generally,
– Failure to pay tax,
– Making false or misleading statements,
– Impeding tax administration,
– Offences by authorized and unauthorized
persons; and
– Aiding and abetting.
Corruption
• High tax rates and/or a multiplicity of taxes provide
the opportunity to escape through under payment
for a bribe;
• Complexity of taxes and increased discretion and
judgment by tax officials also play greater role as it
provides the tax official with the ability to turn out
results in a particular way under influence of
“purchased favouritism”;
• This requires an effective system of discipline and
personnel investigation to tackle the problem.
Corruption
• Persons in authority must be resolute in the
demand for honesty and impose severe punishment
for dishonesty.
• This punishment must extend to the taxpayer who
is a party to the dishonesty.
• Internal controls require the use of specially trained
corps to act as inspectors of quality assurance,
checking abuse, corruption and inefficiency.
• Quality assurance inspection would involve
sampling from time to time the work of tax officials;
pursuing rumours and informers’ ‘tips’.
Corruption
• Employees of revenue agencies should also be
required to file a networth statement at the time of
employment and periodically as a deterrent to
temptation;
• A very important measure against corruption is also
that the tax agency should be sincere enough to
audit the income tax returns of as many tax officials
as possible.
• A proper system of penalties ranging from criminal
action, dismissal, loss of pay or suspension to
reprimands or warnings.
WHY ARE WE HERE TODAY?
• AT THE END OF THE DAY, WE WANT MORE TAX
REVENUES FOR NATIONAL DEVELOPMENT
• IT IS EVERYBODY’S RESPONSIBILITY AND DUTY TO
ENSURE THIS
• TAX EVASION IS CRIMINAL BUT AIDING AND
ABETTING IS ALSO CRIMINAL
• PUBLIC EXPOSURE, INVESTIGATIVE JOURNALISM
• ARE WE READY TO PLAY OUR ROLES EFFECTIVELY
AND EFFICIENTLY
Conclusion
• Tax compliance is an important aspect of tax
administration.
• All tax policies and practices should lead to increased
voluntary compliance either through a better
understanding of national tax laws or through
increasing the risks associated with non-compliance.
• An effective tax system must show clarity and
simplification of tax laws to permit broad
understanding on the part of taxpayers.
• Simplicity makes voluntary compliance very easy while
making tax evasion and avoidance more difficult.
• The catchword is “Transparency”, which is vital for any
effective tax administration.
Conclusion
• Tax is very important for the execution of a
country’s development agenda;
• Taxation is a legal requirement for persons doing
business in the country and so they should pay
• However, some citizens evade or avoid tax using
various schemes - income splitting, transfer pricing
and thin capitalization;
• This can be controlled through transfer price rules,
limiting of interest deductions, etc.
• This is the only way we can get adequate funds for
development without unduly penalising the citizens
- achieve tax justice.
Expression of Gratitude
THANK YOU U!
ASANTE SANA
MERCI Beaucoup!