A taxing challenge: generating adequate fiscal revenues in a globalized world cannot be left to national authorities alone, UNCTAD report says

Press Release
For use of information media - Not an official record
A taxing challenge: generating adequate fiscal revenues in a globalized world cannot be left to national authorities alone, UNCTAD report says
Multilateral and national policies required to stem fiscal haemorrhaging from tax competition, tax avoidance practices and unfair distribution of natural resource rents

Geneva, Switzerland, 10 September 2014

​Governments, from rich and poor countries alike, should be able to finance the investment and other public spending required to meet the demands of their citizens for a more prosperous and secure life. Mobilizing domestic fiscal revenue is key, as in the long run it is more reliable than aid and more sustainable than debt, and less subject than either to conditions that restrict policy space.

In the process of development, countries need to expand public spending on infrastructure, basic services and social transfers. At the same time, with higher average levels of income comes a broader tax base and more reliable sources of revenue collection by the State. This is why, subject to local political pressures and practices, fiscal space and economic development have traditionally evolved hand in hand.

But according to the Trade and Development Report, 20141 : Global governance and policy space for development launched today, the current structure of the global economy is making it difficult for countries to expand government revenues and to choose their tax structure. Lowering trade tariffs has significantly reduced revenues from border taxes, while the increased mobility of capital and the intensive use of fiscal havens have greatly altered the conditions for taxing income and wealth. Tax competition among countries has the potential to trigger a fiscal “race to the bottom” in an effort to attract or retain foreign investors. Corporate and income tax rates have declined in developed and developing countries alike, while the incidence of value added tax and other indirect taxes has increased. A more fragile tax structure has become a more regressive one too.

A large proportion of illicit financial flows – which make use of all kinds of mechanisms for circumventing judicial and regulatory oversight – goes through offshore financial centres, based in “secrecy jurisdictions”. Approximately 8–15 per cent of the net financial wealth of households is held in tax havens, mostly unrecorded. The resulting loss of public revenue amounts to $190−$290 billion per year, of which $66−$84 billion is lost from developing countries, equivalent to two thirds of annual official development assistance. As for corporates, their main vehicle for tax avoidance or evasion and capital flight from developing countries is the misuse of “transfer pricing” (i.e. when international firms price the goods and services provided to different parts of their business to create profit–loss profiles that minimize tax payments). By this means, developing countries may be losing over $160 billion annually, well in excess of the combined aid budgets of developed countries.

The international tax architecture has failed so far to properly adapt to this reality. The Trade and Development Report, 2014 argues that offshore financial centres and the secrecy jurisdictions that host them are fully integrated into the global financial system, and large shares of trade and capital movements (including foreign direct investment) are channelled through them. Using those jurisdictions is now part of “normal” business practice in most large firms and banks. Moreover, the most important providers of financial secrecy are some of the world’s biggest and wealthiest countries or specific areas within those countries. Thus, changing this system requires not only knowledge of the technicalities involved, but also firm political leadership.

In many developing countries fiscal space is still heavily influenced by the operations of their extractive sectors. The report notes that tax incentives provided to these industries have been excessively costly in terms of foregone public revenues. UNCTAD’s calculations for a sample of resource-rich developing countries show that between 2004 and 2012 Governments captured only about 17–34 per cent of the rents generated in extractive industries dominated by private firms.

The report observes that many Governments – both from developed and developing countries – are trying to improve tax collection. With regard to policies in extractive industries, this has meant renegotiating or cancelling existing contracts, increasing tax or royalty rates, introducing new taxes and changing the degree of State ownership of extractive projects. Regarding illicit financial flows, some Governments are also adopting a general anti-avoidance rule in legislation to increase the probability that “aggressive” tax schemes end up being declared illegal once challenged in courts. They can also more effectively address transfer pricing abuses in their international trade by using reference prices for a number of traded goods, particularly for commodities.

However, multilateral measures are of utmost importance to prevent beggar-my-neighbour practices and establish clear and shared rules that ensure firms pay taxes in the countries where they actually conduct their activities and generate their profits. Regarding extractive industries, international initiatives such as the Extractive Industries Transparency Initiative should be made mandatory and extended: it should not focus only on Governments, but also on producing firms and commodity trading companies. There is also a need to increase the focus on monitoring, auditing and accountability, as well as strengthen enforcement of the fiscal conditions and regulations under which extractive industries operate.

The report acknowledges the recent efforts aimed at improving transparency and exchange of information on tax issues.  However, these initiatives are mostly led by the developed economies – some of which themselves harbour secrecy jurisdictions and powerful transnational corporations – and there are risks that the debate will not fully take into account the needs and views of most developing and transition economies. It will therefore be important to give a more prominent role to institutions such as the United Nations Committee of Experts on International Cooperation in Tax Matters and consider the adoption of an international convention against tax avoidance and evasion.

Given their relevance for many developing countries and transition economies, fiscal space and governance issues should be a prominent part of the post-2015 development agenda.

Full report: