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 AzeemGhana 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

• 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 system

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 socio-economic 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 SANAMERCI Beaucoup!