Tax governance in developing countries
Developing countries wish to improve their tax systems and public finance management. National taxes are essential to finance public services and public goods. It is for this reason that the European Union (EU) proposes to support tax reforms in these partner countries as part of its development policy.
Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee of 21 April 2010 – Tax and Development Cooperating with Developing Countries on Promoting Good Governance in Tax Matters [COM(2010) 163 final – Not published in the Official Journal].
The improvement of economic and social conditions in developing countries is related to good tax governance and the strengthening of their tax systems. Furthermore, good international financial governance should allow funding destined for development to be mobilised and used more effectively.
Thus, the European Union (EU) encourages both tax cooperation with developing countries and the fight against tax evasion and avoidance.
Tax governance in developing countries
Development aid policies should contribute to the effectiveness of tax systems and an increase in tax revenue in EU partner countries. Taxes are essential for sustainable development, the legitimacy of the State, economic stability, and the financing of public services and infrastructures.
However, developing countries are subject to several types of difficulty, particularly due to:
- the fragility of their economic structures and their low level of competitiveness;
- their political instability, bad governance and the weakness of the rule of law;
- bad tax management and unequal tax burden distribution among taxpayers;
- the weakness of tax administrations lacking means and skills.
Furthermore, in the context of globalisation, several international factors form barriers to the effectiveness of national tax systems:
- the implementation of domestic tax rules becomes difficult in a world with a high geographical mobility of taxpayers, high volumes of trade and capital flows and the use of new technologies for fraudulent purposes;
- the transition from revenue systems largely dependent on customs revenue to broader and more modern ones;
- a wish to attract sustainable foreign investments;
- the use of bad tax practices, including in developed countries.
In order to overcome these tax reform difficulties, partner countries should:
- distribute the tax burden fairly, particularly by balancing direct and indirect taxes;
- take account of the specific nature of the informal economy (i.e. non-structured economic activities) and support micro and small enterprises;
- stabilise the legal framework and improve the transparency of tax systems;
- enhance the skills and capacities of administrations collecting taxes and reporting expenditure.
Transparency and international tax cooperation
The international context should also be improved by promoting and adopting international principles and standards as regards transparency and the exchange of tax information. This action should be taken in order to combat tax evasion and avoidance, money laundering, corruption and the financing of terrorism. It is also important to enhance the participation of developing countries in international fora dealing with tax governance issues.
The Commission also wishes to carry out its action as part of regional cooperation partnerships with the African, Caribbean and Pacific (ACP) countries, Latin American and European Neighbourhood regions.
Using European Union instruments
Each partner country is to define their policies and reforms. Development aid should be adapted to each country according to its economic situation, international position and policies. Several aid instruments can be used to support these reforms:
- budget support programs and public finance management tools;
- technical cooperation with tax administrations;
- regional cooperation with the African, Caribbean and Pacific (ACP) countries, Latin American and European Neighbourhood regions;
- support for the capacities of oversight bodies, national parliaments and Non-State Actors in developing countries in the field of tax.
These instruments must be established as part of existing programmes (the European Development Fund (EDF), the Development Cooperation Instrument (DCI), or the European Neighbourhood Policy and Partnership Instrument (ENPI)).
In addition, the Commission encourages donor coordination in each partner country, as well as closer international cooperation when international standards on tax cooperation are defined. These standards should take into account the needs and capacities of developing countries.
The Commission’s action is in line with the Monterrey Consensus and the Doha Declaration adopted by the UN.
The second amendment to the Cotonou Agreement takes account of good tax governance principles.