The Role of The World Bank and IMF in responsible and progressive taxation
•
Spring Meetings of the IMF and World Bank, 2016; April 15
Sponsors: Christian Aid & Oxfam
Panellists:
- Sara Jespersen, Project Manager, Tax and Development, IBIS Denmark
- Matthew Martin, Director, Development Finance International
- Ewan Livingston, Advocacy Adviser, ActionAid UK
- Ruud de Mooij, Tax Policy Deputy Division Chief, Fiscal Affairs Department, IMF
- Ismaïla Diallo.Tax official, Finance Ministry Senegal
- Cephas Makunike, Research and Policy Advisor, Tax Justice Network – Africa
- Susana Ruiz, Head of Fiscal Justice Campaign, Oxfam (moderator)
Aid or private sector financing won’t be enough to finance the SDGs. Raising more domestic resources should be done in a progressive way to reduce inequality. Harmful tax practices jeopardize this, and also harm good governance of the developing country tax system. What should their role be beyond their recently announced initiative to help developing countries strengthen their tax system? How can they give more progressive advice? How can the IFC and other DFIs better align their own lending practices to ensure that companies they invest pay the right amount of taxes in the right place at the right time?
SJ, IBIS Denmark
Notes provided by presenter. Please refer to attached slides of the presentation to accompany these notes, referred to in italics
IFC and Tax Havens Springs 2016 IBIS Denmark
This week Oxfam released a paper looking at the IFC and tax havens. The findings are astonishing. It is high time the IFC joins the fight against tax dodging and take steps to ensure that among its clients there is no doubt that the companies pay their fair share.
Context
We are at a time of heightened awareness of the challenges and many efforts to meet them. All actors should contribute to this. The realiaty is that for the foreseeable future they will be loopholes between tax legislation in different countries, and for complex legislation like corporate taxes, there might always be a grey zone for companies to exploit.
The WBG have committed itself to this agenda. We see in our CSO folder a specific initiative launched at these Spring meetings on DRM. Very important efforts. But one thing is missing – the role and responsibility of the private sector. The IFC sets high standards for environmental and social issues in their performance standards, but for responsible tax, they lack far behind.
Findings
2 caveats – we are not even counting the subsidiaries we think are doing “real economic activity” and we only have access to publically available material. So like our numbers of conservative.
Tax Havens
So what is the issue, what does these findings mean.
MNCs have technically the ability to tax plan – here I am not talking about tax evasion, but talking about tax planning from the expected and generally acceptable practices to avoid double taxation to the unacceptable aggressive behavior that leads to very low effective tax rates by using empty companies in tax havens.
We did this because some jurisdictions around the world are known to facilitate particularly aggressive tax planning options, that can effectively minimize tax bills. We call them tax havens. They are widely understood to be a huge part of the problem of the system which have broken down.
IFC Policy
Currently, the IFC does not have a policy that ensures that these types of practices are not allowed among its clients. It has a focus on tax evasion and due diligence for legal compliance, but no means, as far as we are ware to capture the equaly big, if not bigger challenge of tax avoidance and aggressive tax planning. Furthermore, its indicator for what is to be looked it is based on the Global Forum definition of OFCs and this is very limited. Bahamas is not on this list, Cayman is not and Panama is not.
Given the Oxfam findings of number of IFC clients in tax havens, we ask the question of what is hiding behind these numbers? What kind of tax planning mechanisms? And how will the IFC ensure us that this is not the case when they only have instruments to focus on unlawful tax planning also known as tax evasion?
So what can be done? How can the IFC join the WBG efforts:
We want to see the IFC establish a tax-responsible investor policy that has two elements:
- Due diligence procedures that go beyond legal compliance and rests on a much better understanding of what constitutes tax havens and what are the challenges to DRM from these practices – dismantle the “legitimacy” or power of tax havens
- Active ownership policy, that plays a role in encouraging responsible corporate tax practices, which can also support the ability of tax administrations to do their job and enhance their capacity to find the the companies that do not pay their fair share
EL, ActionAid – ‘Getting to Good’
SDGs are underlying basis of development finance challenge
- This means tax – as IMF estimate cost of tax avoidance to developing countries is $200bn
- Concern over sideling of developing countries in decision-making forums
- Key role of private sector in achieving appropriate tax behavior
- This means going beyond simple legal compliance – as Panama Papers leaks showed, that appropriate is not doing bare minimum which has been revealed to be a high-risk approach
- Tax responsibility is a process: transparency, assessment & progressive & measurable improvement
- A tax responsible company seeks a level playing field –avoids use or pursuit of company specific measures.
- Companies that are tax-responsible work to develop methodologies for assessing the socio-economic impacts of tax decisions on employees, shareholders, consumers, tax authorities
WB official
- Countries that struggle to fund basic needs need to effectively mobilise domestic resources, to meet SDGs, and to meet Bank’s own twin goals
- Recent events are provocative reminder re: strength of tax systems’ importance, showing practices that were legal but enabled avoidance of taxation and scrutiny
- Part of discussion in our work is about progressivity of fiscal impact, which is essential to Bank’s twin goals to eliminate poverty and to secure income growth of bottom 40%
- Have produced work on progressivity of fiscal systems, including assessing redistributive effectiveness of e.g. South Africa fiscal/spending programmess
- Increasing support to authorities, and for example EITI, in terms of capacity building to better collect and generate domestic revenue
- WB launched a global tax team in January –seeking to bolster institution’s work on tax, to give members a single counterpart on all domestic revenue mobilisation activities
- So this Global Tax Team is a leader, but also it is hosting consultations across world about how to be effective, what are clients’ specific problems and what actions – especially technology changes – can assist.
- Some of what we’ve heard is to simplify rules on transfer pricing, recent consultation was how the problem manifests itself in different countries diverges, whether e.g. it is multinationals or in other contexts it is domestic countries
- Also looking to collaborate better with Fund and other institutions to improve coordinated dialogue
- A new Tax Policy Assessment Diagnostic Framework is being co-produced with the Fund to allow comparison of performance across countries and over time
- Planning announcement on a platform for collaboration on tax.
- Overarching aim is to support governments to confront tax problems they face
- Wish to improved standard setting in OECD, and improve Fund/Bank technical assistance. Seeking more effective sharing
Matthew Martin
- Tax is a justice issue – like debt 20 years ago
- Is the Fund living up to expectations that its advice will live up to the claims it has made, e.g. inclusion is given as much weight of growth which is the message MD and other senior figures have frequently made
- Current research by DFI and New Rules shows that surveillance and other core business activities such as Technical Assistance of IMF show little to no evidence of these principles being achieved
- Much of what Fund is apparently doing is not yet public, and this requires continuous dialogue with Fund on these issues
- Most IMF TA & Surveillance has focused on increasing tax collection and efficiency, rather than reducing inequality and poverty through progressive tax
- Tax systems studied have revealed to be regressive, even when structured to be progressive they are de facto regressive due to avoidance and evasion, leading to over-reliance on less progressive parts of tax system
- Often IMF has failed to be vocal and public, undermining governments’ abilities to stand up to vested interests that push back against progressive fiscal reform
- personal income tax, or taxes on capital gains. Fund has opposed very high or low rates, but lacks consistent anti-inequality advice on rates or thresholds to ensure progressivity
- Taxes on capital gains, property and wealth need to be the most redistributive. No evidence of IMF providing clear guidance, and sometimes found negative advice to abolish financial transaction taxes
- Corporate Income Tax advice is slowing, perhaps due to spillovers and other work – IMF’s focus has been to help establish ‘large taxpayer units’
- Extractives – IMF has played a relative active and opposite role to include windfall taxes and ending tax exemptions, but less on audits especially where companies suspected of avoiding tax
- IMF has played strong role to replace lots of sales taxes with VAT –which is highly regressive without key exemptions which IMF often resists, also on higher rates on luxury, but also ending blanket regressive exemptions for large companies – all ideas which IMF research has considered but not in the advice given
- Good advice exists against exemptions, but not yet systematised, also helping countries fight illicit individual flows
- Also only ad hoc advice on tax treaties which sharply reduce collection in developing countries
- Very limited publication of IMF TA reports – unlike other papers and types of document
- Lack of a global database examining figures on tax/GDP ratios, composition, rates
- is the key source of tax policy and TA in developing countries
Cephas Makunike
- Analyses in our region of range of countries showed that African tax systems remain highly regressive
- Dependence on corporate taxes – we have seen that share begin to dwindle, and growing reliance on consumption taxes such as VAT – and much of the advice is to use a ‘smart’ VAT tax, to simplify and abolish exemptions, principally causing harm to poorer people, for whom much of their income is spent on basic commodities.
Ruud de Mooij , IMF
- TA is of course work on behalf of governments, and though we encourage governments to publish the advice, but it is a valuable function to them which may not be revealed to the public usefully in their view
- We do publish much of our work, e.g. our principles and our types of analysis
- Given the conclusion of previous presentation that IMF focuses too much on efficiency.
- Three points
- First are these the right questions? Fund approach is grounded in welfare analysis, e.g. how to design fiscal policy with a ‘broad’ welfare concept beyond growth, including inequality and environmental quality and so on
- This is the right approach in order to ask the right questions – e.g. how can we design fiscal policies which contribute to redistribution in the best possible way, and what is the role of progressive taxation to achieve that policy, which is a means to an end rather than a goal in and of itself
- To do so needs to examine spending, not just revenue collection, and how to reach and address poverty issues
- Therefore what is the role of progressive taxation in such a context? This is the key question – shedding a different light on VAT increase – is that pro-poor or not, and answering that by looking at joint incidence of taxation and spending
- Domestic Resource mobilisation is driven majorly by capacity constraints, which are often not present in an advanced economy, e.g. special luxury taxes – is it worth the revenue take to spend scare resources of tax administrators
- Second point – how to assess the Fund’s work? Given 130-150 TA missions per year and only a handful are public, providing very limited information
- Dispute some of the issues – e.g. extractives – Fund does lots of work on how to design special fiscal regimes to reap the special rents. Also Fund work on anti-money laundering, in the Fund’s legal department. Also on tax administration on setting up units on high net worth
- TA is tailored advice, provided only on request of countries, and Fund does not make the policy, which countries often disregard
- Areas we’d accept Matthew’s remarks in particular include publishing the database to develop analysis.
- Also the joint Bank-Fund tool to provide a standardised framework for analysis of tax systems
- Also the Platform – to be revealed this week – of the UN, OECD, IMF, Bank to work together to translate the BEPS outcomes tailored to DCs specific needs, e.g. 8 toolkits, including one already published on tax incentives, to provide an analytical framework to examine how to establish tax incentives.
Ismaïla Diallo
- Representing Francophone Low Income Countries (LICs)
- Domestic Resource Mobilisation (DRM) is essential to finance the SDGs, hence after the Lima ministerial meeting the finance ministers of the Francophone LICs published a statement which required additional commitments by the international community
- In particular they asked that DFIs including the World Bank and IFC ensure that projects which they finance pay taxes in the country, and deny requests for tax exemptions
- We need continued support for tax administration, implementation and really across the board, and to be able to renegotiate and make effective tax reforms.
