Articles by Foreign Ministry staff in the media, 8/20/2015
The following article, co-authored by Mick Moore and Hanna Rinkineva, was published in Finnish in the leading daily in Finland, Helsingin Sanomat, on 6 July 2015.
As this (unofficial) English translation of the article comes out in August, it should be mentioned that Finland joined the Addis Tax Initiative in July. Participants to the Initiative, who are providers of international support, committed to doubling their support to domestic resource mobilization and taxation by 2020 and to ensuring policy coherence for development e.g. through a global tax reform and support to developing countries’ participation in the reform.
Finland supports strengthening of developing countries’ taxation capacity
The efforts to increase tax revenues through development cooperation aim at reducing developing countries’ aid dependency.
Governments worldwide lose a great deal of their potential tax revenue because multinational companies can shift their profits to jurisdictions where they are taxed lightly, if at all.
In 2013, the G20 requested the OECD to produce recommendations for global tax reforms by the end of 2015. The G20 further requested that developing countries be engaged in the reform work.
The European Union, the UN and the IMF share the concern for tax avoidance.
As a member of the OECD, Finland is involved in developing these reforms for e.g. country-by-country taxation of multinational companies. Finland also plays a direct role as an aid donor in helping developing countries exploit these reforms. Developing country governments are typically able to collect revenues of 10–20% of GNP in taxes, whereas Finland raises 44% and most OECD countries raise more than 30%.
Within the United Nations, it is now widely agreed that developing countries should and could raise more tax revenues. Finland should also use aid strategically and help developing countries in their efforts to raise more tax revenue, and to raise it more efficiently and effectively.
There is a high degree of consensus over what needs to be done. It was summarized in a study for the European Parliament by the International Centre for Tax and Development of Sussex University.
Firstly, it is essential that international initiatives to reform the global tax system receive political support and that the rhetoric is followed by action.
Secondly, financial and technical support is required to strengthen developing countries’ tax administration capacities.
Thirdly, regional organizations like the African Tax Administration Forum (Ataf) must be supported in the formulation of joint principles for tax exemptions, the preparation of agreements concerning exploitation of natural resources, and the taxation of local subsidiaries of multinational companies.
Certain progress has been made already. Last autumn, a new global standard on automatic exchange of tax information was agreed under the OECD by 125 countries. The OECD is currently refining the recommendations on how to deal with base erosion and profit shifting (BEPS). Although developing countries are not members of the OECD, they have made their voices heard. They have also made it clear that they want coordinated action to counter tax evasion.
Developing countries have made also independent progress. They have managed to increase tax collection and decrease the share of aid in the state budgets. The ratio between tax revenue and aid in African governments’ budgets has on average tripled in the last two decades. In Zambia, for example, aid now accounts for only 2.6% of the government budget.
However, there are many things that developing countries need to do in order to improve their governance, to upgrade their tax administration capacity, and to get access to modern information technology.
Finland’s previous government actively promoted changes in international tax rules and institutions’ operating principles. Upon an initiative advocated by Finland, the World Bank Board agreed to adopt a tougher line on the use of tax havens in the Bank’s own private sector operations. As a member of the Board of the Extractive Industries Transparency Initiative (EITI), Finland has promoted country-by-country reporting by multinational companies and publicly available company ownership registers.
The MFA is now planning a thematic approach to strengthen domestic resource mobilization and taxation capacity in developing countries, including support for developing countries to participate in and benefit from the reform of global tax system. The Finnish Tax Administration already works with African tax administrations to improve their expertise in corporate taxation.
In addition, Finland supports the empowerment and advocacy of civil society in developing countries towards their own governments. Awareness on taxation is increased among parliamentarians and the media, in order to demand accountability of the government in providing public services to all.
It is highly encouraging that the new Government of Finland set strengthening of tax base of developing countries as one of its development policy priorities.
Mick Moore is Professor at the Institute of Development Studies, UK, and CEO of the International Centre for Tax and Development
Hanna Rinkineva is Counsellor in the Department for Development Policy of the MFA of Finland