Taxing matters in Addis Ababa

This week around 5000 ministers, officials, financiers and advocates are in Addis Ababa at the Financing for Development conference.  The event will set the stage for the next fifteen years of development efforts. If the right mix of financing streams can be identified then the world can feel confident about the ambition to eliminate the worst forms of poverty across the globe by 2030. Yesterday 20 nations came together to launch the ‘Addis Ababa Tax Compact’. This is an initiative to strengthen international cooperation to promote more effective tax systems and fight tax evasion and avoidance. Essentially the compact aims to provide capacity building to developing countries to improve tax collection and generate more domestic revenue. These  funds can then be used to finance health and education programmes and make progress on the achievement of the new Sustainable Development Goals (SDGs). Why is it important in Addis to talk about tax collection? In 2012, ten times more income was generated in Africa from tax than from Overseas Development Aid (ODA).  Tax is also a more reliable source of finance than ODA, and tax that is well administered creates legitimacy for governments and builds democratic responsibilit. Neven Mimica, development Minister of the EU, summarised the concept as “Collect More and Spend Better”.

The UK is one of the first and major supporters of the tax compact, and Justine Greening, Secretary of State for international development, described it as the ‘beginning of a virtuous circle’. Donor nations support partner governments to strengthen the capacity of their tax collection systems, which allows developing countries to be less reliant on donors. “Investment in tax systems gives tremendous return on investment” said Ms Greening, as she made a commitment to double the DFID investment in this capacity building. The Addis Tax Compact calls on all donor nations to double their assistance to this work by 2020, whilst partner countries commit to step up domestic resource mobilisation in order to attain the MDGs.

The themes of the Tax Compact reflect a study recently carried out by RESULTS UK  and KANCO, which looked at the question of how best to finance health care ‘beyond 2015’. In Kenya, at least 25% of the Kenyan population lack access to adequate healthcare , but the report, “Who Pays for Progress?” found that there is untapped tax capacity in Kenya of $2.86 billion dollars. This is more than double the current government spending on health. The report also identified that $4.9 billion was lost to Kenya through capital flight in 2010 alone. This is equivalent to $120 per person. If tax capacity could be enhanced, and Illicit Finance Flows halted, then Kenya would be able to invest far more in primary health care and be in a position to reach Universal Health Coverage by 2030. Illicit Finance Flows have been a major discussion point in many of the sessions of Financing for Development. Thabo Mbecki, ex-president of South Africa, spoke in front of both donor ministers and civil society advocates to call for an end to capital flight from the continent.  During the course of a High Level  Panel  which he chaired last year, with support from Norway and other nations (a copy of the panel’s report can be viewed here) Mr Mbecki found that $50billion is lost every year to Africa through tax flight, arranged both by high net worth Individuals and by Multi-National Companies (MNCs). The Addis Tax Compact calls for an end to tax avoidance and evasion. The compact specifically highlights the role of MNCs stating:  ‘we call on MNCs to respect the spirit and the letter of tax laws’. Whether these good intentions will be enough to reduce Illicit Finance Flows will probably only become clear over the next five years. Reducing Illicit Financial Flows depends more on international tax agreements than on domestic tax agreements – and in Addis so far there have been few concrete deliverable improvements on issues like mandatory reporting of company ownership, or reduction of double-counting. What is clear now though is that improved domestic resource mobilisation, across the developing world, does have the potential to drive significant improvements in budgets of essential health and education programmes. To this extent the developed nations supporting the new Tax Compact need recognition. But the progress made at the domestic level could be magnified ten-fold if solid progress was made to increase transparency in corporate tax payments and end the culture of tax havens and tax avoidance that characterise the modern financial system. Steve Lewis is Head of Policy Advocacy at RESULTS UK Follow on twitter @owstonlewis