The World Bank February PREMnotes know-how to deliver 2013 No. 2 The Changing Politics of Tax Special Series on Governance Policy Reform in Developing & Public Sector Management Countries Mick Moore Who shapes tax policy reform in developing countries? A wider range of political actors are beginning to exercise influence. A brief history will explain who they are and how they operate. Recent History: The rich countries are funded almost entirely from Pessimistic View broad general taxation, governments of developing countries often depend substantially on non-tax One of the most thorough tax reforms in recent revenue, especially income from development history began in Peru in 1991.1 The government aid and from the control of oil, gas and mineral simultaneously fired most of the tax collectors extraction. To some extent it is just a matter of employed by the Ministry of Finance, estab- perception, stemming from differences in the lished a new semi-autonomous revenue agency (SUNAT) staffed mostly by new recruits from balance among types of taxes. The governments the private sector, and radically simplified the tax of rich countries depend heavily on two kinds of code. Among other changes, it abolished most taxes that are highly visible to the average citizen: of the dozens of taxes on the books to leave only personal income taxes, which are paid by half or a handful of significant revenue sources. This more of households through direct deductions reform has become almost iconic in the eyes in- from salaries though PAYE (Pay As You Earn) ternational tax specialists. Most Peruvians were schemes; and excise taxes on products like alcohol, aware of it and affected by it. But they played no fuel and tobacco. By contrast, the governments role in bringing it about. Neither tax policy nor of developing countries depend more on import tax administration issues had been significant in duties and taxes paid by companies, especially cor- Peru’s turbulent politics. They remain minor is- porate income tax. These taxes are highly visible to sues today. In that respect, Peru is typical of most the small number of companies that pay them, but developing countries, and very unlike the United near-invisible to the average citizen. The public at States, where furious debates about taxes are a large have little interest in tax policy. When politi- staple of electoral politics. cians seek public support, they seldom talk of tax. Why the difference? Why are tax issues so Political parties typically take few positions on tax prominent on the public political agenda in policy. Think-tanks produce few tax policy analy- most high-income countries, and so low profile ses. Legislative debates on government revenue are in most developing countries? It is because the often cursory and badly informed. average citizen of a rich country is more likely to The scarcity of public debate in developing perceive herself as the source of the money that countries does not mean that tax policy is static. To the government spends. To some extent, this the contrary, it typically suffers from over-activity. perception is correct. While the governments of Many governments revise their tax codes every FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK year. Policy change seems continuous. But it often is the replacement of old sales taxes and high rates of lacks direction. Frequent small and apparently random duty on imports and exports with new value-added changes in tax codes may cancel each another out. taxes. The second is continuous attempts to improve Why are these changes made so frequently? It is tax administration, especially by simplifying the tax partly because governments feel the need to appear to code: reducing the number of taxes, the number of be in control. Annually or more frequently, ministers rates at which each tax is levied, and the number of of finance present packages of small changes in tax tax exemptions. regimes as part of a strategy to revive, dynamise or re-shape national economies. It is partly the outcome Why has reform experience surpassed expecta- of continuous lobbying by politicians and lobbyists tions? It is not because larger numbers of citizens representing individual big companies, small industry have become involved, tax policy debate more intense, groups, or the wealthy classes: the dominant brewing or policy-making more transparent. It is principally company; producers of solar panels or cycle helmets; because another small group of people have brought exporters of reconditioned truck tires or processed their influence to bear in the closed circles in which cashew nuts; providers of low-cost mortgages or IT ser- tax policy is made: a network of transnational tax vices to the financial sector; sellers of land in designated experts rooted largely in higher income countries and urban development zones; or investors in ‘strategic’ international organizations: the European Union (in enterprises. For example, the 2012 Sri Lankan budget relation to the former centrally planned economies provided tax concessions to both new and existing of central, east and southeast Europe); the IMF; the investments in ‘strategic import replacement enter- World Bank; the OECD; the IDB; a range of aid do- prises’, generously defined to include the cement, steel, nors; international consultancy companies; advisory pharmaceuticals, fabric and milk powder industries. staff from rich country tax authorities; and applied In developing countries, tax politics reflect the fact academics. This ‘epistemic community’ of knowledge- that the average citizen does not perceive herself as be- based experts who think along similar lines has been ing taxed to any significant degree, and that most tax the dominant source of tax reform in most of Africa revenues are collected from a small number of larger and the former Soviet bloc in particular. Some of their companies. The tax activists are companies, wealthy policy positions remain controversial, but they were individuals, national politicians and the revenue policy undoubtedly designed principally with public good specialists in ministries of finance. The arenas in which in mind. And they have been widely implemented. policy is made are closed and exclusive. The bargaining It is true that this is yet another small and rather elite often revolves around the exchange of tax concessions group. However, it is better that tax policy should and exemptions for political support and contributions be shaped by such people than by the lobbyists who to politicians’ funds. might otherwise rule the roost. And this international Policies and practices that are continually re-shaped community of tax experts is becoming more global in out of the limelight and under the direct influence of composition. Latin Americans and Africans are fast the wealthy and powerful tend to benefit no one as joining the ranks. much as the wealthy and powerful. For example, in its 2011 budget, the Government of Sri Lanka offered The Future tax holidays of up to 6 years to companies making new Closed policymaking by lobbyists or closed policymak- investments of up to 300 million rupees in selected ing by transnational experts. Is this the only choice? export or import substitution sectors, but extended Fortunately not. Tax policy debate is opening up those tax holidays to up to 12 years for companies to a wider range of political actors. They vary from investing larger sums. country to country and issue to issue. In general, the following four sets of political actors are increasingly Recent History: The Optimistic View prominent in developing countries, especially in sub- Yet the story of tax reform in low income countries Saharan Africa: over the past two to three decades is far more positive • Business associations. Business associations typically than the paragraphs above lead us to expect. There has are the most visible contributors to national tax been a great deal of real, directed and purposeful tax policy discussions. If governments receive only a reform. Although the content of reform has varied handful of written submissions about tax policy from country to country, two themes recur. The first before the annual budget, these are likely to come 2 PREMNOTE February 2013 from chambers of commerce, employers’ asso- producers of benchmark data on the performance ciations, or other organizations representing the of national tax systems. The Paying Taxes report private sector. Business associations are of course produced annually by PwC and the World Bank self-interested. But they generally pursue those currently has a global coverage and makes the best self-interests in a more transparent way than do of very scarce hard data on tax system performance. individual companies. It is better for the quality Regional reports based on improved data, and of policy debate that the National Association of collected according to common standards, seem Garment Exporters should openly make the case likely to follow. for a tax holiday for new investors than that the less • The most vocal and effective new entrants to policy scrupulous companies should be able to ‘persuade’ debates on tax and development are civil society or- the Board of Investment to give them favorable ganizations (CSOs) like Action Aid, Christian Aid, individual treatment. The organizations that col- Global Financial Integrity, Oxfam and the Tax Jus- lectively represent the private sector are generally tice Network. They focus mainly on international expanding in low-income countries. The effect on taxation issues such as transfer mispricing, tax tax policy debate should be positive. havens, capital flight, information exchange among • Professional associations. Another type of associa- tax agencies, international tax treaties and the ways tion—the professional associations representing tax in which transnational corporations are required to collectors—are having an even more visible impact report their activities and profits—all with a focus on tax policymaking. The most impressive is the on reducing tax avoidance and evasion. These CSOs Inter American Center of Tax Administrations often form organizational coalitions, combining (CIAT). CIAT was founded in 1967. It is now grant-funded policy analysis and policy advocacy expanding beyond the Americas. Its members capabilities in Europe and the United States with include five national tax administrations from relatively small membership activities in Latin Europe, two from Africa, and one from Asia. America and sub-Saharan Africa. They have gener- The continent-wide African Tax Administration ally been very effective in producing material for ra- Forum (ATAF) has grown fast since its creation in dio, TV, internet and print media; in gaining access 2008. These associations provide their effective to tax policy forums nationally and in international members – the senior staff of national tax admin- organizations like the European Commission and istrations – with ideas, inspiration and often quiet the OECD; and in organizing street-level activities collegial support. Membership tends to strengthen to draw public attention to selected transnational the hand of national tax administrations in do- companies believed to be avoiding or evading their mestic policymaking, and is one of an increasing tax responsibilities. Taking advantage of the recent number of channels through which senior African drive by most OECD governments to close gaps tax administrators in particular can join the ranks in their tax-nets, these CSOs have played a major of the international ‘epistemic community’ of role in putting onto international policy agendas tax experts mentioned above. Asia lacks effective issues like tax havens and transfer mis-pricing by regional tax administrators’ associations. This may transnational companies. The scandal of the gross be one reason why tax policy and administration under-taxation of mining companies in countries in most South Asian countries have experienced like Zambia is likely to continue to help them little reform in recent decades. mobilize grassroots memberships in resource rich • The Big Four. The big international accounting nations. Their activities may change, especially as and professional services firms—Deloitte, Ernst global business mobilizes in response, and perhaps and Young, KPMG and PwC—are fast expand- tries to stimulate more civil society activism sup- ing their branch networks and staff numbers in portive of business interests. But the radical CSOs many poorer countries, especially in sub-Saharan are likely to continue to be major international tax Africa. They recruit experienced tax administra- policy actors. tors and appear on all sides of taxation processes and debates: as promoters of improved account- ing and auditing standards in the private sector; Conclusions as advisers to companies on how to minimize tax In the short term, tax policy debates in low-income obligations; as interlocutors for tax administrations countries will remain complex and inaccessible to on the interpretation or reform of tax law; and as many citizens and local CSOs. Accordingly, organized february 2013 PREMNOTE 3 special interests will remain influential. As the inter- with the fiscal decision-makers, and put more effort national aspects of business taxation come increas- into ‘feeding’ those policy debates. Because their tax ingly under the spotlight, the details of tax policy specialists will increasingly be nationals of developing may become even less comprehensible to the ordinary countries, they will be better placed to exercise influ- person in the street. But the longer-term picture looks ence without generating resistance. positive. Tax policy will be debated more openly. A wider range of people will participate. If they are to Note help bring about policy reform, organizations like the World Bank (2001) ‘Strengthening Peru’s Tax Agency’. World Bank will rely less on their close connections PREM Notes, No.60. This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on the PREM Web site (http://www.worldbank.org/prem). If you are interested in writing a PREMnote, email your idea to Madjiguene Seck at mseck@worldbank.org. For additional copies of this PREMnote please contact the PREM Advisory Service at x87736. This series is for both external and internal dissemination 4 PREMNOTE February 2013