Annexes to COM(2010)163 - Tax and Development Cooperating with Developing Countries on Promoting Good Governance in Tax Matters SEC(2010)426 - Main contents
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| dossier | COM(2010)163 - Tax and Development Cooperating with Developing Countries on Promoting Good Governance in Tax Matters SEC(2010)426. |
|---|---|
| document | COM(2010)163  |
| date | April 21, 2010 |
Guided by the EU policy of effective multilateralism, the Commission underlines the importance of the development of and subsequent compliance with global principles and standards on transparency and exchange of information. Ideally, this calls for global conventions with binding commitments for all treaty signatories. For the time being, efforts have to be undertaken to make effective use of existing regional cooperation frameworks established with, for instance, the African, Caribbean and Pacific (ACP) counties, Latin American and European Neighbourhood regions so that best practice in good tax governance can be introduced and broadened at the appropriate regional level. The Commission will also strengthen transparency by putting forward a Communication on Corporate Social Responsibility, where it will consider how to develop a system for mandatory disclosure of governance information in the annual accounting.
Developing countries need to be enabled to participate more effectively in international tax cooperation structures and processes. This would allow them to negotiate relevant agreements, including on tax information exchange, at multilateral, regional and/or bilateral level, wherever most appropriate and effective.
2. HARNESSING EU INSTRUMENTS TO PROVIDE ENHANCED SUPPORT
Progress in strengthening tax systems and raising domestic revenues in developing countries has rather been modest over the last years. The Commission believes the donor community can do more and make better use of the existing funds and instruments by setting up a more consistent approach in this area.
The Commission highlights the importance of assistance, including technical cooperation, in designing developing countries' tax systems and implementing the principles of good governance in the tax area. For example, in 2009 the Commission has disbursed EUR 117 million on ongoing activities and committed an additional EUR 49 million in new projects to support public financial management, including tax policy and administration, in developing countries[8]. EU Member States and other donors provide important support to this area as well.
The following approach should help enhancing support from the EU and the international community to tax systems in developing countries.
2.1. Stepping up and improving the effectiveness of EU support to tax systems
2.1.1. Introducing a more comprehensive approach to tax administration and tax reforms
On the basis of a comprehensive approach taking notably into account the economic situation, political economy and the international environment of the country, as well as broader governance and public finance management contexts, the Commission proposes that relevant assistance tools and instruments be improved and best use made of them in the appropriate frameworks:
- The European Development Fund (EDF) for African, Caribbean and Pacific (ACP) States: when concluding country and regional strategy papers, attention will be given to the principles of good governance in the tax area, using the countries’ governance commitments as a basis. There will be a greater focus on domestic revenue and principles of good governance in tax issues as part of countries' governance commitments and profiles. Countries eligible for development aid which, after assessment based on the elaboration of a governance profile, undertake detailed commitments (Governance Action Plan), may receive an additional allocation depending on the quality of their commitment. This will enable a strengthened dialogue in this area, including in the context of mid and end of term reviews, and Article 8 Political Dialogue. In line with the proposals of the 2009 Communication "Promoting Good Governance in Tax Matters", important provisions related to good governance in tax area and tax reforms have been introduced in the process to revise the Cotonou Agreement.
- The Development Cooperation Instrument (DCI) and the European Neighbourhood Policy and Partnership Instrument (ENPI): Specific attention will be paid to effectively integrating domestic revenue and good governance in tax matters principles into the programming, implementation and monitoring of national and regional envelopes in accordance with the priorities of the Strategic Documents, including in the context of the relevant political and policy dialogues structures established with the partner countries.
- Support for national oversight bodies, parliaments and Non-State Actors, to produce and disseminate quality work about tax fraud and its impact, to ensure public scrutiny of public financial management, including tax governance performance, and to assist in policy formulation, where appropriate and feasible.
This enhanced and broadened focus on tax matters requires building up more expertise at EU level and more coherence in the allocation and use of resources.
2.1.2. Supporting multilateral and regional initiatives
Where appropriate, support to multilateral and regional initiatives on tax administration and tax reforms should be granted. The Commission welcomes regional fora such as the African Tax Administration Forum and the Inter-American Centre of Tax Administrations, which aim at promoting improvements in tax administrations through sharing experiences, benchmarking and peer reviewing best practices. The Commission will consider financial support to these initiatives, inter alia through intra-ACP regional funds.
The Commission considers that support for IMF regional technical centres for the provision demand-driven and targeted technical cooperation on tax administration to developing countries should be enhanced. In addition, support is being considered, also by EU Member States, for the IMF Revenue for Development Trust Fund to extend technical cooperation on revenue management to developing countries.
In resource-rich settings, the Commission, notably through the EDF, and Member States should reinforce support to the Extractive Industries Transparency Initiative (EITI) which has been instrumental in strengthening governance by improving transparency and accountability, through the disclosure of government revenues and company payments from resource extraction.
2.1.3. Strengthening public financial management in the context of budget support
The architecture of budget support programs facilitates policy dialogue, performance measurement and capacity development in order to improve revenue systems and collection. The processes and tools developed for public financial management (PFM) are also relevant for revenue mobilization. The Public Expenditure Financial Accountability (PEFA) framework, which includes indicators on revenue, offers one avenue for this. As regards ACP countries, the revision of the Cotonou Agreement streamlines institutional development and capacity building support to tax reforms and good governance in tax matters and creates incentives to commit to public financial management reforms, including in the revenue area, in order to be eligible to budget support.
The EU should encourage partner governments to develop reform programs, including in resource-rich settings and in the context of support to local authorities that clearly state the objectives in terms of tax policy and tax administration reforms. A structured reform program will facilitate the transition from fragmented projects to a more coordinated donor approach.
2.1.4. Deepening regional integration
Regional integration is crucial for developing countries and a key feature in EU cooperation. The creation of custom unions and the adoption of Common External Tariffs in several areas, and the signature of Economic Partnership Agreements with the EU bring significant economic benefits for the partner countries, but also new challenges, in particular the need to shift the resource base from the external common tariffs towards other types of taxation. Regional organizations have adopted convergence macroeconomic criteria including tax revenue objectives, have worked towards harmonized VAT rates and codes of investment and have provided guidance on strengthening other forms of taxation, increasing efficiency of cross-border tax services and addressing transparency. The Commission considers that support should be enhanced for furthering the process of regional integration in partner regions, notably through the appropriate indicative programs implemented in partnership with the regional organisations concerned.
2.1.5. Improving donor coordination
The Commission intends to improve donor coordination at EU and international levels.
At EU level, the EU Code of Conduct on Complementarity and Division of Labour in Development Policy[9] presents guiding principles on division of labour. These principles, including the notion of lead donorship and delegated cooperation/partnership arrangements, should be applied to the tax area. The Commission and the Member States should coordinate support to government priorities taking into account specific expertise and avoiding overlapping.
An effective division of labour at donor level in general and among EU partners in particular allows for properly targeted tax governance assistance while fully respecting aid effectiveness principles. Close collaboration with the European Investment Bank (EIB), and coherence between EU policy priorities in the tax area and relevant EIB and other International Financing Institutions (IFIs) interventions should be further ensured[10].
At international level, donor coordination in relation to tax assistance should also be further improved notably through the International Tax Dialogue (ITD), members of which include the European Commission, the IMF, OECD, the UN, and the World Bank.
2.2. Working towards a transparent, cooperative and fair international tax environment
The Commission is convinced that tax evasion and avoidance cannot be addressed properly without international tax cooperation in an environment where developing and developed countries can benefit from and contribute to international initiatives.
2.2.1. Enhancing the participation of developing countries in relevant international fora
It is necessary to support developing countries in their fight against illicit outflows and a stronger involvement of developing countries in international tax dialogues and cooperation, including in the standards setting process. International tax standards for cooperation should also be discussed in a forum where developing and developed countries are both represented.
To this end, the Commission supports stepping up international dialogue and cooperation in tax matters, notably through a broader participation of developing countries in the OECD Global Fora on Transparency and Exchange of Information and on Development, respectively. Furthermore, the Commission encourages enhanced cooperation between the OECD Development Assistance Committee and the Committee of Fiscal Affairs, the United Nations Committee of Experts on International Cooperation in Tax Matters, the International Tax Dialogue, and, as an informal platform, the International Tax Compact.
Concrete steps have already been taken under the ongoing revision of the Cotonou Agreement to support ACP countries to participate in international tax cooperation structures and to implement best practices in tax matters, including the principle of transparency and exchange of information.
2.2.2. Supporting adoption and implementation of international standards
The Commission considers that EU action should focus on encouraging and supporting developing countries to adopt and implement international standards in the tax area.
With regard to the principles of good governance in tax matters:
- The Commission will further seek their adoption through relevant agreements between the EU and its partners in line with the ECOFIN conclusions of 14 May 2008;
- The Commission will provide support for their adoption and implementation at regional and national levels, including through technical cooperation where requested, including by:
- Strengthening capacities to conclude and implement Tax Information Exchange Agreements (TIEA) and, where appropriate, Double Taxation Conventions (DTC), including through multilateral mechanisms;
- Adapting the legal framework and improving tax administration capacity as appropriate;
- Sharing experience in international tax cooperation gained through applicable instruments such as the EU Savings Taxation Directive, in order to explore the relevance and feasibility of multilateral agreements and automatic exchange of information for developing countries.
The Commission will encourage research on innovative approaches to the implementation of the OECD transfer pricing guidelines by developing countries, such as assistance by other countries in applying rules, or joint tax audits by developing countries' administrations. The Commission also considers that strengthening assessment capacities in tax administrations of partner countries is necessary regarding the application of the arm's-length principle.
In order to enhance transparency and facilitate access of relevant data by tax administrations in developing countries, there is an increasing interest in a country-by-country reporting (CBCR) standard for multinational corporations operating in developing countries. The Commission supports the timely conclusion of ongoing work being done by the OECD with respect to a CBCR guideline, which should then be referred in the OECD Guidelines for Multinational Enterprises and in the OECD Principles of Corporate Governance. Moreover, the Commission supports research work currently undertaken by the International Accounting Standards Board towards the possible inclusion of CBCR in an International Financial Reporting Standard for extractive industries and encourages further investigation into other methods which could be used to help developing countries authorities to correctly assess, at low cost, the tax liabilities of their taxpayers.
3. CONCLUSIONS AND RECOMMENDATIONS
The Commission proposes to:
- Strengthen support to domestic revenue mobilisation in developing countries, in the context of its broader efforts to strengthen good governance and public finance management in these countries, by:
- Increasing the effectiveness of the support to developing countries' capacities to raise domestic revenues in line with the principles of good governance in the tax area. This will be done in particular through a more comprehensive approach in support of tax reforms and administration, increased support to demand-driven regional and international capacity development initiatives, including EITI and IMF initiatives, and better donor coordination at EU and international levels;
- Making best use of relevant dialogue and assessment tools, e.g. governance criteria, profiles, action plans, for ensuring an effective monitoring of domestic revenue issues and good governance commitments in the tax area;;
- Better integrating tax issues when assessing budget support eligibility and supporting Public Financial Management reforms;
- Strengthening monitoring capacities in developing countries in the fight against illicit financial flows, including through support to non-state actors;
- Supporting regional institutions and countries engaged in economic regional integration and trade liberalisation, and strengthening their capacity to improve domestic tax revenue mobilisation.
- Promote the principles of good governance in tax matters, and support developing countries to fight against tax evasion and other harmful tax practices, by:
- Encouraging and supporting closer cooperation between relevant OECD and UN bodies when developing international standards of tax cooperation, taking into account the specific needs and capacities of developing countries;
- Including, as appropriate, a specific reference to strengthening tax systems and to the principles of good governance in the tax area in all development cooperation agreements with third parties;
- Providing technical cooperation to developing countries committed to the principles of good governance in the tax area to enable them to conclude and implement TIEA and, where appropriate, DTC;
- Supporting the adoption and implementation of the OECD transfer pricing guidelines in developing countries;
- Supporting ongoing research on a country-by-country reporting requirement as part of a reporting standard for multinational corporations, notably in the extractive industry.
[1] COM(2009) 201.
[2] Monterrey Financing for Development Conference, 2002.
[3] Doha Financing for Development Conference, 2008.
[4] Norwegian Government Commission Report “Tax Havens and Development”, June 2009.
[5] COM(2009) 160, 2.4.2009.
[6] The Raw Materials Initiative - COM(2008) 699, 4.11.2008.
[7] COM(2009) 160 and 201, and ECOFIN conclusions of 14 May 2008.
[8] These amounts cover the following activities: fiscal policy and planning; support to ministries of finance; strengthening financial and managerial accountability; public expenditure management; improving financial management systems; tax policy and administration, budget drafting; inter-governmental fiscal relations, public audit, public debt.
[9] COM(2007) 72.
[10] IFIs must carry out a broad-based due diligence in order to avoid that any EU funds are used directly or through intermediaries in Offshore Financial Centres, so-called tax havens or any other jurisdiction, for the purpose of evading tax payment to beneficiary countries and EU Member States or in connection with tax fraud and avoidance.