A functioning tax system is increasingly recognised as the most critical factor in allowing developing countries to build a strong civil society. While aid is important, it will not bring about the changes and revenue required to boost strong, sustainable and balanced growth in these countries.
Sustainable development rests on the ability of foreign and domestic private sectors to increase their investment in infrastructure, agriculture and other economic sectors. In order for developing countries to realise the benefits of that growth, business believes a larger share of aid budgets needs to be spent on capacity building for tax administrations; the current proportion of 0.7% is too low to achieve this.
The private sector can play an essential role in capacity building and domestic resource mobilisation, through providing technical assistance to growing tax administrations in developing countries. As investors, companies recognise the severe domestic challenges in developing countries such as persistent poverty, corruption, political instability, burdensome bureaucracy or inadequate infrastructures.
A tax system that supports investment and is part of a broader investment framework which includes rule of law, predictable and transparent legislative frameworks, open competitive markets for trade and investment, and generally good governance is crucial for successful sustainable development.
BIAC believes that OECD work on taxation and development, including contributions to the G20 in this area, is especially relevant to development polices aiming to foster sustainable economic growth and societal well-being. Business believes that a number of important elements are necessary to progress in this area: capacity building, effective transfer pricing frameworks, transparency, and countering international tax evasion and exchanging information.
Capacity building for tax administration/revenue institutions in developing countries allows them to move from aid to sustainable revenue. It is the basis to develop the public infrastructure and services and a social benefit system in a sustainable way and to transform an informal economy into a formal one. Development aid should therefore be allocated to tax administration infrastructure, including human capital and technology (both hardware and software for a modern tax system).
OECD co-operative efforts with developing countries to build capacity in the field of transfer pricing based on the Arms Length Standard is vital for investment and for the competitiveness of both business and developing country economies. Transfer pricing is a complex and often misunderstood concept. It requires technical expertise and sufficient resources to be correctly implemented and enforced.
As a priority, business is working with the OECD and other stakeholders to provide guidance and technical assistance to help developing countries understand and apply both the OECD Transfer Pricing Guidelines and the principles contained in the OECD Model Tax Convention. Such cooperation is also essential to build confidence between governments and the private sector in this field.
The role of transparency and disclosure in driving development as it relates to international business taxation needs assessing, and this work should be undertaken with a clear development objective. In this respect, current initiatives such as the one for the extractive industries should be tested and evaluated before governments take any further steps. It is vital that we develop best practice in this area through tried experience.
How transparency on the part of revenue authorities can contribute to efficient and effective tax collection should also be considered. Business welcomes the work of the Global Forum on Transparency and Information Exchange at the OECD, whose activities and multilateral co-operation for effective transparency and exchange of information are clearly in the interest of legitimate business. Business also engages the Forum of Tax Administration in this context.
In short, business recognises the urgent need to build tax administration capacity, supports OECD efforts with other international organisations and the financial institutions to achieve progress in this important area, and seeks an active role in the partnership of all relevant stakeholders. Soundly implementing OECD international tax standards is a critical factor for investment, and business urges governments to continue developing transparent predictable tax regimes as a key element to sustainable economic development.
OECD Observer (2008), "Transfer pricing: Keeping it at arm’s length".
The opinions expressed and arguments employed herein are those of the author and do not necessarily reflect the official views of BIAC or those of Rio Tinto plc.
©OECD Yearbook 2012