Taxation and International

Policy & Institutions

Tetteh Hormeku, TWN-Africa
International Tax Academy, 1-6 Dec, 2014 Machakos, Kenya

TAX JUSTICE NETWORK-AFRICA

Introductory
Unlike WTO, World Bank, IMF, etc, International Tax System
is not a Coherent Regime but is a patchwork of:

multilateral and bilateral legal compromises around:

differential and shifting national tax traditions, principles and cultures
national and transnational economic interests and power
community of (international) tax specialists*, located in different a
range of inter-governmental institutions [OECD, IMF, UNDP] which
have varrying degrees of power, academia, etc.

Africa marginal in shaping this patchwork, but taker tax norms

and constructs:
especially in the post-SAP years, at variance the fiscal policy
imperatives deriving from its fundamental developmental challenges

Expressed even in some of the platforms of resistancew

Approach
Evolution of Fiscal Policy and Tax Forms in Africa
(immediate) post-independent period;
structural adjustment decades..

Intersection with International regime for

international business taxation has affected key
elements of this
Elements of the Tax Justice Platform, and what can
be fine-tuned for sensitivity to African-specific
economic developmental (transformatory)
imperatives.*

Tax and Development:

A Tale 2 Paradigms
Incentives versus Resources
Enough resources, only incentives to put them to act.
Not enough; not of the character for ready invesment; public action to
induce and mould

Role of Govt/Public Sector in Economy, and Tax

Public Sector Supplement to Market as Primary: Or Public Sector Place
in its own right. Public and Private as Equal Players. (Ricardo (Britain)
versus Kantian/Cameralist Germany
Not simply ideological; But different paths in evolution of capitalism.
And different issues at critical stages.

Immediate post-independence period:

Period of Keynes, etc. Public Sector Role Affirmed in Economics in
General and Development Economics in Particular

Taxation as Means of Inducing

Economic Development
Public resources are necessary for economic
development
Public resources for essential economic
infrastructure: education, health, communication,
Public expenditure, demand creation and
economic growth
Public Sector investment for pioneering and/or
focusing strategic economic initiative:
pioneer capitalist state, entrepreneural state,
economic nationalist state, developmental state

Issues in Development Taxation

Nicholas Kaldor

Taxation Potential and Capacity to Tax

Taxation Potential:
Economic Surplus: How Much, and in What form?
Distribution between Private Accummulation (i.e.
investment for expanded (re)production as against luxury
consumption) and Public Investment (i.e productive
investment as against unnecessary and/or wasteful
consumption-e.g. military, monument, and corruption

Taxation can shape the surplus. But the forms of

taxation must reflect the nature of the surplus

Taxation Potential in
Underdeveloped Economies
Per Capita Income
Actual Distribution of Income, Levels of
Inequality, related to forms of wealth: income
from landed and other property v work, etc.
Sectoral distribution of outputs-income
agric, minerals, manufacture, services, etc
Political Economy of production and
distribution in a specific economy

Political Economy
Weight of agriculture; nature of agricultural labour and
property
(plantation and export cash crop agric)
Smallholder (one acre or less) with a family of five; traditional land
tenures; territorial. Petty commodity production relations even when
within cash economy

Nature of Enterprise in Secondary and Tertiary Sectors

Preponderance of small enterprises A few medium to large with sea
of artisans, etc

The Role and Importance of Foreign Enterpise (Also High

Surplus Area)
Mining, Plantation Agriculture and Export Agricultural Trade
Import-Export Trade and Top-Tier Distribution
Finance

Taxes (Forms)
Dual Mandate: Increase Economic Surplus; Direct as Much of
This into Re-investment
Personal and Corporate Income Tax
Agricultural Marketing Boards: (Attract and reinvest agric surplus)
Commodity Taxes: Domestic and International Trade.
Frontier tolls; import duties and export taxes

Foreign Enterprise: E.g Mining Sector

Royalties, Corporate Tax; Export Duties (a la Kaldor*); Controls on Profit
Repatriation, Joint-Ownerships

Compulsory Levy
Wider State Economic Activity:
State Trading Companies; State Enterprises; State Financial Institutions: Commercial
and Development Banks, Insurance, Pensions

Structural Adjustment and Neo-liberalism,

(and maybe Ricardos Revenge)

Comparative Advantage and Its Misapplication

Under SAPs
Taxes as Distortion of Market, A Necessary Evil
That Must be Minimised.
(political economy, when the simple principles of it are understood, is only useful as it directs
governments to the right measure of taxation, Ricardo)

Re-defined role and form of

taxation
Market is best left to its own
Public sector must limited to upholding
specific conditions for the market property
rights, law and order, essential public goods,
redefined.
Taxation to raise revenue to support this. But
it must be done so that it does not interfere
with the market.
Question is what is the best tax instrument?

Example: Mining
The recovery of the mining sector in Africa will require a shift in
government objectives towards a primary objective of
maximizing tax revenues from mining over the long term,
rather than pursuing other economic or political objectives
such as control of resources or enhancement of employment.
This objective will be best achieved by a new policy emphasis
whereby governments focus on industry regulation and
promotion and private companies take the lead in operating,
managing and owning mineral enterprises.
Strategy for African Mining World Bank, 1992

Implications
Gravitation towards personal and corporate income taxes at
low levels
Dismantling of (many or all) other tax devices:
commodity and international trade taxes
commodity boards

Dismantling of other means of direct public participation in

attraction surplus for investment
privatisation of state enterprisesone-off returns to state coffers;
more seriously in strategic areas: finance, insurance, development
banking.

Later adoption of VAT and others to make-up

Example: Mining
Attract Foreign Investment. In context of race
to the bottom. Thus, roughly similar overgenerous tax regimes in all countries:
-

No VAT
No import or export taxes (except SL)
CIT rates down from 40% during 70s/80s to 30% or lower
Extremely low witholding taxes (between 10 and 15%) on dividends,
loan interest and consultant fees compared to other mining
economies (20-35%).
- No windfall or additional profit taxes
- Very low royalties: average 3%
- Stability agreements

Elements of International regime

Patchwork of Double Taxation Treaties
Formulated on the Appropriate to Capital Exporting as against capital
importing
Advanced Industrial Countries as cross-importers and exporters
Against Developing Countries as net importers
In addition vitiates Africas non-revenue use of taxes
Africa (and other developing) countries have shied away from DTT,
but:

Central concepts and principles still influence international business taxation: .e.g.
profits to permanent establishment, arms length principle in transfer pricing
More are being signed

Trade and Investment regimes

Tariff and Financial Liberalisation in WTO; More aggressive expanstion in EPA

Effects
Loss of Revenue
Public Deficit Trap:
Loss of broader means of revenue not compensated

Collapse of the Transformatory Role of Fiscal Policy

and of Capacity of the African State
Case of Rural Tranformation
Taxation and Agricultural Serviees
RuralCase of Rural Credit: Cross-subsidised rural banking and postoffice saving and other financial institutions versus micro-credit.

Tax Justice Platform

Two mainstream Goals:
Revenue: Maximising: TNCs, Illicit Flows
Strengthened Social and Public Goods Role.

A new dimension: tax as medium of promoting representative democracy:

Shaky grounds both theoretically and historically IBattle of the Two Deborahs)
But effect is to privilege income-based taxation

Both as a result of this focus, and explictly, the Africa-specific

developmental role minimized/ignored
E.g. Attitude to Informal sector- taxation in return for services vis-a-vis the
economics of petty commodity production and transformatory investment
that is the various devices and forms where fiscal policy can intervene (in)
directly in the creation economic surplus and its re-directing towards the
strategic investment for structural economic transformation

Another Approach
Common Goals: Around TNCs
But Differentiated specifity of fundamental tax
imperatives:
Advanced Industrial World
Africa