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Elusive Revenue; Taxation and quest for alternative development financing

Posted on May 3, 2015 · Posted in Taxation and development

Tax Evasion in GasFor most developing Countries like Tanzania mobilising optimal revenue for development financing has remained elusive. As a consequence every year governments have register missed development targets, making ambitions to cut poverty a lifelong myth.

 Overall, whilst traditional donors will continue to be critical for Africa, including through Aid for Trade, aid budgets will likely come under increasing pressure over the medium term, making search for alternative sources of development finance as important as ever. Amongst the latter, domestic resource mobilization deserves growing attention as the key avenue to reduce aid dependency and take full ownership of development strategies[1]. Taxation for development will replace or be required to replace the current budgeting frameworks which highly dependent on foreign aid multilateral arrangements like General Budget Support and Project support.

 It is for this importance that developing countries like Tanzania and East African Community member states reposition themselves to strategically promote trade, rational fiscal policies, curbing illicit tax flows and use of extra resources generated from increased trade and taxation to invest in quality public and social service delivery. The private sector is the lead implementer and economic agent responsible for production of goods and services that will enable Tanzania take its rightful place in the global market[2]. Fair taxing of citizens and the private sector and addressing loopholes which erode the tax base through tax evasion, avoidance and aggressive tax planning will be a major priority. Having policy and practical options which promote business and private sector growth and creating forums for constant interaction between the public, private and civil society collaboration and dialogue is vital in driving the tax for development agenda for economic growth forward.

 Taxation and curing the resource gap

Over the past this dialogue has been dysfunctional. As a consequence governments are caught up in a vicious circle of low citizens and corporate morale to pay taxes, high despondence towards evasion, narrow tax base, low revenue collection, and poor social service delivery. Bad governance as a non tariff barrier to trade has led to low investment inflows, low trade volumes and low tax collection, over dependence on foreign aid and stagnated economic growth. The unfair international trade and taxation rules or systems which affect or impede development need to be addressed.

Contemporary, Trade, Taxation and development challenges

Despite these positive developments, the governments, private sector and citizens still face multiple development challenges. Poverty levels have remained relatively high. According to the 2011/13 House Hold Budget Survey (HBS), between 28.2 and 33.6% of Tanzanians live below the basic needs poverty and around 9.7% below the average poverty line. According to the national panel reports there has been an increase in income inequality. There is an overall concern that the recorded economic growth rates, level of trade and tax revenue collection is not contributing to development. In Tanzania like most of its neighbouring countries development has by passed the majority and the level of economic vulnerability has remained extreme. The quality of social services has remained relatively poor and inequitably distributed. Generally there is an increasing recognition that economies need a balance between the role of markets and the role of government-with important contributions by nonmarket and non governmental institutions[3]. Export and intra trade led growth is seen as a prerequisite for eradicating poverty.

Poor economic and taxation policies, compounded by the complexity of tax administration and the low understanding of the tax systems contribute significantly towards low tax morale and poor tax compliance. As a consequence the government revenue collections have remained low. There is poor capacity of government to engage in international trade and tax debates and multilateral processes that affect trade and taxation of international trade and investments. The international trade and taxation system has been quite complex and at times working against Tanzania’s revenue objectives. There is wide spread resource leakage through unfair tax practices and tax dodging and illicit capital flight mechanisms which deny the country acute revenues to finance its development aspirations.

Resource leakage and development revenue deficits

tax-evasionIn its 2010 review of illicit flows for the years 2002-06, the Global Financial Integrity (GFI) notes that Tanzania lost an average  of USD 660 mln a year (as high end estimates) out of which USD551 Mln was a result of un recorded capital leakages and USD 109 Mln as a result of trade mispricing. During 2000-08 Tanzania is estimated to have lost USD2.5bln and during 1970-2008 lost USD 7.36 bln from illicit capital flows. These figures suggest the total illicit capital flows from Tanzania range from USD94-660 Mln a year and trade mispricing alone accounts for USD109-127Mln a year[4]. ESRF estimates that revenue lost through non revenue collection is around 35-55% of total tax revenue meaning a likelihood of Tsh1.5-2.4 trillion lost in 2009/10 alone[5] All these resources if saved could be contribute tremendously/significantly towards poverty eradication.

 Citizen disengagement from fiscal policy and taxation

There is weak citizen engagement in trade and tax policy and practical issues. Most citizens view trade and tax matters as complex, unfair and exploitative. They least see the relationship between trade, taxation and development and this factor has led to low tax compliance amongst citizens. According to a study by Afro Barometer Survey in 2013[6] reveals that citizens are willing to pay slightly more taxes if the quality of social services would be improved. Tax education is low and government’s efforts to introduce new tax reforms and methods of revenue collection like use of electronic fiscal devices (EfDs) in 2014 received stiff resistance from the business community. The business traders describe the process as non consultative and selectively applied.  Curbing tax evasion by individuals and multinational companies in international taxation and taxing the informal sector are the most challenging areas in Tax administration. The other is the challenge of tax administration bodies to cope with tax havens,  the changing  international tax planning techniques and the digital economy.Tax justice Meeting

 Development issues like taxation have for many citizens, in the past remained, a ‘no go area.  Yet these issues affect us on a daily basis. We will make them simple to understand and interesting to engage as possible.  In the next period we will nourish on the wide expertise at our disposal to analyse the current issues in Tax and how taxation is affecting development. These will take shape as analytical and sometimes provoking articles on these subjects.  GEPC will also invite and encourage you to join us at the various round table and online discussions on these subjects

 [1] UNECA: Building Trading capacities for Africa’s Transformation: A critical review  of Aid for Trade, UNECA, Addis ababa, 2013

[2] URT: National Trade Policy for a competitive economy and export led growth, Dar es Salaam, February, 2003, pg i

[3] Stigliz E. Joseph;  Freefall; America, Free Markets, and the sinking of the World Economy, New York, London, 2010, pg xii

[4] The One Billion dollar question: How can Tanzania stop losing so much tax revenue; Norwegian Church Aid, 2012

[5] ESRF: How the poor tax  policies contribute towards non compliance, evasion and avoidance thus reducing the tax base, 2010

[6] Afro Barometer Survey;  Africa perspectives on payment   of taxes, 2014