The Great Tax Awakening? Three Reservations

By Mick Moore 

Never has there been such extensive popular and political interest in tax reform. Never have so many governments declared that they intend to change the global tax system and ensure that transnational corporations pay their fair share. Never have arcane issues like ‘transfer mispricing’ received so much media coverage. And never have there been so many promising indicators of real policy change. 

Pressures from American and European legislators and tax authorities have cracked open banking secrecy in Switzerland and Luxembourg, and may end it entirely. Other tax havens are facing the same prospect. The European Union is contemplating a major shift toward a form of ‘unitary taxation’ of transnational corporations. Large British companies have lost much of their appetite for battling with Her Majesty’s Revenue and Customs, and are complying in cases that they would have contested only a couple of years ago. The forthcoming G8 and G20 meetings have crystallised concerns that have been building since the 2008 financial crises, and raised hopes of reforms that will benefit rich and poor governments alike, and ordinary people and businesses worldwide. There is still a good chance that these reforms will happen. But we need to watch out on three fronts in particular.

Most pressing (and feasible) tax reforms gradual, procedural and legal

First, the reforms that are needed now in the global systems for taxing transnational corporations and high net worth individuals are not the dramatic ‘stroke of the pen’ changes that we can easily monitor. It may make sense in the long term to move to a completely new system of ‘unitary taxation’ for transnational corporations. But that will be in the long term. Most of the reforms that are feasible and needed at this moment take the form of legal and procedural changes in complex domains accessible mainly to specialist professionals.

We should, for example:

• greatly extend mechanisms for the automatic exchange of information among national tax authorities; find ways of putting an end to ‘beneficial ownership’ – secrecy about the real ownership of companies, foundations and trusts; 
• motivate transnational corporations to account for their activities and profits in detail, and in a common format, for each country in which they operate; 
• create a mechanism to make it possible to revise the thousands of bilateral tax treaties in existence without re-negotiating each one separately; 
• agree on a common global anti-abuse rule and a way of sharing information among tax authorities about aggressive tax avoidance schemes; 
• make it easier for tax and police authorities to share the information they need to tackle the inter-related problems of corruption, money laundering and tax evasion. 

It would be easy for governments to make grand declarations, but not do all the follow up work that is needed for effective delivery. How will we know whether they really are are putting their money where their mouths are?

Northern domination the global tax system - who will reforms benefit?

Second, all the changes mentioned above are driven, directly or indirectly, by the urgent needs of most rich country governments to raise more revenue to meet their huge fiscal deficits. Those governments, along with the EU and the OECD, dominate the global tax system. There are reasons to be optimistic that the kinds of reforms they are contemplating will also be of benefit to developing countries. We can be fairly sure that the national tax administrations of the BRICs (Brazil, Russia, India, China and South Africa) and other large, middle income countries like Turkey will welcome and be able to cope with these changes. They have the skilled personnel and the IT systems needed effectively to process the large increases in inflows and outflows of information that the reforms require. But it is far from certain that the same is true of most poorer, smaller developing countries. They are anyway almost unrepresented in the current global debate. Their national tax administrations could be overwhelmed by the outcomes, and find themselves net losers, devoting so many resources to supplying data to the rest of the world that they are unable to take advantage of the wider access to information that they will nominally enjoy.

The extension of the principle of automatic information exchange among tax authorities will anyway have to be carefully calibrated. It cannot be automatic, for all countries, instantaneously. The information that is used to collect taxes can also be employed for purposes of blackmail and extortion. We already see a few governments using Interpol international arrest warrants to harass political opponents rather than to apprehend criminals. Concerns about the possibility of tax information being misused are legitimate – but could also become a pretext for excluding many poor developing countries from international arrangements to exchange tax information. Those that are excluded will be at a real disadvantage.

Can the political momentum be sustained?

Third, the coalition of forces that has helped make tax so prominent on the contemporary political agenda may not endure over the period needed to ensure that reforms are real and sustained. National governments have not generally played leading roles in creating the reform agenda. We owe much more to the combination of (a) a very impressive set of advocacy and campaigning organisations like Action Aid (who have published a report on tax havens today), Christian Aid, Oxfam, Global Witness, Tax Justice Network and UK Uncut and (b) authoritative international organisations like the European Union, the IMF and the OECD. But the two do not always work well together. In particular, some of the advocacy organisations also campaign actively against the international organisations, sometimes on grounds that I would characterise as populist and diversionary – most notably in criticising the extent to which the IMF has been an active proponent of Value-added taxes.

It is a good time to celebrate the progress that is being made in setting the stage for serious global tax reform. But it is not the time to relax, to assume that the interests of the poorer countries will really be taken into account, or to indulge in fractious politics over minor issues.

Mick Moore is CEO of the International Centre for Tax and Development (ICTD) and Research Fellow at IDS.


Other Governance and Development posts on tax:

• Better coordination key to more tax and less aid
• Exciting accounting? Country-by-country reporting for transnational corporations
• Tax inspectors without borders: a seriously good idea

The good and bad news from Pakistan's May 2013 elections

by Shandana Khan Mohmand

The Pakistani election of 11 May 2013 marked many positives in Pakistan’s political development, and just as many negatives.

Tentative steps towards democracy

It has been depicted as the making of history, for the fact that it marked the end of the first ever completed term of a democratically elected government, and the first ever democratic transition of power. This is only partly true. The oft-repeated fact of this being Pakistan’s first ever full 5-year term has been intriguing right from the start. Zulfiqar Ali Bhutto’s government, elected in 1970, completed a full term, albeit after a very shaky start during which the country split into two (with the creation of Bangladesh). Previous elections have also been far more historically significant. The 1970 election marked an incredibly dramatic transition from the 11-year military rule of General Ayub Khan, and brought into power Pakistan’s first ever elected government. The 1988 and 2008 elections were significant for the same reason, and marked the transition to democratic rule from the military dictatorships of Generals Zia-ul-Haq and Pervez Musharraf respectively.

The historical significance of this most recent election lies in the fact of one democratically elected government completing its 5-year term and then peacefully handing over power through an election to another elected government, with the election result and handover being accepted by all concerned parties, barring a few allegations of rigging. That certainly has never happened before. While the three elections mentioned above marked transitions to democracy, this is the first to signal Pakistan’s tentative move towards the consolidation of democracy.

Strong voter turnout despite the threats of violence

Other positives include a phenomenal increase in voter turnout. The average turnout for the 8 elections held between 1977 and 2008 was 40%, with the highest being 47% in the 1977 election (International IDEA). Since then fewer and fewer Pakistani voters have chosen to step out and vote on election day. This time the figure is about 55% (according to some closer to 60%), and this despite the fact that it was an election with the greatest ever threat to the regular voter.

Since about April, the Taliban were reported to have distributed pamphlets in various cities warning people against coming out to vote. There was a strong fear that voters would be targeted as they lined up at polling booths. And yet over 50 million voters lined up on 11th May, earning Pakistan the label “the world’s bravest democracy” from one columnist.

Emergence of a third national party

The turnout has much to do with the emergence of a new party – the ex-cricket captain Imran Khan’s PTI – that ran a strong campaign to get out the vote. Its main incentive for doing so was the perception that its largest vote bank lies within Pakistan’s young voters – 48% of Pakistan’s voters are below the age of 35 – and if they could get this group to vote, the party could get quite close to a majority win.

The irony is that though they managed to get the vote out, not all new voters cast their vote for the PTI, choosing in many cases to vote instead for the country’s older parties. Nevertheless, the larger voter turnout and the emergence of a significant third force in what was fast becoming a two-party competition between the Pakistan People’s Party (PPP) and the Pakistan Muslim League – Nawaz (PML-N), are definite contributions of the PTI.

Lack of a level playing field

There are two main negatives, besides of course the allegations of rigging and the fact that the winning party’s seat tally is beyond many expectations (an expert survey by a leading news magazine, published on the eve of the election, gave the triumphant PML-N an average of 35% of the seats in the National Assembly. It ended up getting 45%, or 125 out of 272 seats).

First, it seems no party except the winning PML-N had a level playing field. The PTI and its supporters believe that they have been cheated out of seats that they had expected to sweep, and have directed these allegations against both the PML-N in Punjab and the MQM in Sindh. More importantly, the incumbent PPP, along with two other secular parties, the ANP and MQM, were unable to run campaigns because of terrorist threats and the targeting and execution of some of their candidates. The impact was clearly reflected in their abysmal seat tallies.

Conservative values supported by the youth vote

Second, the election was won by parties on the right, and revealed the growing number of youth to be particularly right leaning. The major electoral agendas that carried the day were corruption, drone attacks, nationalism and anti-Americanism, and promises of infrastructure development. Poverty reduction, labour issues, minority rights and tax reforms were almost entirely absent from the electoral discourse. The winners are admittedly not religious fundamentalist parties (who received less than 0.05% of seats in the National Assembly), but they are certainly conservative and promise nothing in their agendas that can be considered socially transformative. And this the newly mobilised youth has no issues with.

Shandana will be giving a seminar on the elections at the Institute of Development Studies on 23 May.

We need to strengthen our public institutions before the withdrawal of foreign troops from Afghanistan

By Baseer Ahmad*

At the end of 2014 the majority of existing foreign troops will be withdrawn from Afghanistan. The international community (an amalgam of security, humanitarian and development agencies) arrived in Afghanistan to help build a stable and long-lasting Afghan state, capable of representing its people. Ousting the Taliban that ruled the country from 1996 till 2001 was one of its biggest achievements.

The uneasy journey to establish democracy and build peace in this fragile country began in 2001. The main successes so far have been the drafting of a new democratic constitution (2004) and the presidential and parliamentary elections (2004/5 and 2009/10).  However, attempts at building democracy and democratic institutions do not always translate into ‘governments of the people, by the people and for the people’. 

While most experts on Afghanistan identify institutional deficit as the main factor behind the limited functioning of the Afghan Government and its inability to deliver basic services to its people; in my view, it is the fact that most state institutions are run by individuals rather than on organisational mandates which is a key problem. Most of the mandates that exist are not operational, and it is individual leaders and executives who play an important role in formulating and executing public policies. However, many of them are incompetent and, in some cases, are former warlords, and the fact that they govern many of the central and provincial institutions by resorting to patronage, for example, hinders the ‘effective’ functioning of government.

A growing concern that public institutions are being monopolised by individuals

There are many concerns about the impact of the 2014 international withdrawal and predictions for the country’s future are difficult to make. UK Defense Secretary Philip Hammond recently said that nobody could say "with certainty what the future for Afghanistan" would be. One of the major concerns is the reversal of the current achievements and the recurrence of a civil war.

I see the source of this fear coming both from historical precedent and the recent developments around the monopolisation of institutions by ruling elites who are difficult to hold to account. Warlords, commanders, local militias and religious groups were the initial power-fillers after the Taliban regime was toppled in 2001. These informal powerbrokers have transformed into formal actors and become the main representatives of  Afghans to the international community. Supported by the international community in the fight against Taliban, they gained more power. After 2014, it seems likely that these warlords will play a more influential and active role in further monopolising institutions. However, it is uncertain whether these elites will remain united after their resources dwindle in 2014 and beyond. It is also likely that they would use their leverage and influence over the current Afghan National Army (ANA) and fragment it along ethnic lines. If this happens we could potentially face another civil conflict, which will reverse the achievements, made so far.

Is there an exit strategy for Afghanistan?

The exit strategy of the international community emphasises the negotiating and signing of bilateral strategic agreements which will chart out their future engagements and document their commitments to the Afghan state after 2014.

One major bilateral agreement that will determine Afghan security after 2014 is the current security pact under negotiation with the United States. While many in Afghanistan believe that a security pact should be signed with the USA following the bilateral strategic agreement (signed in May 2012), the immunity of the American forces remaining in Afghanistan continues to be a bone of contention between the two states, so the security pact has not yet been signed. Even so, Afghanistan has already been declared a major non-NATO ally which will enable access to US military training, military supplies, equipment loans, and financing for loans.

While the negotiations, debates and rifts define the recent relationship between Afghanistan and the USA, much less has been done to address the fundamental problems. The key issue that Afghan people are concerned with is who is representing them in these negotiations, which will ultimately determine their future security and prosperity. The current exit strategy and even the peace process excludes the majority of the societal actors representing the Afghan people. Instead the process includes groups which have dubious legitimacy and controversial histories.

Building accountable, effective and legitimate institutions

Building accountable, effective and legitimate institutions in Afghanistan should focus on moving beyond the ‘individual centric’ nature which has characterised them so far. Endeavours should be made to restrict the monopolisation of particular individuals and groups over institutions. The more "institutionalised" the institutions, the more deliberative, representative, consensual and legitimate the decisions will be. By "institutionalised",  I mean institutions that are run by mandates not by individual or groups.

Building post-conflict Afghanistan requires taking on board all interests and groups. But at the same time a balance between these interests and groups is critical to the stability of the country. Neutralising the enormous spoiling capability that the warlords have gained so far cannot and will not be addressed unless and until there are institutionalised institutions in place - with the ability to operate along the lines of their mandates rather than being at the whim of their leaders.

*Baseer Ahmad is currently undertaking an MA in Governance and Development at the Institute of Development Studies.

Is the World Bank's attitude towards Participatory Development changing?

By Ila Patlolla*

The recently launched World Bank Policy Research Report titled ‘Localizing Development: Does Participation Work?’ by Ghazala Mansuri and Vijayendra Rao (who also gave a Sussex Development Lecture on the same topic a few weeks back) is both unusual and groundbreaking.

Looking at quantitative evaluations of various participatory development projects (both within and outside the Bank) that are touted to help reduce poverty and inequalities, improve service delivery and build capacity for collective community action, Mansuri and Rao not only push the World Bank to accept what is not working in their approach and admit mistakes, but also bring to the fore key challenges and possible solutions.

In their report, Mansuri and Rao distinguish between “induced” and “organic” participation, where one is driven by external agents (by pumping in money/resources), while the other occurs ‘naturally’ (arising out of the needs and initiative of the community). Recognition of this difference is important, given that the World Bank alone has invested over $85 billion on development assistance for participation. For such induced participation to be effective and sustainable, the World Bank and other external agents need to change their approach to development- to one that is long-term, context sensitive, accepts failure and learns from mistakes. The reasons behind this are:

1. Participatory projects often fail to be truly inclusive. The wealthier, more educated, higher social status, politically connected, and generally male, tend to benefit. This is where local and national ‘context’ (geography, political system, local power dynamics, etc.) plays an important role in determining outcomes of development projects, as these factors determine who decides, how and for whom. Projects funded by the World Bank also often adopt strikingly similar project designs across regions and projects. This undermines the very fact that the needs and requirements of every community are different, and for projects to work and reach intended beneficiaries, one needs to tailor-make them to fit the context.


2. Participatory projects are often unsustainable. During the course of the project, cash or other material incentives may induce people to participate and build networks, but when these are withdrawn the whole system collapses. This calls for a need for capacity building, where communities are equipped with the skills and resources to sustain systems beyond the life of the project. The World Bank and other donor agencies are also known for focusing on short-term, more tangible goals that can be measured and funded as per schedule, rather than long-term, more qualitative goals of changing socio-political systems and attitudes, that may or may not be possible to measure.


3. Participatory projects are often unaccountable to the beneficiaries.  There are no clear mechanisms for downward accountability. Incentives are directed at improving upward accountability, rather than increasing discretionary powers at the lower levels. Planning and reporting requirements are also so complex that they’re beyond the capacity of local field staff often leading to too much time spent doing unnecessary paperwork and delays in decision-making. Project facilitators are also often told what the community think they want to hear, and aren’t always given the exact picture, which makes it hard to assess the impact of the project. This usually happens when project staff fear failure or negative feedback, without realizing that it is only the knowledge of their shortcomings that can lead to improvement.


4. Participatory projects seldom recognise monitoring and evaluation systems as vital to the project, with poor incentives for honest, comprehensive and regular monitoring and evaluation. New, cost-effective and innovative mechanisms are needed in this regard, with adequate importance and priority given by senior management, such that projects can constantly be monitored and improved upon.


5. Most importantly, participatory projects don’t have a predictable trajectory and it is often difficult and unrealistic to expect clear, measurable outcomes within a given timeframe. While planning is important, it should allow enough scope for experimentation and ‘learning by doing’.

In order to have a lasting impact, participatory projects need to be flexible enough to adapt to local contexts and reflect the ‘real’ needs of a community rather than ‘perceived’ needs.

Mansuri and Rao also point out that for innovation and evidence-based policy decisions to take place, one needs to create an environment where failure is acknowledged, accepted, and instrumental in leading the way for developing innovative solutions to development problems. While the message itself is not new, it is heartening to see this recognition and acknowledgement coming from within the World Bank.

The real test is whether these lessons will be reflected in changes in incentives, programming and monitoring. Will the rest of the Bank adopt this latest thinking and lead by example?

*Ila Patlolla is currently undertaking an MA in Governance and Development, at the Institute of Development Studies (IDS).

¡Adiós, Comandante! What now for Venezuela without Hugo Chávez?

By Markus Schultze-Kraft

Since the late 1990s - which from today´s vantage point seems a distant, almost pre-historical era - no other Latin American head of state has been as charismatic, polarizing, witty, hated and loved, and - deeply ironical - long-lived in office as Hugo Chávez.

First elected in 1998, the former lieutenant colonel and 1992 golpista (leader of a coup) made sure that in the years to come he would keep a firm grip on power, which he himself projected to last until 2019 - at least.

Now the comandante is gone. What does this mean for Venezuela, what should be done to avoid violence and chaos?

Dragon in the tropics

Some called Chávez a “dragon in the tropics” and brujo (wizard). Many others saw in him the reincarnation of Simón Bolívar, Venezuela´s 19th century independence hero. Or simply an annoying, endlessly talking South American autocrat and populist who used his advantage of presiding over the sub-continent´s largest oil economy to prop up governments of small, poor countries in the region that professed to be followers of his Bolivarian revolution; and to buy sophisticated weaponry from Russia and China and support regional left-wing insurgencies like the Revolutionary Armed Forces of Colombia (FARC).

Venezuela without Chávez is a potential powder keg

What Chávez achieved or not is open to debate. Time and serious scholarship will tell. But politically there is an enormous difference now between Venezuela before and after 5 March 2013:  Chávez alive, Chávez gone. A country that has been ruled by one and the same man for more than fourteen years - and ruled, I would say, without effective checks on the president´s power and balances between the executive, legislative and judicial branches of government, the armed forces, the media and civil society – does not easily recuperate from the loss; and it does not easily chart a peaceful way forward. Venezuela with Chávez had many serious problems. Venezuela without Chávez is a potential powder keg.

Managing political change – thirty crucial days ahead

In accordance with the 2000 constitution, Vice-President Nicolás Maduro has taken over from Chávez. The new interim head of state is a hard-talking leader of the “boliguesía” (the spoiled upper crust of the Bolivarian revolutionary movement), former foreign minister, MP, bus driver and Chávez confident. Fresh elections will have to be scheduled within thirty days after the president´s death.  Only last October, an ailing Chávez had won yet another resounding election victory over his political opposition, which since its dreadful performance during the obscure moments of the 2002 coup against the Bolivarian president, has been gaining in strength but has yet to prove that it is up to the challenge of governing democratically and for the people. 

These thirty days will be crucial for Venezuela´s future. Among his first acts, President Maduro ordered the army and police out onto the streets across the country to maintain the peace. Venezuela´s armed forces are under oath to protect the Bolivarian revolution and Chávez´s “Socialism of the 21st Century”. There is no doubt that together with – or alongside – several popular militias that were created by the late president, the country´s armed forces could play the role of king maker or deal breaker, depending on the evolution of the uncertain political process ahead. It is the responsibility of the interim government to guarantee free and fair elections; and it is the responsibility of the political opposition to play by the rules and make every effort not to seek revenge but to project a feasible democratic future for all Venezuelans.  

The international community should support Venezuela to achieve a new democratic settlement

As heads of state from across Latin America and representatives of other governments that are part of the alliances Chávez built across the globe flock to Caracas to pay their tribute, they should keep their focus on the most important of all issues in this time of change: Venezuela, the patria (homeland) of Simón Bolivar and so many other notable minds, is a key player in the Western Hemisphere and beyond. Once a model social democracy of the South, the country and its citizens now deserve support in achieving a new democratic political settlement. Many in Venezuela and beyond are aggrieved by Chávez´s death and afraid of what the future might bring. But this should not stop them to seek a constructive way forward. The adversaries of the Bolivarian revolution, foremost the US government, are called upon to do just the same.