By
Tom Odhiambo
Title: Tax and Development – A Comparative Study; Editor: Karen B. Brown; Publisher: Springer International Publishing; Date: 2017; Pages: 377
In general discussion taxation is only related to development directly.
Common discourse tends to project the impact of taxation and taxes on development as the resultant financial investment, in goods and services, that impact the quality of human life.
In other words, money collected should be seen and felt to have been invested in public goods that people benefit from directly.
Except for the experts. who know the various ways in which taxation directly and indirectly impact development, ordinary citizens would be lost if asked to explain the different ways in which tax policies or practices determine local development.
Yet, taxation regimes have both a direct and an indirect influence on the development of society(ies). Double taxation denies the taxpayer extra money which could easily have been invested in some business.
Tax holidays for investors (local or foreign) could enable a business save money and reinvest in machinery or business plants. Specific tax exemptions may allow individuals or businesses to save and use the money to expand the business or improve the existing one.
Indeed, tax policies within a country, tax agreement between nations, and taxation practices across a region or the world have direct and indirect effect on development, especially in African nations, which are industrializing.
African countries, many with weak economies and even weaker tax regimes, are likely to find themselves disadvantaged in relation to the developed nations.
The developing nations, for instance, enter into trade agreements that compel them to buy goods from the developed countries, which goods are often subsidized, and which consequently disadvantage local manufacturers.
Undoubtedly this is an unfair economic practice. But what would a weaker African partner do when a stronger, industrialized partner dumps goods into their market, which cannot be taxed at the same rate as local goods?
In many instances nothing really. This is why tax justice advocates, non-governmental organizations opposed to harmful tax practices, and organizations such as the United Nations have always sought to debate, encourage and institutionalize fair tax practices internationally.
This is not an easy task, as many of the essays in the book, Taxation and Development: A Comparative Study (2017) show.
In Taxation and Development various authors, drawn from different countries across the world such as Australia, Belgium, Croatia, Israel, South Africa, Uganda, USA and Venezuela, discuss their countries’ experiences and how policies have impacted their development.
The conversations revolve around various internal tax practices such as incentives for taxpayers in a direct tax system; and international tax agreements to reduce the burden of tax for direct foreign investors.
Further issues include local and international laws that can protect those investing abroad against unfair tax practices; taxation policies that would encourage locals to compete with foreign investors; and taxation on cross-border incomes.
Lastly, the book also looks at how to tax investments in tax havens by locals among other topics.
The essays in this book deal with the specificities of each country but within the broader global context since it is no longer tenable to think and act about tax and taxation simply within one’s borders.
What happens across country boarders have a substantial impact, especially because of cross-border movements persons, services, goods, or transfer of funds.
Therefore, a book like Taxation and Development is significant for African countries because they are more disadvantaged than their counterparts in the global north and Asia, yet international trade today puts them in the same basket.
What policies should African countries institute and implement in fostering development within individual nations, regionally and continentally?
Can African countries ever truly benefit from international tax regimes, which are generally largely designed to address the needs of the more developed nations? In other words, can there be fairer tax regimes and practices that can help African countries develop?
The essays in Taxation and Development seem to suggest that there is a way in which each country in the world could benefit from collectively designed taxation policies and practices.
This is the ideal situation. In this case, for example, Kenya can indeed trade fairly with the UK, its major European trade partner, without fear that Kenya’s goods are overtaxed in the UK and that the UK is probably subsidizing its manufacturers who sell in Kenya.
Indeed, the UK could even suggest that in order to reduce the cost of production and transportation, it will invest in a factory in Kenya.
Kenyans will be sold the idea that the factory means transfer of technology, knowledge and skills, and that the locals will buy what is made in Kenya. But would such an idyllic situation happen?
Evidence shows that in situations such as the one described above, there is actually little, if any, transfer of technology and skills.
The industry in question could easily (and often do) underdeclare its profits hence paying less tax, thereby transferring (taxable) income out of the country in the form of payment for services or benefits for its employees and so on.
If Kenya were to get into a dispute with the UK, it would be a net loser as the factory could close, the staff would leave, and the country could be declared hostile or unfair to foreign investors.
This is the paradox of multinationals – very few multinationals would willingly pay the correct taxes in the countries where they are located.
Thus, although the wish to have a fairer international tax system is fine, it is nearly impossible to convince countries to wholly sign up to treaties that would force them to implement tax regimes that they may find, from time to time, constraining.
Each country tries as much as it can to raise taxes to pay for its needs.
Therefore, even though a country may share information on taxation; provide tax incentives for foreign and local investors; sign up to bilateral and multilateral investment agreements; institute anti-tax haven provisions, among other measures, each country’s needs will always determine how willing and often it will subscribe to such international policies or practices.
In other words, realism trumps idealism where taxes and taxation are concerned.
Every country in the world wishes for a better life for its citizens. This may be expressed in its policies on development. But progress always has a cost, which can never be paid for by foreign investment or foreign aid or benign foreign tax policies.
Taxation and Development shows that indeed there are taxation policies and practices that can enable progress and enable people to live a decent life across the world. Many countries have developed by establishing such practices.
But the realities of globalization and financialization of economies mean that many countries will always be struggling to keep up with innovations in doing business, which means that taxation increasingly becomes complicated.
Also, for selfish reasons, just like businesses undercut each other, countries will always strive to make themselves attractive to investors and businesses by offering tax incentives that would undoubtedly undermine international agreements.
It is often very difficult to challenge such actions, for the politicians and bureaucrats in charge will counter-argue that they are doing what best serves the interests of their citizens.
In the end, therefore, what Taxation and Development seeks to provoke is a continuing debate on how to create conditions that would enable fair global taxation regimes and practices that may help each country to develop according to its ability and offer humanity decent life.
Tom Odhiambo teaches at the University of Nairobi. He can be reached at: tom.odhiambo@uonbi.ac.ke or +254720009155
