TWN Info Service on Finance and Development (May17/01)
2 May 2017
Third World Network
World Bank must stop encouraging harmful tax competition
Published in SUNS #8453 dated 2 May 2017
Sydney/Kuala Lumpur, 26 Apr (IPS/Anis Chowdhury and Jomo Kwame Sundaram*) --
One of the 11 areas that the World Bank's Doing Business (DB) report includes
in ranking a country's business environment is paying taxes.
The background study for DB 2017, Paying Taxes 2016 claims that its emphasis is
"on efficient tax compliance and straightforward tax regimes".
Its ostensible aim is to aid developing countries in enhancing the
administrative capacities of tax authorities as well as reducing informal
economic activities and corruption, while promoting growth and investment. All
well and good, until we get into the details.
First, the Report advocates not only administrative efficiency, but also lower
tax rates. Any country that reduces tax rates, or raises the threshold for
taxable income, or provides exemptions, gets approval.
Second, it exaggerates the tax burden by including, for example, employees'
health insurance and pensions and charges for public services like waste
collection and infrastructure or environmental levies that the businesses must
pay. The IMF's Government Financial Statistics Manual correctly treats these
separately from general tax revenues.
Third, by favourably viewing countries that lower corporate tax rates (or
increase threshold and exemptions) and negatively considering those that
introduce new taxes, DB is essentially encouraging tax competition among
Thus, the Bank is ignoring research at the OECD and IMF which has not found any
convincing evidence that lower corporate tax rates or other fiscal concessions
have any positive impact on foreign direct investment.
Instead, they found net adverse impacts of tax concessions and fiscal
incentives on government revenues.
According to the research, factors such as the availability and quality of
infrastructure and human resources were more important for investment decisions
The World Bank's Enterprise Surveys also do not find paying taxes to be high on
the list of factors that enterprise owners perceive as important barriers to
investment. For example, the Enterprise Survey for the Middle East and North
Africa found political instability, corruption, unreliable electricity supply,
and inadequate access to finance to be important considerations; paying taxes
or tax rates were not.
Yet, the World Bank has been promoting tax cuts and tax competition as magic
bullets to boost investment. Not surprisingly, thanks to its still considerable
influence, tax revenues in developing countries are not rising enough, or
worse, continue to fall.
According to some estimates, between 1990 and 2001, reduction in corporate
taxes lowered countries' tax revenue by nearly 20%.
Instead of encouraging tax competition, therefore, the World Bank should help
developing countries improve tax administration to enhance collection and
compliance, and to reduce evasion and avoidance.
According to OECD Secretary-General Angel Gurria, "developing countries
are estimated to lose to tax havens almost three times what they get from developed
countries in aid".
Global Financial Integrity has estimated that illicit financial flows of
potentially taxable resources out of developing countries was US$7.85 trillion
during 2004-2013 and US$1.1 trillion in 2013 alone!
CONFLICTS OF INTEREST
However, the Bank's Paying Taxes and DB reports do little to strengthen
developing countries' tax revenues.
This should come as no surprise as its partner for the former study is
Pricewaterhouse Cooper (PwC), one of the "Big Four" leading
international accounting and consultancy firms.
PwC competes with KPMG, Ernst & Young and Deloitte for the lucrative
business of helping clients minimize their tax liabilities. PwC assisted its
clients in obtaining at least 548 tax rulings in Luxembourg between 2002 and
2010, enabling them to avoid corporate income tax elsewhere.
How are developing countries expected to finance their infrastructure
investment needs, increase social protection coverage, or repair their damaged
Instead of helping, the Bank's most influential report urges them to cut
corporate tax rates and social contributions to improve their DB ranking,
contrary to what then Bank Chief Economist Kaushik Basu observed: "Raising
[tax] allows developing countries to invest in education, health and
infrastructure, and, hence, in promoting growth."
How are they supposed to achieve the internationally agreed Agenda 2030 for the
Sustainable Development Goals in the face of dwindling foreign aid?
After all, only a few donor countries have fulfilled their aid commitment of
0.7% of GNI, agreed to almost half a century ago.
Since the 2008 financial crisis, overseas development assistance has been hard
hit by fiscal austerity cuts in OECD economies except in the UK under Cameron.
The Bank would probably recommend public-private partnerships (PPPs) and
borrowing from it. Countries starved of their own funds would have to borrow
from the Bank, but loans need to be repaid.
Governments lacking their own resources are being advised to rely on PPPs,
despite predictable welfare outcomes - e. g., reduced equity and access due to
higher user fees - and higher government contingent fiscal liabilities due to
revenue guarantees and implicit subsidies.
Financially starved governments boost Bank lending while PPPs increase the role
of its International Finance Corporation (IFC) in promoting private sector
Realizing the Bank's conflict of interest, many middle-income countries ignore
Bank advice and seek to finance their investments and other activities by other
means. Thus, there are now growing demands that the Bank stop promoting tax
competition, deregulation and the rest of the Washington Consensus agenda.
BANK MUST SUPPORT SDGs
However, nothing guarantees that the Bank will act accordingly. It has already
ignored the recommendation of its independent panel to stop its misleading DB
While giving lip service to the International Labour Organization (ILO) and
others who have asked it to stop ranking countries by labour market
flexibility, the Bank continues to promote labour market deregulation by other
If the Bank is serious about being a partner in achieving Agenda 2030, it
should align its work accordingly, and support UN leadership on international
tax cooperation besides enhancing governments' ability to tax adequately,
efficiently, and equitably.
In the meantime, the best option for developing countries is to ignore the
Bank's DB and Paying Taxes reports.
[* Anis Chowdhury, a former professor of economics at the University of Western
Sydney, held senior United Nations positions during 2008-2015 in New York and
Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations
Assistant Secretary-General for Economic Development, and received the Wassily
Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.] +