The world in which governments function is rapidly changing from what it used to be. Public agencies are expected to cooperate with each other, with non-profit organizations and others to use strategic ways to manage and deliver services in modern times. They are under pressures to use domestic resources efficiently to develop their countries especially since the abundance of resources in countries like Ghana and Nigeria has not yielded much development. This phenomenon is commonly referred to as the ‘resource curse’ and relates to a complex set of political, economic and social factors.1
Tax is very key to the growth and development of any country, it is the most sustainable source of domestic financing. The level of impact that tax has in steering the affairs of any country cannot be overlooked or overemphasized.
Tax can be defined as a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state to fund various public expenditures.2 Failure to pay, or evasion of or resistance to taxation, is usually punishable by law. By implication, taxes have influence in public expenditure, where public expenditure means spending made by government of a country on collective needs and wants such as pension, provision of infrastructure, schools and health facilities.
There are many schemes that have plagued the tax systems of developing countries, time and again multinational companies hide information, shift profits and avoid taxes altogether in the countries where they operate. The result is that developing countries lose hundreds of billions of dollars every year while large companies make huge profits from their natural resources and workforce.3
Tax Incentive is one of the ways by which developing countries lose out on the much needed taxes. A tax incentive is a reduction in a tax bill offered by a government to a company often multinational companies and not domestic businesses. It may include reduced corporate tax rates, tax holidays, special economic zones, reduced tax on goods brought into the country, etc.4 The devastating effect of tax incentives on the political, economic and social stability of African states is huge, it promotes multinational companies’ businesses to the disadvantage of small scale business.
In ages past, African countries have viewed tax incentives and tax holidays to open the door to otherwise scarce and inaccessible foreign investments and that this increases flow of investments. In addition, a tax incentive was seen as a way that helps in winning over investors for prioritized sectors of the economy, especially as a mechanism to encourage the flow of investment into these sectors. Yet such a mechanism can erode a country’s tax base, it may well be perceived as unfair or altering the flow of taxes in a country, as tax incentives replace taxation, investors and companies realize that getting tax incentives is lucrative. Developing countries must cut down and eliminate tax incentives for their own good.
Add to the above, tax avoidance is technically legal but usually immoral. Often there is no law, or a weak/bad law or policy, which a company exploits in a way not intended by the lawmaker to reduce its tax bill. Multinational companies often set up complicated artificial structures across borders purely for the basis of exploiting weak laws. Studies have shown that companies close down, and open up under a new name, with a new “owner”, in order to take advantage of a tax incentive only offered to new investment/companies.4 This directly contributes to the reduction of tax revenues in developing countries.
Developing countries can ensure they play their part well by reforms and implementing standard laws regarding tax while holding organizations accountable for their tax actions on a regular and professional legal basis.
Also, Citizens’ lack of interest and education on tax related matters contributes to the debate since this represents an important role in generating taxes. This situation can be explained by evidence of poor accountability culture and the existence of behaviour that is not in line with the current laws on tax registered at the constitutional level of developing countries. Civil Societies and non-profit organizations can run awareness programs for stakeholders to build their knowledge on tax and to increase transparency.
In addition, non-profit organizations, civil society and citizen involvement in tax matters can have an effect on taxation in developing countries, it can make tax avoidance more risky, make it easier to provide good strategies to public officials and ease flow of taxes for the public service.
Illicit Financial Flows deals with money that is illegally acquired, transferred or spent across borders such as corruption, bribery and theft by government officials, criminal activities, drug trading, human trafficking, illegal arms sales and tax evasion.4 Governments must be directly involved in all financial flows across sectors of their economies. Also, priority should be given to reforms that have the greatest impact on reducing Illicit Financial Flows and/or alleviating the curse.
In conclusion, to benefit from tax developing countries must be strict enough to take the highlighted measures, in part by cooperating with stakeholders and other organizations.
Daniel Nii Ankrah ©
Photo Credit Google
- #TaxPower – ActionAid’s campaign explained ActionAid, July 2013
- Tax Power Campaign Glossary