I’m sure we’ve all had a good old whinge about HMRC phone queues, or moaned about the fact that any part of our hard earned money disappears into the Tax Office. But our country couldn’t function as well as it does without the taxation systems and regulations that exist. And part of the reason that developing countries struggle to move forward independently, is a lack of an efficient tax system.
Why this is an international issue?
The Organisation for Economic Co-operation and Development (OECD) published approximate figures from developing and developed countries. They say that in a developed country, the money made from tax is 35% of the overall GDP. In a developing country, this revenue plummets to only 14% of the GDP.
What is GDP?
It’s worth quickly clarifying here, GDP stands for Gross Domestic Product. This means the value of all the services and good made in a country during a particular amount of time. It is an international measurement and so is a useful tool when comparing how well countries’ economies are doing.
International solution required
Back to the low 14% of GDP tax revenue in developing countries. Obviously, this means that they have less money to spend on infrastructure and crucial services in their countries. As a result, they rely on aid from more developed countries for basic needs. The new support strategy aims to help these countries sort out their tax systems, so they can reinvest their own money and need less aid from developed countries.
What are the other benefits?
Another element is that of international tax fraud and evasion. The less stable and efficient tax systems are, the easier they are to manipulate for people who don’t want to pay their fair share of tax. As this is done on a global scale, it benefits all countries to make sure that governments everywhere can properly track tax paid by their citizens.
Countries with solid financial systems are also much more attractive to businesses as potential locations for investment.
Another benefit is that countries with economic stability are more likely to be able to maintain political stability; increasing the pool of possible international trading partners.
How much will this cost?
The entire support strategy costs £47m, which is divided up into different strands of help. The cost really lies in the price of the support provided, rather than actual sums of money. The largest portion going to the OECD to use in developing countries to improve their tax systems to meet international standards. This also involves rooting out tax avoidance and evasion.
Part of this is a group called Tax Inspectors Without Borders. They provide tax experts on the ground to developing countries to advise them. So far, this section of the support is immensely cost-effective, with £100 made in revenue for every £1 it has cost. A pretty good return by anyone’s standards.
How is the UK helping?
The Department of International Development announced its commitment to this plan, with Penny Mordaunt, the International Development Secretary saying:
“This new UK support will help countries collect more taxes and leave them less reliant on aid. It will turbo charge their development.Governments in the developing world want to move beyond aid and we want to help them get there faster. We are supporting their efforts to implement a fairer, more transparent tax system which is vital in helping our aid money go further. We are helping developing countries create the right environment for foreign investment and giving British businesses the confidence to invest in them. This is a win for the developing world, as well as a win for the UK.”
The UK has world-renowned tax experts, so it makes sense that other countries look to us for knowledge. For example, HMRC has committed to sending two of their tax professionals to work with the African Tax Administration Forum for four years.
Perhaps we should all take a minute and appreciate the fact that we have a tax system that is based on fairness, is administrated by experts and does generate enough tax revenue to cover our necessary services and infrastructure. Nothing is perfect and we can all argue about where we think different proportions of tax money should be spent – but we should value what we have as it could be so much worse.