How clamping down on tax avoidance can unlock billions for development

There is an existing global instrument to help prevent the £2tn annually lost to governments. The UN should focus on making it work

Tax evasion is a major cause of underdevelopment. Against the backdrop of Greece struggling to plug budgetary holes, aggravated by rampant tax evasion, the upcoming UN financing for development conference to support achievement of the sustainable development goals (SDGs) is giving increased attention to cultivating domestic resources to promote development.

Rather than adopting new initiatives to bolster tax bases and reduce evasion, UN members ought to focus on making existing tools work better. Among the most powerful instruments available is the anodyne-sounding convention on mutual administrative assistance in tax matters, which was developed under the OECD and Council of Europe, but is open to all jurisdictions.

The convention is the result of tough negotiations and constitutes a major breakthrough, but has yet to achieve its potential. With governments worldwide losing an estimated $3tn (£2tn) annually to tax dodging, making this agreement effective —particularly for developing countries — could help unlock billions of dollars for national development efforts.

There are many reasons why taxation is central to development. Most obvious is that taxes give states resources to invest in essentials such as education, roads, and healthcare. As countries become wealthier, taxes fund social welfare and pensions, reducing poverty and inequality and evening out aggregate demand.

Less appreciated is the role of taxes in the development of states themselves. Historical scholarship, such as John Brewer’s classic work on18th-century Britain, shows that revenue collection builds governments’ bureaucratic competence and institutional integrity. The need for revenue drives capacity to collect taxes, which leads to improvements in state administration overall, thereby supporting broader economic growth.

One of the sad ironies of public finance is that countries’ level of development is positively correlated with the share of gross domestic product (GDP) represented by taxes. In other words, wealthier states take a greater percentage of national income in the form of taxes than poorer countries. Within the OECD, the percentage of GDP taken up by the state ranges from 26-48% , while in developing countries the state typically receives only 5-20% .

This is where the convention can make a major contribution.

Developing countries’ relative inability to tax effectively has a variety of causes but lack of information tops the list. To avoid scrutiny by domestic tax authorities, wealthy persons and companies routinely shift their funds to foreign jurisdictions.

Lacking legal means to demand the information from their counterparts overseas, national revenue authorities have often been without recourse. Until now.

The convention is meant to reduce the need to enter individual bilateral tax information-sharing agreements, while streamlining the actual exchange of information.

The process is quite simple. A tax authority in one country suspects a taxpayer of having income or assets in a foreign jurisdiction. The authority sends a request for information to the equivalent foreign body. Subject to procedural protections, including assurances of confidentiality, that authority processes the request and transmits the information to the requesting authority, which can then take steps to assess taxes owed.

While the convention’s mechanisms are straightforward, a number of steps are needed to make it effective and the UN financing for development conference should back these.

First, developing countries need to sign and ratify the agreement. Until now, although 85 jurisdictions have joined, only 26 are developing countries and in only 15 of those has it entered into force. If developing countries don’t enter, they can’t use the treaty’s mechanisms.

Indeed, as more countries enter, the convention will become more useful because the pool of jurisdictions from which others can obtain tax information will be enlarged.

Next, to encourage ratification and improve implementation, the convention should be prioritized in development activities. With OECD figures showing that support for tax administration represents less than 1% of all official development assistance, much more emphasis should be placed on making theconvention work.

Above all, these initiatives should focus on building developing countries’ administrative capacity. Training and technical assistance are essential. Rather than being a vaguely defined ambition, these efforts must achieve demonstrable results.

Specifically, they must help to upgrade national standards to a level that allows other participating countries to disclose confidential taxpayer information with certainty that its integrity will not be compromised.

Official development proclamations regularly pay homage to goals of financial sustainability, while doing little to achieve it. Foreign aid can contribute to development but it will never rival states’ own tax and revenue-generating capacities. Developing those competencies, in relation to international revenue cooperation, will have spillover benefits for overall domestic revenue collection. And this will put governments firmly in charge of their own development efforts.

As a legally binding treaty, the convention can catalyse activity by all stakeholders. If it is fully operational, there will be more chance of achieving the SDGs. It’s time to put this task at the top of the development agenda.