Driving the getaway car? Ireland, taxation and development

Abstract

Taxation is about far more than revenue-raising: it concerns power and impacts taxpayer behaviour. It is pivotal in enhancing accountability and participation in young states through the bargaining process between a government and its citizens. Very significantly, it often has unexpected consequences, and the tax system of one country can easily have an impact on economic or social behaviour in another. Since business is now international, it is important that taxes are designed not only with a domestic agenda in mind, but with a view to their consequences internationally, particularly for vulnerable economies in the global South. The ability to collect tax is particularly important for Southern countries, for which it represents a far more sustainable solution to poverty than international aid. But Southern countries face particular challenges in this area. On a domestic level, there is the problem of how to tax a vast informal economy with little financial infrastructure. Southern taxing authorities struggle to collect revenue in the face of post-colonial attitudes resulting in poor tax compliance, relative tax complexity and poor taxpayer education, major gaps in their capacity, shifting tax structures often driven by IMF or World Bank lending, trade liberalisation, corruption and a deficient rule of law. On an international level, tax challenges for Southern countries include capital flight, a lack of relative power in negotiations around foreign direct investment (FDI), tax competition, transfer pricing abuse by multinational firms, secrecy in some tax haven jurisdictions, and isolation through a thin network of tax treaties. Mozambique was chosen for particular examination in Section 5 of this report because it is an Irish Aid priority country. The country has been through IMF-led tax reform, and illustrates many of the classic problems encountered by the taxing authorities of Southern countries. Suggested solutions to some of Mozambique's difficulties may be taken from the experience of other African countries. Ireland may pose an inadvertent threat to the tax capacity of Southern countries if its tax system is used by multinational firms as part of capital flight, or international tax evasion schemes.Ireland has attracted considerable foreign direct investment (FDI) through tax competition using a low rate of corporation tax, a wide network of double tax treaties and incentives for intellectual property to encourage multinational firms to locate in the country. Although Ireland has recently introduced new rules to counter transfer pricing abuse, these have significant weaknesses. There is a clear risk that without closing these gaps, our tax system can become a vehicle for complex tax avoidance schemes used by multinational firms to reduce their global tax liability. This is neither in the interests of countries which lose revenue to these firms, or in the interest of Ireland as a legitimate destination for FDI