Filling tax gaps

Health systems across the developing world are short of cash. Taxation could be the most reliable way to boost government budgets so that more money can be spent on healthcare.

While aid money can be short term and unpredictable, taxation can provide governments with a steady flow of much needed income, free from any strings. It is a much more sustainable way of doing development, building accountability ‘down’ from states to their citizens, rather than ‘up’ to donors, and helping to break the aid dependency cycle.

What’s the problem?

Many developing countries lack the infrastructure, systems and personnel to collect taxes effectively. These could be taxes on personal income, on goods or on company profits.

At the same time, vast sums of money are flowing out of developing countries and into the rich world, as powerful companies make full use of tax havens and legal loopholes.

A further problem is that developing countries often compete between themselves to keep tax rates low in a bid to attract foreign investment. But of course the damage this does far outweighs any short term benefits to their bank balance.

Key terms

Tax havens are countries which provide the infrastructure and services for money to be stashed away while subject to low or zero tax. Non-resident individuals or companies can hold money in ‘off shore’ accounts.

Tax havens allow financial activities to take place under cover of secrecy with little or no legal cooperation with other countries. There are around 70 examples including Hong Kong, Cayman Islands, Switzerland, Bermuda, British Virgin Islands, and Mauritius.

Tax avoidance is reducing the amount of tax that is payable by following practices that are within the law. This might include using tax-avoidance schemes, pressing governments for tax concessions that will make it more profitable for a company to invest, or negotiating low royalty rates on output.

Tax evasion refers to efforts not to pay taxes by illegal means. This can include deliberating mispricing goods and services being bought or sold within a company’s subsidiaries, mispricing the transfer of money within a company, or creating false invoices.

Transfer mispricing A key strategy is for multinational companies deliberately to misprice transactions between parent companies and their subsidiaries. This allows them to shift profits and losses between countries to obtain the highest possible profits and lowest possible tax bill. More than half global trade is now between subsidiaries of the same companies, demonstrating just how widespread the practice has become.

ActionAid reports that one company apparently ‘imported’ a single hairdryer into Nigeria for the unlikely sum of $3,800.

False invoicing This is a ruse where fake transactions take place between unrelated companies.

How much money is being lost?

The complex and secretive world of tax avoidance makes it hard to estimate what is being lost. But figures from experts at UNCTAD, the United Nations Conference on Trade & Development, suggest that more money is flowing out of Sub Sahara Africa than coming in, because of tax loopholes and the illicit flow of money out of countries.

Christian Aid has calculated that developing countries are losing $160 billion each year through just two tax evasion practices – far more than the combined aid budgets of the entire rich world, put at around $120 bn.

The figure is certainly in the hundreds of billions of dollars per year.  Some researchers have suggested that nearly $1 trillion each year is flowing out of all developing countries.

What could these sums mean for healthcare?

Accountants can dispute the exact figures, but one thing is clear: if international companies were to pay the tax rightfully due to developing countries, there would be more than enough money to meet the Millennium Development Goals. Countless lives could be saved if just a small proportion was spent on healthcare.

At the same time, tackling harmful tax practices would reduce the developing world’s dependency on aid, giving governments greater space for policy-making while boosting their accountability to their citizens. It would also cut opportunities for corruption. Tax havens and secretive business operations make it easier for elites and officials to siphon off money that belongs in the public purse.

A related source of finance would be global taxes – on financial transactions for example – which are currently being discussed in the wake of the economic crisis.

Learn more about:

• Aid, Financing and Debt
• Global taxes for health
• Trade and health

Last modified: 11/01/2011