The private and public sectors must work together more closely to improve global tax systems. Nine thought-provoking ideas for sustainable reforms.
Reforming the tax system is a high priority for a number of tax authorities, governments, and public sector bodies. There is also a growing consensus in developing countries that the mobilization of domestic resources by means of a well-functioning tax system is the only sustainable way of financing society’s key social and economic priorities. However, many administrative bodies lack the capacity and resources that would allow them to independently carry out tax reforms and accompanying institutional transformations.
At the Third International Conference on Financing for Development in Addis Ababa in 2015, the UN made it clear that the effective mobilization of domestic resources in order to achieve the sustainable development objectives by 2030 is of central importance. It emphasized once again the necessity of expanding the income base, improving tax collection, and combating tax evasion and illegal finance flows. The reforms necessary to achieve this are neither cheap nor easy.
Most governments therefore require some form of external support if they are to close this gap. Official development aid is certainly important, but it is not a long-term financing solution for public services in developing countries.
The private sector can support governments and tax authorities with the development of more robust tax systems around the world, and not simply through tax payments or limited specialist services. The private sector often has a shared interest with governments in better-functioning tax and public finance management systems. It can play a part in reducing capacity gaps, for example by transferring knowledge and expertise, providing stimuli and suggestions for reforms, and offering financial support, direct services, and cooperative engagement as a taxpayer. There are some obstacles to the involvement of the private sector in reforming the tax system, including a lack of mutual understanding, and real or perceived conflicts of interests. However, these barriers can be overcome, or at least mitigated. To achieve this, we propose a list of concrete measures the G20 can implement to boost private sector support in the field of tax reform.
Action 1: Establish an expert group for tax cooperation
As a first step, the G20 could put together a tax cooperation task force. Its central task would be to establish how best to press ahead with the specific suggestions listed below and to consider additional recommendations by the members. This expert group could be made up of selected members of the existing G20 dialogue forums related to this field, in particular Business 20 (B20), Civil 20 (C20), and Think 20 (T20).
Action 2: Recognition of guidelines for public and private cooperation on tax reform
It is possible to foster a culture of greater collaboration on tax matters through formal recognition by the G20 – or individual member states –by working toward making such a cooperation desirable when properly implemented. For example, the G20 can support its member states and other countries by issuing high-level principles, which individual governments can take on and customize as required.
Action 3: Publish and promote examples of successful collaboration
Positive examples often have a greater effect than enacted regulation. Publicly recognized role models of private-sector support in important tax matters can prove that it is possible to overcome obstacles, and they can also demonstrate the value of close collaboration. It is possible that some public authorities are unable to imagine the extent of the support that can be made available to them through the private sector. Presenting successful flagship projects could change that. This can be effected at national level as well as through the relevant G20 summit meetings, working groups, and publications.
Action 4: Boost the collaboration capacity of governments in developing countries
Collaborations are most effective when both sides apply a certain level of understanding and capacity. An unbalanced collaboration – for example where a tax collection body is particularly inexperienced or suffers from a lack of resources – can significantly reduce their ability to utilize the support effectively. Furthermore, the G20 countries can help the governments of developing countries to develop a minimum capacity for tax authorities by making available their own specialist staff for training local employees, or by providing financial support for building up local capacities.
Action 5: Establish and promote special “Enhanced Engagement Programs”
“Enhanced Engagement Programs” (EEPs) can help build trust and reduce the cost of maintaining and administering the tax system. They can also help to make tax reforms more transparent by deepening the tax authorities’ understanding of companies and the environment in which they are operating. In this way the private sector can play a part in improving tax systems by acting as a committed and responsible taxpayer. The governments themselves should consider introducing formal provision such as EEPs, and G20 governments that have already successfully initiated them can help other countries that are currently in the set-up phase by providing advice and expertise.
Action 6: Strengthen existing platforms and establish new platforms for collaboration
Numerous platforms for collaboration are already available and these could be further supported by the G20. For example, the Association of African Tax Institutes is a group of multinational corporations with substantial operations in Africa. It was formed as a platform for collaboration with African governments and financial authorities on matters pertaining to tax, systems, and administration. They have an active working relationship with the African Tax Administration Forum (ATAF).
The OECD has officially integrated the Business and Industry Advisory Committee (BIAC) into the consultation process. Groups like this one can function as a powerful instrument for promoting dialogue and building trust between governments and industry on issues relating to tax, clamping down on freeloaders, and reducing awareness of lobbying work.
However, the existing groups do not cover all regions and sectors. The G20 therefore has a crucial role to play in supporting the establishment of additional cooperation platforms for other fields, and these could then function as recognized representatives of a certain location, sector, or market.
Action 7: Facilitate dialogue between public and private stakeholders
In addition to establishing and developing formal collaboration platforms, governments also have a role to play in opening up tax policy with regard to suggestions for reform put forward by the private sector (not only including the business sector, but also other stakeholders such as individual taxpayers and NGOs). Their input and suggestions for change could be decisive in ensuring that reforms are also solidly designed. The governments should integrate formal consultations into their tax reform processes so that taxpayers have access to an official channel providing advice.
G20 countries can – whether individually or as a group – also play a greater coordinating role by bringing together public sector bodies that are interested in support and private sector organizations that are prepared to offer it. Experience shows that these two groups, in many cases, quite simply lack the necessary connections. Setting up an appropriate forum could remove this barrier to potential collaboration.
Action 8: Financial support to promote a stronger collaboration
G20 countries can also play a part in the private sector’s efforts to boost and build up capacity by providing financial support for less developed countries. Establishing formal mechanisms for the attractive design of mixed financing is one possible method the G20 and other countries could use to facilitate the flow of financial resources from the private sector into expensive reform programs. Stakeholders from the private sector who have an interest in the development of more robust tax systems can use these mechanisms to contribute financial resources in accordance with the arm’s length principle, since their financial resources are combined with those of other supporters – for example aid organizations and philanthropic organizations. International financial institutions already use these kinds of mixed financing mechanisms.
The G20 can also offer financial support in a way that promotes stronger alignment between the tax authorities and private sector service providers, and that simultaneously makes possible a more extensive cooperation. Payment by Results can – provided it is well implemented – function as a mechanism for aligning incentives between service providers and governmental contracting authorities. That would, incidentally, be a way of getting the private sector involved in areas where limited incentives might otherwise have meant it remained uninvolved.
Action 9: Encourage engagement and compliance by companies through public spending transparency
Last but not least, companies probably feel a closer connection to the tax system if they believe the tax revenue is spent wisely. For example, by reducing corruption in the public sector and by boosting public spending on society, on the national economy, and on the business environment in which they are operating. The G20 should also ensure that their tax and public finance systems are free of corruption and that expenditure is open and transparent for the general public. Support provision for developing countries can even prioritize this element of public financial administration.
There is no denying that the reform of the tax system is a critical business and financial issue. As the “central forum for international collaboration in the field of finance and business,” the G20 should fulfill its leadership role in promoting greater collaboration between all parties in order to build up the capacities of tax authorities and support more robust tax systems for the future.
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