A Tale of Two Tax Systems

Taxation plays an important role in democratic governance and market economies. Tax revenue finances social and physical infrastructure. It reinforces national sovereignty. When coupled with good governance and institutions, it ensures that the costs and benefits of development are felt across society.

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Calling all accountants: the developing world wants YOU!

The private sector plays an important role in sustainable democratic and economic development. By creating jobs and opportunities, providing necessary goods and services, and thus improving people’s living standards, private enterprise in a market economy offers citizens the ability to prosper independently of state-provided goods and services. That, in turn, gives citizens the necessary leverage to hold their government accountable because public officials rely on citizens for support, not the other way around.

An accountable and efficient public sector is still a necessary part of development, though, and governments and private businesses must work together in this regard. Usually that entails efforts to ensure a sound business environment for the private sector to thrive, and an important part of any country’s business environment is the structure of the tax system.

Fair and efficient tax regimes are also an important part of the social contract that connects citizens to their government: citizens pay tax so that the government will provide certain public goods such as roads, ports, schools, etc. Citizens, in turn, must hold their government accountable to provide those services. Businesses are responsible for their share of taxes, too, and they benefit from those publicly-provided infrastructures as well.

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Tax policy on the tap in Ghana

A recent report from ActionAid made headlines when it accused SABMiller, the world’s second largest beer company, of avoiding millions of pounds worth of tax in India and the African countries in which it operates.

ActionAid argues that through financial transactions with subsidiaries located in tax havens, SABMiller shifts its profits largely via royalty and management fees to firms in developed countries with lower tax rates. As a result, lower local profits mean less taxable income, and that denies governments the revenue needed to build key infrastructures such as schools, roads, and ports.

On the other hand, Zahid Torres-Rahman on the Guardian’s Poverty Matters blog highlights arguments conflicting with ActionAid’s allegations. Torres-Rahman accurately points out that SABMiller is not breaking any laws in its financial activities. Indeed, in response to the allegations SABMiller denied engaging in “aggressive tax planning” and drew attention to its positive social contributions such as jobs, investment, and dividends to local shareholders. SABMiller also claims that it pays a significant level of tax, although some disagree with SABMiller’s definition of significant.

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