Commission staff working document accompanying the Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee - Tax and Development Cooperating with Developing Countries on Promoting Good Governance in Tax Matters COM(2010) 163
Date: 2010-04-21
Institutions: European Commission
Subjects: European tax cooperation, cooperation policy, developing countries, development policy, fiscal policy, international cooperation

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EUROPEAN COMMISSION 

Brussels, 21.4.2010 
SEC(2010) 426 final 

COMMISSION STAFF WORKING DOCUMENT 

accompanying the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE 

Cooperating with Developing Countries on Promoting Good Governance in Tax Matters 

Tax and Development 

COM(2010) 163 

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COMMISSION STAFF WORKING DOCUMENT 

Tax and Development 

TABLE OF CONTENTS 

1. 

Strengthening good governance in tax matters in developing countries...................... 3 

1.1. 

Revenue collection in developing countries ................................................................ 5 

1.1.1  Domestic factors hampering developing countries' tax systems.................................. 6 

1.1.2. 

International factors hampering tax systems................................................................ 7 

1.1.3.  Specific Factors in Natural Resource Rich Settings .................................................... 8 

1.2. 

Supporting effective, efficient, fair and sustainable tax systems ................................. 8 

1.2.1.  Assisting in tax reforms and strengthening tax administrations .................................. 9 

1.2.2.  Promoting domestic accountability and public financial management...................... 10 

1.2.3.  Strengthening transparency and cooperation in the international tax environment... 12 

2. 

Harnessing EU instruments to provide enhanced support ......................................... 13 

2.1. 

Stepping up and improving the effectiveness of EU support to tax systems ............. 14 

2.1.1. 

Introducing a more comprehensive approach to tax administration and tax reforms 14 

2.1.2.  Strengthening public financial management in the context of budget support.......... 15 

2.1.3.  Supporting multilateral and regional initiatives on tax administration and tax reforms

.................................................................................................................................... 16 

2.1.4.  Revenues from Natural Resources ............................................................................. 17 

2.1.5.  Deepening regional integration .................................................................................. 18 

2.1.6.  Strengthening division of labour in the tax area ........................................................ 19 

2.2.  Working towards a transparent and cooperative international tax environment........ 20 

2.2.1.  Promoting the principles of good governance in tax matters..................................... 20 

2.2.2.  Enhancing the participation of developing countries in relevant international fora .. 22 

2.2.3 

Enhancing transparency of multinational corporations' activities ............................. 22 

ANNEX.................................................................................................................................... 24 

Evaluation of replies to the Monterrey questionnaire on domestic resource mobilisation ...... 24 

1. 

2. 

EU assistance to developing countries in tax and customs matters ........................... 24 

Member States development cooperation and the principles of Good Governance in 
tax matters .................................................................................................................. 25 

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Executive Summary 

This Staff Working Document accompanies the Communication on Tax and Development – 
Cooperating with developing countries on promoting good governance in tax matters1. It aims 
at  identifying  the  main  challenges  developing  countries  face  when  it  comes  to  domestic 
revenue  mobilization,  analyses  existing  EU  instruments  of  development  cooperation  and 
considers  relevant  on-going  regional  and  international  initiatives.  In  most  developing 
countries  the  tax-to-GDP  ratio  ranges  between  10-20%  of  GDP,  while  it  stands  between  25 
and  45%  in  developed  countries,  showing  that  there  might  much  space  for  improvement  in 
many countries  of the  developing world. Furthermore,  domestic  revenue  mobilisation  is  not 
only the most sustainable and predictable way to raise badly-needed funds; it also enhances 
democratic accountability and ownership.  

However, a series of domestic and international factors hamper developing countries' ability 
to  raise  tax  revenues,  also  in  resource-rich  settings.  Weak  administrative  capacities,  ill 
designed tax policies, politico-economic interests, poor public service delivery and therefore 
weak legitimacy of the public sector, deficient rule of law and the structure of the economy 
with a large informal sector have, inter alia, a negative impact on revenue collection. Freely 
moving  capital  together  with  the  existence  of  non-cooperative  jurisdictions,  that  shroud 
financial activities without disclosure in a context of insufficient international tax cooperation, 
make it often difficult for tax authorities to assess tax liabilities, notably in the case of wealthy 
individuals  and  multinational  corporations.  According 
to  a  Norwegian  government 
commission illegal money flows from developing countries totalled USD 641 to 979 billion in 
2006, thus at least seven times higher than official development assistance. 

This  document  analyses  issues  that  are  key  in  supporting  developing  countries  in  building 
fair,  effective,  efficient  and  sustainable  tax  systems.  This  includes  assistance  to  tax  policy 
reforms  and  tax  administrations,  public  financial  management  and  promoting  governance 
principles  such  as  participation,  inclusion,  transparency  and  domestic  accountability. 
However, enhancing domestic revenue mobilisation not only calls for increased effectiveness 
of EU support to tax systems but also for the promotion of a transparent and cooperative tax 
environment.  In  this  context  the  adoption  and  implementation  by  third  countries  of  the 
principles of good governance in the tax area, i.e. transparency, exchange of information and 
fair  tax  competition,  has  an  important  role  to  play.  At  the  level  of  developing  countries 
success will largely depend on enhanced international cooperation and improved transparency 
of transnational enterprises. 

1. 

STRENGTHENING GOOD GOVERNANCE IN TAX MATTERS IN DEVELOPING COUNTRIES 

Taxes  are  central  for  the  functioning  of  the  state  and  for  the  provision  of  public  goods. 
Increasing  domestic  revenue  collection  is  indispensable  for  meeting  the  Millennium 
Development Goals (MDG) and reducing poverty in a sustainable manner. It is also essential 
for promoting democracy by raising domestic accountability and political participation at all 
levels  of  society  since  tax  payers  hold  their  governments  accountable.  Transparent  and 
accountable use of public revenue has therefore a mutually reinforcing effect, enhancing both 
government  responsiveness  and  tax  player  compliance  and  transforming  the  relationship 
between the citizen and the state into a social fiscal contract. 

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COM(2010) 163. 

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At  the  Financing  for  Development  Conference  in  Monterrey  in  2002  the  international 
community  highlighted  the  importance  of  “mobilizing  domestic  resources,  increasing 
productivity and reducing capital flights" in developing countries. Six years later in the Doha 
declaration  governments  committed  to  “step  up  efforts  to  enhance  tax  revenues  through 
modernized tax systems, more efficient tax collection, broadening the tax base and effectively 
combating tax evasion." Most developing countries cannot finance their policies through taxes 
and rely largely on external revenues such as development assistance. Their tax-to-GDP ratio 
is  much  lower  than  in  developed  countries,  generally  ranging  between  10  and  20%  in  Low 
Income Countries, whereas it averages 35% in OECD countries. 

In many developing countries, the sustainable provision of public services that is necessary to 
achieve  and  maintain  the  Millennium  Development  Goals  requires  an  increase  in  domestic 
revenue.2 Increasing domestic revenue not only creates additional space for supporting MDG-
related  spending,  it  also  allows  a  country  to  assume  ownership  for  its  policy  choices.  As 
underlined in the 2008 Doha Declaration on Financing for Development, mobilizing domestic 
financial  resources  for  development  is  central  to  the  global  partnership  for  sustainable 
development, especially in support of the MDG. For the developing countries this partnership 
means  enhanced  efforts  to  mobilise  domestic  resources  to  finance  development  priorities 
while  donors  have  to  respect  their  commitment  to  provide  long-term  and  predictable 
assistance towards internationally agreed poverty reduction objectives.  

A number of domestic and international factors hamper developing countries' ability to raise 
tax  revenues.  Weak  administrative  capacities,  ill  designed  tax  policies,  poor  public  service 
delivery  and  therefore  weak  legitimacy  of  the  public  sector,  deficient  rule  of  law  and  the 
structure  of  the  economy  with  a  large  informal  sector,  inter  alia,  have  a  negative  impact  on 
revenue  collection.  Freely  moving  capitals  together  with  the  existence  of  non-cooperative 
jurisdictions,  that  shroud  financial  activities  in  secrecy  in  a  context  of  insufficient 
international tax cooperation, make it often difficult for tax authorities to assess tax liabilities. 
Moreover,  the  international  competition  for  Foreign  Direct  Investment  has  led  many 
developing countries to grant tax expenditures to investors resulting in the erosion of their tax 
base and increasing complexity of their tax systems. 

Taken  all  together,  it  is  estimated  by  NGOs  and  academic  sources  that  illegal  money  flows 
from  developing  nations  total  close  to  €  500-800  billion  per  year. 3    That  would  mean  that 
illicit capital outflows correspond to at least 7  times the total development assistance going to 
these  countries  and  that  the  total  annual  tax  loss  by  emerging  and  developing  countries  is 
more than the annual global development aid budget and greater than the € 30 – 45 billion the 
World  Bank  estimates  will  be  required  annually  to  meet  the  MDGs.4  However,  other 

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In countries involved in decentralisation processes, the delivery of social services (primary education, 
basic  health  services,  water…)  which  is  a  central  task  of  poverty  reduction,  is  also  entrusted  to  local 
authorities. In this context developing fair and efficient tax systems at local level has become a  main 
challenge.  More  generally,  public  finance  sustainability  at  local  government  level  is  key  to  ensuring 
sustainable and efficient service provision. 
The  Norwegian  Commission  on  Capital  Flight  From  Developing  Countries,  Preliminary  Report,  June 
2009, quotes a number of analyses regarding the scale of capital flight.  See, for instance, Kar, D. and 
Cartwright-Smith, D., Illicit financial flows from Developing countries: 2002 – 2006, Global Financial 
Integrity, 2009. 
The  concentration  of  the  tax  base  in  a  few  hands,  which  are  often  rich  in  resources,  makes  countries 
more  vulnerable  to  tax  evasion  through  tax  havens,  and  thereby  contributes  to  the  possibility  that 
developing  countries  experience  a  greater  relative  reduction  in  their  tax  revenues  as  a  result  of  tax 
havens. 

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researchers emphasise the difficulties of quantifying flows and tax revenue losses and argue 
that  most  existing  estimates  of  tax  losses  in  developing  countries  are  not  based  on  reliable 
methods and data. 5  

The  impact  of  the  financial  and  economic  crises  on  developing  countries  has  not  only 
sharpened the awareness regarding the importance of good governance in tax matters but also 
made it even more urgent to take up the call for action to increase much needed tax revenues 
in developing countries. The need to comply with OECD international standards was affirmed 
in the final Communiqué of the G20 meeting in London this year, where the world's leaders 
stated  their  readiness  “to  take  action  against  non-cooperative  jurisdictions,  including  tax 
havens”  and  “to  deploy  sanctions  to  protect  our  public  finances  and  financial  systems.  The 
era  of  banking  secrecy  is  over.”  As  to  the  management  of  EU  funds,  the  position  of  the 
Commission  on  the  use  of  off-shore  financial  centres  is  very  strict  and  clear.  International 
Financial Institutions (IFI) must carry out a broad-based due diligence in order to avoid that 
any EU funds are used directly or through intermediaries in Offshore Financial Centres, so-
called  tax  havens  or  any  other  jurisdiction,  for  the  purpose  of  evading  tax  payment  to 
beneficiary countries and EU Member States or in connection with tax fraud and avoidance. 

On 28 April 2009, the European Commission issued a Communication on Good Governance 
in  Tax  Matters6,  with  the  intention  to  launch  a  debate  about  concrete  actions  that  could  be 
taken to better promote the principles of good governance in the tax area (i.e. transparency, 
exchange  of  information  and  fair  tax  competition)  both  within  the  European  Union  and 
towards  third  countries.  The  general  objective  is  to  improve  fighting  tax  evasion  and 
avoidance  on  as  broad  a  geographical  basis  as  possible.  On  18  May  2009  EU  Foreign 
Ministers  invited  the  Commission  to  propose  concrete  EU  action  “on  dialogue  with,  and 
assistance to, developing countries on promoting Good Governance in tax matters and more 
effective  national  tax  systems  in  order  to  achieve  development  goals”.  This  present  Staff 
Working  Document  accompanies  the  Communication  which  responds  to  that  invitation.  It 
aims at identifying the main challenges developing countries face when it comes to domestic 
revenue  mobilization,  analyses  existing  EU  instruments  of  development  cooperation  and 
considers relevant on-going regional and international initiatives.  

1.1. 

Revenue collection in developing countries 

When  attempting  to  increase  tax-to-GDP  ratio,  developing  countries  are  confronted  with 
numerous  domestic  and  international  constraints.  While  some  are  linked  to  their  level  of 
development,  the  structure  of  their  economy,  socio-cultural  paradigms,  politico-economic 
interests as well as domestic policy choices, others are a result of the increasing integration of 
international markets.  

While every country has its own specific tax system, some general observations can be made 
about the current state of tax systems and tax reform in the developing world. Countries with 
a  high  per  capita  income  generally  tend  to  rely  more  on  direct  taxes  as  in  OECD  countries 
where they average 15.6% of GDP, while in Latin America they account for only 5% of GDP. 
Low  income  countries  raise  more  revenues  at  the  border,  where  tax  collection  requires 
comparatively  low  administrative  capacity, since  only  a  limited  number  of  collection  points 
need to be supervised. For the same reason they are also more likely to rely strongly on excise 

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See Fuest, C. and Riedel, N., Tax evasion, tax avoidance and tax expenditure in developing countries, 
Oxford University, Centre for Business Taxation, June 2009. 
COM(2009) 201. 

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duties  (fuel,  alcohol,  tobacco).7  Trade  taxes  account  for  24%  of  tax  revenues  in  the  lower-
income  group  compared  to  only  1  percent  in  the  higher-income  group.8  Taxes  from  natural 
resources  also  constitute  a  substantial  part  of  fiscal  revenues  in  many  developing  countries. 
They are more prone to the fluctuation of market prices and less sustainable, making budget 
planning more difficult.  

The  relative  importance  of  taxes  has  changed  in  the  last  decades  with  revenues  from 
consumption taxes increasing, mostly because of the widespread introduction of VAT9. This 
form  of  taxation  was  frequently  introduced  to  compensate  for  tax  losses  due  to  trade 
liberalization and lower trade taxes. In middle income countries 45 to 60% of tax losses from 
trade  liberalization  were  recovered.  In  low  income  countries  revenue  recovery  was  much 
weaker,  with  about  only  30%  of  each  lost  dollar10.  Leading  economists  argue  that  when 
introducing  the  VAT  in  developing  countries  to  replace  trade  taxes,  the  existence  of  a  vast 
informal  sector  in  many  developing  countries  is  not  sufficiently  taken  into  account. 
Introducing  a  VAT  in  this  context  can  have  a  welfare  reducing  impact  and  increases  the 
distortion between the formal and the informal sector. 11  

Developing countries seem to be particularly vulnerable to the increasing mobility of capital 
that  has  significantly  reduced  corporate  tax  rates  both  in  developed  and  in  developing 
countries.  Revenues  from  this  tax  decreased  by  20%  in  developing  countries,  due  to  falling 
statutory rates and the increasing use of tax holidays, free trade zones and tax breaks in many 
countries.12  

In  Sub-Saharan  Africa  the  tax-to-GDP  ratio  improved  from  less  than  15%  in  1980  to  more 
than  18%  in  2005.  However  this  increase  is  almost  entirely  due  to  natural  resource  taxes 
(income  from  production  sharing,  royalties  or  corporate  income  tax  on  oil  and  mining 
companies). This type of income is highly volatile and hard to predict. In the same 25 years, 
non-resource related revenue rose by less than 1% of GDP. Although natural resource taxes 
have  generated  domestic  revenues  in  many  developing  countries,  governments  have  often 
failed to ensure a better allocation of state revenues. The challenge for developing countries is 
to make sure funds stemming from extractive activities are duly redistributed and devoted to 
the reduction of poverty, especially in the least developed countries. 

1.1.1  Domestic factors hampering developing countries' tax systems 

The most noticeable domestic factors hampering tax revenue collection in many developing 
countries are large informal economies, a predominance of agriculture and natural resources 
over  industry  and  services,  less  redistributive  tax  systems  with  predominance  of  indirect 

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Zolt, Eric M. and Bird, Richard M., Tax Policy in Emerging Countries. Environment and Planning C: 
Government  and  Policy, Vol.  26, pp. 73-86, 2008;  UCLA  School of Law,  Law-Econ  Research  Paper 
No. 08-18. 
Zolt  Eric  M.  and  Bird  Richard  M.  Introduction  to  Tax  Policy  Design  and  Development.  Draft  paper 
prepared for World Bank course on practical issues of tax policy in developing countries (2003). 
In  some  countries  as  Mozambique  debt  relief  under  the  Heavily  Indebted  Poor  Countries    (HIPC) 
programme was conditioned to the introduction of Value Added Taxation (VAT). 
IMF  working paper, Tax  revenue  and  (or)  trade  liberalization,  Baundsgaard  T.  ,Keen  M. (2005), see 
www.imf.org. 
Emran, M. Shahe. and Stiglitz, Joseph E., On Selective Indirect Tax Reform in Developing Countries 
(June 2002),see  http://ideas.repec.org/p/wpa/wuwpit/0210003.html. 
Keen, M. and Simone A.(2004), Tax policy in developing countries: Some lessons from the 1990s, and 
some challenges ahead, in Gupta, S., Clements B. and G. Inchauste (Eds.), Helping countries develop: 
the role of fiscal policy, Washington, D.C.: International Monetary Fund. www.imf.org. 

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taxation, in particular custom and trade revenue, weak tax administrations, poor public service 
delivery, higher incidence of corruption, poor governance and deficient rule of law. They all 
eventually  result  in  poor  management  of  a  narrow  tax  base,  low  tax  morale,  inadequate  tax 
revenues  with  low  tax  efforts  and  revenue  elasticity  in  the  face  of  rising  expenditure  needs 
and  an  uneven  distribution  of  tax  burden.  Last  but  certainly  not  least,  they  undermine  the 
legitimacy  of  the  political  systems  and  the  built-up  of  effective  institutional  capacity. 
Furthermore, both political and macro-economic instability have shown to encourage capital 
flight leading to heavy losses in potential revenues. 

1.1.2. 

International factors hampering tax systems 

Fierce  international  tax  competition  to  attract  much  needed  foreign  direct  investment  (FDI) 
leads  to  frequent  use  of  tax  exemptions  and  derogations.  In  order  to  attract  FDI  developing 
countries  often  chose  to  grant  tax  incentives  instead  of  improving  tax  procedures  or 
decreasing tax rates. Although some countries have started to reduce their Corporate Income 
Tax rates, in Africa they are still as high as 30% in average. To mitigate the impact of these 
rather  high  rates  two  third  of  the  countries  in  Sub  Saharan  Africa  have  introduced  tax 
incentives,  with  Low  Income  Countries  introducing  them  more  frequently  than  Middle 
Income Countries. Some studies suggest that the amount of money that could be recovered by 
ending tax incentives is likely to be quite high, and evidence suggests that the widespread use 
of tax holidays fails to attract sustainable investment. 

While  harmful  tax  practices  and  lack  of  transparency  and  information  exchange  exercise  a 
negative  impact  on  developing  countries’  revenues,  a  perhaps  even  more  detrimental  result 
relates to the fact that non-cooperative jurisdictions contribute to maintaining a vicious circle 
in  developing  countries  where  institutional  development  and  political  legitimacy  is 
undermined by tax evasion and avoidance. Indeed recent research concludes that the existence 
of  tax  havens  both  in  developed  and  developing  countries,  combined  with  harmful  tax 
practices, "represent an important hindrance to growth and development in poor countries".13 

The Organisation for Economic Cooperation and Development (OECD)14 points out that non-
cooperative  jurisdictions  "reduce  revenue  available  to  developing  countries  by  acting  as  a 
destination for income streams and wealth protected by a lack of transparency and refusal or 
inability to exchange information with revenue authorities".  

Studies  show  that  differences  in  corporate  tax  rates  between  jurisdictions  may  encourage 
jurisdictions15.  Transnational 
multinational  corporations 
corporations  may  manipulate  prices  in  internal  transactions  (‘transfer  mispricing’)  or  shift 
receivables and payables within an enterprise in order to generate profits in countries where 
tax conditions are most favourable.16 In fact, this mispricing only happens when companies do 

to  shift  profits 

low-tax 

to 

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See Footnote 3, p. 17. 
OECD  Secretariat  Issues  Paper,  Domestic  Resource  Mobilisation  for  Development:  the  Taxation 
Challenge 2010.  www.oecd.org. 
Methods  used  to  transfer  profits  to  low  tax-jurisdictions  include  inter  alia    (1)  over-pricing  of 
transactions from low-tax to high-tax jurisdictions, or to under-price transactions from high to low-tax 
jurisdictions. (2) debt-financing of subsidiaries in high-tax jurisdictions (3) transferring the ownership 
of  brand  names  to  subsidiaries  in  tax  havens.  Norwegian  Commission  on  Capital  Flight  from 
Developing Countries, Tax havens and development, Preliminary Report, June 2009, p. 69. 
Estimates state that tax revenue losses from developing countries due to corporate profit shifting range 
between  35  and  160  billion  dollars.  However,  these  figures  are  contested  by  some  researchers.  See 

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not  apply  the  OECD  guidelines  and  do  not  use  the  arm's  length  principle  for  intra-group 
transactions and when the authorities in developing countries are not able to detect this.  

1.1.3. 

Specific Factors in Natural Resource Rich Settings 

Only  a  handful  of  developing  countries  have  managed  resource  revenues  in  a  way  that 
promotes  sustainable  economic  growth  and  poverty  alleviation.  In  all  too  many  cases,  the 
discovery of hydrocarbon or mineral resources has been associated with devastating political 
conflict  and  economic  setbacks,  as  referred  to  in  the  literature  under  the  term  "resource 
curse"17. While a number of promising international initiatives have emerged to promote good 
governance and transparency in the hydrocarbon and mining sector and are supported by the 
EU18,  there  would  be  merit  in  strengthening  and  expanding  upon  these  to  create  a  more 
systematic  approach  to  address  the  particular  revenue  collection  challenges  for  natural 
resource rich settings. 

Some  key  factors  can  hamper  domestic  revenue  collection  by  triggering  rent-seeking 
behaviour of involved stakeholders with harmful effects on poverty, corruption and conflicts. 
A  lack  of  transparency  in  allocating  and  negotiating  extractive  projects  combined  with  the 
asymmetric distribution of information, experience and competence between companies and 
governments  can  favour  corruption  or  lead  to  unbalanced  rent  distributions  from  resource 
extraction.  After  negotiation,  contracts  are  kept  secret  whereas  contract  transparency  would 
increase  the  domestic  accountability  and  set  incentives  for  stakeholders  to  negotiate  more 
balanced  deals.19  Furthermore  complex  fiscal  regimes  combined  with  inadequate  tax 
administration and collection capacities often reduce significantly the amount received from 
extraction taxes and royalties. 

1.2. 

Supporting effective, efficient, fair and sustainable tax systems 

Efficient and equitable tax systems are crucial for growth and poverty reduction. They tend to 
be  associated  with  higher  revenues,  hence  lower  natural  resource  and  aid  dependency,  less 
inequality and more competitive economies. In particular, the nexus between tax reform and 
the  improvement  of  the  business  environment  is  critical.  Successful  reformers  focused  on 
reinforcing this nexus by conducting tax reforms in tandem with regulatory changes that make 
it  easier  for  businesses  to  invest,  to  trade  and  to  create  jobs,  without  necessarily  increasing 
average tax rates. Such an approach leads to higher revenues through higher economic growth 
and  broader  tax  bases,  inter  alia  by  bringing  in  the  informal  economy  and  reducing 
corruption, waste and tax evasion. 

In  many  least  developed  countries  the  sustainable  provision  of  public  services  that  is 
necessary  to  achieve  the  Millennium  Development  Goals  requires  the  mobilisation  of 

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19 

Fuest,  C.  and  Riedel,  N.,  Tax  evasion,  tax  avoidance  and  tax  expenditure  in  developing  countries, 
Oxford University, Centre for Business Taxation, June 2009.  
This term has been used first by Richard M. Auty in 1993. Auty, Richard M. Sustaining Development in 
Mineral Economies: The Resource Curse Thesis. London: Routledge (1993). 
Many  Sub  Saharan  African-resource  rich  countries  score  relatively  low  on  the  2009  Human 
Development  Index  (HDI),  for  example  Chad  (175),  Nigeria  (158),  Cameroon  (153),  Sudan  (150), 
Angola (143), with the slight exceptions of Botswana (125) and Gabon (103) 
See for example initiatives such as the Extractive Industries Transparency Initiative or the Kimberley 
Process (diamonds). 
Rosenblum,P  ./Maples,S  (2009):  Contracts  Confidential:  Ending  Secret  Deals  in  the  Extractive 
Industries. 

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increasing  domestic  resources.  Taxes  can  become  a  reliable  and  sustainable  source  of 
development  finance  if  a  taxation  regime  is  in  place  that  curbs  tax  evasion  and  abusive  tax 
avoidance  and  at  the  same  time  ensures  horizontal  and  vertical  equity.  This  effort  is 
intrinsically linked to the built up of effective and efficient tax administrations promoting both 
non-coercive tax compliance and strict enforcement of the applicable tax code. An increase in 
the capacity to collect taxes should be accompanied by a strengthening in the efficiency and 
social legitimacy of a country’s governing institutions, and it should be compatible with the 
stimulation  of  economic  activity  and  with  the  promotion  of  an  environment  encouraging 
investment.  Furthermore  it  has  to  be  ensured  that  taxpayers  have  the  possibility  to  appeal 
decisions from revenue authorities before court. 

In a nutshell, successful tax systems can only thrive in an environment where tangible efforts 
are  underway  to  promote  the  rule  of  law,  good  governance  in  the  public  sector,  sound 
economic  policies  and  effective  multi-stakeholder  involvement.  In  that  respect,  better 
integrating  tax  reforms  and  broader  governance  and  public  sector  reforms  would  enable  to 
better  address  the  governance  and  political  economy  factors  that  often  hinder  tax  reforms 
efforts and lead in particular to large tax exemptions. 

1.2.1.  Assisting in tax reforms and strengthening tax administrations 

The EU acknowledges the prime responsibility of developing countries themselves to improve 
their  revenue  systems  and  policies,  according  to  their  own  economic  and  political 
circumstances20.  In  the  Guidelines  for  EU  participation  in  the  International  Conference  on 
Financing  for  Development21,  “the  EU  recalls  that  financing  for  development  depends 
primarily  on  the  domestic  resources  mobilization”  and  commits  to  supporting  “the  capacity 
development of custom, judiciary and tax administration”.  

A comprehensive tax administration effort to enhance tax revenue therefore seeks to collect 
taxes  1)  due  on  the  informal  economy  (notably  by  creating  a  more  conducive  policy  and 
regulatory business environment for formal sector activities),22 2) due but not paid (because of 
possible  corruption,  weak  enforcement  mechanisms,  patronage  systems,  etc)  and  3)  due  on 
income earned by multinational companies and individuals and then moved or kept off-shore 
without  paying  appropriate  domestic  tax.  Appropriate  policy  and  legal  frameworks,  focused 
institutional  and  capacity  building,  sufficient  financial  and  competent  human  resources  are 
necessary  to  guarantee  that  the  complex  and  intertwined  tasks  of  tax  policy  formulation, 
implementation, monitoring and enforcement be addressed in a comprehensive and effective 
manner. 

Particular  attention  has  to  be  given  to  the  correct  design  of  taxation  systems  and  the 
strengthening of tax administrations at national and local levels. Country-specific tax reforms 
will  have  to  address  the  challenge  of  finding  a  conducive  policy  mix  of  direct  and  indirect 
taxation where structure, type and level of applicable taxes will have to take into account key 
development  objectives  such  as  efficiency  and  administrative  simplicity  in  tax  collection, 

20 

21 
22 

See for example GAERC Council Conclusions, 11 November 2008, Guidelines for EU participation in 
the International Conference on Financing for Development (Doha, 29 November - 2 December 2008), 
sections 15-23 
http://ec.europa.eu/development/icenter/repository/CC%20DOHA%20Guidilines%20for%20EU%20pa
rticipation%20EN2008%2011%2011.pdf 
See footnote 20. 
A  more  conducive  business  environment  includes  the  provision  of  services  necessary  to  business 
activities such as information centres, internet access, etc. 

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economic growth and social equity, broadening of the tax base and bringing in the informal 
economy,  incentivizing  productive  investments  and  facilitating  employment  generation, 
notably in the micro and small business sector. A stable legal framework, lower uniform tax 
rates  and  simplified  procedures  result  in  significantly  reduced  transaction  costs  in  tax 
compliance for enterprises and encourage investment. The complexity of the tax system tends 
to be a strong disincentive for investment. Tax reform is not only about introducing tax rates, 
administrative  improvements  are  almost  equally  important.  Improving  the  investment 
environment  does  not  simply  mean  to  reduce  tax  rates,  it  also  implies  standardizing  and 
simplifying  procedures  in  order  to  reduce  compliance  time  for  investors  and  ease  tax 
collection for authorities. Tax payers must also be convinced that paying taxes is a win-win 
position  equally  benefitting  the  state  and  the  tax  payer.  Targeted  awareness-raising  and 
information  campaigns  explaining  the  tax  system  and  what  the  government  does  to 
facilitate/ensure compliance could contribute to sensitising tax payers. 

When  considering  reform  of  tax  systems  in  order  to  attract  foreign  direct  investment,  it  is 
important  to  bear  in  mind  that  the  Corporate  Income  Tax  is  only  one  of  the  taxes  that 
businesses have to pay, accounting in average only for 37% of the Total Tax Rate. The World 
Bank Group publication Doing Business points out that in Cameroon paying taxes takes more 
than  1000  hours  and  requires  a  total  of  47  payments.  On  a  global  scale  in  2008  the  most 
popular  reforms  undertaken  were  reducing  tax  rates  and  introducing  electronic  filing  of  tax 
information.23 In this context it is indispensable to improve the data base on which the fiscal 
system acts. This relates in particular to taxation statistics and the ability to process and assess 
relevant data such as income and tax distribution, sources of taxation, consumption patterns, 
etc. 

Tax  administrations  have  to  fulfil  two  basic  conditions:  First,  they  have  to  be  committed  to 
fully apply the tax code. Second, they have to have the necessary means to effectively combat 
tax  fraud  and  ensure  tax  compliance  for  all  economic  actors,  nationals  and  internationals 
alike.  This  may  require  the  establishment  and  progressive  strengthening  of  special 
departments  dealing  with  high  risk  taxpayers,  income  from  natural  resources,  fraud 
investigations units and a reinforced cooperation with the police and judiciary apparatus, both 
at  home  and  internationally.  As  a  matter  of  fact  some  countries  have  chosen  to  introduce 
Large  Taxpayers  Units  in  order  to  deal  effectively  with  the  few  yet  most  important  tax 
contributors.  

1.2.2.  Promoting domestic accountability and public financial management 

The EU recognizes the importance of strengthening the effectiveness of domestic revenue (tax 
and non-tax) systems in developing countries, both from a resource mobilisation and a state-
building/accountability  point  of  view,  and  as  an  engine  of  growth  and  poverty  reduction. 
Reforming  tax  systems  must  go  hand  in  hand  with  strengthening  fiscal  institutions  with  a 
view to enhancing transparency and accountability. The role of parliaments and supreme audit 
institutions (SAIs) is particularly important in this context. Throughout history, taxation and 
democratic representation have been closely related. "No taxation without representation" is a 
well known slogan, but particularly in situations of state fragility extending taxation may also 
be  a  means  to  strengthening  state  institutions  and  their  legitimacy,  as  long  as  it  is 
accompanied  by  greater  transparency  and  accountability  regarding  the  use  of  taxpayers’ 
money.  It  is  therefore  important  to  ensure  that  tax  reforms  be  implemented  in  tandem  with 

23 

Price  Waterhouse  Cooper  /  The  World  Bank  Group,  Paying  Taxes  2009  The  Global  Picture,  see 
www.worldbank.org. 

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measures  to  enhance  democratic  accountability  and  to  strengthen  the  oversight  role  of 
parliaments  and  SAIs,  including  the  promotion  of  complaint  mechanisms.24  This  should  be 
seen  as  an  integral  part  of  a  greater  focus  on  supporting  tax  governance  in  developing 
countries. Poor governance,  lack  of accountability and corruption,  leading to tax avoidance, 
tax evasion and large tax exemptions can be obstacles to tax reform. Addressing this broader 
political  economy  question  is  essential  if  significant  additional  progress  is  to  be  made  in 
domestic resource mobilization. 

Enhancing ownership and domestic accountability is at the forefront of the EU's development 
cooperation framework, given the emphasis put on the use of country systems in aid delivery, 
including the use of budget support. This includes using budget support to insist on adherence 
to sound public finances also with regards to revenue flows resulting from mineral resource 
projects.  It  will  certainly  be  important  to  continue  to  push  for  greater  transparency  in  the 
formulation of the budget, for example "tax expenditures", i.e. subsidies provided through tax 
exemptions, as well as on the transmission to parliaments of regular budget execution reports 
and  annual  audits.  More  attention  will  be  needed  to  strengthen  the  technical  expertise  of 
parliaments (e.g. through the promotion of technical bodies producing analysis on budget and 
tax issues) so as to enable them to assess and contribute to the formulation and oversight of 
the national budget in a meaningful way, including on domestic revenue and tax matters.  

Non-state  actors  such  as  academia,  think  tanks,  NGOs  and  media  play  an  important  role  in 
providing  public  fora  for  an  informed  discussion  on  tax  governance.  Aware  of  the  harmful 
effects that natural resources endowment can have on poverty, corruption and conflict in cases 
of  poor  governance  it  appears  sensible  to  “help  developing  countries  to  further  implement 
effective  and  sustainable  raw  material  policies  based  on  good  governance  and  build 
capacity”25. Strategies geared towards maximizing revenue from a country’s natural resource 
should  address  all  stages  of  the  value  chain  to  ensure  that  the  maximum  value  can  be 
extracted in a way which benefits the wider population. This includes greater emphasis on the 
way in which resources are allocated at the start of the process, as well as increased domestic 
accountability for revenue collection, management and spending.  

Governments need to be strengthened, by taking into account the asymmetrically distributed 
information,  competence  and  experience  between  globally  operating  companies  in  the 
extractive sector and local governments, in order to ensure better informed procurement and 
negotiation decisions and allow for effective fiscal regimes leading to equitable outcomes and 
a  sound  investment  climate.  To  increase  domestic  accountability,  it  would  be  helpful  if 
contracts  were  published  and  made  transparent,  for  example  by  using  standard  contract 
models  whenever  possible26,  which  are  also  more  efficiently  enforceable  by 
tax 

24 

25 

26 

In this context effective citizen participation is another key element that should contribute to increasing 
revenue collection. Arrangements fostering direct citizen participation in the budgeting process at local 
level are likely to contribute to improving transparency and developing trust between citizens and the 
public sector. 
Communication  on  “The  Raw  Material  Initiative:  ensuring  our  critical  needs  for  growth  and  jobs  in 
Europe” - COM(2008) 699, 4.11.2008 and the Conclusions on "An integrated approach to a competitive 
and sustainable industrial policy in the European Union", adopted by the Competitiveness Council on 
28.5.2009  which  stated  that  "the  specific  situation  of  poor  developing  countries  has  to  be  taken  into 
consideration". 
In Liberia, all recent extractive contracts are published and based upon a standard contract model with a 
transparent fiscal regime. 

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administrations.  This  should  be  combined  with  the  disclosure  of  revenue  receipts  and 
payments under the EITI framework to enhance transparency and accountability.27. 

To  hedge  the  volatility  of  extraction  revenues,  governments  should  follow  prudent  fiscal 
policies  and  consider  long-term  investment  funds  in  order  to  ensure  a  steady  flow  of  the 
revenues for future generations. Such sovereign wealth funds28 need to be even more subject 
to domestic accountability and respect all criteria of sound public financial management.  

1.2.3. 

Strengthening transparency and cooperation in the international tax environment 

Initially  in  Monterrey29,  then  in  Doha30,  capital  flights  and  illicit  financial  flows  were 
explicitly  identified  as  a  major  hindrance  to  mobilisation  of  domestic  revenue  for 
development. Non-cooperative  jurisdictions trigger tax evasion from developing  countries31. 
Measuring  this  loss  of  income  remains  a  difficult  task.  One  reason  for  this  is  that  so-called 
"tax  havens"  rarely  or  never  produce  statistics  about  capital  inflows.  Relying  on  a  single 
estimate  is  therefore  insufficient.  Estimates  produced  with  different  methods  have  to  be 
compared  and  questioned.  The  amount  of  illicit  financial  flows  said  to  leave  developing 
countries  -  mostly  to  tax  havens-  ranged  between  850  billion  and  1  trillion  US  dollars  in 
2006.It  increased  at  a  an  average  rate  of  18,2%  from  2002  to  2006.  About  50%  of  these 
outflows originated from Asia, and only 3% from Sub-Saharan Africa. However about Sub-
Saharan Africa the authors of the study further state that “the share would have been higher if 
more complete and reliable data were available” 32. 

Promoting  good  governance  in  tax  matters  and  avoiding  harmful  practices,  including  in 
relation  to  foreign  direct  investment,  gained  prominence  on  the  international  agenda.  The 
need to comply with the OECD standards of transparency and exchange of information was 
affirmed by the G20 on 2nd April 2009. These standards include good access to information, 
including on accounting and ownership data, ability to exchange information, including bank 
and fiduciary data, and information exchange on request. While all on and off-shore financial 
centres have already committed to these standards the challenge now lies with their effective 
implementation. In this context compliance with these standards and their enforcement needs 
to be monitored as well. This is done through a peer-review process within the Global Forum 
on Transparency and Exchange of Information monitoring the progress of implementation of 
the  standards33.  According  to  the  OECD  Global  Forum  a  country  is  considered  to  have 

27 

28 

29 
30 
31  
32 

33 

In  order  to  fight  against  corruption,  tax  evasion  and  illegal  financial  flows,  the  General  Affairs  and 
External Relations Council on 11.11.2008 supported the promotion of " the principles of transparency 
and  accountability  over  natural  resource  revenue  by  supporting  and  implementing  the  Extractive 
Industry  Transparency  Initiative  (EITI),  as  well  as  other  specific  initiatives  aiming  at  improved 
governance and transparency in the extractive sector". 
One example of good practice is the Government Pension Fund of Norway which manages Norway's 
revenues from oil extraction. 
Monterrey Financing for Development Conference, 2002. 
Doha Financing for Development Conference, 2008. 
See for example footnote 3, p. 76. 
Kar,  D.  and  Cartwright-Smith,  D.,  Illicit  financial  flows  from  Developing  countries:  2002  –  2006, 
Global  Financial  Integrity,  2009.  Fuerst  and  Riedel,  however,  consider  these  estimates  to  be  too high 
and hold that "too much emphasisis is put on producing aggregate estimates of tax revenue losses for 
the  developing  world  as  a  whole",  Fuest,  C.  and  Riedel,  N.,  Tax  evasion,  tax  avoidance  and  tax 
expenditure in developing countries, Oxford University, Centre for Business Taxation, June 2009. 
Jurisdictions  that  have  committed  to  the  principles  but  not  substantially  implemented  them  (as  of  25 
March 2010) include Belize, Cook Islands, Dominica, Grenada, Liberia, Marshall Islands, Montserrat, 
Nauru, Niue, Panama, St Lucia,  Vanuatu (all these countries met the tax haven criteria of the OECD in 

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substantially  implemented  the  internationally  agreed  standards  when  it  has  signed  12 
agreements  on  exchange  of  information.34  These  criteria  for  being  qualified  as  cooperative 
jurisdictions are to be reviewed by the OECD with a view to ensuring that countries continue 
to  enter  into  agreements  with  as  many  jurisdictions  as  possible  and  that  agreements  be 
effectively implemented. 

Guided  by  its  stated  policy  of  effective  multilateralism35  the  EU  seeks  to  promote  good 
governance in tax matters on as broad a geographical basis as possible. The development of 
and  subsequent  compliance  with  global  principles  and  standards  on  transparency  and 
exchange  of  information  calls  for  a  stronger  role  of  the  UN,  ideally  through  global 
conventions  with  binding  commitments  for  all  treaty  signatories.  Moreover,  engaging  in 
multi-stakeholder  tax  governance  suggests  formulating  and  agreeing  on  codices  of  conduct 
linking governments and companies alike. Existing regional cooperation fora and frameworks 
established with the ACP, Latin American  and  European Neighbourhood communities have 
provided room for exchange of experiences, south-south sharing  of successful practices and 
testing  of  good  practice  in  tax  governance  in  the  developing  world.  Many  developing 
countries that suffer important tax losses due to  tax  evasion and other  harmful tax practices 
are  not  involved  in  international  tax  cooperation  structures  and  processes.  They  have  so  far 
failed  to  negotiate  agreements  on  tax  information  exchange,  at  multilateral,  regional  and/or 
bilateral  level.  In  addition,  their  tax  administration  capacities,  including  on  audit  and  risk 
assessment  and  profit  reporting,  notably  for  multinational  companies,  have  yet  to  be 
strengthened so as to make full use of relevant data for tax analysis and collection purposes. 

To further ensure transparency an accounting standard requiring multinational corporations to 
publish data on a country-by-country basis in particular in the extractive industry is currently 
being  discussed  at  international  level.  Given  the  need  for  a  meaningful  involvement  of 
developing  countries the  EU  is  clearly  interested  in  ensuring  that  their voice,  representation 
and capacity be effectively strengthened.  

2. 

HARNESSING EU INSTRUMENTS TO PROVIDE ENHANCED SUPPORT 

Progress in strengthening tax systems and raising domestic revenues in developing countries 
has been modest over the last twenty years. In that regard, developing countries in particular, 
but  also  the  donor  community,  can  do  more  and  better  to  strengthen  tax  systems.  EU 
assistance, unlike that from a few Member States, notably Germany, France, Spain and United 
Kingdom,  has  so  far  not  been    engaged  to  the  full  extent  in  this  area  –  at  least  not  in  a 
systematic and sufficiently coordinated way36.  

34 

35 

36 

2000). Other financial centres that still have to substantially implement the standards are Brunei, Costa 
Rica, Guatemala, Philippines, Uruguay. See: http://www.oecd.org/dataoecd/50/0/43606256.pdf   
The European Parliament considers this to be insufficient: In § 16 of its non-legislative resolution of 10 
February 2010 it considers "the OECD framework for combating tax havens [to be] unsatisfactory" and 
underscores that "the EU should actively promote the improvement of the OECD standards". EP: non-
tax  matters"  adopted  10/02/2010 
legislative  resolution  on  "Promoting  good  governance 
(INI/2009/2174). 
Mentioned in the European Security Strategy of 2003 as the concept placing main emphasis on a rule-
based international order, with the United Nations at its core. 
Please refer to section 1 of the Annex "Evaluation of replies to the Monterrey questionnaire on domestic 
resource  mobilisation".  This  annex  is  complementary  to  chapter  2  of  the  Staff  Working  Document  " 
Financing for Development – Annual progress report 2010: Getting back on track to reach the EU 2015 

in 

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Support provided to developing countries in their endeavours to raise domestic revenues has 
been granted through different types of instruments in the past, often through bilateral projects 
aiming  at  supporting  tax  reform  and  tax  administration  or  by  introducing  tax  matters  in  the 
policy dialogue. Projects have notably focused on reform of tax and customs administration, 
legislation  and  procedures,  capacity  development,  electronic  filing  of  tax  information,  the 
introduction  of  the  VAT.  Other  countries  have  focused  their  support  on  fighting  against 
corruption  and  judiciary  reform.  Further  efforts  to  enhance  coordination  among  donors,  are 
undertaken.  

Assistance  to  partner  countries  is  implemented  in  forms  of  funds,  training  programs, 
equipment  and  technical  cooperation37  (best  practices,  study  visits,  expert  missions,  and 
policy advice). Some Member States and the Commission have provided support to initiatives 
such  as  the  IMF  Regional  Technical  Assistance  Centres  the  African  Tax  Administration 
Forum, the International Tax Dialogue and the International Tax Compact. 

2.1. 

Stepping up and improving the effectiveness of EU support to tax systems 

Developing more effective EU action towards supporting tax systems in developing countries 
requires  putting  emphasis  on  three  pillars:  a  more  comprehensive  approach;  strengthening 
public financial management in the context of budget support; and support to multilateral and 
regional initiatives. Furthermore, support takes into account the commitments of developing 
countries to implement the three principles of good tax governance (transparency, exchange 
of information and fair tax competition).  

2.1.1. 

Introducing a more comprehensive approach to tax administration and tax reforms 

A  comprehensive  approach  in  tax  matters  calls  for  a  better  integration  of  tax  policy  and 
administration  efforts  into  broader  reforms  towards  good  public  sector  governance,  but  also 
private  sector  development,  macro-economic  stability  frameworks,  social  protection  and 
cohesion  programs,  state  building  and  democratic  accountability  measures.  In  addition, 
international  trade  and  investment  flows  as  well  as  regional  integration  commitments  have 
made  it  more  crucial  to  ensure  effective  domestic  revenue  (tax  and  non-tax)  management. 
Partner country tax administrations are subject to increasing cross-border flows, and face the 
complex  task  of  taxing  multinational  companies.  The  development  of  an  effective  state, 
institutional and policy environment, with effective multi-stakeholder governance translating 
into a high degree of administrative cooperation, a collaborative relationship between the state 
and  economic  agents,  notably  from  upper-income  groups,  and  in  general  a  high  level  of 
consultation are considered conditions that are conducive for the establishment of a successful 
tax  system.  Given  this  intrinsic  relationship  between  sound  domestic  revenue  management 
and economic, social and political development, in some cases a program of comprehensive 
reform of the tax institutions has even the potential of being a major driver towards improving 
overall governance. 

The  operationalisation  of  this  link  between  tax  and  broader  governance  questions  support 
depends on local circumstances, and will generally better be articulated under a programmatic 
approach  as  compared  to  stand-alone  and  narrowly  defined  tax  projects.  Based  on  the 

37 

target  on  ODA  spending?",  accompanying  the  Communication  on  "A  twelve-point  EU  action  plan  in 
support of the Millennium Development Goals" adopted on 20 April 2010. 
Consistent  with  the  backbone  strategy  regarding  aid  effectiveness  in  technical  cooperation  and  the 
principle of ownership (2005 Paris Declaration on Aid Effectiveness).  

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developing country's proper reform priorities broader economic governance or state building 
programmes including a tax component, such as supported by the Commission in a few ACP 
countries, would seem in many cases to be an appropriate instrument of intervention.  

Under  this  framework,  support  to  tax  administration,  for  which  the  International  Financial 
Institutions  play  a  leading  role,  appears  to  remain  essential,  and  could  be  progressively 
expanded  to  'new  issues',  such  as  taxation  of  multinationals,  natural  resources,  exchange  of 
tax information, adoption of international standards, etc. 

This  broad  approach  to  tax  reforms  also  calls  for  taxes  to  receive  adequate  attention  in  the 
countries'  development  strategies.  When  conceiving  country  strategy  papers,  preparing 
national  and  regional  indicative  programmes,  conducting  mid  and  end  of  term  reviews, 
assessing  governance  action  plans,  conceiving  governance  profiles,  and  conducting  relevant 
sector  policy  dialogues  appropriate  attention  should  be  given  to  systematically  address 
questions  of  tax  governance,  as  suggested  in  chapter  3  of  the  Communication  on  Tax  and 
Development. Similarly, annual budget support reviews and PFM assessments do not put the 
necessary emphasis on domestic revenue management issues.  

Promoting  taxation  is  also  about  explaining  the  purpose  of  taxation  to  the  populations  in 
developing  countries.  NGOs  working  on  economic  governance,  local  civil  society  but  also 
think thanks, academia and the media are channels through which taxpayers can be educated 
and where awareness about harmful tax practices or lacking governmental accountability can 
be  raised.  Supporting  these  stakeholders  on  tax  matters  is  particularly  critical  given  the 
technical complexity of the issues at stake and the need to mobilise effective input from all 
knowledgeable actors. Assisting the demand side of accountability appears to be essential if 
tax  reforms  are  to  be  successful  in  the  long run. In accordance with  the  Communication  on 
Tax  and  development,  funds  under  both  the  Development  Cooperation  Instrument  and  the 
European Development Fund could be used to facilitate an effective participation of non-state 
actors in this process 

This enhanced and broadened focus on tax matters requires more expertise and resources at 
EU level. 

2.1.2. 

Strengthening public financial management in the context of budget support 

A  recent  survey  of  EU  Delegations  in  developing  countries  revealed  that  budget  support  is 
potentially  an  effective  instrument  for  encouraging  revenue  reforms  and  supporting  their 
implementation  in  partner  countries.  In  order  to  become  eligible  for  budget  support, 
developing  countries  need  to  commit  to  a  stability  oriented  macroeconomic  policy  and  a 
relevant and credible programme of reform of public financial management. The first of these 
conditions  implies  increasing  domestic  revenue  and  ensuring  levels  of  public  expenditure 
consistent  with  a  sustainable  fiscal  policy.  The  second  requires  strengthening  the 
effectiveness,  efficiency  and  accountability  of  revenue  collection  and  public  expenditure. 
Aiming  at  and  maintaining  compliance  with  these  eligibility  conditions  encourages  partner 
countries to engage in reforms and opens a space for dialogue in countries that manage budget 
support programmes  but also in more  fragile countries that aim at becoming eligible to this 
type of aid. 

In addition budget support programmes typically include a capacity development component 
that is often used to support the implementation of reform measures. One of its purposes is to 
strengthen  institutional  capacities  of  all  relevant  actors,  including  national  parliaments  and 

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audit 
the 
institutions  with  oversight  and  monitoring  responsibilities.  Progress 
implementation of these programmes is regularly jointly monitored by the partner government 
and  the  donors  providing  budget  support  as  part  of  the  assessment  of  eligibility  and  more 
specific  conditions  linked  to  the  disbursement  of  funds.  This  encourages  an  increasingly 
structured  dialogue  on  these  issues.  The  Commission  assumes  this  mutually  shared 
responsibility  by  providing  an  increasing  share  of  development  assistance  through  budget 
support,  including  through  innovative  aid  modalities  such  as  the  MDG-Contracts  concluded 
with a number of ACP countries. Collectively these MDG-Contracts account for about €1.8 
billion,  representing  50%  of  all  General  Budget  Support,  and  some  14%  of  total  national 
programme commitments under the 10th EDF. Coverage may be expanded to other countries 
(including  non  ACP  ones)  as  the  Commission  learns  from  experience  and  countries' 
monitoring frameworks improve. 

While  in  some  countries  the  programme  of  reform  in  public  financial  management  already 
covers both expenditure and revenue (e.g. Burkina Faso, Mali), in other partner countries the 
main  focus  is  on  the  expenditure  side.  However,  the  architecture  of  budget  support 
programmes is conducive to the extension of dialogue, conditions and capacity development 
to strengthening revenue systems and raising revenue collection. The processes and the tools 
developed  for  public  financial  management  are  in  general  also  relevant  for  revenue 
mobilisation  when  this  is  not  already  included  in  the  overall  Public  Finance  Management 
(PFM)  programme  of  reform.  The  EU  can  encourage  partner  governments  to  develop 
programmes of reform that clearly state the objectives that they intend to achieve in terms of 
tax  policy  and  tax  administration  reforms.  When  considering  budget  support  the  level  of 
decentralisation should also be taken into account, where appropriate. Budget support could 
contribute  to  strengthening  local  public  finance  systems,  including  tax  management  at  local 
level.  

Government-donor  coordination  groups  can  be  established  (or  PFM  groups  extended  to 
revenue  management)  to  align  support  to  the  government  programme  of  reform  and  ensure 
complementarity  and  proper  division  of  labour.  A  structured  programme  of  reform  could 
facilitate  the  transition  from  a  fragmented  project  to  a  more  programmatic  and  sustainable 
approach,  with  the  pooling  of  financial  resources  into  trust  funds  and  more  aid  effective 
financing modalities. 

The  main  instrument  for  assessing  a  country's  PFM  system,  i.e.  the  Public  Expenditure  and 
Financial Accountability (PEFA) instrument, however, does not sufficiently focus on revenue 
administration.  A  scoping-study  for  a  new  PEFA  drill  down  indicator  tool  for  revenue 
administration, will be conducted by NORAD, the IMF and World Bank in the course of the 
first half 2010 in order to strengthen the revenue assessment. It could also be applied to assess 
the revenue administration in the extractive sector. 

2.1.3. 

Supporting  multilateral  and  regional  initiatives  on  tax  administration  and  tax 
reforms 

The need for tax reforms to be better ‘owned’ and the recognition that there is no ‘one size fits 
all’ approach to taxation in developing countries was underscored in the Pretoria Declaration 
of 2008. Against this background, there has been a recent focus on building southern-based 
organisations, such as the African Tax Administration Forum (ATAF) launched in 2009 and 
the Inter-American Center of Tax Administrations (CIAT), which aim at stimulating regional 
cooperation  with  the  view  to  improving  tax  administration.  The  Commission  has  been 
following  the  emergence  of  these  regional  fora,  considering  that  through  the  sharing  of 

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lessons  and  experiences  on  common  challenges  they  will  enable  tax  administrations  of  the 
regions concerned to learn from one another and also better deal with key challenges such as 
transfer pricing, taxation of natural resources (especially mining and oil), harmonisation of tax 
laws,  exchange  of  tax  information,  etc.  A  number  of  EU  Member  States  are  planning  to 
support the ATAF and several already support CIAT.  

The IMF has also embarked on an important initiative of decentralization, through its regional 
technical centres in Africa, Latin America, the Caribbean and the Middle East. Those centres 
have proven their effectiveness in providing demand-driven technical assistance to developing 
countries,  including  on  revenue  management  and  tax  administration.  The  framework 
agreement  model  recently  signed  by  the  European  Commission  and  the  International 
Monetary Fund (IMF) would provide room for support to these mechanisms. This agreement 
allows for the signature of individual contribution agreements for IMF technical assistance on 
revenue management within countries and for possible future EU support to the IMF Revenue 
for Development Trust Fund. 

In  addition  to  these  regional  initiatives,  a  number  of  more  global  initiatives  exist  that  could 
play  an  enhanced  role  in  supporting  tax  systems  in  developing  countries,  and  strengthening 
southern-based initiatives. The OECD ‘Outreach Programme’ aims at promoting international 
collaboration  on  tax  policy  and  administration.  It  represents  an  important  element  in  the 
global  dialogue  on  taxation  by  serving  as  a  meeting  place  where  the  tax  authorities  from 
different countries can share experience and lay the basis for improved tax policies. 

2.1.4.  Revenues from Natural Resources 

In resource-rich settings the proposed frameworks in chapters 2.1.1 and 2.1.2 can also address 
the  challenges  of  the  extractive  sector,  in  order  to  tap  its  potential  for  increasing  domestic 
revenues. The policy dialogue on PFM in the context of budget support operations could for 
instance  focus  increasingly  on  good  economic  governance  in  the  extractive  sector,  also  by 
using  instruments  such  as  the  Governance  Action  Plans,  PFM  annual  reviews  and  PEFA 
assessments. Examples of good practice for mainstreaming raw materials governance into the 
budget support dialogue are the Performance Assessment Frameworks used in the EU budget 
support  operations  in  Ghana  and  Cambodia,  which  imply  concrete  and  time  bound  output 
indicators on improving the collection, management and/ or transparency of natural resource 
revenues as budget support disbursement triggers.  

The  Extractive  Industry  Transparency  Initiative  (EITI)  initiative,  which  is  part  of  the  EU-
Africa Governance Partnership and supported by 10 EU Member States, the Commission and 
the  European  Investment  Bank  (EIB),  has  been  instrumental  in  supporting  improved 
governance  and  accountability  through  the  verification  and  full  publication  of  company 
payments  and  government  revenues  from  oil,  gas  and  mining.  All  EU  Member  States  that 
support the EITI provide financial assistance, with most using the World Bank's Multi-Donor 
Trust  Fund,  and  a  few  giving  grants  to  the  EITI  International  Secretariat.  Additionally  to 
financial  support  to  the  EITI,  some  Member  States  also  provide  support  to  developing 
countries in the implementation of the EITI through bilateral projects. The Commission has 
proposed a further contribution to the EITI Multi-Donor Trust Fund under the Annual Action 
Programme 2010 of the Thematic Programme on Environment and Sustainable Management 
of  Natural  Resources,  including  Energy  (ENRTP)  to  cover  the  next  3  years  of  its 

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implementation.  Furthermore  the  Commission  is  planning  to  assess  options  of  directly 
supporting the EITI secretariat and of widening its support to complementary initiatives.38 

Some EU Member States would like to see a more active Commission role in the EITI, for 
example through  more active participation at EITI board meetings, a stronger promotion in 
the framework of the Raw Materials Initiative or by mainstreaming it in the EU Delegations' 
policy dialogue with resource-rich partner countries in order to assist them in implementing 
EITI  principles.39  In  addition,  other  international  initiatives,  such  as  the  Kimberley  Process, 
the  Forest  Law  Enforcement,  Governance  and  Trade  (FLEGT)  Action  Plan  and  the  Action 
Plan to Fight Illegal Logging should be strengthened. 

2.1.5.  Deepening regional integration 

The  Commission  and  the  Member  States  have  supported  regional  integration  in  developing 
countries. The creation of custom unions, a significant step towards economic integration, has 
resulted in the adoption of Common External Tariffs in several areas, e.g. Union Economique 
et  Monétaire  Ouest-Africaine  (UEMOA),  Southern  African  Development  Community 
(SADC),  East  African  Community  (EAC),  etc..  In  some  cases  convergence  macroeconomic 
criteria were adopted: in the UEMOA these imply a joint objective for the ratio of tax revenue 
to  GDP  against  which  member  country  performance  is  monitored.  The  East  African 
Community40 is currently elaborating a common code of tax procedures for the region, having 
identified  this  measure  an  an  important    factor  for  the  establishment  of  a  common  market, 
along with the avoidance of double taxation, common training standards for tax administrators 
or the harmonization of indirect taxes41. More recently, the signature of Economic Partnership 
Agreements with the EU has brought new challenges, in particular the need to  raise revenue 
collection  from  non-customs  related  types  of  taxation,  as  it  is  currently  the  case  in  the 
UEMOA's  fiscal  transition  programme  (Programme  de  Transition  Fiscale),  e.g.  through  a 
better  coordination  between  customs  and  revenue  authorities.  Regional  organisations  have 
already taken initiatives aiming to work towards unified TVA rates by providing guidance on 
strengthening other forms of taxation and increasing efficiency of border customs services.  

With  the  aim  of  integrating  their  markets  and  avoiding  unfair  competition,  regional 
organisations  have  often  adopted  common  codes  of  investment  that  sometimes  promote 
standardised approaches to incentives and tax expenditures. In some cases it may be important 
to  verify  the  coherence  between  domestic  policy  objectives  and  regional  regulations.  More 
recently the issue of transparency was addressed at regional level in Southern Africa: SADC 
has  developed  a  draft  convention  to  promote  transparency  and  exchange  of  information.  In 
this  context  the  Commission  could  enhance  its  support  to  the  initiatives  that  regional 
organisations  have  undertaken  to  assist  their  member  countries  in  furthering  the  process  of 
regional  integration.  In  the  ACP  area,  this  can  be  made  through  the  regional  indicative 
programmes in partnership with the regional organisations. 

38 

39 

40 
41 

In  their  replies  to  the  Monterrey  questionnaire  several  Member  States  have  called  for  an  active 
participation of the Commission in EITI Board meetings. However, participation in board meetings is 
contingent upon contributing financially to the EITI Secretariat.  
The EIB recently has started to systematically impose on its mining sector borrowers an obligation to 
regularly disclose payments made to host countries and to encourage the latter to formally subscribe and 
adhere to EITI. 
Burundi, Kenya, Rwanda, Tanzania, Uganda. 
Joint  areas  for  cooperation  between  the  German  Technical  Cooperation  (GTZ)  and  the    East  African 
Community – November 2008. 

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2.1.6. 

Strengthening division of labour in the tax area 

 Effective donor coordination and division of labour, notably at EU level, is also key in the tax 
area.  At  international  level,  donor  coordination  in  relation  to  tax  assistance  is  undertaken 
through  the  International  Tax  Dialogue  (ITD),  members  of  which  include  the  European 
Commission, the IMF, OECD, the UN, and the World Bank. The International Tax Compact, 
an international initiative to support developing countries to fight tax evasion and avoidance, 
has started to prepare a mapping of all donors active in the field of development cooperation 
in tax matters. 

While the Commission’s comparative advantage is on the expenditure side of Public Finance 
Management, where it has considerable experience, there is a need, however, to better include 
domestic revenue management in the dialogue around PFM and private sector development. 
The  Public  Expenditure  Financial  Accountability  (PEFA)  framework,  which  includes 
indicators  on  revenue,  offers  one  avenue  for  this,  as  does  the  policy  dialogue  on  budget 
support. This stronger involvement opens the door for possible Commission financial support 
on revenue and tax matters. In this context the following options can have a positive impact: 

(1) 

(2) 

(3) 

(4) 

42 

43 
44 

A  programmatic  approach42  compared  to  a  stand-alone  project  approach,  with 
comprehensive  programmes  being  effectively  integrated  into  the  countries'  reform 
efforts and priorities and closely coordinated with complementary donor activities; 

A  distinct  focus  on  specific  tax-related  areas  where  the  Commission  may  enjoy  a 
comparative  advantage  or  a  clearer  mandate  than  other  donors,  e.g.  customs,  tax 
harmonisation, etc; 

Following  from  the  above,  a  strict  and  consistent  implementation  of  EU  Division  of 
Labour Guidelines in the tax area. The EU Code of Conduct on Complementarity and 
Division  of  Labour  in  Development  Policy  (2007)43  presents  guiding  principles  on 
division  of  labour  for  EU  Members  States  and  the  Commission.  These  principles, 
including  the  notion  of  lead  donorship  and  delegated  cooperation/partnership 
arrangements,  are  particularly  valid  in  the  tax  area,  where  only  a  few  EU  Member 
States have been traditionally active. The Commission will not take a leading role in 
tax matters in countries where there is already a strong Member State presence in the 
area. 

A close collaboration with the EIB, and coherence between Commission work in the 
tax  area  and  relevant  EIB  interventions  should  also  be  ensured.  In  that  regard,  the 
the 
that 
Commission  welcomes 
first international financial institutions to adopt, in 2005, a policy on offshore financial 
centres (OFC), has recently reviewed it in consultation with EU Members States, key 
expert 
and  other 
stakeholders in  order  to  conform with  the  principles  endorsed  by  the  G20  summit  of 
world leaders in London in April 2009.44 

lead  organisations, international financial institutions, NGOs 

the EIB,  who  was 

among 

fact 

the 

 Programmatic approach means providing coordinated support to a programme of reform agreed with 
the partner country as opposed to providing stand-alone and fragmented measures.  
COM(2007) 72. 
Reference is made in particular to the EIB revised interim policy on OFC adopted on 14 July 2009 and 
updated  on  11  March  2010.  The  EIB’s "Interim  Revised  Policy  towards  Offshore  Financial  Centres" 
adopted  in  July  2009,  regulating  the  Bank's activities  in weakly  regulated  or  non-cooperative 

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2.2.  Working towards a transparent and cooperative international tax environment 

The world all over, governments are overwhelmed by the complexity of the global financial 
system. This is particularly true for developing countries that often lack human and financial 
resources  and  institutional  capacities.  More  information  is  needed  about  tax  avoidance  and 
evasion in the context of developing countries, not enough has been done to involve them in 
the international fight against tax fraud. Strengthening the presence of developing countries in 
international  cooperation  structures  on  tax  matters  is  essential,  as  it  is  necessary  to  ensure 
more transparency on economic and financial activity in developing countries. 

The Commission is convinced that tax avoidance and evasion cannot be addressed properly 
without  international  tax  cooperation.  Developing  countries  need  to  be  encouraged  to  adopt 
the principles of good governance in the tax area (i.e. transparency, exchange of information 
and fair tax competition). 

2.2.1.  Promoting the principles of good governance in tax matters 

Tax  evasion  and  other  harmful  tax  practices  are  an  increasing  problem  in  developing  and 
developed countries alike. EU Member States freely design their tax systems in order to fund 
their public policies. However, there has been a trend towards enhanced regulation in the area 
of  taxation  to  prevent  the  erosion  of  national  tax  bases  in  the  context  of  cross-border 
investments  and  free  movement  of  goods,  services  and  persons.  The  EU  has  recognised  the 
need for common action and taken effective measures to create a level playing field within the 
Union.  These  measures  include  administrative  assistance  between  jurisdictions,  concerted 
action against harmful tax practices (through the promotion of a Code of conduct on business 
taxation)  and  initiatives  to  ensure  transparency  and  exchange  of  information.  Developing 
countries  can  also  benefit  from  a  clearer  and  better  regulated  environment  ensuring  a  fair 
share of the tax base.  

Moreover, they often lack administrative capacity to effectively implement the principles and 
standards agreed at international level. Last but not least, the level of regional integration in 
developing  countries  is  not  comparable  with  the  level  of  integration  found  within  the  EU. 
Promoting the principles of good governance in tax matters will depend on the political will, 
the  administrative  capacity  and  the  ability  of  developing  countries  to  ensure  cross-border 
cooperation  while  developed  countries  must  engage  in  sharing  their  experiences  and 
successful practices45. 

The  need  to  fight  tax  evasion  has  been  exacerbated  by  the  on-going  financial  crisis.  The 
OECD has played a crucial role by drafting model tax conventions that establish principles for 
transparency and exchange of information between jurisdictions. Article 26 of the Model Tax 
Convention  has  been  broadly  accepted  as  the  legal  basis  for  tax  treaties  that  provide  for 

jurisdictions  -  including  tax  havens-,  puts  a  particular  emphasis on  the  fight  against  harmful  tax 
practices in addition to illegal tax activities such as tax fraud and tax evasion already targeted under the 
2005  policy. It  strengthens  the  EIB's commitment  to align  with  the  EU  institutions'  positions  on  tax 
matters  and  conforms  with  the  country  assessments  carried  out  on  tax-related  issues  by reputable 
international  organisations,  including  the  OECD  Global  Forum  on  Transparency  and  Exchange  of 
Information for Tax Purposes. Among the instruments available to the EIB to fight against illegal and 
harmful tax practices, the revised policy provides for a systematic enhanced due diligence of all projects 
linked  to  offshore  financial  centres  and  increased  tax  disclosure,  together  with  stringent  relocation 
requirements for counterparts incorporated in tax havens and their controlling entities. 
Please refer to section 2 of the Annex "Evaluation of replies to the Monterrey questionnaire on domestic 
resource mobilisation", see footnote 35.    

20 

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EN 

 
                                                                                                                                                         
bilateral  exchange  of  information  for  tax  purpose.  The  article  does  not  specify  how 
information is exchanged, but the most commonly used methods are on request, automatically 
and  ad  hoc.  In  the  last  year  progress  has  been  particularly  impressive,  with  now  ninety 
countries committing to the OECD principles and expected to implement them, including all 
jurisdictions hitherto considered as non cooperative. However, only few developing countries 
vulnerable to tax evasion have signed tax information exchange agreements. In Sub-Saharan 
Africa only South Africa has signed a tax information exchange agreement (TIEA) so far. 

The Global Forum on Transparency and Exchange of Information has opened its membership 
to all countries adhering to its principles, as it commends the OECD initiative to put in place a 
coordinated  technical  assistance  program  to  assist  smaller  jurisdictions  in  the  rapid 
implementation of the standards. Joining the Global Forum on Transparency and Exchange of 
Information  and  adhering  to  the  principles  of  exchange  of  information  is  an  important  first 
step towards fighting tax evasion.  

Based  on  sound  administrative  and  legislative  structures  as  well  as  a  level  of  effectively 
working  exchange  of  information  on  request  in  tax  matters  following  the  OECD  standards, 
developing countries might also consider whether to evolve towards more integrated forms of 
administrative  and  judicial  cooperation  in  tax  matters.  In  particular  automatic  information 
exchange could be chosen as an instrument for avoiding tax evasion. It is a principle of the 
taxation  of  savings  in  the  EU,  and  in  its  relations  with  dependent  and  associated  territories 
with  which  it  has  close  economic  and  financial  links.  However,  whether  the  application  of 
automatic  exchange  of  information  by  developing  countries  is  among  their  priorities  and 
whether  they  have  sufficient  technical  capacity  to  implement  it  needs  to  be  clarified.  The 
application of automatic exchange is a steady development within the EU and receives strong 
support  from  the  European  Parliament.46  Furthermore  The  European  Parliament  has  given 
strong signals of support to action in this area. On the EP's initiative the Commission received 
an  additional  appropriation  intended  for  promoting  good  governance  in  tax  matters  in 
developing countries. It will be used to support actions identified in the Communication. 

It is also in this context that the efforts of the UN Committee of Experts towards establishing 
a Code of Conduct  on  Cooperation  in Combating International  Tax Evasion and Avoidance 
are of great value.  

Last  but  not  least,  multilateral  treaties  have  the  potential  of  being  a  more  efficient  way  of 
dealing  with  the  multiplicity  of  non-cooperative  jurisdictions  and  allow  for  internationally 
accepted  rules  in  matters  of  transparency  and  exchange  of  information.  The  OECD  Global 
Forum  is  currently  exploring  the  possibility  of  expanding  existing  multilateral  agreements. 
The  OECD  /  Council  of  Europe  Convention  on  Mutual  Administrative  Assistance  in  Tax 
Matters being a multilateral instrument that provides for exchange of information for a vast 
array  of  taxes,  assistance  in  the  collection  of  taxes  and  service  of  documents,  could  be  an 
inspiring  model  for  developing  countries  as  well  as  all  jurisdictions  considered  to  be  less 
cooperative.  This  might  allow  developing  countries  to  fully  take  advantage  of  the  current 
progress made in international tax cooperation.47  

46  

47 

The European Parliament considers that the EU should actively promote the improvement of the OECD 
standards,  with  the  aim  of  making  the  automatic,  multilateral  exchange  of  information  the  global 
standard  -  non-legislative  resolution  on  "Promoting  good  governance  in  tax  matters"  adopted 
10.02.2010 (INI/2009/2174). 
Since  the  exchange  of  information  on  tax  issues  may  involve  the  processing  of  personal  data  and 
therefore has to respect the fundamental right as regards the protection of personal data, it is necessary 

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2.2.2.  Enhancing the participation of developing countries in relevant international fora 

Raising  developing  countries'  capacities  to  fight  tax  evasion  and  avoidance  requires  a 
thorough assessment of the patterns of tax fraud in these countries. New initiatives could be 
instrumental  in  studying  mechanisms  of  tax  evasion  and  avoidance  and  proposing  concrete 
and  country-specific  solutions.  The  OECD  plans  to  enhance  cooperation  between  the 
Committee of Fiscal Affairs and the Development Assistance Committee, to ensure synergy 
and coherence in  order  to  address  the  specific challenges developing countries face through 
the established structures in international tax cooperation. Moreover, and to further ensure a 
better  matching  between  developing  countries’  tax  governance  needs  and  priorities  and 
existing mechanisms, cooperation between the OECD working groups, the UN Committee of 
Experts and regional bodies based in developing countries such as ATAF or CIAT could be 
instrumental.  The  recently  launched  International  Tax  Compact  initiative  could  play  an 
important role in promoting dialogue between these different parties. 

The  UN  Committee  of  Experts  on  International  Cooperation  in  tax  matters  includes 
developing  and  developed  countries.  However,  it  is  not  an  inter-governmental  body  and  its 
secretariat would need to be strengthened before more ambitious functions can be assumed. 
The Committee produces valuable work, including in the field of double taxation. Avoiding 
double  taxation  is  decisive  for  attracting  investors,  i.e.  by  making  sure  that  profits  be  not 
taxed  twice  in  the  source  and  in  the  residence  country.  The  UN  Committee  of  Experts  has 
drafted  a  model  for  double  taxation  agreements  that  is  considered  by  some  observers  to  be 
more favourable to developing countries since it stipulates the right of the country where the 
economic activity takes place to levy the tax (i.e. taxation at source).  

2.2.3 

Enhancing transparency of multinational corporations' activities 

Currently multinational corporations are not required to publish their accounts on a country by 
country basis. Country-by-country  reporting would require multinationals to disclose details 
of  their  commercial  transactions  by  country  and  therefore  enhance  transparency.  Such 
reporting could also be an additional source of information for the assessment of taxpayers, 
specially when they are multinational corporations with complex and sometimes insufficiently 
transparent  financial  structures.  However,  the  usefulness  of  country-by-country  reporting 
depends  on  the  definition  of  what  information  is  to  be  disclosed  and  this  is  currently  the 
subject of discussion in a number of fora such as the OECD. According to many observers, 
introducing  country-by-country  reporting  in  international  accounting  standards  for  all  major 
multinational corporations operating in developing countries could be beneficial. 48 

It has been suggested that country-by-country reporting could be alternatively  included as a 
principle for Corporate Social Responsibility (CRS). This is certainly useful but, since these 
principles  are  voluntary,  advocates  of  a  more  mandatory  approach  hold  that  there  would 
probably not be a strong incentive for application.49 Including these standards, however, in the 
International Financial Reporting Standards (IFRS) of the International Accounting Standards 

that  such  exchange  of  information  complies  with  applicable  rules  on  data  protection  such  as  those 
enshrined  in  Article  8  of  the  EU  Charter  of  Fundamental  Rights  and  Article  16  of  the  Treaty  on  the 
Functioning of the European Union. 
Companies  would  be  required  to  report  on  where  business  activities  take  place,  on  transactions 
effectuated, and on taxes they pay, etc on a country-by-country basis. 
See  for  example  Actionaid,  Accounting  for  poverty  –  How  international  tax  rules  keep  people  poor, 
2009, pp.24, see www.actionaid.org. 

48 

49 

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Board (IASB) would indeed represent a more global and, above all, mandatory Country-by-
country reporting requirement where use of IFRS is compulsory. However, IFRS would need 
to be proposed by first the IASB and then adopted by the EU as a reporting standard, which 
could be a lengthy process.  

The IASB is currently undertaking a cost-benefit analysis of such a standard for the extractive 
sector  and  is  considering  its  inclusion  in  IFRS  6.  The  Commission  encourages  developing 
countries and non-governmental stakeholders to actively contribute to this project.  

In  addition  to  improvements  in  accounting  the  application  of  the  OECD  transfer  pricing 
guidelines50  also  helps  to  prevent  double  taxation  and  allow  for  a  fair  share  of  the  tax  base 
between  countries.  Applying  the  arm's  length  principle  is  not  always  easy  and  will  require 
additional  resources.  In  that  respect,  regional  technical  assistance  could  deliver  valuable 
support. 

50 

Comprehensive  application  of  the  OECD  Transfer  pricing  guidelines  would  provide  developing 
countries  "with  the  tools  they  need  to  fight  artificial  shifting  of  profits  out  of  their  jurisdiction  by 
multinational  enterprises"  and  provide      multi-national  corporations  with  certainty  of  treatment, 
encourage  trade  and  investment,.  Further  it  would  reduce  the  "risk  of  double  taxation"  and  create  a 
"level  playing  field  between  countries".  OECD  Secretariat  issues  paper  "Domestic  Resource 
Mobilisation for Development : the Taxation Challenge" (2010). 

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ANNEX 

EVALUATION OF REPLIES TO THE MONTERREY

51

 QUESTIONNAIRE ON DOMESTIC RESOURCE 

MOBILISATION 

1. 

EU assistance to developing countries in tax and customs matters 

that 

they  support  developing  countries'  reform 
Most  Member  States  state 
programmes on capacity  development  of custom, judiciary and tax administrations. 
However  progress  in  strengthening  tax  systems  and  raising  domestic  revenues  in 
developing countries has been rather modest over the last years. In the past some EU 
and Member State funded support has been provided to developing countries in their 
endeavours to raise domestic revenues through different types of instruments, often 
through  bilateral  projects  aiming  at  supporting  tax  and  customs  reform  and  tax 
administration  or  by  introducing  tax  and  customs  matters  in  the  policy  dialogue. 
Member  States  and  the  Commission  also  favour  the  improvement  of  customs 
administrations especially in the context of regional integration efforts. 

Overall,  assistance  from  EU  donors  to  developing  countries  looks  scattered  and 
needs  to  be  better  coordinated  and  integrated  with  a  view  to  promoting 
comprehensive  and  properly  targeted  tax  reforms  in  developing  countries.  The 
International  Tax  Compact's  initiative  of  mapping  donors  active  in  support  to  tax 
reform  and  tax  administrations,  is  a  welcome  first  step  in  assessing  the  work 
currently  undertaken,  and  has  the  potential    of  creating  synergies  for  future 
cooperation.  

1.1 Overview on EU cooperation in tax and customs matters 

1.1.1 ACP region 

Almost all Member States that support capacity development of customs, justice or 
tax  administrations  have  provided  support  to  ACP  countries.  In  the  ACP  region, 
assistance has been granted through regional technical assistance centres supporting 
public finance management and/or by strengthening developing countries’ domestic 
reform programmes. Some Member States provide technical cooperation in support 
of  customs  reform,  including  by  promoting  the  implementation  of  customs 
legislation,  improving  customs  procedures  and  supporting  bodies  such  as  the 
Investment  Climate  Facilities  for  Africa  (ICF).  Furthermore,  budget  support 
operations  in  the  region  in  general  represent  an  opportunity  to  address  governance 
issues  in  the  wider  context  of  macro  and  relevant  sector  policy  dialogues  and  to 
monitor  performance  through  specific  indicators  in  the  context  of  budget  support 
disbursements. 

51 

The  Monterrey  questionnaire  is  an  annual  survey  of  Member  States'  replies  on  their  financing  for 
development commitments ("EU progress on financing for development and Millennium Development 
Goals – Questionnaire for the 2010 report")  carried out by DG Development, European Commission. 
The  survey  was  sent  to  Member  States  on  3  December  2009  and  replies  were  received  in 
January/February 2010. Since certain questions related to taxation matters it was decided to report on 
these replies in the annex to this Staff Working Document.     

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1.1.2 Enlargement 

Eight Member States  support administrative capacity  development in EU candidate 
countries.  This assistance is often provided through Customs/Fiscalis programmes or 
the  Instrument  for  Pre-Accession  Assistance  Programme  (IPA),  both  addressed  to 
candidate  or  potential  candidate  countries  (Western  Balkans  and  Turkey).  IPA 
includes e.g. twinning projects as well as the previous Customs and Fiscal Assistance 
Office  programme  (CAFAO)  and  the  Technical  Assistance  to  Customs  and  Tax 
Administrations  programme  (TACTA).  The  TAIEX  instrument  is  also  used  for 
technical assistance and information exchange. 

1.1.3 European Neighbourhood 

Under the European Neighbourhood Policy the region also benefits from TAIEX and 
twinning  projects  managed  by  the  Commission  in  the  context  of  tax  and  customs 
reforms.  Five  Member  States 
reported  supporting  administrative  capacity 
development  in  the  countries  covered  by  the  European  Neighbourhood  Policy.  The 
EU also encourages and supports reform programmes in these countries, including in 
the  context  of  the  Eastern  Partnership,  to  improve  the  functioning  of  customs 
administrations and to modernise customs legislation and procedures.   

1.1.4 Latin America and Asia 

Only  a  few  Member  States  provide  assistance  to  Asia  (six)  and  Latin  America 
(three).  An  example  for  this  is  the  support  to  the  modernisation  projects  of  tax 
in  Uruguay  (FIGARI).  The 
administrations 
Commission 
its  regional  programme 
EUROSOCIAL  which  includes  a  component  to  support  capacity  building  in  tax 
administrations. 

in  Colombia  (MUISCA)  and 

in  Latin  America 

is  active 

through 

2. 

Member  States  development  cooperation  and  the  principles  of  Good 
Governance in tax matters  

Most Member States undertake governance assessments when designing cooperation 
policy,  which  in  some  cases  may  also  include  revenue  management.  12  Member 
States,  in  their  response  to  the  Monterrey  questionnaire  state  that  they  take  into 
account  the  degree  of  commitment  to  the  principles  of  good  governance  in  tax 
matters (i.e. transparency, exchange of information and fair tax competition) by the 
partner country. However, some qualify their response and it seems that compliance 
with the principles of good governance in tax matters is not a specific condition for 
development assistance. The Council52 mandated the inclusion of a specific provision 
on  good  governance  in  the  tax  area  in  relevant  agreements  that  the  EU  and  its 
Member States conclude with third-countries.  

Many Member States take an interest in ensuring that the effects of international tax 
avoidance  and  evasion  schemes  on  developing  countries  be  mitigated.  In  order  to 
tackle  tax  evasion  and  avoidance  from  non  cooperative  jurisdiction,  some  Member 
States  have  adopted  defensive  measures  in  their  domestic  law  ranging  from 

52 

 ECOFIN  Council  Conclusions,  14  May  2008,   press  release,  p.  22-23  Tax  issues  in agreements  with 
3rd countries,  http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/100339.pdf 

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Controlled  Foreign  Company  (CFC)  rules  to  withholding  taxes  and  provisions  on 
non  deductibility  of  expenses  or  dividends  from  non  cooperative  countries.  They 
have  also  concluded  bilateral  agreements  with  third  countries;  some  of  them 
containing  exchange  of  information  agreements  and/or  safeguard  (limitation  of 
benefits) clauses (such as Belgium and the Netherlands). 

Some Member States called for progress in initiatives taken at international level. In 
the context of the G20 in 2009, the profile of the tax and development agenda was 
raised  by  gaining  international  agreement  to  develop  proposals  to  ensure  that 
developing  countries  could  benefit  from  the  new  transparent  tax  environment  on 
exchange  of  information.  Some  Member  States,  such  as  the  UK,  Spain,  the 
Netherlands  and  Finland  call  for  progress  in  this  area  at  international  level,  for 
example in the OECD Forum (the Netherlands) and within the EU (Finland, Spain). 

Most  Member  States  have  concluded  or  are  seeking  to  conclude  TIEAs  (Tax 
Information Exchange Agreements) or, where appropriate, Double Tax Conventions 
providing  for  such  exchange  of  information  with  developing  countries.  However, 
only  three  Member  States  reported  that  they  provide  assistance  in  tax  governance 
matters  to  countries  with  which  they  plan  to  have  TIEAs  or,  where  appropriate, 
Double Taxation Conventions providing for effective information exchange (Ireland, 
Portugal,  United  Kingdom).  When  supporting  developing  countries  in  concluding 
and implementing tax information exchange agreements and double tax conventions, 
one of the aims should be that developing countries have the capacity to effectively 
levy their fair share of taxes. 

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