Tax, social protection and development: European proposals paint only half the picture

Added 18 Oct 2012

by Francesca Giubilo

In its Communication on Social protection in European Union development cooperation, released last month, the European Commission (EC) emphasises the need for fair and efficient tax systems to support social protection schemes in partner countries, but misses a crucial part of the picture: preventing the enormous illicit financial flows that rob billions each year from the exchequers of those countries.

“Revenue reform for fiscal space” is one of the priorities suggested by the EC in support of social protection in partner countries. Considering the crucial role that domestic resources play in this process, the Communication highlights that “the EU will support measures to develop effective, efficient, fair and sustainable tax systems, according to the capacities of individual partner countries, in order to increase fiscal space to fund social protection.” The EC also indicates that “this may include capacity-building for tax administration and revenue reform to improve the tax base as well as the replacement of regressive subsidies with more effective social protection measures”.

Despite the importance it gives to tax regimes, the Communication does not mention how the EU could help partner countries raise additional domestic resources. It does not mention, for instance, tax evasion and avoidance by multinational companies and illicit capital flight which drastically undermine the tax base of developing countries. Research conducted by Global Financial Integrity shows that developing countries lost $6.5 trillion through illicit financial flows in the last decade.  Recent tax Justice Network research estimates that even these large figures are dwarfed by the assets held offshore by wealthy individuals.  While the Communication has a section on “improved coordination among EU policies” there is no mention of the many things Eurodad and partners have been pushing the EU to do to combat this problem, such as supporting transparency and accountability of multinational companies through country-by-country reporting, or using the upcoming review of its anti-money-laundering directive to force companies to disclose who they are really owned by, and make banks know the real identities of their customers.

This is particularly relevant given that the EU wants the private sector to play a more prominent role in development efforts. As stressed in its controversial Agenda for Change strategy, the EU wants to “explore up-front grant funding and risk-sharing mechanisms to catalyse public-private partnerships and private investment.” Reflecting this trend, the Communication stresses: “while governments have the main responsibility for social protection policy and provision, there are some situations in which social protections schemes can best be delivered through PPP”. Recent Eurodad research highlights concerns about promoting this model of development, but the Communication does not detail which situations it refers to.

Read Oxfam reaction to EU Development Ministers’ conclusions on social protection for the world’s poor.