Tax shake-up could give poor countries head start on anti-poverty track

May 11, 2011

Istanbul - Reforming how countries manage customs and tax revenues and strengthening anti-corruption and oversight measures could help reduce illicit funds flows, amounting to billions of dollars per year, from least developed countries (LDCs).

Recommendations for customs and tax reform are put forward in a United Nations Development Programme (UNDP)-commissioned paper, “Illicit Financial Flows from the Least Developed Countries: 1990-2008," presented and discussed today at the Fourth UN Conference on the LDCs in Istanbul, Turkey.

“For the Millennium Development Goals to be achieved, not only do countries’ economies need to grow, but also revenue from that growth needs to be invested back into services and infrastructure,” said UNDP Administrator Helen Clark. “Many forms of illicit financial flows divert scarce resources away from development.”

The United States-based non-profit research body, Global Financial Integrity, estimates that developing countries collectively lose as much as US$1 trillion in illicit financial outflows, including through corruption, trade in smuggled goods, and criminal activities such as drug trafficking and counterfeiting.

“That is money which could otherwise be helping to get all children into school, helping all mothers give birth safely, and expanding access to basic healthcare, better nutrition, and clean water and sanitation for all,” added Helen Clark.

According to the UNDP-commissioned paper, approximately 65 percent of illicit financial flows from LDCs are through trade mispricing, when imports are overpriced and exports underpriced on customs documents.

To help curb the loss of these funds, the discussion paper recommends that customs and tax reforms in the LDCs should be accompanied with robust legal institutions and regulatory systems to fight corruption.

Watchdogs should also be empowered to provide adequate oversight over the operations of the financial system including the customs authorities, multinational and domestic companies, and the collection of taxes.

The paper notes that these measures can only become reality if supported by political will both in the LDCs and internationally, where the lost revenues end up.

Given that taxes are the most sustainable source of finance for development, the paper emphasises the need for equitable and fair domestic tax systems that do not unduly burden the poor, and could boost economic growth that benefits more than a privileged few.

The international community also has a critical role to play in improving the systematic exchange of tax information between different governments, related to non-resident individuals and corporations.

UNDP works with partner countries, including LDCs, to enhance their anti-corruption capacities, with the longer term aim of making more resources available for education, health care, and other public investments.

Last year, UNDP offices in more than 100 countries supported national governments through, for example, technical advice to anti-corruption bodies, and building of partnerships with civil society groups to help strengthen government oversight.

In Laos, for example, UNDP helped the government to align its fiscal policy with its poverty reduction objectives, leading to a larger share of government budget being allocated to priority areas such as education, rural infrastructure and environmental conservation.

UNDP is also supporting the Maldives and Vanuatu governments and development partners in strengthening their customs services’ automated clearance processes.

UNDP is a member of the Leading Group on Innovative Financing for Development, an alliance of more than 50 governments and international organizations, which seeks to explore new and effective ways to fund development efforts, including through stemming of illicit finance flows.

The discussion paper focused on 34 of the 48 LDCs for which complete data is available.

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