In poor nations, collecting taxes can be tough in the best of times.
Economists say in African, and other, developing countries up to $800 billion is lost each year to tax evasion, money that could go toward development, but instead makes Africa borrow money from the rest of the world.
Analysts say some multinational companies avoid paying high taxes by using what financial experts call transfer pricing - improperly declaring high income and expenses in the low-tax countries they operate in, while underdeclaring their levels of income and expenses in high-tax countries.
Henri-Bernard Solignac-Lecomte, a senior economist at the Organization for Economic Cooperation and Development (OECD), says regulation of both transfer pricing and tax havens is important.
"African governments often do not have the power to negotiate with multinationals whose turnover is sometimes a multiple of their own [gross national product] – terms and conditions that would make those companies fair contributors to the economies in which they are operating," he says. "So far, these are issues mainly discussed by representatives of richer countries who all want to make sure they get their fair share of taxation from multinationals [on their territory]. But Africans have been absent in this debate and need to be brought in. "
The global financial crisis has made things even more difficult. Slumping economies mean fewer goods and services for governments to tax.
Room for improvement
At this week's meeting of the G20 in Pittsburgh leaders may discuss ways to enhance revenues, and improve budgets for improving social programs.
The group has promised to crack down on tax havens. The Washington Post newspaper, citing sources close to the G20, says the group is considering imposing sanctions on Uruguay and Panama if they continue to shield tax dodgers.
Some economists have suggested the group consider a tax on international currency transactions to help developing nations build social safety nets. Solignac-Lecomte says, however, that there’s no consensus on the issue: Europeans often favor international taxes, while the U.S. opposes them.
In the long run, he says the G8 has given a clear mandate to the OECD to help African countries find solutions to tax collection issues.
He says the Paris-based organization is helping African countries identify alternatives, including taxes on some urban properties. It’s also helping a number of countries and institutions set up an African Tax Administration Forum to be launched in Kampala, Uganda, in November.
"They would first [agree on a set of] principles," he explains, "and [assess] how much they lose from tax evasion. So they’d be joining forces [to maximize savings reserves and reduce dependence on foreign aid]. They would set up capacity building programs to help administrations become more effective at negotiating and implementing tax policies, including toward foreign economic agents [companies], " says Solignac-Lecomte.
The G20 is also likely to discuss another issue that may affect taxation – the need for all countries to adhere to the same accounting practices.
"There is a patchwork of accounting practices," explains John Kirton, Director of the G20 Research Group, based at the University of Toronto, Canada, "which makes it difficult for the average investor or citizen to read a company’s balance sheets and compare them across countries -- even if it is the same company doing business in different countries. [The question is] which standards are they following?"
Kirton says it’s not clear summit that delegates to the meeting will discuss the ultimate way to enhance the budgets of developing countries – additional aid.
So far, the G20 has promised U.S. $50 billion to support social protection measures, boost trade and safeguard development in low income countries. The OECD estimates Africa could get between $ 21 - $23 billion.
Industrialized countries have also agreed to provide $300 billion over the next three years to multilateral development banks, including the African Development Bank (AFDB) in an effort to increase lending to low income countries. The World Bank and the AFDB have allocated up to $15 billion to be used in Africa.