UK Politics

Foreign aid strategy should focus on tax collection, MPs say

Roadside shop in Lahore, Pakistan
Image caption Pakistan has shown the way by boosting its tax take by a quarter in the past year

The UK should give more priority to helping the poorest countries collect their taxes as part of its foreign aid strategy, MPs have suggested.

The Commons International Development Committee said dependable tax revenues were a far better route out of poverty than reliance on overseas aid.

In a report, it said supporting more efficient tax collection represented "excellent value" for UK taxpayers.

The UK spent £7.8bn on aid in 2011 and this is set to rise to £11bn by 2015.

The government welcomed the report and said it was "firmly committed to helping developing countries access more sustainable sources of revenue".

Amid cuts in other departments, the foreign aid budget is being protected to help the UK meet its target of spending 0.7% of national income on aid by 2013.

The cross-party committee said an efficient and transparent tax system was of "fundamental importance" to a country's economic and social development.

Tax havens

It urged ministers to support the authorities in developing nations to improve the collection rates of income tax, VAT and local property taxes and to ensure governing elites paid their fair share.

"If developing countries are to escape from aid dependency, and from poverty more broadly, it is imperative that their revenue authorities are able to collect taxes effectively," the committee's chairman, Lib Dem MP Malcolm Bruce said.

"The aim of development work is to enable developing countries to escape from over-reliance on aid.

"Supporting revenue authorities is one of the best ways of doing this: it represents excellent value for money, both for the countries concerned and for UK taxpayers."

In their report, the MPs expressed concern that recent changes to tax rules affecting UK-owned companies operating exclusively abroad could make it easier for them to use tax havens and reduce their tax liability in developing countries.

Aid agencies have estimated this could cost developing countries billions in lost tax revenues and the committee said the government should consider reversing the changes "as a matter of urgency".

"The government is committed to supporting economic growth in developing countries to reduce their dependency on aid. While this is clearly the right thing to do, it would be deeply unfortunate if the government's efforts were undermined by its own tax rules," Sir Malcolm added.

Ministers should introduce rules requiring companies to publish financial information on a country-by-country basis to discourage cross-border tax evasion, the report said.

A government spokesperson said: "The Committee is right to praise British aid for helping poor countries to boost their tax systems and help them to pull themselves out of poverty by investing in schools, hospitals and infrastructure.

"We will consider the detailed recommendations carefully and will produce a formal written response in due course."

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