Britain must help developing countries increase tax revenues

On his diplomatic mission to Pakistan today, David Cameron told the country that it should raise more tax revenue alongside the British aid it receives. Development agencies such as ActionAid have been calling for the government to make this link between overseas aid and helping developing countries raise more tax revenue for some time. It's how developing countries will eventually move away from dependence on aid altogether.

So I was thrilled to hear the prime minister call for a zero-tolerance approach to tax avoidance by the Pakistani elite, which he said was "not fair on ordinary Pakistanis, who suffer at the sharpest end of this weak governance or on British taxpayers, who are contributing to Pakistan's future".

The trouble is, he forgot to mention that Britain, our tax haven overseas territories, and our multinational companies all have the power to help or hinder developing countries' efforts to raise more taxes. The massive loopholes in the international tax and financial system will not be closed by ticking-off the tax-dodging elites; nor are better tax laws and stronger revenue authorities on their own enough. Developed countries like Britain need to stop giving with one hand and taking with another.

Corruption, tax dodging by rich individuals and domestic companies, and tax dodging by multinational businesses all result in a massive flow of "illicit capital" out of developing countries that exceeds the aid they receive from rich nations. Three policy solutions are needed to help reverse this trend and truly fulfil the spirit of Cameron's remarks.

First, revenue officials in developing countries need to be able to follow the money that their rich elites have stashed in tax havens. At present, countries have to conclude individual treaties with each country from which they want this kind of information, and can only do so if that country is willing. This is cumbersome and cannot serve the interests of low-income countries. The UK is one of over a dozen countries that recently ratified a multilateral convention that could provide the solution – but only if developing countries are supported to join, and if tax havens are compelled to participate. The G20 summit in France in November is the opportunity to make this happen.

Second, anti-corruption and tax justice campaigners – and indeed some revenue officials – want multinational companies to break down their financial reports on a country-by-country basis. This proposal is being considered right now by the European commission, and was raised by the chancellor, George Osborne, at a recent G20 summit.

But the devil will be in the detail. If companies have to declare tax payments by country, it will be much harder for corrupt officials to spirit the money away. But if other information such as profits and sales is also included in the breakdown, we could scrutinise the tax payments themselves, holding companies and governments to account for the tax dodging that multinational companies can get away with.

Third and finally, we need the global network of anti-tax avoidance laws to be fit for purpose. It's unfortunate that changes to the UK's "controlled foreign companies" rules in last month's budget will open the floodgates to tax avoidance by British companies overseas. This could cost developing countries £4bn in revenues, effectively wiping out the value of half the British aid budget. At the same time, developing countries keen to crack down on such avoidance are being forced to adopt international "transfer pricing" rules that make them leak like sieves.

It's within the power of the British government to equip developing countries like Pakistan with the information, the rules and the enforcement capacity they need to raise much more tax revenue.

Martin Hearson is tax policy adviser at ActionAid