Global tax reforms are needed to ensure small business owners do not suffer.

Financing our future: the role of tax and aid

14 July 2015
Author: Ben Jackson

This is an updated version of a comment piece that first appeared on the Guardian website.

Market stall holder Caroline Muchanga from Zambia works 15 hours a day, seven days a week. At her stall in the town of Mazabuka she sells “White Spoon” bags of sugar, produced at Zambia Sugar’s vast plantation and factory less than a kilometre away. On a good day Caroline makes the equivalent of about £2.61 and will pay around 33% in tax.

Compare this to Zambia Sugar itself – a subsidiary of UK food giant Associated British Foods (ABF). Its factory, just outside Caroline’s town, is the largest sugar mill in Africa. The company makes nine-tenths of the sugar produced in Zambia, for domestic consumers and for export to the UK and Europe. According to a report published by Action Aid in 2013, Zambia Sugar Plc annual reports from 2008-2012 showed that annual revenues were more than £130m a year. But Action Aid calculated that since 2007 the company had paid on average just 0.5% of pre-tax profits in corporate income tax.

According to ActionAid’s report, Sweet Nothings, Zambia Sugar – which benefits from Caroline’s sales – paid 90 times less tax than Caroline, relative to their respective incomes. ABF has said: “The reason that no corporate tax has been paid in Zambia for the last couple of years is because of our £150m investment building the biggest sugar mill in the country. There are capital allowances available on that, in the same way similar reliefs are available to investors in most countries, including the UK.”

But it is undeniable that an unfair global tax system that forces one woman – living on less than £3 a day – to pay a higher income tax rate than a rich neighbouring business is exactly why the UK and other countries need to take strong steps at a conference in Addis Ababa this week to improve global tax governance. That’s why a coalition of Bond members has been arguing that the Third Financing for Development Conference (FFD3) needs to deliver a strong financing framework. Unless more world leaders commit to meaningful reforms of the international tax system then FFD3 won’t meet expectations.

During its G8 presidency, Britain initiated a valuable dialogue about tax transparency needs to be built upon at FFD3. This is crucial to redress the balance of power in favour of developing countries so that they have an equal say when discussing the issues that are more important to them. Tax transparency is also critical to the UK if it is to improve the way it uses its resources and it should be supported by public country reporting by multinationals, public registers of beneficial owners of companies and trusts, and universal use of open data formats. It is also necessary to increase the effectiveness of all financial flows. International Development Secretary Justine Greening is leading the UK delegation in Addis, chairing the Roundtable on International Public Finance this afternoon (Tuesday 14 July) and meeting members of the Bond network. We look forward to working with her to ensure that she gets strong support from across the government.

An area where the UK is already a leader is aid spending. It was the first G7 country to meet the target of spending 0.7% of its gross natinal income on aid and to enshrine that commitment in law. As such it is in a strong position to urge other countries to help reach a global commitment to 0.7% by 2020. This target was included in early versions of the FFD3 draft outcome document, but was diluted during negotiations. Donor countries need to follow the UK government’s example and honour aid targets and commit to timetables that show how and when they are going to meet their official development assistance (ODA) targets. Half of all ODA should also be given to the Least Developed Countries (LDCs) in order to reverse the current trend of declining aid to those nations.

FFD3 is the first stop on the road to the UN General Assembly meeting to agree the sustainable development goals and the Conference of Parties to agree a climate deal. We need the right financial framework in place to ensure a better world for people and planet.

Bond members have made further recommendations.

About the author

Ben Jackson
United Purpose

Ben Jackson is global director of innovation and partnerships at United Purpose.