Question

You are about to enter the tax profession. Your future employer Tax Advice and Policy Services (TAPS) has stressed the importance of being able to clearly and professionally structure and present ideas, judgements and opinions. TAPS has informed you that in your new role, you could be expected to brief a wide audience including the Australian Tax Office, Treasury, international corporate taxpayers, and small business owners. TAPS is concerned that you may not fully understand the complexity of the taxation regime and the additional complications that COVID-19 has introduced to the fiscal system.

Fortunately, during your time at QUT you studied advanced tax law where the real world came to you and you heard from nine senior tax experts from around the world. Each were interviewed throughout your unit, sharing their insights into current problems and future challenges in tax.

TAPS has advised you that on your first day, you will be asked to prepare an internal briefing note to be circulated among the partners. This briefing note will be used to determine what section of the firm you are placed into. As part of that briefing note, you are asked to address the following:

B) Select one aspect of the international tax system that is particularly challenging for developing nations and explain why you think this is the case.

Answer 1

Developing countries do face challenges when they try to establish tax systems. Some of the reasons for the same are as follows -

1) Majority of the population in these countries is typically employed in agriculture or in small, informal enterprises. As they are paid a irregular, unfixed wage, their earnings fluctuate, and many are paid in cash. The base for any tax is therefore hard to calculate. Nor do workers in these countries typically spend majority of their earnings in large stores that keep accurate records of sales and inventories.

2) It is difficult to create an efficient tax administration without well-educated and well-trained staff, more so when money is lacking to pay good wages to tax officials and to computerize the operation, and when taxpayers have limited ability to keep accounts. As a result, governments often take the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern, and efficient tax systems.

3) Because of the informal structure of the economy in many developing countries and because of financial limitations, statistical and tax offices have difficulty in generating reliable statistics. This lack of data prevents policymakers from assessing the potential impact of major changes to the tax system. As a result, marginal changes are often preferred over major structural changes, even when the latter are clearly preferable.

4) Income tends to be unevenly distributed within developing countries. Although raising high tax revenues in this situation ideally calls for the rich to be taxed more heavily than the poor, the economic and political power of rich taxpayers often allows them to prevent fiscal reforms that would increase their tax burdens.

In conclusion, in developing countries, tax policy is often the art of the possible rather than the pursuit of the optimal. It is therefore not surprising that economic theory and especially optimal taxation literature have had relatively little impact on the design of tax systems in these countries.

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