ICAI’s Learning Review of DFID’s approach to tax is disappointing


Report Cover

I was excited to hear last year that ICAI (the UK’s Independent Commission for Aid Impact) was embarking on a Learning Review of DFID’s programme of work on international tax avoidance and evasion. It is a small programme (according to the report around £3 million a year, and three advisors who participate in international committees) which runs alongside DFID’s much larger in-country tax work. But if there is an area of development that would benefit from a careful analysis by an independent organisation this is it.

The problem is this isn’t it. The report released this week raises some important issues and makes high level recommendations about joined-up action which are fair enough, if a bit general: DFID should draw on learning from its in-country work, it should collaborate with other departments on tax capacity building, it should set explicit objectives and it should identify where UK tax policies impact on the priority concerns of developing countries.

However while calling for coherence, ICAI’s substantive criticisms of DFID’s approach are a mass of contradictions, and though everyone will find something interesting and something they agree with in this report, the analysis is superficial. It only goes as far as aggregating differing feedback from its soundings, rather than developing a single coherent analysis about donors’ roles on this issue and DFID’s performance.

Contradictory criticisms

ICAI’s two main substantive criticisms are on one hand that DFID’s approach gives too much emphasis to international standards, and on the other that it has done too little to encourage developing country participation in the international committees developing these standards.

The programme is ‘top down’ and does not match the priorities of developing countries. DFID is not doing enough to give non G20 developing countries a voice in international processes
“Aspects of the new standards are technically demanding and resource intensive to implement, and it is not yet clear whether DFID’s partner countries will be able to apply them effectively.”

“It is unclear whether measures such as exchange of information will prove effective, given more basic problems such as corruption in national tax administrations and the lack of effective sanctions and asset recovery mechanisms.”

“DFID’s efforts to make the international standard-setting processes more inclusive of developing countries were only partially successful.”

“DFID supported the participation of developing countries in various G20 and OECD processes,… However, key stakeholders from both OECD and developing countries agree that developing countries gained little practical influence over the new standards.”

For both challenges ICAI highlights the key limiting factors of lack of capacity and relative priority of these technically complex issues, particularly for the poorest countries:

  • “Our survey and our case studies confirm that many developing countries consider strengthening their domestic tax systems as a higher priority [than cross border avoidance & evasion]. There is therefore a risk that implementing new tax standards could draw limited national capacity away from more important domestic tax priorities.“
  • “One of the barriers to inclusive dialogue on international tax is that few low income countries have the resources or expertise to participate substantively in what are often highly technical discussions. “

However ICAI then draws divergent and incompatible conclusions; arguing that DFID’s capacity building should have been more demand-led by the priorities of partner countries, while at the same time DFID should have put more emphasis on encouraging developing country governments and tax experts in DFID country offices to spend more of their time working on G20 issues.


ICAI warns that the immediate relevance to developing countries of addressing cross-border tax avoidance and evasion through the G20 process may have been oversold – particularly in relation to the lower income and lower middle income countries mainly reflected in DFID’s priority group.

However it is worrying that the one number that the review uses to put the issue into context is in danger of overselling the perception of potential for large revenue gains.

ICAI say “The estimated revenue losses from tax avoidance by multinationals accounts for a higher share of GDP in developing countries than in OECD countries, owing to their greater reliance on corporation tax. UNCTAD estimates that multinational corporations shift over £300 billion away from developing countries each year. While the figures are controversial, the G20 itself has acknowledged that the damage caused by tax havens and non-cooperative jurisdictions is particularly important for least developed countries.”

If you read it quickly the first sentence sounds like it makes sense (it doesn’t). The second sentence sounds like it is an estimate of revenue loss (it isn’t). This may just be sloppy editing, but for a study whose first step was to undertake an extensive literature review on the scale and impact of tax evasion and avoidance on developing countries, it is not good.

£300 billion appears to be an approximation of UNCTAD’s estimate (from the World Investment Report 2015) of the amount of corporate profits shifted from developing economies ($450 billion). But the same study offers an estimate for the resulting annual tax revenue losses of some $90 billion (c. £60 billion). Using the gross profit shifting figure rather than the revenue loss figure without careful explanation risks misinterpretation. ICAI also does not point out that the UNCTAD estimate relates to all developing economies, and that in absolute terms the majority relates to major emerging economies (including in large part the G20 countries Argentina, Brazil, China, India, Indonesia, Saudi Arabia and South Africa). £300 billion is simply not a useful benchmark figure to give as context for ICAI’s discussion of how inclusive the G20 & Global Forum process has been, and how DFID can support its priority countries to address international tax avoidance and evasion.

At the same time, the reports seems to encourage overselling of its conclusion by comparing the impacts of this small programme with an uncosted wish for earlier and larger investment in wider multilateral engagement. The report argues that DFID’s efforts to make the G20 processes more inclusive have been too little too late, but does not reflect on the value-for-money implications (and opportunity cost for developing countries) of larger multilateral meetings, and the associated capacity building and diversion of attention needed.

If you are not at the table, you are on the menu?

No one would argue the current level of participation and technical engagement by countries in international standard setting on tax is the ultimate optimum and should remain fixed.

However ICAI’s conclusion are stronger than simply saying that DFID should support increasing participation over time – they say that that attempts to make the G20 tax reform agenda truly inclusive have not been successful and that DFID’s objective of influencing the G20 tax standards to reflect the needs of developing countries was not achieved.

The evidence it cites for pronouncing failure are that  (1) Some developing country priorities are not covered by the BEPS agenda, and (2) Automatic exchange of information is beyond the capacity of many tax authorities. However the review seems to have not delved further to understand these issues, and its reasoning does not support the strong conclusions.

‘BEPS Measures do not Address a Number of Issues of Concern, such as tax incentives’

ICAI notes that tax incentives are excluded from BEPS agenda, despite being an important issue for developing countries. However the fact that this issue is missing from BEPs 15 Action Areas does not mean it necessarily should be there. The BEPs programme was developed to deal with the specific and bounded problem of companies exploiting gaps and mismatches between the tax regulations of different countries, treading carefully into the sensitive area of tax sovereignty. Tax incentives are entirely within the power of a single jurisdiction – they are excluded from BEPS not by accident but by design. ICAI does not examine the case that addressing wasteful tax incentives requires a multilateral forum, but seems to assume it.

‘Automatic exchange of information is beyond the capacity of many tax authorities

It is practically inevitable that any effective global system of automatic information exchange should begin with the rich countries as Mick Moore of the International Centre for Tax and Development has argued “ The vast bulk of international economic transactions are among high income countries. That is also where most tax avoidance and evasion activities are to be found. And it is the tax authorities of the richer countries that have the most experience in challenging transnational tax avoidance, and are best equipped to do so. …. The OECD/G20 are operating under tight self-imposed time limits to make real progress in tax reform. It is therefore inevitable that most developing countries – which are not so well organised and are also highly diverse in their tax affairs and concerns – would not be central to the decision making over automatic information exchange.“


The need for DFID to effectively generate and apply learning is a key point that ICAI raises. But it only scratches the surface of the trying to learn lessons from DFID’s experience, mirroring back rather than trying to make sense of the contradictory demands and beliefs about tax and development revealed by its interviews.

Interestingly ICAI notes that in 2009 DFID had the ambition to invest in research as a way of bringing stakeholders together around a common understanding of tax and development. However after commissioning the Fuest and Reidel report (which was furiously received) it seemed to have backed away from trying to foster this dialogue, leaving a gap in understanding which has festered, and in which wishful thinking has flourished.

The ICAI Learning Review has a mandate to strengthen the evidence base and build more robust shared understanding, which is d why its report is so disappointing. Nevertheless, if the criticisms encourages DFID to be more explicit about its strategy and thinking, and to capture and share learning from country programmes on tax that can only be a good thing.

2 Responses to “ICAI’s Learning Review of DFID’s approach to tax is disappointing”

  1. 1 Richard Gledhill

    Dear Maya,

    Thanks for your blog. We are always glad when people engage substantively with ICAI’s reports, even when the critique is a challenging one.

    Our research team came across your writing on the shortcomings of commonly cited estimates of the losses to developing countries from international tax avoidance and evasion, and your scepticism that there is a ‘pot of gold’ for development to be gained from reforms to the international tax system.

    We found these to be helpful observations. While we cited in the report UNCTAD’s estimate of total corporate profits shifted away from developing countries, we did so in the context of a passage stressing the controversy surrounding such numbers. We noted the difficulties that developing countries face in levying taxes on international business, and we pointed out that strengthening domestic tax collection is likely to yield them greater returns.

    I therefore don’t think that we have contributed to any lack of realism on the subject of international tax and development.

    You argue that we contradicted ourselves by suggesting that international tax processes don’t match the priorities of developing countries, and at the same time concluding DFID could have done better in its efforts to give them more voice in those processes and in providing demand-led capacity building.

    We believe the apparent contradiction you have identified is readily resolvable. We were concerned that DFID may have oversold the benefits of implementing new international tax standards and processes. However, more analysis of developing country needs and better consultation could well have resulted in the inclusion of measures of real practical benefit. We express our doubts as to whether DFID’s capacity building work on international tax is likely to generate significant additional revenue, given more fundamental problems with domestic tax systems. However, an approach to international tax that was better tailored to the circumstances of individual countries, and better sequenced with the development of national tax systems, might yield practical benefits.

    More generally, in our independent scrutiny role of the UK aid programmes and portfolios, we start with DFID’s own objectives and activities in the area under review, and we assess these for relevance and effectiveness, and value for money of course. It’s not the role of an evaluator to take a blank sheet of paper and imagine how things might have been done differently – we think that’s better left that to policy analysts like yourself.

    Kind regards,

    Richard Gledhill
    Lead Commissioner on the ICAI review ‘UK aid’s contribution to tackling tax avoidance and evasion’

  2. 2 Maya

    Dear Richard,

    Thank-you for your reply.

    On the numbers, my point is not so much that they are controversial, but that they are often simply misunderstood.

    The phrase “multinational corporations shift over £300 billion away from developing countries each year” is not readily understandable. Yet it is the single number offered in a box headed ‘Tax and revenue loss in developing countries’. It is sandwiched in the middle of a paragraph that is bookended in terms of “estimated revenue losses from tax avoidance by multinationals” and “damage to least developed countries.” I am sure it is not intentional, but in this context many readers are likely to assume that this number is being offered as an anchor to help them to understand the scale of revenue losses to least developed countries. (indeed the Guardian found the number so difficult to interpret that they confused it for another one altogether) .

    Given that the Commission was aware of the pattern of misunderstanding, and inflated expectations of these numbers, it would have been helpful to offer some clarification here (and used UNCTAD’s tax revenue loss estimate) to assist the policy makers who will read the report to avoid falling into the common trap of assuming that multinational tax avoidance is, for example, worth several times more than aid to the poorest developing countries.


    The Review makes an important contribution by making clear that there is a tension between drawing resources towards high-profile international issues and addressing domestic priorities. There is no problem with reconciling this finding with the conclusion that DFID’s approach to capacity building should be demand-led and tailored to the circumstances of individual countries. These are consistent.

    The contradiction is with the argument that DFID should have done more to encourage non-G20 developing countries to have a voice in the G20 process at an earlier stage. In trying to reconcile these two conclusions the review seems to it conflate different kinds of tax issues:

    A) Capacity to implement and engage with international tax issues can be broken into

    . i) Basic existing international tax processes such as transfer pricing audits and exchange of information

    · ii) New standards (such as BEPS changes and automatic exchange of information).

    B) Other domestic tax priorities fall into

    · i) Those that can be addressed through domestic action

    · ii) Those that require internationally coordinated action.

    As the Review highlights the capacity building programmes are mainly focused on A(i) (“even in countries that have received assistance for several years, there is little evidence that the tax authorities have the in-house capacity to carry out [transfer pricing] audits without external support”). However there is a tension between drawing resources into this and addressing domestic tax issues (B).

    It does not necessarily follow that diverting scarce developing country capacity out of A(i) and B into highly technical international debates about new standards A(ii) would have made the situation better (indeed convincing developing countries to place their resources here could have required a greater degree of ‘overselling’ as any benefits are likely to be more uncertain and long-term, and the capacity building needed to engage in these debates would not be demand-led). Nor is it obvious (as the Review seems to assume) that priority domestic issues (B) necessarily require internationally coordinated action (e.g. that tax incentives should have been addressed by BEPS).

    The topic of tax and development is an area where there are disagreements about the best direction to take. The contradictions in the Review seem to reflect an aggregation of viewpoints from different stakeholders. However the sharp constraint on resources means that such as “all of the above” answer is not viable. The impression of easy reconcilability perhaps reflects the methodology of individual telephone interviews and separate roundtables for different stakeholder groups – which avoids argument but means hat contradictory conclusions (or simply different assumptions and interpretations of the same language) are not clearly surfaced and tested together. This seems like a missed opportunity. I hope that the opportunity is taken in convenings to gather and discuss responses to the Review to bring together stakeholders with different viewpoints and areas of expertise.

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