The claim:

“We cannot expect the people in the UK to pay taxes to improve education and health in Pakistan if the Pakistan elite is not paying income tax.”

– International Development Committee, report on Pakistan, 4 April 2013

The background

Over at the House of Commons, MPs have been getting nervous about Pakistan.

Why, MPs on the International Development Committee have asked, should British taxpayers be footing the biggest bills in Pakistan when Pakistan’s taxpayers don’t want to?

The matter is one of urgency, they say, because the country is about to become the largest recipient of UK bilateral aid. Aid to Pakistan, they noted, was about to double, from £267m in 2012-13, to £446m in 2014-15

FactCheck was intrigued – is Pakistan really that bad?

The analysis

By a number of accounts, Pakistan’s tax collection rates aren’t that strong. More than 70 per cent of Pakistan’s MPs, including many ministers, do not pay tax, according to the report.

The report said that for the last decade, tax revenue as a proportion of GDP has remained at around 10 per cent.

We looked at the World Bank to see what they said tax revenue had been as a percentage of GDP.

In 2008, tax revenue was 9.9 per cent of GDP; in 2009 it was 9.3 per cent; in 2010, 10 per cent, and in 2011, 9.3 per cent – so the committee is right.

What was less clear, however, is why Pakistan should be singled out.

The MPs correctly said that the country was about to become the biggest recipient of DFID aid.

Before then it had been India. Like Pakistan, it’s classed by the World Bank as a lower middle income economy, and would be an obvious comparison. In 2011/12, excluding humanitarian aid, India received £284m.

When we look at their tax collection rates, it would appear that they were no better at it than Pakistan. In 2008, tax revenue made up 10.7 per cent of GDP. In 2009, it was 9.8 per cent, and in 2010, it was 9.7 per cent.

The next biggest recipient of UK development aid has been Ethiopia. According to DFID, in 2009/10, it receivd £151m; it got £245m in 2010/11, and £268m in 2011/12.

According to the World Bank, as a proportion of GDP, their tax collection rates were: 2008 – 7.4 per cent; 2009 – 6.6 per cent; 2010 – 9.8 per cent.

And after Ethiopia, came Bangladesh for largest aid recipients, both of which are low income economies. Between 2009/10 to 2011/12, Bangladesh has received £538m. The World Bank said that in 2008, money collected from taxes made up 8.8 per cent, and in 2009, it was 8.6 per cent.

It’s not that surprising; Pakistan, India and Bangladesh are known as being countries in which wealthy elites have vast control not only over political power, but also the political economy. As Dr Jonathan Di John, a senior lecturer in political economy at SOAS, University of London, said: “In South Asian countries there is a high level of capture elites have over the states. Also, there is a tolverance of tax evasion in high wealth groups in these countries.”

When it comes to collecting taxes, neither has the UK always been the most helpful.

Indeed, another report by the same committee last August suggested that the UK was proposing measures which would give greater incentive to multinational companies to shift profits from developing countries to tax havens.

That was through changes to the 2012 Finance Bill. Previously, a UK-owned corporation making profits in countries with lower corporate tax rates could see the UK government impose an extra tax charge on them to make up the difference. It was a disincentive to shifting profits to tax havens from developing countries.

But under the changes, the UK government would only be obliged to impose the levy if the money was shifted from the UK to a tax haven. In other words, there was nothing to stop UK-owned companies from shifting their profits from developing countries to tax havens.

It’s fair to say that profits from multinational companies are not going to make up the bulk of tax revenues for Pakistan and other countries. But it does seem odd that while criticising Pakistan for its tax collection, the UK government should implement measures which are likely “to have a significant detrimental impact on the tax revenues of developing countries”, according to the MPs report of last year.

Likewise, the committee made a recommendation that the UK government introduces legislation to require tax authorities to exchange information relating to UK citizens or companies.
In reply, the government said: “Disagree. The government is fully committed to tackling tax evasion and see transparency and information as key tools but does not regard the introduction of [such measures] as an appropriate means to achieve this … The UK approach is to work in partnership with other governments, including those in developing countries, to increase tax transparency and exchange of information.”

So while berating Pakistan for its inability to collect taxes, the UK government has also resisted means which would make it easier for developing countries to hold foreign multinationals to account in fiscal matters.

The verdict

Pakistan’s tax collection rates have been low, and FactCheck doesn’t dispute that.

But so have those of the three other largest recipients of DFID aid in recent years – India, Ethiopia and Bangladesh.

The question is – why Pakistan, and why now?