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MPs urge aid to help collect tax

Britain's international aid effort should concentrate more on helping developing countries to ensure they collect their own taxes properly, MPs have said.

The Commons International Development Committee said that a reliable flow of tax revenues offered countries a far better route out of poverty than reliance on foreign aid donations.

It urged the Department for International Development to support the revenue authorities in developing nations to improve the collection rates of income tax, VAT and local property taxes.

Committee chairman Sir Malcolm Bruce said: "The aim of development work is to enable developing countries to escape from over-reliance on aid. Supporting revenue authorities is one of the best ways of doing this: it represents excellent value for money, both for the countries concerned and for UK taxpayers."

The committee said it was essential that the governing "elites" within developing countries paid - and, critically, were seen to pay - the correct amounts in personal taxation.

The report also expressed concern that recent changes to the controlled foreign companies rules - which no longer apply to UK-owned companies operating exclusively outside the UK - could make it easier for those firms to use tax havens.

The move has dismayed aid agencies, with ActionAid estimating that it could cost developing countries up to £4 billion in lost tax revenues, and the committee said the Government should consider reversing the changes "as a matter of urgency".

"The Government is committed to supporting economic growth in developing countries to reduce their dependency on aid. While this is clearly the right thing to do, it would be deeply unfortunate if the Government's efforts were undermined by its own tax rules," Sir Malcolm said.

Lucia Fry, ActionAid's head of policy, welcomed the report and urged the Government to accept the committee's recommendations on the controlled foreign companies rules. However, the Treasury said the controlled foreign company rules were there to protect UK tax revenues and were not designed to protect those of other countries. The changes were designed to encourage investment and drive growth in the UK.

Shadow Treasury chief secretary Rachel Reeves said: "It is astounding that given the rhetoric coming from the coalition on tax avoidance, that despite warm words from Liberal Democrats, we were voted down by coalition MPs on this issue. Labour has been pushing for over a year for proper studies into the impact of these changes."

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