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How can we build tax capacity in developing countries?

Jim Brumby's picture
Well-functioning tax systems allow countries to chart their own futures and pay for essential services such as education and healthcare.
(Photo: Curt Carnemark / World Bank)

This week, the World Bank, together with the International Monetary Fund, the Organisation for Co-Operation and Development, and the United Nations, submitted recommendations to the G20 on how we can best work to strengthen the capacity of our client countries to build fair, efficient tax systems. Responding to a request the G20 made in February, and working as the recently-formed Platform for Collaboration on Tax, we dug deep into our collective years of policy-setting, technical advice, and on-the-ground experience to arrive at guidance for providing assistance and suggestions for funding that work. In short, we looked at how best we could help.

The recommendations in our report, “Enhancing the Effectiveness of External Support in Building Tax Capacity in Developing Countries,” present an ambitious agenda for development partners to support developing nations to strengthen their tax systems and realize their development objectives, as well as strive for achievement of the Sustainable Development Goals.

Adequate tax capacity is vital to our client countries. Well-functioning tax systems allow countries to chart their own futures, pay for essential services such as education and healthcare, and build trust with their citizens. Indeed, tax capacity is a fundamental development issue. Countries with tax revenues below 15 percent of GDP have difficulty executing basic state functions. Sadly, more than one-third of the world’s poorest countries are below this threshold, as are 70 percent of countries afflicted by conflict and violence.

In our findings we emphasize that enthusiastic country commitment is vital to success in tax reforms. This cannot be created from the outside. Countries and their governments need to make their own decisions on strengthening their tax systems, reflecting their specific needs and circumstances.

We identify five factors that provide an environment receptive to tax reform and provide specific recommendations for the role of international organizations, donors and other providers of development support in these areas:

  • Assisting countries to develop a coherent revenue strategy as part of a development financing plan;
  • Coordinating effectively among providers of capacity development;
  • Making accessible a strong knowledge and evidence base;
  • Promoting regional cooperation and support; and
  • Strengthening participation of developing countries in international rule-setting.
The report sets out concrete next steps for implementing the recommendations. These include putting in place three-to-five pilot programs that would help selected countries develop medium-term revenue strategies and provide support for them to participate effectively in international tax policy discussions and institutions. The platform’s partners will also continue to build on experiences gained through implementing the report’s recommendations. We will provide a follow-up report in three years.

Increasingly, tax capacity is an international issue that is gaining traction among donors and others in the international development arena, not least with the commitment of those who signed the Addis Tax Initiative to double funding to this area by 2020. There is wide recognition that countries need to improve revenue collection, and that they must have technical and financial support to do it.

Improvement of tax capacity is an issue that will require coordination across borders and across sectors. In writing this report, we collaborated across organizations and we also sought your input. We heard what you said: that successful tax reform requires a practical approach that takes into account the specific political environment; that you recognize the need for tax policy that promotes economic growth and legal, fair and transparent tax collection; that you are in favor of improving technical and managerial skills in tax administration, as well as analytics and strong regional cooperation; that you prefer support through technical cooperation rather than incentives; that you caution against duplication of data efforts; that as a member of the private sector, you would like better access to the legal framework underpinning countries’ tax policies and you would like to see countries have updated legislation; that tax assistance should include investment in infrastructure and not just technical advice and training; that you are concerned about a proliferation of diagnostics that may overburden our partner countries; that you think the legislature in developing countries should receive technical training on tax matters; that you think some of our recommendations could be bolder and more ambitious; that civil society organizations and citizens should be included in training on tax issues.

Let’s continue the conversation. For more detail on where we landed, please read our full recommendations to the G20. We believe that if we work together, we can help to make a difference. We can encourage safe political space for reform in governments that have the will; we can offer solid, well-placed technical advice; and we can pass on knowledge and experience that will build good tax institutions. This is unfinished business. Please join us.

Comments

Submitted by Uzma on

absolutely spot on to point all the requisites (and prerequisites)as you spelled out in the second last para. As a tax admin official from a developing country, development of support institutions is indispensable for sustainable implementation of tax policies. Effective taxation especially in the areas of Tax avoidance, NR taxation and transfer pricing can deliver best when coupled with strong accountability mechanism - both from the court system and internal (tribunal etc) systems.

Submitted by Anna Webster on

Great blog. The point that successful tax reform depends on consideration of the political environment ties in nicely with new research on how political institutions effect fiscal capacity: http://www.effective-states.org/working-paper-59/

Submitted by Jens-Peter Kamanga Dyrbak on

Jim, thanks for this great blog post. I agree on your overall points.

Just to stress the obvious link between country ownership and likelihood of success in revenue reform. I still think too many revenue reform programmes are too focused on the technical issues and miss the biggest gain of them all - tax is a core state survival function as well as a crucial accountability link between citizens and the state. Equally often, high level dialogue rarely seem to highlight the importance of revenue reform, tax structure and tax/GDP levels as much as one would hope - especially at a time where donor flows at possibly reducing or at best being re-focused.

Thanks again.

Submitted by Amina Ado on

Good post. However, tax compliance is difficult in environments of low accountability that we see in many African countries. Local context needs to be taken into account as well. For example there has been increased funding by some donors such as the UK to encourage reforms that are difficult to implement even in the UK.

Submitted by Habtamu on

I'm Habtamu, From ETHIOPIA! TAX POLICY STAFF
Good and must encouragement work!
Thank you for your effort & for your collaborate with the International Monetary Fund, the Organisation for Co-Operation and Development and the United Nations.
Improving tax capacity is the dependable choice for Well-functioning of tax systems!
Thanks again!
Regards,
Habtamu A.

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