Revenue mobilization is a key development priority and essential to finance investments in human capital and infrastructure to achieve the World Bank’s twin goals of ending extreme poverty and boosting shared prosperity. Countries generate and collect public revenues through taxes and fees, domestically and internationally, to finance activities and services to improve healthcare, education, infrastructure services, public order and other services for their citizens and businesses. Preliminary analyses estimate the financing gap for achieving the Sustainable Development Goals for developing countries at about US$2.5 trillion (UNCTAD, 2014). Yet, developing countries that are most in need of revenues, including fragile and conflict affected states (FCS), often face the steepest challenges in collecting taxes.
More and Smarter Revenues
Many countries are still struggling to collect sufficient revenues to finance their own development. Countries collecting less than 15 percent of GDP in taxes must increase their revenue collection in order to meet basic needs of citizens and businesses. This level of taxation is an important tipping point to make a state viable and put it on a path to growth (IMF, 2016). As of 2015, 35 of the world’s 75 poorest countries (of which 18 FCS) collect less than 15 percent of GDP in taxes. The Addis Ababa Action Agenda of 2015 called on countries to step-up their efforts to mobilize domestic resources, recognizing that much of the increased public financing to achieve the SDGs needs to be generated domestically. The World Bank assists countries in raising revenue, through efforts to:
- Improve tax policies and administrations’ ability to collect revenues
- Equip revenue administrations with knowledge and tools to raise revenues in hard-to-tax sectors and reduce the size of the shadow economy
- Institute transfer pricing arrangements and mechanisms for resolving disputes between taxpayers and revenue administrations that secure a fair share of taxes on profits for developing countries such as Vietnam
- Expand the tax net to include the digital economy, e.g., items sold on foreign marketplaces
- Fight tax evasion through early detection, smarter auditing, and effective investigation and prosecution that hold evaders accountable, especially among the richest taxpayers (Zucman et al., 2018), and thus create public confidence in the tax system
- Increase taxpayers’ voluntary compliance with tax laws through outreach and education to increase collection and address informality
- Close wasteful loop holes and reduce unwarranted tax incentives for investors
- Promote knowledge exchange on country experiences with DRM reform
Making it easier to pay taxes improves competitiveness. Modern tax systems seek to optimize tax collections while minimizing the burden of taxpayers to comply with tax laws. “A low cost of tax compliance and efficient tax-related procedures are advantageous for firms. Overly complicated tax systems are associated with high levels of tax evasion, large informal sectors, more corruption, and less investment” (World Bank, 2017). Undue burden on taxpayers can occur in connection with the filing or correction of mistakes in tax returns, claiming refunds on value added tax, undergoing tax audits, and appealing tax assessments. Depending on the nature of these burdens, the Bank can help governments:
- Simplify taxes for small and medium-size enterprises—this also can help to address corruption
- Institute e-filing to reduce the time and effort spent on filing
- Establish one-stop shops (e.g., for registering businesses and obtaining VAT and company tax numbers)
- Create swift and fair dispute settlement mechanisms that instill confidence among investors
- Ensure the predictability of tax policies and their administration, thus reducing corporate risks.
There is a need to ensure that the tax system is fair and equitable. Governments need to balance goals such as increased revenue mobilization, growth, and reduced compliance costs with ensuring that the tax system is fair and equitable. Fairness considerations include the relative taxation of the poor and the rich; corporate and individual taxpayers; cities and rural areas; labor and investment income; and the older and the younger generations. Consistent with its focus on shared prosperity and poverty reduction, the World Bank works with governments to reduce the adverse impact of the tax system on the poor, which may include helping:
- Increase taxes on wealthy households through taxation of properties and capital gains
- Use the tax system to provide incentives for better social outcomes, for example through tobacco taxation and smart earmarking of taxes to support social programs in education and health
- Institute minimum thresholds for paying taxes and progressive personal income tax regimes which contribute to reducing income inequality.
Strategy and Delivery
The World Bank is the largest provider of development finance for DRM. As of September 2018, the World Bank was actively supporting 106 countries across the world to improve their domestic resource mobilization through numerous operations. In total, the World Bank has outstanding commitments of US$1.3 billion in loans for strengthening DRM in its client countries. World Bank financing of DRM projects has grown from US$647 million in approved projects in FY15 to US$913 million in FY18 – an increase of 41 percent. The increase has been most significant for the poorest countries, where lending almost doubled in the same period (up from US$278 to US$545 million).
In addition to financial support, the Bank also supports governments in designing and implementing reforms, establishing effective revenue strategies, addressing technical challenges, diagnosing bottlenecks and opportunities for performance improvement, and tracking reform results and impact. World Bank support includes provision of technical advice, high- level policy dialogue and financing for:
- Assessing the strengths and weaknesses in the performance of revenue authorities and their regulatory framework through tools such as TADAT, DIAMOND, and the Tax Policy Assessment Framework
- Developing country capacity to design critical and sensitive policy reform
- Investing in the modernization of tax administration systems
- Assisting on the development of Medium-Term Revenue Strategies (MTRS)
- Addressing specific tax issues such as transfer pricing, simplification, compliance management, bilateral tax agreements, tax investigations, risk based auditing, and digital economy
- Improving the revenue collection of customs systems through the use of technology and streamlined logistics
- Strengthening monitoring and evaluation of reforms and implementation plans.
The Bank remains engaged in the poorest and most challenging environments. The Bank is currently active in 24 of the 35 countries in fragile situations to help create the foundations of a working tax administration. In middle-income countries with very low tax collections – below 15 percent of GDP – the Bank is on the ground in 41 countries. The Bank is also engaged in 55 of the 75 poorest countries eligible to receive concessional IDA resources. The focus on these high-risk environments is driven by the need to assist these clients in their state building process.
Actively Working with Partners
The Global Tax Program supports the strengthening of tax systems in developing countries. The program is funded by the governments of Australia, Japan, Luxemburg, Netherlands, Norway, Switzerland and the United Kingdom. It supports global tax activities and global public goods (Window 1); country level activities (Window 2); and actionable research and data, knowledge and learning (Window 3).
The Platform for Collaboration on Tax brings together partners to support developing countries. The Platform for Collaboration on Tax is a joint initiative of the International Monetary Fund (IMF), Organization for Economic Co-operation and Development (OECD), United Nations (UN), and the World Bank Group to strengthen coordination and collaboration on DRM. The Platform fosters collective action for stronger tax systems in developing and emerging countries. The four PCT members support, in their different capacities, country efforts through policy dialogue, technical assistance and capacity building, knowledge creation and dissemination, and input into the design and implementation of standards for international tax matters. The Platform produces guidance and tools on key issues of capacity building and international taxation, and has also developed the Medium-Term Revenue Strategy, which is an approach for coordinated and sustained support to country-led tax reform.
Results and Impact
Clients are delivering impressive results with World Bank support. The World Bank Group’s Independent Evaluation Group has reviewed the evidence of the support provided to tax policy and administration reform in fiscal years 2005 through 2015 (World Bank, 2017). The review found that while government ownership is a generic prerequisite for any policy reform, it is particularly the case for politically sensitive reforms such as tax reforms. Similarly, correcting structural and systemic issues requires long-term sustained engagement. The project examples below highlight some of our clients’ recent successes:
- Armenia. The Tax Administration Modernization Project (2012-2018) has trained 35,000 tax inspectors, automated 96 percent of tax services and documents, and significantly reduced the time required for making tax payments (by 187 hours, or 37.5 percent). Since 2012, tax collection has improved from 16.3 to 21.0 percent of GDP.
- Kuwait. Through Reimbursable Advisory Services, the Bank supported the government’s efforts to modernize its entire system of tax administration by creating an automated database covering more than 95 percent of registered taxpayers.
- Peru. Technical assistance under an international tax project is contributing to the collection of more than US$120 million in additional revenue in 2018 due to audits by the tax administration of transfer pricing arrangements of multinational companies.
- Philippines. With World Bank support, the government raised tobacco and alcohol taxes over the period 2012-16. The ‘sin tax’ reform helped reduce the number of smokers from 30 percent of the population in 2011 to 25 percent in 2015, with the largest declines posted by the poor and young. The reform also generated 80 percent of the US$3.9 billion in additional revenues that were recorded over three years and was linked to a threefold increase in the budget of the Department of Health. The additional resources were used to triple the number of families receiving free health insurance, from 5.2 million in 2012 to 15.3 million in 2015.
- Tajikistan. A Bank-financed project has helped double the number of active firms and individual taxpayers filing taxes, increased the average tax revenue collected per tax official by 85 percent, and reduced the number of hours spent on complying with tax-related regulations by 36 percent.
- Tanzania. The Bank has helped the government increase e-filing of VAT returns from less than 500 in 2009 to over 4,000 in 2011, while some 376,666 taxpayers registered with the newly introduced mobile tax payment for property taxes. The reforms helped triple total tax revenue collection between 2007 and 2011.
- Pakistan. The Bank supported revenue authorities at the federal level, as well as in Pakistan’s two most populous provinces, Sindh and Punjab, through a comprehensive DRM engagement focusing on tax, customs and administration reforms. The ongoing engagement has already produced tangible results. Pakistan’s tax-to-GDP ratio rose steadily to 12.5 percent (FY17), a significant 2.3 percentage points above the 9.5 percent baseline (FY11).
lastupdated: Oct 04, 2018