Domestic Resource Mobilization (DRM) – increasing the flow of taxes and other income into government treasuries – is key to achieving the ambitious Sustainable Development Goals (SDGs). Yet the World Bank Group’s client countries, who are most in need of revenues to ensure the provision of basic services and to reduce poverty, often face steep challenges collecting taxes. The Bank Group is committed to strengthening its clients’ capacity to develop and implement good tax policy. And it is committed to amplifying its clients’ voices in increasingly important global tax discussions.
To map their own futures and fund essential services such as education and healthcare, developing countries need to collect more taxes. In fact, a country’s ability to collect domestic taxes and spend those resources effectively lies at the crux of financing for development. Through our extensive experience and long-standing partnerships around the world, the Bank Group recognizes that developing countries face particular challenges in tax policy and administration, including improving tax compliance by businesses and professionals, high levels of informality, weak revenue administrations and poor governance.
In addition to increasing the sheer volume of tax revenue, the mechanism of tax policy and collection matters. Fair, efficient tax systems are necessary for poverty alleviation and equitable growth. They ensure that even the powerful pay their fair share and that the poor see a path to economic improvement. We support tax reforms aimed at reducing income inequalities, improving inclusiveness, and promoting public goods such as better health and a cleaner environment.
This includes helping developing countries to tackle international tax issues by working with the OECD and other stakeholders on the agendas for Base Erosion and Profit Shifting (BEPS) and the effective exchange of information on taxes between countries.
Many developing countries have strengthened the foundation for economic growth while improving DRM. They have done this through adopting tax policies, following good administrative procedures, and building capacity to combat domestic and foreign sources of tax base erosion. The Bank Group is working with other international organizations to develop a tax policy assessment framework and to increase the voice of developing countries in the global discussion on tax issues.
We believe that effective collection of government revenue can strengthen the social contract between citizens, companies and government. In many developing countries, including many middle-income countries, basic weaknesses in public financial management are an immediate obstacle to spending better. These weaknesses can lead to inefficiency.
Strengthening public investment, the management of public enterprises, social transfer payments and procurement can build confidence in the efficiency of public-sector expenditures. This is key to ensuring taxpayers’ willingness to support effective taxation.
At the United Nations Financing for Development conference in Addis Ababa in July, the Bank Group and the International Monetary Fund committed to a joint initiative to help client countries strengthen their tax systems. In addition to its continuous work with individual countries, the Bank Group recently launched a Global Tax Team to bolster the institution’s cutting-edge work on tax and to liaise with other global institutions and build a more coordinated dialogue on important international tax issues.
One of the first tasks of this team is to organize a series of consultations with developing countries to listen to their concerns, hear their experiences, and understand the specific hurdles they face in the tax arena. In these consultations, countries are invited to share their experiences, challenges, and objectives in improving DRM, as well as develop an approach for country-level activities and support by development partners.
This spring, the Bank Group joined three international partners to launch the Platform for Cooperation on Tax, a formal, collaborative initiative designed to boost developing countries’ ability to build more equitable, efficient tax systems and ensure that the interests of developing countries are heard in the growing international dialogue on tax reform. The other members of the platform are the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD), and the United Nations (UN).
The members of the platform will be responsible for producing cutting-edge research, organizing events, and collaborating with donors, regional organizations, including regional development banks, and regional tax organizations. The platform’s members will also respond to specific tax-related needs voiced by developing countries, which are seeking both more support in building capacity and greater influence in designing international rules.
The Bank Group is actively engaged with countries to improve the equity dimension of their overall fiscal systems by assessing the joint impact of taxation and expenditure programs. For example, policy development lending in Colombia has aimed to ensure improved equity outcomes as part of its support of a tax policy reform.
Advisory work in Chile has assessed the impact of recent changes to the corporate income tax law on equity and is currently engaged in ensuring that spending on education helps to reduce inequality. The Bank Group also provides support for DRM through lending and advisory services across the developing world, including in Afghanistan, Indonesia, Kuwait and Pakistan.
Bank Group lending for tax work under active projects amounts to some $500 million, while more than $50 million are being invested on technical assistance accounts. These include the application of behavioral insights to improve tax compliance and increasing the tax base in Guatemala; looking at the incidence of tax policies in South Africa; fiscal technical assistance in China; tax incentives in Sri Lanka; and equity aspects of tax reform in Colombia.
The Bank Group works with countries on broad international tax and base erosion issues, including but not limited to: tax competition, achieving the right balance between taxing capital and labor, designing efficient tax systems (CIT, VAT, tariffs) for international traded goods and services, improving the effectiveness of tax incentives, addressing domestic taxing rights on passive income sourced, managing fiscal revenues from natural resource wealth, and bringing small and medium size businesses into the formal tax base.
The Bank Group has worked with Kenya to build capacity within the Kenya Revenue Authority to identify and prevent illegal transfer pricing. The program has led to an increase in the number of audit cases completed, revenue collected, and number of cases going to dispute resolution. A transfer pricing adjustment based on advice given by the program resulted in additional tax revenue of $12.9 million.
Last Updated: Mar 29, 2016