The first section of this paper provided an overview on DRM to now, from both the partner country and development partner perspective, highlighting areas where progress has been made and where challenges and key issues were faced. This section turns the attention to the future, looking at ways partner governments can better shape DRM-specific support from development partners, how action on key areas outside of (but relevant to) success is needed and how it can be supported, and at steps development partners can play to ensure their support for DRM is effective through meeting development effectiveness principals and having coherent approaches.
Key areas in which recipient governments can guide greater and more effective ODA for DRM
Political commitment and international engagement
Based on country examples and development partner perspectives, an essential element in creating a domestic environment conducive both to DRM itself and to securing international support is high-level domestic political commitment. This signals to the international community that there is in-country commitment to national development and building state processes to develop and strengthen DRM. This was a key first step in Georgia following the ‘Rose Revolution’, when an articulated development vision by the Prime Minister helped start the process of public financial management (PFM) reforms.33 This also helped to engage international support, and revenue-to-GDP rose from 16% in 2003 to 30% in 2017. Strong national political commitment to strengthening DRM is also driving greater development partner engagement in Somalia (Box 5).
Countries can also promote engagement with the international community by signing international conventions, such as the multilateral Convention on Mutual Assistance in Tax Matters and the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting. In addition, IMF programmes have been shown to be effective catalysts for strengthening DRM.34
Development partners such as the UK’s Department for International Development (DFID) have stated that they will prioritise support for countries committed to joining the Open Government Partnership and the ATI.35 As the co-chair of ATI says, “ATI membership is not a ticket to the party, but it does give countries more visibility and shows commitment”.36 However, initial evidence on disbursements from ATI development partner members suggests that some countries saw disbursements fall from 2015 to 2016, with one (Gambia) yet to receive any ODA for DRM despite its membership of the ATI. However, it may be the case that as the ATI has developed since 2016, development partner priorities have shifted.
Box 5: High-level political commitment driving DRM in Somalia and encouraging international support
Since the Federal Government of Somalia was formed in 2015, and guided by the 2016 Vision, it has led numerous fiscal reforms supported by the IMF. These include forming staff-monitored programmes in 2016/17 and in 2017/18, and 87 technical assistance programmes since 2013. Following elections in early 2017, the new Prime Minister and Minister of Finance have both advocated for fiscal reform and DRM to fund development. Recent tax reforms are hoped to improve the ratio of government tax to GDP from 1.6% in 2016 to 2% in 2020. With international support, the Federal Government is also working with state governments to harmonise taxation policy.
Sources: Reuters, 2017 and Halbeeg, 2018.37
Using strategic plans or assessment
Partner countries can usefully encourage support by clearly outlining their plans for increasing domestic public resources – and the role international support can play in those plans. This can help development partners to align their efforts with existing plans.
- Outlining the role of ODA within strategic plans – Through strategic plans by revenue authorities (Table 1) or through wider strategic plans (e.g. PFM strategies), partner governments are articulating roles for international public finance with which development partners can align.
- Outlining DRM within development cooperation policies – In the latest Development Cooperation Forum (DCF) Mutual Accountability Survey,38 of the 39 respondents who said they had a national development cooperation policy, 56% reported that this included a DRM strategy.
- Using international assessments to articulate needs – More developing countries are conducting tax assessments, which partner countries can use to articulate further support. For example, the Rwanda Revenue Authority used tax survey findings from the Tax Administration Diagnostic Assessment tool (TADAT) process in 2015 to gain support from the IMF and Australian government to support improved tax compliance.39
Having effective mechanisms to engage in dialogue around DRM is key for several reasons, for both development partners and domestic stakeholders. Dialogue can enable structured engagement between developing countries and partner countries and can help to communicate action plans (Box 6), along with improving coordination and alignment of development partners. In addition, effective and inclusive dialogue mechanisms, both formal and informal, can foster better integration of the private sector and civil society organisations into discussions for greater mutual cooperation.
Box 6: Dialogue mechanisms in Lao PDR strengthening DRM support
In Lao PDR, the national aid coordination mechanism, established with the support of the UN Development Programme, links to the national development plan and to effective development cooperation. This roundtable process has 10 working groups, of which the macroeconomic group reviews progress on DRM and public financial management (PFM), producing annual reports, with representatives across government and development partners. It was key to establishing the Public Finance Development Strategy 2025.
Sources: Lao PDR, 2017 and Lao PDR, 2015.40
Strengthening other areas critical for improving DRM
In addition to creating an enabling environment for development partners to support DRM-specific activities, there are several wider areas that are critical for supporting improving DRM. While these need to be led by governments, development partners can play key supporting roles.
Building trust through transparency and accountability
The sustained payment of taxes or provision of other forms of revenue to governments depends on a level of trust that the income will be used to benefit the paying person or organisation, either directly or indirectly through wider societal benefits. Therefore, being transparent and accountable is one key way in which a government can support building trust between citizens or businesses and the state.
A range of information can help build trust and a social compact with governments. Fiscal data is perhaps the most crucial but information on actions of the state, such as passed legislation or reports of activities or achievements, is also important. Research suggests that fiscal information can build trust from even a low base, such as in Afghanistan.41
Considerable investment from development partners has focused on providing web portals to store fiscal information, from both state and non-state infomediaries. There has been some initial progress in increasing transparency. However, the 2017 Open Budget Index42 from the International Budget Partnership has outlined that progress has stalled, because only certain documents are being released and data is generally provided in inaccessible forms. This means that use rates are low and non-state demand for the information, particularly in sub-Saharan Africa, is low.43
State accountability broadly involves having sufficient legislative frameworks to protect rights, backed up by a strong and independent judiciary to ensure the rule of law and reduce opportunities for corruption. While this is outside the focus area of DRM, there are connections through the need for clarity about taxation law and the opportunity of a trial should there be a dispute with the state.
Developing robust statistical systems
Data – both economic and administrative – is at the centre of designing taxation policy and ensuring effective tax administration. Required data can include information held by a revenue authority or tax policy department (such as a taxpayer database or company accounts), as well as by other ministries, departments and agencies (such as land or other asset registries, registered company databases, company shareholder lists and household surveys). However, a key challenge is that, in countries where statistical capacity is low or the economy is highly informal, databases can often be partial. This makes it difficult to standardise information, leading to tax policy being based on broad assumptions or revenue authorities requesting private information (Box 7).
Box 7: Data challenges and evolving tax policy in Ghana and Uganda
Ghana – Following the proposal of significant tax policy reforms by the Government of Ghana in 2016, the Ministry of Finance requested support from the UK Institute for Fiscal Studies to help estimate the cost of the policy changes. A major challenge was finding information on the proportion of the tax base and the rates companies faced, to understand current and future liabilities of companies for corporate income tax. The IFS is now working to digitise taxpayer data to facilitate future research.
Source: IFS, 2017. Tax policy costings: refining approaches and incorporating behaviour. Available at: https://www.ifs.org.uk/publications/12873.
Uganda – In 2015, the UK Department for International Development (DFID) provided US$15,000 to the International Centre for Tax and Development to research taxation of high-value tax payers: ‘high net worth individuals’ in Uganda. This group was hard to tax, being generally outside the formal economy. The research led to a high net worth individual unit being established in the Uganda Revenue Authority, which in its first year increased collection by US$5.5 million and improved compliance rates from 13% to 78%. The majority of tax collected was connected to property income, as other data was of insufficient quality to identify assets in other areas (e.g. company profits). Therefore, the Uganda Revenue Authority has been seeking information on all bank accounts in the country, a move that was swiftly rejected by the president as unlawful.
Sources: International Centre for Tax and Development, 2018 and Nile Post, 2018.44
Effective tax policy and administration requires enough information to make informed decisions. However, governments need to balance the needs for data collection and privacy. While insufficient information on individuals and companies may lead to lost tax receipts, overeagerness to collect data can lead to a worsening social contract, which in turn reduces taxpayer compliance. This has been exemplified recently in Uganda: media attention has focused on the attempt of the Uganda Revenue Authority to collect information from banks about all accounts held by them, to help track high-value taxpayers (Box 7). While many have praised its intent, this endeavour was perceived as an act of desperation to address a lack of taxpayer data, undermining the effectiveness of its tax administration.45
To address challenges like those in Uganda and Ghana, international focus has centred on the role of technology and digitalisation to bridge data gaps, reduce the burden of compliance, improve efficiency (e.g. at customs ports) and provide solutions to privacy concerns. There are recent examples of this in Estonia’s digital transformation effort46 and Kenya’s digital platforms.47 While technological advances here show clear potential, they cannot replace effective regulatory frameworks. National statistical systems to provide information in key areas, such as land and company registration, are essential foundations for effective tax policy and administration.
The need for a whole-of-government approach
Numerous areas outside DRM play a significant role in building the tax or revenue frontier. The actors involved in all these areas are diverse, cutting across government ministries and agencies, and extending through national and subnational levels. DRM also involves a broad range of taxpayers participating. Therefore, governments need to provide institutional and policy coherence to achieve effective and sustainable DRM. One example of success here is Liberia, which, albeit at an early stage, is developing a whole-of-government approach to DRM (Box 8).
Box 8: Institutional coherence for effective PFM reforms in Liberia
Since the passing of the PFM act in 2009, Liberia has undergone significant reforms, assisted by development partners. Since 2010, the government has adopted several PFM strategies and an action plan, which have formalised intuitional arrangements to bring together all government actors related to PFM in three committees.
PFM Steering Committee: responsible for setting the programme’s overall policy direction, chaired by the Ministry of Finance and including six other ministries and agencies, plus civil society involvement.
The Project Technical Committee: monitoring the implementation of programmes contained in work and procurement plans, where all component managers provide status updates.
The Reforms Coordination Unit: in charge of day-to-day operational administration of PFM coordination.
Sources: Ministry of Finance and Development Planning, Liberia, 2017.48
Providing effective ODA support for DRM
Strengthening DRM is based on building state capacity and the role of the state in providing services to its population. Any ODA resources allocated to DRM or related sectors to build tax and revenue frontiers will be effective only if support from development partners is aligned with principles of development effectiveness and policy coherence. This subsection looks at both of these issues and outlines current progress, challenges and some examples of best practice.
Complying with development effectiveness
Adherence to development effectiveness principles is key to the effectiveness of all development cooperation. This agenda was widely agreed over a decade ago and has been refined and reiterated since then. However, in DRM as elsewhere, implementation remains poor – particularly in partner countries’ ownership of their own development.
ODA for DRM involves assistance over a comparatively long time horizon, given that it involves building effective systems, especially where significant reform or capacity building is needed. As highlighted in Table 1, in outlining the strategic plans of revenue authorities, a central challenge remains in understanding longer-term funding commitments in support of national plans.
Countries have faced challenges in coordinating support from development partners, with different projects either not well aligned to country strategies, or different standards and systems implemented by different partners. One potential solution to increase harmonisation is to create more basket funds or trust funds directly linked to DRM or wider PFM programmes. These are more common in social sectors, but there are examples in DRM too, for example in Tanzania,49 Mozambique50 and Nepal.51
While these funds have enabled greater alignment by development partners, they have not been provided as specific budget support. Rather, they form a separate fund to finance programmes in the revenue authority itself. The only possible exception to using country systems for DRM-related activities is support for non-state actors to advocate for policy reform. This form of support is common in development partners’ strategies, and in those of foundations (see Box 3).
Successful strengthening of DRM requires not only investing in systems but also an overall approach by development partners to building state systems through supporting governments to implement their own development strategies. This should be done through the use of country systems and not by establishing separate, parallel systems. As seen in Iraq and Afghanistan, parallel systems delivering aid outside government systems have undermined the state-building process. This in turn reduces the legitimacy of the state to citizens and consequently affects taxpayer compliance and DRM potential.52
As shown by the EU’s report, Budget support: Trends and Results 201753 there has been a steady improvement in PFM systems, including revenue collection, in countries where budget support has been used. This highlights the indirect benefit of budget support to DRM. Despite this clear link, there has been a lack of progress in this area. For example, the Global Partnership for Effective Development Cooperation’s 2016 Monitoring Report54 noted that development partner use of country systems is increasing overall, if slowly. However, the report highlighted that, crucially, where recipient-country PFM systems are not well developed, development partners are less likely to use country systems. 55 This challenge has also been highlighted in several OECD peer reviews of DAC members.56
For countries in most need of support for DRM (such as the poorest and most fragile), development partners continue to be reluctant to use country systems fully. A recent report by the Commission on State Fragility, Growth and Development calls on development partners to replace automatic distrust of recipient governments with conditional trust – and to work with country systems even if they do not fully conform to international norms.57 Development partners who provide significant investment to DRM need to accompany this with support for national ownership, and use of country systems, to optimise the effectiveness of ODA for DRM.
Developing policy and institutional coherence
Policy coherence for sustainable development is a central component of both the AAAA and the SDGs (Goal 17). Its importance to ODA for DRM is exemplified by the commitment of ATI development partner members to policy coherence in the support they provide. However, to date, reporting progress on policy coherence has tended to outline how policies and strategies are coherent with one another, and how certain institutions are coherent in supporting ODA for DRM (e.g. in terms of development agencies’ links with their own ministries of finance and revenue authorities). While this is clearly a good start, there is a need to expand reporting from processes to results in the following three ways.
- Better reporting on coherence of DRM support to wider development strategies – Strengthened DRM systems can have a significant impact on SDG attainment, both through the additional resources created or directly through tax policy (e.g. focusing on progressiveness, gender equality, health and environment). To date, development partner reporting on ODA for DRM has tended to report links to gender equality, poverty reduction and meeting other SDGs, as indirectly increased revenue generation could theoretically be spent on these areas (Box 9). However, development partners could move to report on actual outcomes of DRM-related projects through better coordination with partner countries.
- Greater evidence and reporting of the impact of development cooperation on DRM – With the increased focus of development partners towards private-sector investment, for example through disbursements though their own development finance institutions, there is significant potential to affect DRM systems in partner countries. While some development partners like DFID specify that any company it invests in should pay local taxes, and the European DFI umbrella organisation lists strengthened domestic tax revenue as a direct impact of their members work,58 there is no reporting framework in place to monitor companies’ level of compliance or extent of tax planning. However, the Finnish government’s Finnfund has stronger mechanisms for reporting on tax payment by investee companies, and a commitment to avoid aggressive tax planning (Box 10). Finnfund is an example of how private-sector investments can support DRM in host countries, with greater reporting and transparency of potential impacts. Another area that has received significant interest in this manner is development partners’ use of tax exemptions for ODA. While there are justifiable reasons for wanting certain exceptions, recent research by the Overseas Development Institute59 has shown that certain practices may not be coherent with policy aims and greater scrutiny of them is needed.
- Stronger assessment of development partners’ own policy decisions and impact on DRM in partner countries – With the increasingly global, mobile and digitised economy, there is an increasing focus of development partner government policy in areas like tax and trade, for example, recent tax cuts by the USA.60 Although policy changes are ultimately a sovereign decision, development partner governments could outline potential impacts to partner countries on revenue generation, particularly where they provide support for DRM. Also, the international tax agenda is often championed by development partner governments as a way of showing coherence in their approach, such as through the Base Erosion and Profit Shifting (BEPS) inclusive framework. Yet concern has been raised about the role developing countries government can play in shaping the agenda and using the information produced.61 Therefore, it should be a priority of developing countries that they are supported further in this way.
Box 9: DFID’s reporting on DRM only assumes links to strategic priorities
DFID’s strong commitment to ‘leaving no one behind’ and the related ‘zero targets’ does not translate into an explicit focus on poverty reduction or gender equality in the UK’s tax and development programme. While the UK’s International Development (Gender Equality) Act 2014 makes it mandatory to screen every development and humanitarian programme against its effect on gender equality, DFID tax support does not target gender equality directly. Instead, it acknowledges indirect links between stronger tax systems, increased revenues and the positive impact of increased public spending and social service provision for vulnerable groups and women.
The IMF-led Pakistan Stability and Growth Programme, which includes DFID support for increased and fair taxation to fund basic services, exemplifies how tax support is expected to (indirectly) improve gender equality:
Economic growth leads to poverty reduction, which will especially benefit women, given that in Pakistan women are disproportionately likely to be living in poverty.
Increased government revenue provides more resources, including for health, education, security and social safety nets. These are especially critical to the wellbeing of women and girls.
Strengthening the coverage of the national cash transfer scheme (Benazir Income Support Programme/BISP), including timely and predictable payments, to 5 million women and their families, offers increased control by female recipients of their household spending.
Also, the ‘gender equality regard statement’ from the 2017 DFID-supported Ghana Revenue Reform Programme argues that, “Improved revenue generation has the potential to improve the delivery of public services. This has a disproportionate effect on women and girls, particularly if the investments are concentrated in sectors that directly or indirectly affect women including maternal health, child health, education and access to water.”
Box 10: Finnfund supporting DRM in partner countries
Finnfund’s main mandate and contribution to sustainable development is to create new jobs and increase tax revenue in partner countries to reduce poverty and provide basic services. One of its most important development aims is therefore to support DRM through tax revenue and other official payments made to their host countries by companies financed by Finnfund. Through its policies on tax and corporate social responsibility, Finnfund complies with Finland’s general state-ownership policy guideline on the publication of tax information. It requires that companies in which Finnfund invests do not use artificial structures to avoid paying tax in developing countries. The effect on tax revenue is also a factor in each funding decision taken by the Finnfund board. Finnfund requires full transparency to tax authorities on corporate structure and tax payments. Also, Finnfund is not allowed nor wishes to promote any aggressive tax planning or tax evasion in investee companies.
Many companies that Finnfund finances are significant taxpayers, directly or indirectly, in their target countries. Finnfund-financed companies paid a total of EUR285 million as taxes and tax-like charges in their respective countries.62 Of this, corporation tax amounted to EUR127 million or 45% of the taxes paid. Most of the taxes and tax-like charges were paid to countries in Africa (EUR113 million), followed by Latin America (EUR88 million) and Asia (EUR65 million). Total taxes paid between 2013 and 2015 amounted to nearly EUR1 billion.63, 64