At its 2018 spring meetings, the International Monetary Fund delivered a stark assessment about the current state of domestic resource mobilisation (DRM) in low income countries:
While commodity exporting low income countries have seen their revenues drop since 2014 due to lower commodity prices, low income countries generally are also in worse financial positions. This broader pattern suggests that efforts to raise revenue domestically have not kept up with increased government spending needs.
While this should ring alarm bells given the widely recognised central role DRM has to play in national development plans and the SDGs, it does focus attention on the challenges faced in building stronger and more effective tax systems. This assessment is timely, coming before the opening of the Financing for Development (FfD) Forum in New York, where numerous state and non-state actors are gathering to discuss the importance of domestic public resources for financing the 2030 Agenda for Sustainable Development.
This blog assesses three of the key discussion points from the Forum’s draft outcome document and programme, and outlines what development partners could do to strengthen nationally owned DRM systems.
1) Use technology to strike a balance between data collection and privacy
For tax policy and administration to be effective, there needs to be enough information available to make informed decisions. However, in the search for data, governments need to be mindful about the balancing act between data collection and privacy. While failing to have sufficient information on people and companies may lead to lost tax receipts, an over-eagerness to collect data can lead to a worsening social contract impacting taxpayer compliance. This has been exemplified recently in Uganda, where much press attention has focused on the Revenue Authorities (URA’s) attempt to collect information from banks about the accounts they hold, to help track high value taxpayers. While many have praised URA’s intent, it has been seen as an act of desperation to address a lack of taxpayer information, undermining the effectiveness of its tax administration.
To solve issues like these, international focus has centred on the role of technology and digitalisation to bridge the data gaps, improve compliance and provide solutions to privacy concerns, and is set to be a key discussion point at the FfD Forum. Useful relevant evidence can be found in Estonia’s digital transformation efforts and block chain citizen identification, as well as Kenya’s I-Tax and M-service platforms. While such technological advances show clear potential, they should not be seen as magic bullets, because effective regulatory frameworks (as highlighted in Kenya) and national statistical systems (to provide information in key areas like land and company registration and administrative data) are essential foundations of effective tax administration efforts. In addition, for initiatives like medium-term revenue strategies to succeed in shaping tax policy that is cognisant of distributional implications and wider development targets (e.g. poverty, health and environment), there need to be sufficiently developed national statistical systems that can support fiscal incidence analysis. For example, the implementation of medium term expenditure frameworks has been less successful where insufficient data was available. Therefore, development partners’ support for these wider areas outside of tax administration and policy is likely to be crucial for sustainable solutions, especially given the current gaps in funding for data systems.
2) Make use of the potential of DRM to drive greater policy coherence
Policy coherence for sustainable development is one of the major cross-cutting themes in both the Addis Ababa Action Agenda and the SDGs. It is also one of the three key commitments of the Addis Tax Initiative (ATI), the only one that is shared by all ATI members. Maya Forstater’s policy paper on Tax and Development outlines how it has the potential to be the most impactful of all ATI commitments.
It is therefore surprising to only see one entry that merely acknowledges the importance of policy coherence in the outcome document draft, rather than a more detailed account of the implications and progress against this crucial cross-cutting theme. A reason for this could be the term’s broad framing, lack of clarity and the absence of a formalised set of measurements, which hasn’t helped keep it high on the agenda. For instance, efforts by ATI members to report progress against it have mainly focused on policy coherence strategies, rather than tangible results. The term would therefore need a clearer understanding and definition of what implementation looks like, both from a development partner and recipient country perspective. The FfD Forum, which stresses the interconnectedness of development finance flows, provides an ideal opportunity to further discuss policy coherence. Here are two concrete approaches through which DRM can actively support a whole-of-government approach for policy coherence for sustainable development:
- Integrated national financing framework (INFF) – The term INFF was first used in the Addis Ababa Action Agenda outcome document. The UN Development Programme’s Asia-Pacific Development Effectiveness Facility (AP-DEF) has since conceptualised the INFF term and supports its operationalisation across multiple countries through development finance assessments. The INFF could provide an implementation and monitoring approach to government policy coherence at the national level and is set to be discussed at a side event at FfD.
- Medium-term revenue strategies – Although still in the pilot phase, these have been the focus of much attention including around the upcoming FfD Forum. They’re intended to develop tax policy and administration systems that are coherent with wider national development planning, including fostering economic growth and supporting social and environment goals. Their upcoming implementation may provide key evidence on how they can feed into coherent whole-of-government approaches.
Development partners’ reporting to the ATI on policy coherence for sustainable development and DRM has thus far tended to focus on policy, strategies and approaches, rather than tangible results. But more concrete evidence from development partners could support developing a monitoring framework of the ATI commitment on policy coherence through assessing institutional (e.g. ministerial coordination), regulatory (e.g. strategies and policies) and reporting coherence (e.g. evidence of change/results). For example, Finland’s Tax and Development Action programme clearly states that efforts to improve developing countries’ tax capacity require policy coherence that supports development and cooperation between various actors. Concrete national-level measures for ensuring policy coherence in tax aim to strengthen cooperation among various central government actors, including Finnfund, which is required to report on the contribution to government revenue of its private sector investments.
3) Facilitate increased South–South cooperation
Recently there have been increasing calls for technical cooperation to be less focused on prescriptive ‘one-size-fits-all’ approaches and more on tailored support to countries’ own strategies. For example, there have been significant challenges in integrating medium-term expenditure frameworks or the recommendations from the base erosion and profit shifting (BEPS) action plan into government strategies and practices. Therefore, South–South peer learning can play an important role in identifying country-specific solutions to the challenges blocking stronger and more effective DRM systems. For example, tax reform experiences from Georgia could help inform change in contexts where there are high levels of corruption and tax evasion.
There are different complementary avenues to strengthen South–South peer learning on tax matters. High-level meetings such as the FfD Forum and the Platform for Collaboration on Tax provide opportunities for increased South–South learning in international tax issues, although they may not always genuinely represent southern voices. Development partners, either bilaterally or through partners (e.g. the African Tax Administration Forum and Tax Inspectors Without Borders), are also providing regional learning opportunities. While the UN’s Committee of Experts on International Cooperation in Tax Matters facilitates peer learning, its funding is deemed insufficient to fulfil its mandate, according to the FfD outcome document. In summary, if toolkits like TADAT (the Tax Administration Diagnostic Assessment Tool) and concepts like medium-term revenue strategies are to be effectively implemented by governments, then a tailored stepped approach based on specific country contexts, guided by increased South–South peer learning, will be key. Hopefully the FfD Forum provides a platform to do this and initiatives like ATI could facilitate greater understanding of the role of South–South providers in future.
Solutions to reversing the trend of stagnating DRM are multifaceted and require cooperation and coordination from a range of stakeholders, both international and national. At this juncture it is crucial that quality and sustainable DRM remains at the forefront of people’s minds – and not a refocus on revenue generation at any cost. While at the heart of the issue is securing government political will, all stakeholders need to consider their own roles in achieving success.
The three key ways discussed here in which development partners can support DRM in ways that foster greater collaboration – around technology and data, increased policy coherence and greater peer-to-peer learning – will be expanded on in a full report in May. If the Addis Ababa Action Agenda was the call to action and follow-ups have established the process and structures, the International Monetary Fund’s findings show that now is the time to fully assess progress and refine approaches collectively if the 2030 Agenda is to be realised.