Domestic resources for development a 'highly neglected' action area, experts say

An employee at a government tax office sits behind a desk in Jakarta, Indonesia. Photo by: REUTERS / Fatima Elkarim

WASHINGTON — Development leaders crafted the Addis Ababa Action Agenda with an eye on mobilizing domestic public resources. But the focus on helping countries raise more funds and effectively manage them, borne from the Financing for Development Forum in 2015, has since been eclipsed by a focus on private capital and private business, according to some development experts.

“It’s highly neglected. It’s not a matter of chance, as neglected as it is, it is systematically happening,” said Neeti Biyani, who leads the Centre for Budget and Governance Accountability’s advocacy efforts around transparency and accountability in the global financial system.

Some believe that more technical assistance and capacity building support is needed at the country level to help governments build better systems, improve budget planning, and reduce corruption. Others think work to reduce illicit financial flows and tax evasion is insufficient and a more inclusive system better equipped to hold companies accountable is needed.

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At the ECOSOC Forum on Financing for Development earlier this year, United Nations Secretary-General António Guterres warned that the international community “should not disregard supporting domestic mobilization of resources.”

“This means increasing tax revenue. That also requires the international community to do much more to fight the tax evasion, money laundering, and illicit financial flows that undermine this effort, he said. “These measures alone, if successful, would be enough to finance the public services that are essential to achieve the Sustainable Development Goals in some emerging market economies.”

“What is lacking is implementation, what is lacking is political will, what is lacking is the sense of common destiny.”

— a Zambia representative at the U.N. Forum on Financing for Development

Addressing these issues means tackling domestic tax policy, planning, transparency and more at the country level, as well as cracking down on companies that avoid paying taxes.

“To expect developing countries to enhance domestic resource mobilization without stopping resource leakages in their economy is like expecting them to collect water with a sieve,” said Dereje Alemayehu, executive coordinator at the Global Alliance for Tax Justice, adding that there needs to be an enabling international environment to help governments succeed.

The picture isn’t entirely bleak. Some countries have changed tax systems and seen an increase in public funds, but more needs to be done, particularly on the issue of illicit financial flows and tax avoidance, several experts told Devex.

SDG alignment

Some countries have already made changes to improve tax collection and better align spending with policy priorities.

In Indonesia, the government introduced fiscal incentives and has worked to harmonize tax policy, in part by unifying the central and local tax system. It has also enhanced audit capacity in an effort to increase efficiency and domestic revenue, Bambang P.S. Brodjonegoro, minister for national development planning in Indonesia, told the U.N’s Forum on Financing for Development earlier this year. Among the incentives was a reduction on the tax for micro-, small-, and medium-sized enterprises by half a percent and tax exemptions for the construction sector. The result of those tax reforms was a roughly 13% increase of tax revenue in 2018, he said.    

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In Benin, the government is working to improve its tax procedures and has piloted a tax system that will allow SMEs to pay taxes online, which it hopes it will expand to all companies in the country, said Jules Yehouenou, director-general of the Ministry of Planning and Development in Benin, at the U.N. Forum. He called the new program a “major step forward” that will reduce the timeframe for receiving payments and reduces the risk of corruption by limiting face-to-face contact.

“One of the major challenges is that it’s not enough to just mobilize resources, but we have to know how to spend them,” Yehouenou said, adding that the current government is making efforts to improve public expenditure and align it more closely with public policies.

In some countries, there is a lot of aspiration to have budgets more aligned with the SDGs, but countries often find it hard to make difficult decisions such as cutting fossil fuel subsidies, said Ben Slay, a senior adviser at the United Nations Development Programme focused on Europe and Central Asia. He’s seen the most progress in the area of regulatory reform, such as adopting European Union standards for household appliances or new buildings, he said.

There are some countries where existing tax laws are holding back the achievement of the SDGs and in fact depressing the government’s ability to expand its covers, including Bosnia, where only 30% of the working population is working, Slay said. Instead, many people migrate, while others choose not to work or do so informally because the tax rate is so high that formal work doesn’t make financial sense, he said. So while in some cases tax increases could boost country coffers, in other cases taxes may need to be reduced to levels that aren’t disincentivizing work, Slay said.

Particularly for lowest-income countries, some of the tax collection and management challenges can be particularly difficult, in part because there is a small base for resource generation, high rates of people evading or avoiding paying taxes, and often weaker institutions and less expertise. That’s where investment is needed to help governments set priorities, build better systems, and improve transparency, several development professionals told Devex.

Global tax policy

Following Addis, responsibility for monitoring and improving global tax systems to improve transparency and cut down on tax avoidance has sat with the Organisation for Economic Co-operation and Development, which has touted progress even as some developing country and civil society leaders have been critical of its efforts.

According to OECD, $240 billion is lost each year due to tax avoidance by multinational companies. A challenge that OECD’S base erosion and profit shifting — or BEPS — process is working to address.

Just last month, in a report to G-20 finance ministers, OECD noted the success of its tax transparency standards and its BEPS measures and wrote that more work is needed on tax issues related to digitalization. OECD has reviewed more than 250 tax rules related to multinational corporations since 2015 and nearly all that were found to be harmful have been changed or abolished, according to the report.

OECD is supporting 30 programs aimed at helping developing countries implement BEPS priorities and working through the Tax Inspectors Without Borders initiative to provide audit support and capacity building for tax administration in low- and middle-income countries, according to the report, which characterizes their participation as on “equal footing” with OECD countries.

But not everyone sees it that way. There is a growing opinion that the OECD standards have failed and corporations aren’t paying their fair share of taxes, said Tove Ryding, tax coordinator at the European Network on Debt and Development, or Eurodad.

While the BEPS framework will allow developing countries to join, they must first sign on to the BEPS package, about 2,000 pages of documents including decisions and standards, which for some is a very high bureaucratic hurdle, and for others is unpalatable because of concerns that they won’t truly be part of decision-making, Ryding said.

“There are concerns developing country proposals won’t be taken seriously,” she said. “It’s an open question if those who joined have influence.”

She pointed to the example of India, which put forward a proposal of what the second BEPS should result in but was given “very little space” in a January consultation document, according to Ryding.

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These concerns harken back to one of the biggest battles and final negotiating points at the Addis summit. The group of 77, representing LMICs, pushed for the creation of a U.N. body focused on international tax issues, including tax avoidance, arguing that the U.N. was the only forum where they could participate on equal footing. They failed in that effort as OECD countries refused, preferring instead for the OECD to own that process.

Now LMIC leaders and civil society, frustrated with the system in place, are again calling for the creation of a secretariat at the U.N. that could be a forum for setting international tax policy that would be accessible to more countries.

Galvanizing political will

More focus, more resources, and importantly more political will are needed to improve the ability of countries to effectively and transparently tax and manage their finances.

One challenge is that illicit financial flows are a tier 3 SDG indicator, which means that countries are under no obligation to prioritize their measurement, particularly if they are struggling with more basic issues such as hunger and poverty, said Biyani of the Centre for Budget and Governance Accountability.

Success will require institutional pressure, good tools and good experts, said Erica Gerretsen, head of budget support, public finance management, and domestic revenue mobilization at the European Commission Directorate-General for International Cooperation and Development.  

“Political will is essential for the future,” she said, adding that as the EU determines its next budget there is an internal process that needs to make sure DRM is funded.

Countries also need new tools policy discussions, Gerretsen said, adding that the integrated national financing frameworks that countries are tasked with creating could be a good forum for holding conversations about financial strategies, debt, and efficient resource use.

Thus far there isn’t a lot of buy-in from governments on the financing frameworks, and while the tool is theoretically in place, it needs to be further developed into a methodology, she said. More joint work among organizations and donors needs to be done at the country level in supporting sound policies and providing technical assistance on tax issues, Gerretsen said, adding that countries also need to be asking for support on these issues.

The European Commission is also looking at the risks and potential of digitalization in this space, such as satellite data could be used to check corporate reporting, or how digital payments could reduce corruption.

While some donors are acknowledging a need to provide additional support, efforts to get countries to finance more of their development activities may also be hampered by the emerging debt crisis.

As countries deal with debt they may turn to the International Monetary Fund for loans, but those often come with conditionalities and could result in a boost of regressive taxes that have a higher impact on the poor, Ryding said.

Concerns about the debt crisis, illicit financial flows, and tax avoidance aren’t likely to disappear from the agenda soon, and they are expected to feature at the high-level dialogue on financing for development in September, Ryding said.

“There are enough ideas, is enough finance, is enough capacity, enough trained, qualified and experienced human capital to achieve all the objectives,” said a Zambia representative at the U.N. Forum on Financing for Development. “What is lacking is implementation, what is lacking is political will, what is lacking is the sense of common destiny.”

About the author

  • Adva Saldinger

    Adva Saldinger is a Senior Reporter at Devex, where she covers the intersection of business and international development, as well as U.S. foreign aid policy. From partnerships to trade and social entrepreneurship to impact investing, Adva explores the role the private sector and private capital play in development. A journalist with more than 10 years of experience, she has worked at several newspapers in the U.S. and lived in both Ghana and South Africa.