Q&A: How tax collaboration could change global development

NEW YORK — In development finance, domestic resource mobilization is suddenly all the rage. The Addis Ababa Action Agenda adopted at the financing for development conference in 2015 listed “domestic public resources” as its first “action area.” Even President Donald Trump, who has proposed to cut nearly every other aspect of United States foreign aid, proposed additional funding for a new domestic resource mobilization initiative in his budget request earlier this month.

Last week in New York, four of the biggest players in global development co-hosted the first global conference of the “Platform for Collaboration on Tax,” an effort launched two years ago to help the World Bank, International Monetary Fund, United Nations, and Organization for Economic Co-operation and Development better coordinate their work on taxes in developing countries. These and other development donors and organizations are working with countries both to broaden their tax bases and increase public revenue, as well as to help them fight back against tax evasion and avoidance by multinational corporations.

Part of the purpose of the platform is to create toolkits and publications to help countries implement a series of measures put together by the OECD and G-20 to stem those tax evasion strategies, known as “base erosion and profit shifting” — or BEPS. Some civil society groups have challenged that this framework was developed without enough input from developing countries, and that it doesn’t go far enough to prevent them from exploitative tax practices.

The potential for increased tax revenues to put more money in the hands of governments — and for improvements in tax expenditure to help them use it for things like achieving the Sustainable Development Goals — is massive. At the conference, multiple speakers referenced a goal of raising revenues to 20 percent of gross domestic product. One-third of low-income countries, and 70 percent of fragile conflict-affected countries, are below this threshold, according to the World Bank.

If Bangladesh were to increase its tax revenues from 8.5 to 15 percent of current GDP, it would amount to over $14 billion per year. While that is no easy proposition, it’s not hard to see why advocates for greater country “self-reliance” are looking for ways to support domestic resource mobilization.

With this new platform, the IMF, World Bank, OECD, and U.N. “have come together out of a concern that we want to make sure that … we were all closely working together as international organizations on the domestic resource mobilizations agenda and have coherent messages, but also leverage each other,” Jan Walliser, the World Bank’s vice president for equitable growth, finance, and institutions, told Devex on the sidelines of the conference.

The following interview with Walliser has been edited for length and clarity.

The global tax platform is about ensuring coordination and coherence, but what exactly will it seek to do?

The platform is an instrument to ensure that type of coordination, but also has its own outputs — importantly toolkits that we're developing. One of them that we have already put out is on transfer pricing so that we can help consistently develop the tool that we all endorse and then implement it at the country level.

Another key issue is the medium-term revenue strategies that the IMF and the World Bank are rolling out at the country level. The idea there is to build, with the governments, a comprehensive medium-term strategy on how they want to raise revenues. And then underneath that identify the support that can be given. That then becomes a platform that is not just our platform — the four international organizations that are supporting it — but actually allows bilaterals also to come around the table at the country level and support this agenda in a more coherent fashion. If you go back to the Addis agenda, the Addis Tax Initiative has also as one of its emphases — and it has many bilaterals in there — to not have multiple bilaterals giving technical assistance for incoherent, or not well-coordinated work at the country level.

With the medium-term revenue generation strategies you mentioned, how much of that is, what you might call, “best practice” driven versus country driven? How much do they vary from place to place?

So this is in the early stages in terms of its roll out — we have, I think, identified the first nine or 10 countries. But they are really tailor made. They start with a diagnosis, and then they're translating that into the gaps that we find. But ultimately the countries are going to be the ones who are translating that into actionable items over the medium term. And so in the end it's the priorities at the country level and the country circumstances that will be driving what the tax base [looks like], where the gaps are in tax administration.

Revenue generation itself is not the end goal here. It's actually using that revenue to achieve development targets. What's happening to fortify that link between generating revenue and actually investing in things that create good development outcomes — and what's the bank's role in that second step?

Our more traditional engagement has been on the expenditure side. One of the things we emphasize is for the whole tax and expenditure link not to be forgotten, because that's where you get the citizens to feel that the tax revenue that they are contributing is actually resulting in benefits in terms of government services. So we've had over many years engagements on the quality of expenditures, such as public expenditure reviews, to see whether government spending is effective. In fact in the World Bank, the tax team sits with governance practice, which is also following the expenditure side — and the fiscal affairs department at the IMF in the same way. So there are these linkages. We do, from our side as well, look at equity in a comprehensive manner. So, for example, we analyze together the tax system with the spending system to see ultimately how that affects the income distribution before taxes, after taxes, and spending to see who benefits and how that shifts resources to the poorer segments of the population.

And what are you finding? Is it bearing out that countries that are able to generate more revenue are able to invest that revenue in things that are achieving these goals?

Typically the most important item of expenditures is education. That's the largest number of civil servants in most countries. So that's where we concurrently have a big effort to really raise quality of expenditures and have a stronger measurement of outcomes in addition to just the inputs. I think that's really critical to shift to that outcome and results focus in the education sector, to close the gaps and make spending effective.

So in addition to being a potential well that you can draw on for spending on public services, there are also ways that taxation can by itself achieve development outcomes. Is it possible for taxation to be a force for gender equality? Can you just talk a little bit about how that link exists?

We had another development report looking at traditional ways in which households organize themselves. One of the key issues is for the tax system not to discourage labour force participation of women. Again, you cannot just separate the taxation from the way in which then the resources are being spent. You have to look at the whole system. If you don't have the right tax system, for example, the marginal tax rate might be very high for the household for [women to enter the labour force] under certain types of taxation. So there are ways in which you can look at the household entity to make sure that it is important for women to have equal opportunities; that the tax system and the implicit tax they are facing when they make certain choices is not higher than that for men. That's an analysis that would depend on individual country tax systems, but is a way in which you can put that through a gender lens. I think that's often forgotten. We see households as a single entity often when we look at it — or just from the male [perspective], who have the higher labor force participation in many countries. Looking at this together as an entity and then seeing what types of incentives the system can provide for women to have equal opportunities is important.

I'm just coming out of the session on tobacco. We've also been very active in using tax as a way of discouraging smoking and all its negative health consequences. So that's another way in which tax systems can work in promoting the health goal of the SDGs.

There's been a lot of rhetoric around domestic resource mobilization. It played such an important role in getting to a point of agreement in Addis Ababa. Do you feel that there is undue pressure coming from rich countries, onto developing countries? That there may be a shifting of responsibility towards the developing world to finance these goals? Or is your sense that the conversation around domestic resource mobilization is demand driven in both directions, that developing countries want this emphasis too?

My sense was really it was defined as a partnership, and it was clear that developed countries were continuing to provide development assistance, but that that would never be sufficient for achieving the SDGs. It was in everybody's self-interest to not just count on one source but actually to start looking at their own options to fund the development goals themselves. I must say that we see a lot of interest from developed countries in working with a platform. A lot of partners are pushing this agenda and working with us at the country level so that there isn't just the Addis Tax Initiative or the Addis Declaration, but there's also action and actively supporting that agenda.

On the [developing] country side, there is also the feeling that it provides a buffer for them, because it's easier to make your own decisions. Aid, as you know, is always volatile. If you're under 15 percent of GDP with your tax revenue it's very hard to fund your security needs and fund all the services that you want to finance, not to even talk about the ambitions of the SDGs. There is also a clear understanding in most of the countries that we work with that that's really a strong self-interest in raising revenue and using them well at the same time.

Is there a paradox at all in that countries most in need of financing are likely to be those least capable of generating their own domestic resources?

I wouldn't say that. I think what we've seen in the last discussion on our International Development Association 18th replenishment is that at the same time those who finance IDA [the International Development Association] have shifted their resources more to the most fragile states. So the way that the formula was adopted and the resources are being allocated takes into account that those who have the least capability of raising their own revenues are getting a larger share of the concessional resources from the bank.

But if there's going to be more emphasis on the role of domestic resources in financing development, then it's going to be more important for international donors to make sure that the things that they're financing are complementary to domestic resources?

That they are reinforcing, right? I mean if you take some of the poorest countries we work on, take the Central African Republic. You have, after the crisis that they went to in 2013, you come out with a tax-to-GDP ratio of 5 percent, and that's clearly not enough to restart the economy and also to have a credible state.

So at that moment, the resources from donors are very important for stabilization, and for giving the government a role and credibility. But then I think the understanding is that it is not a sustainable situation either, that they stay at 5 percent, that then the ambition is to bring them back to 10, 12 percent as quickly as one can by strengthening the revenue administration and also looking at the natural resources sector and others to make sure that they are reasonably well managed and you don't escape from the tax net. So the way I see it is that you can’t, in the beginning, expect that their own revenue are going to be sufficient, but there needs to be a sort of compact that, as the resources are focused on the recovery, at the same time the governments strengthen their own systems to bring back their own revenue base.

And that some of the technical assistance provided would be towards that goal?

If you look at one of our projects we did in the Central African Republic, part of it was helping with the civil service simply to be paid under the transition period, but it had a second component that was strongly focused on both the revenue and expenditure side to bring back the customs revenue and to start refocusing the expenditure on the neediest.

This may be too hypothetical, but imagining several years down the road when more development activities are funded by countries' own domestic resources. For those organizations and implementing partners who currently think of themselves mainly as serving clients that are aid donors — the World Bank or bilateral donors or whomever — what do you think they need to be thinking about as that shift occurs towards domestic resources being a bigger portion of the driving finance behind development?

I think it depends a bit on the way in which it plays out. First of all, I think this is a long process. I mean we know that institution building, this is going to take a while, and it has to be steady and sustained over time. But if that were to happen, I would assume that the partnerships would have to be more than they might be right now around where governments are spending themselves and are needing, for example, help to strengthen their quality of education, or systems and policies in a particular sector, rather than that they are ... bypassing governments and directly delivering services, without going with the government's. And all of this of course would also depend on how the overall aid environment is shifting, whether there is really a reduction in resources, which right now I think the understanding of the Addis Agreement or Financing for Development work was that there wasn't going to be a reduction, but that just the additional effort would have to be increasingly coming from domestic resources as well.

And in the meantime, as there is more emphasis on putting in the building blocks to domestic resource mobilization and better tax systems and better tax administration, where do you see the opportunities for technical assistance? Where's current demand?

What I see is we work with a lot of bilateral partners but often the expertise in tax administration or tax policy is quite specialized. So, either consultants or the people that are part of our staff, often have their own experience having done that work in their own countries. So typically I would expect that one would have to bring some earned experience in that area to give strong, relevant long-term technical assistance on the ground and build these partnerships. And that's the way that much of our technical assistance support and that of the IMF looks like.