Building tax systems in developing countries is vital to overcoming COVID-19 and achieving the SDGs

By Ben Dickinson, Head of the Global Relations and Development Division, Centre for Tax Policy and Administration, OECD

T&D cover imageThe Sustainable Development Goals (SDGs) serve to stimulate action in areas of critical importance for humanity and the planet. With the COVID-19 pandemic affecting lives and livelihoods alike, the question is how will the SDGs be financed?

Domestic resources, primarily tax revenues, provide the vast majority of financing for development – money needed to build roads, schools, hospitals, social protection systems, and other critical services in developing countries. A new report released today, highlights the OECD’s work on building tax systems in developing countries, unlocking a range of tools, experience and expertise to meet the tax challenges of the 21st century.

The OECD has a long history of providing training to developing country officials on many tax issues. But tax authorities in developing countries want more than training courses, and are rightly becoming more assertive in influencing the new international tax rules made at the OECD, particularly those targeting bank secrecy and countering aggressive tax planning by multinational enterprises. Developing countries have much to gain in these areas, with a higher share of residents’ assets held offshore, and a greater reliance on corporate tax than OECD countries.

Developing countries included in the OECD Revenue Statistics database have a tax-to-GDP ratio of around 17.5%, almost half the OECD average, making each dollar of tax revenue that much more important. With the implementation of international transparency standards underway, tax authorities worldwide are already seeing the benefits with  data exchanged on 84 million financial accounts held offshore amounting to EUR 10 trillion in 2019, and a 24% (USD 410 billion) reduction in foreign-owned bank deposits in international financial centres (IFC)  between 2008 and 2019. The membership of both the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) and the OECD/G20 Inclusive Framework on Base Erosion and Profit-Shifting (BEPS) (the Inclusive Framework), goes well beyond the 37 OECD members, with a large proportion coming from the developing world.

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Having a voice in making the tax rules on exchange of information and BEPS is triggering demand from developing countries for help in different areas that can support their domestic resource mobilisation efforts.  In reply, in 2019, the OECD increased its focus on development in tax matters with the launch of a more systematic approach, backed by a flexible, pooled fund from multiple donors. For example, the OECD has been working with countries to analyse and advise on how tax policy can be best utilised to support the health goals of the SDGs. A new report, Domestic resource mobilisation for health financing in Morocco (OECD, 2020, forthcoming) provides a roadmap for Morocco to address the challenges they face, including recommendations on improving the design of specific taxes.

Similarly, a priority for many developing countries is on value-added tax (VAT), which is the most important source of tax revenue for most low-income and developing countries. Over 100 jurisdictions now participate in the OECD Global Forum on VAT, endorsing new standards on the application of VAT on e-commerce. The OECD is developing regional toolkits to help developing countries with the implementation of these standards and piloting additional forms of bilateral support.  Responding to calls for practical hands on help, Tax Inspectors Without Borders initiative (TIWB) provides experienced tax officials to work side-by-side with local auditors on live audits.  To date the TIWB initiative has realised increased revenues of over half a billion dollars with the assistance carried out in Africa, Asia and the Pacific, Eastern Europe and Latin American and the Caribbean.

The OECD cannot do any of this work without partners. We work with UNDP on Tax Inspectors Without Borders initiative,  the Africa Union Commission on the development of Revenue Statistics, the Africa Tax Administration Forum on transfer pricing implementation, with the Intergovernmental Forum on Mining on a Base Erosion and Profit-Shifting (BEPS) and extractives project, to name but a few. We are also well coordinated with the IMF, the World Bank Group and the UN through the Platform for Collaboration on Tax.

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These are just a few examples of how the OECD standards, data, guidance and expertise can help tax policymakers and tax administrators in developing countries. The COVID-19 pandemic makes realising the SDGs more difficult, not least in terms of financing development. Ensuring the OECD continues to deepen the inclusion and participation of developing countries in the international tax agenda is more vital than ever.