Tax and Development

Tax and Development

Aid Modalities for Strengthening Tax Systems You do not have access to this content

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06 Mar 2013
9789264177581 (PDF) ;9789264177574(print)

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Tax revenues provide governments with funds to invest in development, relieve poverty, deliver public services and build the physical and social infrastructure for long-term growth. Moreover, there are mutually beneficial links between taxation and good governance. Tax and Development: Aid Modalities for Strengthening Tax Systems highlights how taxation can have a positive effect on the quality of governance and a government’s relationship with citizens and, in turn, how good governance can have a positive effect on compliance and revenue mobilisation.

How can international assistance providers, including OECD members, international and regional organisations, support the development of tax systems in developing countries? Tax and Development: Aid Modalities for Strengthening Tax Systems provides practical guidance for policy makers and practitioners based on the results of an extensive literature review, a survey of aid agency officials and six country case studies (Ghana, Guatemala, Liberia, Mali, Mozambique, and Tanzania). It examines the aid instruments that donors use to assist developing countries including general and sector budget support, basket financing, stand-alone bilateral aid and funding South-South organisations. The strengths and weaknesses of each modality for supporting tax systems are identified, and some 50 recommendations to support the development of effective, efficient and growth-oriented tax systems in developing countries are provided.

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  • Foreword

    The topic of Domestic Resource Mobilisation has become a top priority of the international development agenda. Together with other international fora and initiatives, the OECD is one of the leading trendsetters in this field. By setting up a joint programme and the Informal Task Force on Tax and Development, the OECD has brought together, for the very first time in the organisation’s history, the working areas of the Development Assistance Committee and the Committee on Fiscal Affairs.

  • Acknowledgements

    This publication was commissioned by the OECD/DAC Network on Governance (GOVNET) and German Financial Co-operation (KfW) as part of the International Tax Compact. It is based on a report written by Bruce Bolnick, Chief Economist in the International Group of Nathan Associates Inc.

  • Acronyms and abbreviations
  • Executive summary

    After years of neglect, taxation is increasingly focusing the minds of aid agencies and prompting them to view it as a development assistance priority. Two factors prompt this newfound perception. The first is a groundswell of interest in mobilising domestic resources for sustainable fiscal management and an eventual exit from aid dependency. Second, there is growing awareness that the tax system is a central pillar of state building and good governance. It is against this background that the present study seeks to assess the role of various so-called aid "modalities" (or instruments) in supporting tax systems and recommends practical ways of improving such development assistance. The assessment draws on three sources: a review of the pertinent literature; a survey of aid agency officials; and six case studies that afford a ground-level view of how various modalities work in practice. Given the scope and complexity of the issues at stake, the aim here is not to propose comprehensive solutions, but to contribute to the international dialogue on aid for taxation.

  • Introduction

    This introductory chapter first sets the scene for the discussion of aid modalities that donors may use to support tax systems. It states the context, motives, and objectives behind this book and, importantly, considers some definitions of "aid modality". It seeks to explain why a study of development assistance for tax systems is topical – prompted by a surge of interest in domestic revenue raising that has brought taxation out of the shadows of development assistance and made it a mainstream priority target. The chapter then goes on to describe the research methodology underpinning the study, which draws on the literature, a survey, and the experience of selected countries. It then outlines the study’s scope, structure, and objectives.

  • Taxation and governance

    This chapter looks at the literature on taxation and governance from which it draws four chief themes: 1) the centrality of taxation to the role of the state; 2) taxation as a critical component of state building and governance; 3) the positive effect of taxation on the quality of governance and the government’s relationship with the people, particularly in respect of accountability, responsiveness and sound public finance management; 4) the positive effect of good governance on revenue mobilisation and compliance. The chapter explores areas of convergence and divergence (e.g. earmarking, tax thresholds, informality) in the debate over tax and governance.

  • Aid modalities for supporting tax systems

    The previous chapter considered the thinking behind aid modalities to strengthen tax systems and tax-governance linkages and the approaches that inform their implementation. The focus in this chapter is narrower and more technical: it examines seven individual modalities and assesses how fit they are for purpose. The chapter prefaces each assessment with a definition. It then goes on to conclude that each modality makes its own valuable contribution to stronger, fairer tax systems and tighter tax-governance links – as part of a mix that meets host countries’ preferences and particular needs.

  • Technical assistance and cross-cutting issues

    While Chapter 3 looked separately at seven aid modalities, assessing their individual strengths, weaknesses, and applicability, this chapter examines what they have in common. It first discusses two broad categories of aid that are central planks of any aid programme to strengthen and modernise tax systems and improve the efficiency of revenue collection: technical assistance and training and information technology (IT). The chapter then broadens its sweep to five concerns that cut across all aid modalities: programmatic priorities; diagnostic tools; tax-related indicators; the division of labour among donors; and conditions for donor exit. It rounds off its consideration of technical assistance and IT with a series of recommendations and does the same again for the cross-cutting issues it has identified.

  • Six case studies

    This chapter presents the experience of six countries, all recipients of tax assistance provided through the modalities which the previous chapter addressed. The countries are: Ghana, Guatemala, Liberia, Mali, Mozambique, and Tanzania. The case studies offer ground-level views of the aid modalities used to strengthen the tax system and the interface between taxation and governance. Each case study considers tax reform highlights in the country as of early 2011 and concludes with a set of key findings. The main concern has been to understand how the modalities and linkages actually work, the nature of problems and issues encountered, and how to improve the modalities from the insights gained. For each country, the study team reviewed documents and conducted face-to-face and telephone interviews or exchanged emails with officials who had direct experience of dealing with tax programmes on both donor and government sides. In essence, the case studies are designed to inform analysis, not as comprehensive reviews in their own right.

  • Findings and recommendations for stronger tax and development aid

    This chapter concludes the study of aid modalities for strengthening tax systems. It draws together the different thematic strands discussed in each chapter to state the key findings and make practical recommendations for tax-related development assistance. Running throughout is the theme of tax-governance linkage and its implications for tax reform and state building. To close the study, the chapter restates the most important of the 50 or so practical recommendations advanced in the course of this study and closes with some pointers to future directions for research.

  • Annex A. Officials and experts who provided information for the study
  • Annex B. Survey questionnaire

    As an information input to the study, a questionnaire was sent to representatives from 33 organisations – 19 bilateral agencies, 10 multilateral organisations, 2 regional tax organisations (CIAT and ATAF), and 2 non-government organisations (the Tax Justice Network, and the International Centre for Tax and Development). In consultation with KfW and the OECD (sponsors for this study), 20 of these organisations were identified as priorities for a direct interview, based on their involvement with tax and development issues. In the end, 17 interviews were completed, using the questionnaire as a framework for discussion; one other respondent replied in writing rather than doing an interview. For the organisations that were not targeted for interview, the study team invited designated representatives to respond by email, especially when only quick answers were required. For this group the response rate was very low, with 4 questionnaires received.

  • Annex C. Survey findings

    This annex presents a synopsis of findings from the survey of bilateral and multilateral agency officials that was undertaken as an input to the study (see Annex B). The survey asked respondents for information in five areas…

  • Annex D. Empirical perspectives

    This annex provides a brief overview of the data on tax collection performance in lowand lower-middle income countries, and some "stylised facts" on the relationship between taxation and two prominent indicators of governance.

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