Financing the Sustainable Development Goals (SDGs) is a key challenge and was the rationale behind the Addis Ababa financing for development conference which resulted in the Addis Ababa Action Agenda (AAAA). The AAAA recognized the need to mobilize more domestic public resources for development, and identified them as the single largest and most important source of financing for the SDGs. One way to mobilize more domestic public resources is increasing government tax collection. However, a huge roadblock in that direction is large scale tax avoidance, particularly for developing countries with weak tax administrations.
How does tax avoidance affect development? According to the OECD, in 2015, African countries as a whole had a total tax revenue to GDP ratio of around 19 percent, with Latin America and Asia averaging at around 22 percent and 15 percent respectively, compared to around 34 percent for OECD countries.
One of the contributors to this gap is large-scale tax avoidance. Multinational enterprises (MNEs) play a part, as they frequently engage in highly complex international tax planning strategies to shift profits from where they are earned to low or no tax jurisdictions; this is also called base erosion and profit shifting (BEPS).
According to UNCTAD, an estimated US$100 billion of annual tax revenue losses for developing countries can be attributed to multi-nationals’ offshore hubs. This means that developing countries also lose out on future re-investment of this income. Adding both together (lost tax revenues plus lost potential re-investment of tax revenues), total ‘development finance loss’ is estimated in the range of $250 billion to $300 billion.
If MNEs pay their fair share of taxes, it could positively influence developing countries’ ability to raise domestic resources. According to UNCTAD, the percent of MNE contributions to government revenues is around 10 percent in developing countries, compared to just 5 percent in developed countries. In Africa, the share of MNE contributions to government revenues is 14 percent. Appropriate MNE taxation is thus central to increasing the domestic resources of developing countries, so that taxes are paid where economic activity occurs and value is created.
How is UNDP addressing the challenge? UNDP and OECD launched a joint-initiative, Tax Inspectors Without Borders (TIWB), in July 2015. The aim is to support developing country administrations to build tax audit capacity and increase domestic revenues. The results so far have been significant, with the mobilization of additional $328 million in tax revenues for developing country governments. It is estimated that for every dollar spent on the initiative, these countries can receive a return in excess of $1,000 from taxes recovered, making it an incredible return on investment.
President Ellen Johnson Sirleaf of Liberia has personally praised the initiative. She said, “We are quite sure that TIWB will be able to help our revenue authorities to be more efficient in managing our tax systems, and to reform it appropriately, to ensure greater level of revenue to support our development.”
TIWB transfers tax audit knowledge and skills by providing technical assistance from highly trained independent tax audit experts to local tax officials. With 30 programmes in 25 countries worldwide so far, the initiative provides support in a variety of sectors including mining, tourism, financial services, maritime, manufacturing and telecommunications. Some technical focus areas include transfer pricing, asset valuations and risk assessment.
South-South deployment is a growing element of TIWB programmes. As a trusted development partner in this joint initiative, UNDP brings local knowledge, reach and scale to the table. It leverages field support, builds demand and political support for tax reform, ensures the initiative is embedded in national development strategies and informs national and international policy dialogues on broader international tax reform.
What are the challenges for TIWB and the way forward? TIWB hosted an international workshop in Paris in November 2017 for tax experts to share experiences and discuss ways of tackling common challenges, given TIWB’s ambitious goal of 100 programmes by 2020. Two major themes emerged, managing potential conflicts of interest between stakeholders and looking beyond just the easily quantifiable tax revenue numbers. It is thus important for TIWB to strengthen its checks and balances and expand its impact measurement by veering its key indicators of success towards sustainable skills transfer, institution building and long-term change in tax compliance culture of the developing countries.
MNE tax avoidance remains a major concern for development. Thus, given TIWB’s tremendous potential to bring about large-scale systematic change and UNDP’s focus on mobilizing diverse sources of financing to effectively deploy them in support of sustainable development, TIWB is emerging as the new champion for domestic resource mobilization and the development financing agenda.
For more information, visit the Tax Inspectors Without Borders website.