Supporting developing countries’ ability to raise tax revenues

The aim of the DPRN project (Dutch Development Policy Review Network) is to enhance the exchange of information and cooperation among relevant actors aiming to support developing countries’ ability to raise tax revenues and presenting concrete recommendations and tools for policy makers and NGOs on how to achieve this support. To address this, SOMO and Tax Justice in the Netherlands organised a series of activities in the framework of the DPRN. Some results: several reports, created linkages, dialogues, an increasing awareness, a signed Memorandum of Understanding and campaigning & research by advocacy groups.

To address the knowledge gap and need for more in-depth discussion between academics, NGOs and policymakers of the issues at hand, SOMO and Tax Justice Network in the Netherlands organised a series of activities in the framework of the Development Policy Review Network (DPRN), including a seminar, which took place in Amsterdam on 2 December 2009. The aim of the project was to enhance the exchange of information and cooperation among relevant actors aiming to support developing countries’ ability to raise tax revenues and presenting concrete recommendations and tools for policy makers and NGOs on how to achieve this support.

The activities of the DPRN project comprised three main components: (1) Building an enhanced knowledge base about research, policies, and initiatives on the issue. More information you find on the website tax revenue(opens in new window) or read the papers Tax revenues process, research papers(opens in new window) (2) stimulating an informed policy dialogue on the subject and cooperation between different actors. For a detailed account of the workshops and recommendations, see the seminar report in attachment below (3) following up and embedding newly created linkages and information infrastructure in existing initiatives and networks.

DPRN project has resulted in regular discussions between Tax Justice Network NL, SOMO and the Dutch Ministry of Foreign Affairs (BuZa) on what the Dutch government can do to support developing countries, created linkages between BuZa and the African Tax Justice Network, and led to a dialogue with Multinational Corporations (MNCs) and accountancy firms on integrating tax into their Corporate Social Responsibility criteria.
Reflecting an increasing awareness worldwide that financial regulation is inextricably interlinked with development and economic justice, NGOs welcomed the announcement made by BuZa during the seminar that the Dutch Finance Ministry has signed a Memorandum of Understanding with BuZa to work together on Dutch policy to support developing countries to raise tax.

Thanks to relentless campaigning and research by advocacy groups, a similar development is taking place at the international level with the OECD: after more that 30 years co-existing as two of the three OECD directorates, the tax and development committees for the first time held a joint meeting on 27 January 2010, resulting in an important declaration recognising the role of tax in societal and economic development and committing to improving transparency in MNCs’ reporting of profits and tax payments.

More information about:

• DPRN(opens in new window)
• background information, see below

Background information

Domestic tax revenues are the most sustainable source of financing for public expenditures in developing countries. Various studies show that tax revenues are more stable and more predictable than foreign aid. In addition, they allow for more policy space because of the conditionality attached to loans or grants. Enhancing direct tax revenues also has the potential to strengthen government accountability towards a country’s citizens rather than external donors or national elites.

However, the ability of developing countries’ governments to raise direct tax revenues is constrained by a number of external and internal factors. External factors include trade liberalisation, which reduces revenues from customs duties, and tax avoidance and evasion by multinational corporations and wealthy individuals, sometimes involving tax havens and harmful tax measures by other countries. Internal factors include a lack of capacity of revenue authorities and low tax compliance. Developing country governments may also offer irrational tax breaks to large investors due to a variety of internal and external pressures.

Attention for this theme from development agencies and NGOs has been relatively limited, especially compared to other themes related to financing for development such as aid volume and quality, debt and trade. While various NGOs are already engaged in monitoring the allocation of government budgets, still very few initiatives exist that monitor government revenues. At the same time, donor countries can do more to support developing countries to raise tax for development, be it by changing their domestic policies on taxing multi-national corporations (MNCs) operating in those countries, or by influencing international forums such as the UN and OECD to improve transparency through accountancy standards or reporting guidelines for MNCs.