Wealth creation through Domestic Resource mobilization for achieving the SDGs

Africa faces challenges to  mobilize adequate, stable and predictable domestic resources to finance priority programs as Agenda 2063, the Sustainable Development Goals and national Development plans od individual countries. Domestic Resource Mobilisation (DRM) presents a glimpse of hope to address these challenges. The biggest leakages in public coffers is not money squandered or stolen, but that which is never collected in the first place. DRM emanates from a foundation now almost two decade old. These include the Monterrey Consensus in 2002, the UNCTAD report, Economic Development in Africa 2007, the Doha conference on Financing for Development in 2008, United Nations University study (UNU-WIDER, 2008) ,the African Tax Administration Forum, the African Economic Outlook 2018, African Agenda 2063 and the OECD 2012 all exchanged expertise on the need to focus more on domestic resource mobilisation. DRM is commonly defined as the mix of financial resources available to a government to fund its operations, including direct and indirect taxes, other revenue, and borrowing from local capital markets. DRM is premised on the underpinning that greater reliance on internal resources increases a country’s ownership of public policy, ties accountability to citizens instead of external investors and aid donors, and reduces the volatility associated with outside funding. Enhanced domestic resource mobilization in Africa is critical for state-building and government accountability. There is now renewed interest that mobilising DRM will eventually exit most aid dependant countries from aid dependency and bring in an error of sustainable fiscal policy management. Effectively implemented DRM can consolidate Africa’s ownership and management of its own development agenda and autonomy in policy-making.

OECD data shows, tax/GDP ratios in sub-Saharan countries where tax administration reforms are being implemented now exceed 16.8% of GDP, which was the average for fragile and lower income countries. To collect more tax more information is needed about how tax administrations actually work and where the problems. Institutional arrangements, organisational arrangements

Low tax collection rates have devastating consequences on development. The state has a role to play in creating an environment conducive to collecting taxes

Historical moves towards support of DRM through taxation

Commitments have been made to enhance the tax systems. EU policy on tax and development set out in the 2010 commit to support developing countries in tax policy, tax administration and tax reforms, including in the fight against tax evasion and other harmful tax practices. The support offered would include financially, already established regional tax administration frameworks such as CIAT (Centro Inter-Americano de Administraciones Tributarias) and ATAF (African Tax Administration Forum), as well as IMF Regional Technical Centre; The EU has made the commitment to work towards exploring country-by-country reporting as a standard for multinational corporations; a global system for exchange of tax information; reducing incorrect transfer pricing practices; and promoting asset recovery.

Over the period 2005-2010, tax ratio in Africa (tax revenue as a percentage of GDP) was 20 percent compared to 15 percent for high income countries, 13 percent for middle income countries, and 11 percent for East Asia and the Pacific. However tax ratios in the European Union are much higher than the African average[1]. In real terms for some African countries (Central African Republic, Republic of Congo, Ethiopia, Liberia, Nigeria, Sudan) tax ratios are below 10 percent hence the need to focus on expanding the tax base, improving tax administration, and tapping relatively underutilized sources of taxation such as property and environmental taxes.

Evidence of success stories of aid in domestic resource mobilisation is available. Aid from the UK supported Rwanda to quadruple its own taxes between 1998 and 2006. In 1998, the Government used part of a grant of £20 million from the UK government, to set up the Rwandan Revenue Authority[2].Ghana, Mali, Mozambique, Rwanda, Senegal, Tanzania, Uganda and Zambia are among the many countries which have benefited from donor support to increase their tax revenue collections. Studies have shown that aid has improved tax revenue collection, across Africa has increased by more than 7% of national income since 2000. However despite these significant reforms and success story tax mobilization remains weak with capital flights, tax evasions and avoidance and proliferation of tax exemptions further eroding the tax base.

Aid modalities for Domestic Resource mobilization

DRM in developing countries provides governments with additional revenues which are vital for investments in infrastructure and service delivery given the anticipated decline in future aid. It is potentially the biggest source of long term financing for sustainable development. Graduation from aid requires a strategy to raise DRM also to deliver more effective public services. In particular, sub-Saharan African countries would need to mobilize resources to finance funding gaps for infrastructure investments (about $120 billion per annum), as well as other post-2015 agenda issues. Strengthening tax institutions improve accountability relationships between government and its citizens. More effective tax systems contribute to broader governance reforms and ensure accountability by the government in provision of the terms of social contracts with the governed.

The starting point in DRM is that aid should develop the tax system. Tax issues are thought of as mainly technical, but the real constraints are often political will and leadership. Governments need to plug revenue leakage caused by tax evasion as well as developing more effective means of monitoring trans-national corporations and transactions, especially in the context of extractive industries, to increase the domestic financial resources available to transform the continent. According to the OECD, every $1 of ODA spent on building tax administrative capacity generates about $350 in incremental tax revenues. The OECD estimated (based on 2005 data) that only 1.7 percent of bilateral aid for economic-related programs was targeted at improving tax institutions. This evidence calls for the need for providers of development assistance to rethink their aid focus to tilt more towards tax reforms.

There are several aid modalities that can be employed with an ultimate impact of enhancing DRM. Investing ODA in building tax systems can yield impressive returns. These include aid being delivered towards general budget support; sector budget support; basket financing; joint programme or project financing, stand-alone bilateral interventions; South-South regional programme funding; and in‑kind assistance. The various funding modalities often support the provision of technical assistance, training, equipment, or infrastructure support for tax systems and will be discussed in the next paragraphs.

Aid to strengthen DRM in taxation can be delivered through general budget support (GBS). A review of most Aid policies across Africa unpacks that GBS is the most preferred aid delivery modality by recipient governments. It warrants direct transfers to the finance ministry. GBS is the best tool for high-level dialogue that addresses a broad range of public expenditure management and governance issues linked to the tax system. It is in line with the use of local or country systems as agreed in the Busan Document. However the effectiveness of GBS is diluted in terms of accountability for revenue results. Another tool would be Sector budget support (SBS) for public finance management (PFM) are an indispensible part of any budget support arrangement. It creates a direct link between budget funding and Public Financial Management performance, which includes tax performance. It is also the most effective modality for coordinating revenue reforms with improvements in budget governance.

Basket aid financing entails a designed tax basket for joint funding for a unified programme with common procedures for diagnostic analysis, performance assessment, and policy dialogue in strategic tax issues. It aligns donor support with the recipient’s strategy for tax administration reform, and creating a dialogue that is sharply focused on the effective implementation of reforms.  Conversely, donors can incorporate tax-related activities in projects designed for other purposes, such as business environment reform, parliamentary capacity building, or strengthening civil society and the media.

Aid for DRM to Multi-donor projects or programmes can be delivered in situations where multiple donors agree to pool funds for a specific set of tax-related activities, or where a lead donor develops a project and accepts (or solicits) participation from other partners. Bilateral interventions on the other hand account for a large share of aid flows to most recipient countries. Demand-driven bilateral arrangements that align with recipient country priorities can be very effective. It remains a paramount modality for supporting tax systems. Also regional organisations can provide low-cost and high-value aid inform of support for improving tax systems. They are especially important for supporting peer networking among tax officials, promoting South-South knowledge sharing on practical solutions to common tax problems.

Technology is critical in DRM. Most countries with competitive and comparative advantage in information technology are able to perform fairly well on the global markets than those with no or with out-dated technology. Aid to improve the technological advancements of recipient countries will increase their capacity for increased production at minimum cost. Technology can transform lives especially in the provision of health. 

Aid can support DRM through regulatory means, such as combating illicit capital flows and reducing the misuse of transfer pricing as well as strengthening the Extractive Industries Transparency Initiative (EITI) and adopting legislation for country by country reporting for multinational enterprises.

Aid can thus be used in tax policy design to build the technical capacity in terms of tax policy analysis and design. Aid can help make tax systems more solid by enhancing capacity and organisational structures, computerisation of risk management systems. Aid can help promote transparency reporting by Multinational corporations thereby reducing tax havens in order to tackle cross border tax evasion. Aid could support knowledge exchange between tax officials in both North-South and South-South cooperation by creating peer learning platforms and professional networks. The BRICS business council is example in which Brazil, Russia, India, China and South Africa have provided funds to allow for peer learning. Such will go a long way in realising Domestic resource mobilisation.

Aid can help in building technical capacity, in improving their negotiation skills and research in international best practices, prior to negotiating natural resource contracts.  It can support CSOs to promote greater dialogue on tax related issues. This enhances the capacity of CSOs to demand transparency in tax authorities’ operations, require accountability regarding government authorities’ use of revenues. It can also be used to improve the tax collection authorities’ institutions. It also helps to improve the tax base by creating mechanisms that make it possible for the informal sector to contribute to tax. In this accord seminars and training workshops can go a long way to improve the effectiveness of the tax collection officers. For example aid can go towards technology that can assist revenue authorities to collect tax for example fiscalised electronic registers which gives the revenue authorities real time data on how much revenue they should collect.

Challenges

Africa still has underdeveloped capital markets and complete lacks of other long-term financing instruments are major constraints to DRM. Stock markets exist, but, with only a handful of listed companies, trading is infrequent and market activity dogged by insider trading. Corporate bond markets are non-existent; even secondary markets such as in government securities and inter-bank lending are at a nascent stage.

Capital flight poses a major challenge to DRM. Africa lost over US$854 billion in illicit financial flows between 1970 and 2008 corresponding to a yearly average of about US$22 billion. Zimbabwe alone lost about US$12 billion over the last three decades 3-5% corruption, 30-35% criminal activities and 60-65% commercial activities[3].The illicit outflows are approximately 7-10 times the amount of aid going into developing countries. This massive flow of illicit money out of Africa is facilitated by a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mispricing, and money laundering techniques.

Transfer pricing by multi-national companies presents another challenge for both developed and developing countries, transfer pricing schemes may result in large tax revenue losses due to weaker tax administrations.

Africa has a large informal economy which constitutes 40% of GDP. However, the lack of formal financial records for such businesses operating in this sector presents various challenges for tax authorities. The informal market encourages tax evasion and other loopholes that undermine collection. The other challenge faced is institutional. Most countries have complex tax legislation that is difficult to understand and on the discretion of tax officials leading to corruption.

Recommendations

The benefits of strong, sound tax systems are self evident  as they result in efficient revenue raising, fair distribution of the tax burden, and the balancing of public and private needs towards national development goals. It is up to the partner government to enact and uphold the appropriate regulatory measures and policies to ensure that the virtuous cycle of tax collection development spending development progress increased tax collection materialises. African governments, supported by donor agencies, should focus on further strengthening their tax institutions. Donors can assist developing countries by promoting more transparent reporting by multinationals and tax havens in order to tackle cross-border tax evasion.

Aid should also be channelled through country systems so as to improve its impact in DRM. The EU and its Member States can facilitate this process by continuing to expand their support to strengthen the capacity of tax systems, and to ‘incorporate tax administration and fair tax collection, including rationalising tax incentives and good governance in tax matters, into policy dialogue with partner countries. The necessity of utilizing remittances to strengthen productive sectors and recommended that national, regional and diaspora bonds should be used to harness resources to fund development projects. A concerted effort should be made by all African countries to repatriate funds deposited outside Africa to stem the illicit financial flows from the continent, operating on the motto: “track it, stop it and get it”.

In conclusion the agenda for Mexico needs to focus on domestic resource mobilisation but need to be clear about what the common message is from Africa. African countries that have the most resources are in most instances poorest is an indication that there is need to develop a common strategy for Mexico. DRM should be in line with Africa’s quest for long-term inclusive growth and sustainable development. Africa should build the skills and expertise to mine their own resources. It remains a fact that the participation of developing countries in structures and procedures of international tax cooperation should be strongly encouraged, including in the United Nations and the OECD, in the International Tax Dialogue and International Tax Compact. 

Reference

ActionAid Italy (2011) Real aid, ending dependence. Accessed at: https://www.actionaid.org.uk/sites/default/files/doc_lib/real_aid_3.pdf

AfDB  (2013) At the Center of Africa’s Transformation Strategy for 2013–2022, Accessed on 19/11/2013 at: http://www.afdb.org/fileadmin/uploads/afdb/Documents/PolicyDocuments/AfDB%20Strategy%20for%202013%E2%80%932022%20%20At%20the%20Center%20of%20Africa%E2%80%99s%20Transformation.pdf

European Commission (2013) EU Accountability Report 2013 on Financing for Development Review of progress by the EU and its Member States, 535 final, Vol 1, Assessed on 19/11/2013 at:http://ec.europa.eu/europeaid/what/development-policies/financing_for_development/documents/financing_for_dev_2013_accountability_report_01_en.pdf

IMF, ‘Tax Composition and Growth: A Broad Cross-Country Perspective’, WP/12/257, 2012.

“Aid as Catalyst for Domestic Resource Mobilization in Africa”  High Level Event held at AU Conference Centre, Addis Ababa, Ethiopia – 24 July 2013 Assessed on 19/11/2013 at: http://www.africa-platform.org/sites/default/files/event_report__aid_as_catalyst_for_domestic_resource_mobilization_in_africa.pdf

OECD, (2012) ‘Tax and Development - Aid Modalities for Strengthening Tax Systems’, DCD/DAC(2012)34, 2012. 

UN Economic Commission for Africa (2012) What We Know About Domestic Resource Mobilization in Africa Assessed at: http://cfi.co/africa/2012/08/un-economic-commission-for-africa-what-we-know-about-domestic-resource-mobilization-in-africa/

UNECA/OECD (2011), Mutual Review of Development Efffectiveness in Africa: 2011 Interim Report