Collecting taxes and fees is a fundamental way for countries to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for citizens and businesses.
Preliminary analyses estimate the financing gap for achieving the Sustainable Development Goals for developing countries at about $2.5 trillion annually. Much of this financing gap will need to be met by increased private-sector investment in sustainability, which requires appropriate tax policies to create the needed price incentives. Yet, developing countries that are most in need of revenues, including fragile and conflict-affected states (FCS), often face the steepest challenges in collecting taxes.
Taxes have a key role to play in making growth sustainable and equitable, especially in the context of the COVID-19 crisis, and through such efforts as greening tax systems and fighting tax evasion and avoidance.
Many countries are still struggling to collect sufficient revenues to finance their own development. Countries collecting less than 15% of GDP in taxes must increase their revenue collection in order to meet basic needs of citizens and businesses. This level of taxation is an important tipping point to make a state viable and put it on a path to growth. As of 2018, 48% of IDA/Blend countries and 69% of FCS countries fall below this 15% baseline.
Making it easier to pay taxes improves competitiveness. Overly complicated tax systems are associated with high levels of tax evasion, large informal sectors, more corruption, and less investment. Modern tax systems should seek to optimize tax collections while minimizing the burden on taxpayers to comply with tax laws.
There is a need to ensure that the tax system is fair and equitable. Governments need to balance goals such as increased revenue mobilization, sustainable growth, and reduced compliance costs with ensuring that the tax system is fair and equitable. Fairness considerations include the relative taxation of the poor and the rich; corporate and individual taxpayers; cities and rural areas; formal and informal sectors, labor and investment income; and the older and the younger generations.
The World Bank is the largest provider of development finance for collecting public revenue.As of January 2021, the World Bank Group had 233 active engagements (technical assistance and lending operations) on domestic resource mobilization across 105 countries, totaling $2.8 billion in commitments.
In addition to financial support, the Bank also provides governments with guidance and support in the following areas:
The Bank assists countries inraising revenuethrough efforts to:
- Improve tax policies and administrations ability to collect revenues.
- Equip revenue administrations with knowledge and tools to raise revenues in hard-to-tax sectors andreduce the size of the shadow economy.
- Institutetransfer pricingarrangements and mechanisms for resolving disputes between taxpayers and revenue administrations that secure a fair share of taxes on profits for developing countries, Vietnam being a recent example.
- Expand the tax net to include thedigital economy, informal sector and environmental damages.
- Build trust in the tax system by fighting tax evasion through early detection, smarter auditing, and effective investigation and prosecution that hold evaders accountable.
- Increase taxpayers voluntary compliance with tax laws through outreach and education to increase collection and address informality.
- Close wasteful loopholes and reduce unwarrantedtax incentivesfor investors.
Depending on the nature of tax burdens in a given country, the World Bank Group can help governmentsimprove competitiveness:
- Simplify taxes forsmall and medium-size enterprises this also can help to addresscorruption.
- Institutee-filingto reduce the time and effort spent on filing.
- Establish one-stop shops (e.g., for registering businesses and obtaining VAT and company tax numbers).
- Create swift and fair dispute settlement mechanisms that instill confidence among investors.
- Ensure the predictability of tax policies and their administration, thus reducing corporate risks.
- Implement environmental tax designs that support competitiveness like consumption-based carbon taxes, border tax adjustment or output-based tax rebates.
The World Bank Group works with governments tocreate fair and equitable tax systemsby reducing the adverse impact of the tax system on the poor, which may include helping to:
- Increasetaxes on wealthy householdsthrough taxation of properties and capital gains.
- Use the tax system to provide incentives for better social outcomes, for example through tobacco and carbon taxation and smart earmarking of taxes to support social programs in education and health.
- Institute minimum thresholds for paying taxes and progressive personal income tax regimes which contribute to reducing income inequality.
- Colombia: The country designed a comprehensive carbon pricing policy mix and implemented a carbon tax. Its complementing domestic carbon offsetting mechanism is a great example of triggering private investment in low-carbon projects beyond the scope of the tax. Colombia is now working to fully operationalize its national emissions trading system, with support from the World Bank.
- South Africa: The country introduced the worlds first carbon tax, in June 2019, as well as a domestic offset system, and is adopting a whole-of-economy approach to tackle climate change. Reform in the energy sector now allows for embedded electricity generation, a critical step to mobilize cleaner energy of up to 100MW. These reforms, supported by the World Bank, paved the way for a landmark, multilateral agreement at COP26 to help finance South Africas just transition.
- Armenia:TheTax Administration Modernization Project(2012-2018) has trained 35,000 tax inspectors, automated 96% of tax services and documents, and significantly reduced the time required for making tax payments (by 187 hours, or 38%). Since 2012, tax collection has improved from 16 to 21% of GDP.
- Kuwait:Through Reimbursable Advisory Services, the Bank supported the governments efforts to modernize its entire system of tax administration by creating an automated database covering more than 95% of registered taxpayers.
- Peru:Technical assistance under an international tax project has contributed to tax adjustments of more than $120 million in 2018 due to audits by the tax administration of multinational companies transfer pricing arrangements.
- Philippines: With World Bank support, the government raised tobacco and alcohol taxes over the period 2012-16. The"sin tax" reformhelped reduce the number of smokers from 30% of the population in 2011 to 25% in 2015, with the largest declines posted by the poor and young. The reform also generated 80% of the $3.9 billion in additional revenues that were recorded over three years and was linked to a threefold increase in the budget of the Department of Health. The additional resources were used to triple the number of families receiving free health insurance, from 5.2 million in 2012 to 15.3 million in 2015.
- Tajikistan:A Bank-financed project has helped double the number of active firms and individual taxpayers filing taxes, increased the average tax revenue collected per tax official by 85%, and reduced the number of hours spent on complying with tax-related regulations by 36%.
- Pakistan:The Bank supported revenue authorities at the federal level, as well as in Pakistans two most populous provinces, Sindh and Punjab, through a comprehensive domestic resource mobilization engagement focusing on conventional and environmental taxes, customs and administration reforms. The ongoing engagement has already produced tangible results. Pakistans tax-to-GDP ratio rose steadily to 12.5% (FY17), significantly above the 9.5% baseline (FY11).