Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
To achieve the Sustainable Development Goals (SDGs) by 2030, developing countries need additional funding. Funding can come from four sources: domestic public resources (or revenues), international public resources, domestic private resources or international private resources. Of these four sources, domestic revenues from taxes and non-tax sources (e.g. profits from state-owned oil companies) are by far the most important. Tax revenues amounted to USD 4.3 trillion in 2016 for low- and middle-income countries alone, which is more than double the amount of international public and private capital these countries received in the same year. Domestic revenues have been growing in a majority of low- and lower-middle-income countries over the last 15 years. However, these increases remain insufficient to cover the financing needs of the SDGs, estimated at USD 2.5 trillion per year for developing countries, according to figures from the United Nations Conference on Trade and Development. In addition, these countries have to deal with the recent decline in financial flows from international public and private sources – a decline of 12 per cent between 2013 and 2016. As a result, many governments are under pressure to mobilise more revenues at home. What options do they have to achieve this goal?
In this briefing paper, we focus on the international dimensions of the issue. We argue that governments need to act multilaterally in three key areas.
First, tax avoidance by multinational corporations (MNCs) remains a global problem, despite important progress in recent years. Though not openly illegal, tax avoidance causes considerable damage to developing countries. Poorer countries depend to a higher degree on corporate taxes than richer countries and are thus more vulnerable to these practices. International initiatives to act upon tax avoidance – for instance, by introducing a minimum tax and by taxing the digitalised economy – should take the taxation rights of poorer countries into account.
Second, fighting illegal tax evasion is another relevant topic. At an international scale, the exchange of tax-related information – for instance, on the beneficial ownership of assets – is a key factor, and developing countries need to participate in this exchange on a broad scale. This will require additional domestic and international efforts to boost capacity and credibility.
Third, governments worldwide should increase trans¬parency on their tax expenditures and dismantle those structures that prove to be either harmful or ineffective in fiscal, social or environmental terms, or create negative spillovers for other countries. As a first step, governments should agree on common reporting standards and start producing regular, public and encompassing reports on the tax expenditure schemes in place.
Evidently, this is not an agenda for individual countries or a call for unilateral action. Current approaches to international tax cooperation – mostly propelled by the Organisation for Economic Co-operation and Development (OECD) and the G20 – need to be broadened and include all countries on an equal footing; they should also be deepened to cover those aspects of taxation that are not yet being sufficiently addressed. It is also clear, however, that the degree to which developing countries will take part in international standard-setting and regulation depends to a considerable degree on their capability to push forward critical governance reforms at the domestic level.