Collect More – Spend Better

An EU Approach to help countries to better mobilise domestic resources

A contribution to the FfD conference in Addis Ababa

June 2015

Unit 03 – Budget Support & Public Financial Management 1

Outline

• 0|Context

• 1|Collect More… Spend Better approach

• 2| Collect More

• 3|Spend Better

• 4|A call for action

• Context

• EU Communication "Tax and Development" 2010

• EU Budget Support Guidelines 2012

• Financing for Development Conference, July 2015

Addis Ababa

1 COLLECT MORE…

SPEND BETTER

APPROACH

Trends in Tax Ratios in Developing Countries

Source: African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank, the International Monetary Fund, and the World Bank, (2015), "From billions to trillions: transforming development finance. Post-2015 financing for development: multilateral development finance", page 8.

Fiscal Space Diamond

3. Debt Financing

2. Efficiency and Effectiveness of Expenditures

4. Official Development Assistance

1. Domestic Revenues Mobilisation

Many developing countries lack the

fiscal space to step up development

expenditures in a sustainable manner

and achieve policy goals.

Incluside Growth

Poverty Eradication

Sustainable Development

For

Collect More Spend Better

2 COLLECT MORE

Objective:

Closing the tax policy gap and tax compliance gap by increasing the efficiency, effectiveness, fairness and transparency of DRM and tackling tax avoidance, tax evasion and illicit financial flows.

Closing the Dual Tax Gap

The tax policy gap between the tax due under a normative) tax policy and the tax due under the current tax policy structure.

Not increase the tax burden on the poor / broaden tax base / closing loopholes in tax policies / fighting tax avoidance.

The tax compliance gap between the tax due under the current tax policy structure and the tax actually collected.

Improving the efficiency and effectiveness of tax administration / reinforcing voluntary compliance and good governance / fighting tax evasion and illicit financial flows.

International drivers of the Dual Tax Gap

• 1| The behaviour of the MNE

Abusive transfer pricing, intra-company debt shifting, locating intangible assets in low tax jurisdictions; tax loopholes; treaty shopping; deferred home taxation of income earned abroad; inversion

• 2| International Governance of tax systems

Unfair tax competition negative spillovers in developing countries

Where should business profits be taxed? EU principle: is that taxation should take place in the source country where economic activity takes place.

Revenue from the Corporate Income Tax in percentage of total revenue

Source: Crivelli, E. et al., (2015), "Base Erosion, Profit Shifting and Developing Countries", IMF Working Paper (WP/15/118), page 4

Corporate Income Tax Rates, 1980-2013

Source: International Monetary Fund, (2014), "Spillovers in International Corporate Taxation". IMF Policy Paper, page22.

Revenues from Natural Resources, 2011

Source: Lemgruber, A. and Shelton, S., (2014), "Revenue Administration: Administering Revenues from Natural Resources—A Short Primer", International Monetary Fund Fiscal Affairs Department – Technical Notes and Manuals, page 4.

Domestic Drivers of the Dual Tax Gap

• Political constraints – lobbies, corruption,…

• Administration constraints – draining of skilled personnel, lack of tax collection infrastructure, need to update IT systems,…

• Economic dimension – narrow tax base, weak administrative capacity, informal sector, tax exemptions, tax incentives,…

3 SPEND BETTER

Objective:

Improve the efficiency and effectiveness of public expenditure and financial accountability systems by addressing three important areas:

• investment expenditures,

• public procurement and

• debt management.

1| Curtailing costly and ineffective expenditures subsidies = unproductive spending, inefficient, costly, usually fail to reach the target population 2| Improving efficiency of public investments public procurement IMF estimates the average inefficiency in public investment across countries at around 30%.

Energy Subsidies by Region and Energy Product, 2013

Source: Coady, S. et al., (2015), "How large are the energy subsidies?" IMF Working Paper (WP/15/105), page 23.

• Debt Financing

• Debt-to-GDP ratio at manageable levels >> quality of public investment and sound debt management, based on a debt strategy that aims at raising the required amount of funding at the lowest possible cost, consistent with a prudent degree of risk.

• Partnerships with the private sector (such as public private partnerships or PPPs) longer

term benefit is dependent on efficiency gains.

4 EU RESPONSE

• Lead by example: at the EU Internal Market level several legal and regulatory initiatives have been taken forward recently that address good governance in tax matters at the EU level.

• Global partnership: To successfully develop international cooperation and global solutions, it is essential

1) to include the perspective of developing countries and ensure that their specific needs are integrated in the international standards setting and

2) to provide technical assistance and capacity building.

EU reaction to the Addis Tax Initiative

1. International standards to improve tax good governance

2. Transfer pricing legislative and regulatory frameworks

3. Tax good governance

4. Coordination amongst key players

5. Revenue statistics.

6. Fiscal assessment tools.

7. Transparency and accountability in the extractive industry sector.

8. Effectiveness and efficiency of public expenditures.

9. Efficiency in public investment and public procurement.

10. Sustainable debt management.