The Addis Agenda emphasises that States should improve the fairness, transparency, efficiency and effectiveness of tax systems, including by broadening the tax base and continuing efforts to integrate the informal sector into the formal economy.
A country may broaden the tax base on two main fronts: broadening the base on which corporate or personal income taxes are applied or increasing the incidence of indirect taxation. In general, as shown in the figure, middle-income countries rely more heavily on indirect taxes (general goods and services taxes) and corporate income taxes, while LDCs and SIDS place more importance on indirect taxes and trade revenue. Developed countries continue to have greater proportions of personal income and goods and services taxes. An increase in indirect taxation, for example through increasing value-added taxes or reducing exemptions, can provide scope to easily increase the revenue collected. Although resource-rich countries rely less on income and consumption taxes as a source of revenue, the institutional framework for taxation remains important. Commodity exporters are sometimes exposed to higher fiscal risks because of the high volatility of revenues associated with resource extraction and the propensity towards boom-bust economic cycles. However, indirect taxation can be regressive by taxing lower-income consumers proportionally more. The balance of the approach should depend on country circumstances, taking into account the specifics of the country’s economic and institutional framework.
Countries on every economic group have been increasing the indirect tax base and rate. The value of goods and services taxes collected by developing countries has generally increased over the past decade, particularly in LDCs, as shown in the figure. shows the increase in the revenue realized from on goods and services for various country groups. The increasing reliance on these types of indirect taxes has important implications for the progressivity of tax systems.
The intersection of tax policy and tax administration with the digitalization of the economy can be characterized as a series of small innovations being patched onto an institutional framework that is not sufficiently updated to take advantage of the opportunities or counter the risks presented.
Automated information systems can improve compliance, widen the tax base, and enable revenue authorities to more quickly and easily identify and mitigate risks related to tax avoidance and evasion, staff, technology and processes. Other possible benefits include improving government service delivery and levelling the playing field for taxpayers. They can also make enforcement more effective by enabling revenue authorities to share information across borders. For example, one estimate of seven major developing and emerging economies finds that digitizing payments can lead to direct savings between 0.8 and 1.1 per cent of GDP on an annual basis, with about 0.5 per cent of GDP accruing to government.
Both the 2030 Agenda and the Addis Agenda include commitments to increasing investments in gender equality and women’s empowerment. Taxes are a primary source of financing public services, which are of particular importance to women because they can reduce unpaid care and domestic work. Gender bias in taxation, while an outgrowth of broader bias in society, also reinforces persistent inequalities. Explicit gender bias is the existence of specific provisions in tax law or regulations that impose different rules on men and women. Implicit bias is the existence of provisions in tax law or regulations that consistently have different impacts on men and women.
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Tax and domestic resource mobilization policies can reinforce and/or perpetuate discrimination in ways that undercut women’s access to decent paid work and income security; reinforce women’s role in providing unpaid care; and limit women’s access to productive assets, wealth and other economic opportunities. For example, a tax that directly or indirectly discourages women from seeking formal employment can threaten women’s income and participation in the labour force.
As shown in the figure, developing countries have seen a rising amount of revenue as a share of GDP raised through goods and services taxes, which includes VAT. Given women’s overrepresentation in low-income groups, they bear disproportionate burdens of indirect taxes and consumption taxes. Recent research has also looked into the range of other ways that authorities raise revenue, including presumptive taxes and fees, particularly those assessed at the subnational level. These may also have implicit gender bias and subnational authority efforts to raise own-source revenue should take this into account.
Tax systems and tax policy can be used as powerful tools in addressing inequality, including gender inequality. To be gender responsive, tax policies and the tax mix adopted by a Government can be structured in a progressive manner and designed to reduce implicit bias. A gender analysis of personal income tax should consider four main issues: (i) insufficient tax relief for minimum basic living costs; (ii) the impact of shifts to flat-rate personal taxation; (iii) joint taxation of adult couples; and (iv) the tying of social benefits to income. Overall, however, there is very little internationally comparable sex-disaggregated data on tax system performance and impacts, underscoring the need for more sex-disaggregated data on fiscal systems.
Countries experiencing situations of conflict and violence face some of the most pressing challenges to achieving the SDGs. The Task Force has previously noted that there is increasing evidence that countries with tax revenues below 15 per cent of GDP have difficulty funding basic state functions. An IMF study of conflict-affected countries shows that the average tax revenue-to-GDP ratio in 39 States was below 14 per cent during 2005–2014 compared to 19 per cent in other developing countries.
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Research conducted in the last two decades points to weak institutional development, particularly in terms of legitimacy, approaches, and practices in conflict-affected countries. In conflict-affected situations, citizens typically have no or low trust in state institutions. The overarching goal is to stop or prevent violence and restore citizen trust. To achieve this goal, legitimacy is important. Redistributive institutions (e.g., revenue, expenditure, and social transfer entities) can help create incentives for individuals, groups and Governments to refrain from using violence. Increasing the mobilization of domestic resources can enhance accountability and thereby state-building, particularly if such efforts are explicitly linked to the provision of public goods [http://www.worldbank.org/en/publication/wdr2017#]. Developing fiscal capacity is particularly important for conflict-affected countries, as the functioning of other State institutions, and the resultant service delivery, depend on the ability to finance them. Yet, tax and other revenue-raising functions tend to receive less attention compared to the attention paid to political institutions by the international community.
Mobilizing greater tax revenue depends on efficient and effective domestic tax administrations, which are frequently not present in conflict-affected situations. Often, an approach other than “best practice” is required in conflict-affected states. Policymakers may need to develop implementable second-best solutions. In this regard, conflict-affected countries rely more on trade taxes as a source of revenue, and are less diversified than non-conflict affected countries. Considerable attention is often paid to reforming the tax administration in conflict-affected countries, while customs administration is considered secondary. One general lesson from international organization experience is that more attention needs to be paid to reforming and strengthening customs administration and enforcement—especially when revenue from taxes at the border is significant. Improvements to customs administration are also critical to contribute to global public goods in many areas, such as mitigating corruption, combatting money-laundering and terrorist financing, combatting drugs and human trafficking, protecting the environment, and trafficking of cultural property, among others.
Aside from changing the balance in taxation, new taxes can also be developed at both the national and subnational levels. New indirect taxes may be applied, for instance on digital activity, which would be a way to levy a tax on the transaction even when the entity providing the service does not have a fixed place of business in the country where the final sale takes place. Taxing digital activities either through the introduction of a new tax and taxable event, or by bringing to tax digital business models under the anti-avoidance regulations, has become a trend in several countries.
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A number of countries amended their anti-avoidance regulations to capture transactions structured so as to avoid establishing a tax presence (i.e. permanent establishment) in the country concerned. One developing country introduced a new levy in 2016 aimed at taxing the profits of internet advertising providers that earn income through sales in that jurisdiction without having a permanent establishment for tax purposes. Two other countries introduced a diverted profits tax, whereby tax payers are charged a higher corporate tax rate on profits generated in that country but artificially shifted overseas. This tax is outside the income tax system and not covered by the terms of bilateral tax treaties, meaning there is no corresponding relief for the tax charged. Another country has introduced legislation on tax avoidance by MNEs, and has levied GST on offshore supplies of digital products and services. Another country introduced a consumption tax on digital transactions. It is applicable on distribution of e-books via the internet, downloading music or video, use of online software, e-commerce (online space to sell products), online advertisements, and consulting services rendered continuously through phone or email.
Countries around the world have implemented or are considering the implementation of measures to collect the VAT on the ever-rising volume of internet sales, including sales of digital products, by overseas sellers. A number of European countries, as well as others, have adopted new regulations in order to better tax digital transactions from overseas sellers under their domestic VAT / GST laws. One has passed legislation that requires domestic companies to purchase their Internet ads only from locally registered companies. This rule would require foreign internet advertising providers to have a presence in country in order to sell advertising.
Environmental taxes, such as carbon taxes, can also be applied (see separate section on energy taxation). Excise taxes are another example of taxes that have been successfully applied in some countries with the intent of raising revenues. Governments may also choose to introduce a property tax if they do not already have one, or improve the effectiveness of existing property tax systems.
The Tax Policy Assessment Framework (TPAF) is being developed jointly by the World Bank and the IMF to assess the performance of tax policy in developing countries in a systematic and standardized manner. Through application of a comprehensive set of performance indicators, TPAF will allow the identification of relative strengths and weaknesses in tax policy-related systems, processes, and institutions. Based on the assessment, actionable reform programs can be designed, building a common understanding of a given country’s priorities in the tax policy area. TPAF’s aim is to identify tax policy bottlenecks, priorities, and sequencing of a reform, which can serve as valuable information for all stakeholders, including country authorities, international and regional organizations. TPAF is currently at a design stage and has yet to be implemented in the field.