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REVENUE MOBILIZATION and DEVELOPMENT PITAA 2011. Graeme Ludlow IMF Fiscal Affairs Department Washington D C. Session overview An introduction to FAD, Revenue A dministration Revenue Mobilization in Developing Countries - key points from the IMF Policy Paper

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revenue mobilization and development pitaa 2011

Graeme Ludlow

IMF Fiscal Affairs Department

Washington DC

  • Session overview
  • An introduction to FAD, Revenue Administration
  • Revenue Mobilization in Developing Countries
  • - key points from the IMF Policy Paper
  • Revenue Mobilization and Development Conference - April 2011
FAD Revenue Administration Division

Provides technical assistance in tax and customs administration on request by IMF member states:

- missions to about 80 countries in fiscal 2012

- over 200 targeted assignments by technical experts

- resident advisors in an increasing number of countries

- supports 8 regional TA centers, similar to PFTAC

- about 60 percent of TA is externally financed – under regional & country-specific programs , and

two multi-donor trust funds

FAD Revenue Administration Division
  • Technical Notes:
  • Developing a Compliance program
  • Performance Measurement in Tax Administration
  • Autonomy and the Revenue Authority Model
  • Toolkit for Implementing a Revenue Authority
  • Functionally Organized Tax Administration
  • Managing the Shadow Economy
  • Tax Administration in Small Economies
  • Taxpayer Audit – Use of Indirect Methods
  • Taxpayer Audit – Development of Effective Plans
  • Designing and Developing a Domestic Law to Implement a Tax Treaty
Revenue Mobilization in Developing Countries

- IMF Policy Paper, March 2011

“Improving revenue administration is essential for enhanced and fairer revenue mobilization and for wider governance improvement; though success is hard to evaluate”

Success with wide ranging administration reforms has been mixed:

Examples –

Impressive Limited Sustained Stagnated

Mozambique DR Congo Bolivia Guatemala

Peru Haiti Ghana Honduras

Rwanda Nicaragua Uganda Zambia

Tanzania Sierra Leone

Revenue Mobilization in Developing Countries

- IMF Policy Paper, March 2011

  • Many organizational changes have been constructive .........
    • Functional structures
    • Strengthened headquarters
    • Merged direct and indirect tax management
  • But others not so successful..............
    • Revenue authorities often have not met expectations:
      • Can divert attention from function to structure
      • Have had limited impact on reducing corruption
      • Often have delayed substantive procedural reforms
Revenue Mobilization in Developing Countries

- IMF Policy Paper, March 2011

  • Segmentation has enabled better resource allocation and risk management, for some...............
    • Large taxpayer functions (up to 70–80% tax revenues)
    • Medium, small, micro taxpayers – different levels of revenue risk and therefore different approaches
    • High wealth individuals
    • Specialist resource tax functions in some countries
  • Patchy and often disappointing IT system development.....
    • More successful in routine business processes
    • Less successful in ex post controls (audit, enforcement, appeals)
    • Limited connectivity /interface with customs systems
    • Limited connectivity/interface with Treasury/PFM systems
Revenue Mobilization in Developing Countries

- IMF Policy Paper, March 2011

  • Compliance costs remain high in many developing countries.........
  • (Doing Business, 2011)
  • Income group Payments/ year Hours/year
  • Low 38 295
  • Lower middle 35 359
  • Upper middle 31 272
  • High 15 172
  • ............but many still suffer from under-resourcing, misallocation , and weak mid level managerial skills...........
    • Inadequate budgets, staff shortages, low technical capacity
    • Low management skills, inadequate management systems
    • Resources misapplied to low yield activities
Revenue Mobilization in Developing Countries

- IMF Policy Paper, March 2011

  • Most developing countries have developed a VAT
Revenue Mobilization in Developing Countries

- IMF Policy Paper, March 2011

  • A VAT can catalyze improvements in broader tax administration BUT flawed design and implementation can undermine effectiveness
  • Examples -
    • Low (or no, eg Nigeria) threshold
    • Extensive exemptions and zero rating
    • Inadequate/rushed preparations – not enough public sensitization
    • Weak compliance and enforcement (eg, registration, audit)
    • Refunds a particular problem:
      • Processing delays, including for corrupt purposes
      • High risk of fraud, but under-developed detection
  • Resulting in low VAT productivity , despite relatively high rates
Revenue Mobilization for Development Conference

Taxation as “state building” and the quality of revenue management are now prominent in the debate on development cooperation, eg:

Doha Declaration on Financing for Development (2008):

“........enhance tax revenues through modernized tax systems, more efficient tax collection, broadening the tax base and effectively combating tax evasion............”

OECD Informal Task Force on Tax and Development (2010):

“.......the central role taxation plays in development and poverty reduction, a strong tax system is the heart of a country’s financial independence, its revenues are the lifeblood of the state itself.........”

“.......taxation is more than just about revenue mobilization. The way in which revenues are collected and spent defines the symbiotic relationship between the state and its citizens, strengthening the former and making it more accountable to the latter....”

Revenue Mobilization for Development Conference
  • The challenges ahead –
  • Consolidation (eg, structure, segmentation, self assessment)
  • Continued fundamental process improvement
  • Resources, managerial and technical skills
  • Inter-agency coordination (customs, ministries, others)
  • Compliance strategies – risk based, results measured
  • Corruption – political and institutional leadership is critical
  • Greater capacity – risk assessment, revenue analysis
  • Stronger legal powers and the confidence to use them
  • Political support – an holistic view (eg, fewer exemptions, incentives, amnesties; and reduced complexity)
  • J. Toro, Division Chief, Revenue Administration Division
Revenue Mobilization for Development Conference
  • The political economy of tax reform –
  • Traditional adviceAlternative vision
  • Strategic, opportunistic: Mobilize public support:
  • Avoid powerful interests and - Envision equity,
  • political controversy transparency,
  • inclusiveness
  • W. Prichard, International Center for Tax and Development

Tax reform








Revenue Mobilization for Development Conference
  • Kenya: a developing country perspective –
  • Revenue mobilization is crucial for creating fiscal space to finance important priority developments
  • But creating fiscal space from revenue effort is a challenge in a number of developing countries because:
    • Structures of economies can affect revenue efforts
    • Increasing complexity of tax codes: many amendments
    • Narrow tax bases: large informal sector, wide tax evasion
    • Tax policy design: many exemptions & incentive regimes
    • Institutional constraints : resources, capacity, etc
Revenue Mobilization for Development Conference
  • Kenya : a developing country perspective on policy design –
  • Need innovative/new sources of additional revenues , eg –
    • Simplified regime for small taxpayers & informal sector
    • Expanded urban property and capital gains taxes
    • Land taxes to raise revenue, discourage speculation &
      • enhance economic productivity
    • Investment in environmental conservation, carbon credit financing as a revenue source
  • “ There is more scope to raise revenue but political commitment to tax policy reforms is imperative “
  • H. Rotich, Deputy Director Economic Affairs, Ministry of Finance
Revenue Mobilization for Development Conference
  • Georgia: a case study in tax reforms –
  • Phase I: 2004-2007Phase II: 2007-2009
  • Fight against corruption Improving institutional capacity
  • Eliminating red tape Collection enforcement reforms
  • Deep cuts Further reduction of tax burden
  • Basic institutional changes
  • Phase III: 2010-2011
  • Deep and comprehensive policy reform
  • Finishing customs reforms
  • Prioritizing services
    • Sharply reduced compliance costs through IT enhancements
Revenue Mobilization for Development Conference

Georgia: a case study in tax reforms –

Before After

Number of taxes 22 6

Potential tax revenue % GDP 40-45% 28-30%

Actual tax revenue % GDP 15.6% 23.4%

Compliance Rate 35% 78-85%

“ Effectively functioning public institutions and rule of law led to a dramatic reduction of informal activities “

R. Kemularia, Deputy Minister of Finance

Revenue Mobilization for Development Conference
  • Tax reforms for small and medium businesses -
  • Tax rates and tax administration consistently ranked in the top 5 constraints to businesses, across all regions
  • The cost of compliance is higher for small firms than larger
  • Informal payments impact more heavily on small firms
  • Which encourages them to stay in the informal sector
  • And thereby impacts on their growth......and government revenues.....and transfers the economic costs to compliers
  • But an SME tax regime can have benefits, eg:
    • small business access to formal (bank) finance
    • opportunities to bid for government contracts
    • sales to purchasers who prefer VAT registered suppliers
    • limit the need to artificially (illegally?) stay “small”
Revenue Mobilization for Development Conference
  • General guidelines for SME tax design –
  • Compliance costs must be low
  • Administration costs must not be excessive: the revenue potential is low
  • Ideally based on self assessment & risk-based verification
  • Needs to encourage business growth & therefore increased economic impact
  • But need safeguards against abuses
  • And distinguish between formal SMEs and subsistence enterprises (micro businesses)
Revenue Mobilization for Development Conference
  • Some key issues in SME tax design –
  • What is “small” ?
  • What safeguards will deter larger enterprises in disguise?
  • How much compliance activity, given low revenue?
  • How should the system align with the standard tax regime?
  • How can it be demonstrated to be fair and transparent?
  • What incentives will encourage book and record keeping?
  • How to avoid under and over taxing SMEs?




SME tax reform



Rules & Regs



Revenue Mobilization for Development Conference
  • Lessons learned –
  • Mostly MoFs pushing SME regimes but tax dept. must be involved
  • Abuse by larger firms in many countries – countermeasures required
  • Lack of reliable data complicates system design
  • Learning from other country successes is helpful – not only what they did but why they did it
  • Estimate turnover based on indicators, and profit margins based on turnover, in presumptive regimes
  • Develop guidelines for tax accounting rules design
  • R. Awasthi, Investment Climate Advisory Services, IFC