Regional : Establishing a Regional Hub on Domestic Resource Mobilization and International Tax Cooperation

Multisector / ADB's corporate management, policy and strategy development

ADB's Strategy 2030 recognizes the importance of revenue mobilization through OP 6 on strengthening governance and institutional capacity, and the Anticorruption Policy on Enhancing the Role of the Asian Development Bank in Relation to Tax Integrity. Given ADB's long-standing experience and partnership with DMCs and development partners across Asia and the Pacific and strong convening power, ADB will further enhance its efforts on DRM and ITC as one of the keys to enhancing successful achievement by its DMCs of the Sustainable Development Goals (SDGs) in a world reshaped by the coronavirus disease (COVID-19).

In 2020, the COVID-19 pandemic has caused a multidimensional health and economic crisis. With only a decade left to achieve the SDGs, the pandemic threatens to reverse years of progress. Before the pandemic, the financing gap for developing countries worldwide to achieve the SDGs was estimated at $2.5 trillion to $3.0 trillion annually. The Economic and Social Survey of the United Nations Economic and Social Commission for Asia and the Pacific found that developing countries in Asia and the Pacific would need $1.5 trillion annually to end extreme poverty and ambitiously move toward universal health coverage, quality education, and infrastructure while staying on track to limit climate change. However this amount will likely increase because of the impact of COVID-19. While the role of external finance is crucial in filling the fiscal gaps of DMCs, strengthening DRM is key. DMC tax yields have not increased concomitantly with the strong and steady growth in gross domestic product over the last decades. Even prior to the pandemic, many DMCs did not achieve a tax yield of 15% of gross domestic product -- now widely regarded as the minimum level required for sustainable development -- because of a narrow tax base and low tax administration capacity in general. For countries to finance their SDGs, and to promote medium-term fiscal sustainability, greater effort in increasing tax revenues will be required. This TA will be specifically aligned to SDG 17 (Strengthen the means of implementation and revitalize the global partnership for sustainable development).

ADB's DMCs can only achieve the SDGs if they develop and implement an ambitious program to mobilize substantial additional financial resources. Many governments will have to carefully consider their next steps in economic and public policy reform, in particular, on how to transition their government budgets from pandemic relief to recovery and, eventually, to providing their citizens with more equitable, sustainable, and reliable access to essential services. Increased mobilization of domestic resources would not only reduce the need to issue domestic debt but also address possible overreliance on external debt, which may undermine the use of fiscal and monetary policy to support domestic economies. In developing the program to mobilize substantial additional revenue, the following reforms will be critical: (i) broadening the domestic tax base, (ii) enhancing tax compliance, and (iii) developing more transparent and efficient tax administration with digital technologies. It will also require ensuring that tax policy promotes investment, and that private sector development leads to more inclusive and sustainable economic growth, including the SDGs. The tax policy measures, such as environmental taxes, may be leveraged to recover the strong growth trajectory and to get development goals, including SDGs and green recovery, on track. Lessons from previous TA projects point to strengthening capacity in revenue administrations. This will take on added importance in light of emerging challenges, including significant and rapid changes in the business environment (i.e., expansion of cross-border supply chains and the digital economy) and the scaling up of capacity-building initiatives.

To broaden the tax base and mitigate income inequality, DMCs should consider expanding the tax net in a manner that encourages trust among its citizens, while adopting a more progressive tax system may be a possible solution for addressing income inequality. This also means that governments should take decisive steps to address harmful tax practices, such as (i) aggressive tax planning of some multinational enterprises that exploit gaps in the interaction of different tax systems to artificially reduce taxable income derived from DMCs, a process known as base erosion and profit shifting (BEPS); and (ii) tax evasion, which happens through the exploitation of the interconnected global financial network and use of tax havens. Joining the Inclusive Framework on BEPS and the Global Forum on Transparency and Exchange of Information for Tax Purposes is a key step towards protecting national revenue against BEPS and strengthening DRM through the implementation of international standards on global transparency and exchange of information for tax purposes. In addition, DMCs should engage with the international community to address tax challenges arising from the digital transformation of the global economy, which are increasing as a result of the impact of COVID-19. Indeed, the loss of potential revenues because of a lack of a global agreement on the tax challenges arising from the digitalization of the economy are estimated at $50 billion$80 billion per year. Given the narrower tax base, the loss of revenue from a no-agreement scenario is proportionately greater for developing and emerging economies.

Subsequent economic and public policy reforms should be informed both by international standards on transparency and exchange of information for tax purposes, as well as by country-level development and fiscal needs, revenue administration, and tax and governance structures. The country-specific, medium-term revenue strategy (MTRS) is a mechanism for countries to determine a comprehensive, whole-of-government strategy for increasing tax revenues over the medium term. Complemented by a thorough communication plan, an MTRS can help DMCs attain sustainable and effective tax system reforms. MTRSs will require high-level political support over an extended period, with the revenue goals being aligned with political economy considerations. MTRSs can also serve as foundations for development coordination. To this end, DMCs, in collaboration with development partners, need to maximize regional and international resources of knowledge, expertise, and finance on DRM and ITC. A significant gap in DRM and ITC in Asia and the Pacific is the lack of a pan-regional tax community. Although there are important tax communities in Asia and the Pacific, such as the Study Group on Asian Tax Administration and Research and the Pacific Islands Tax Administrators Association, they do not provide a platform for strategic policy dialogue, and the coverage of economies are limited. To fill this gap, ADB announced the creation of a regional hub on DRM and ITC, which will serve multiple functions, including an open, inclusive, and pan-regional tax platform for (i) strategic dialogue, institutional and capacity development, and exchange of information and ideas among DMCs; (ii) knowledge sharing across knowledge partners, international finance institutions, other bilateral revenue organizations, and DMCs; and (iii) collaboration and development coordination across development partners. The regional hub will promote the SDGs and the Group of Twenty (G20) and/or Organisation for Economic Co-operation and Development (OECD) initiatives, such as the Global Forum on Transparency and Exchange of Information for Tax Purposes and the Inclusive Framework on BEPS. The hub will also assist each DMC to define differentiated DRM and ITC goals, including (i) an MTRS, in coordination with the Platform for Collaboration on Tax; and (ii) a road map for digitalization of tax administrations, which facilitates the introduction of digital tools.

DRM and ITC for supporting Sustainable Development Goals and sustaining economic recovery from COVID-19 improved (ADB Strategy 2030 Operational Plan for Priority 6)

Collaboration and knowledge sharing on DRM and ITC enhanced

Regional hub on DRM and ITC established and institutionalized

Strategic conferences and dialogues among DMCs, development partners, and ADB facilitated

Web portal on the regional hub developed

Digital solutions on DRM and ITC promoted