WASHINGTON: The World Bank and the International Monetary Fund are launching a new initiative to help developing countries strengthen their tax systems, says an official announcement.

Analysis associated with the two institutions suggests that many lower-income countries have the potential to increase their tax ratios by at least 2 to 4 per cent of their GDPs, without compromising fairness or growth. Raising additional revenues will allow developing countries to fill financing gaps and to promote development.

Pakistan is top on the list of the countries that need to reform their tax systems. In a recent statement, the IMF mission chief in Pakistan urged the rulers to broaden the country’s tax base.

The country’s tax-to-GDP ratio stood at 9 to 10pc of GDP, which, the IMF believes, should be increased to 15pc over the medium term to protect spending on high priority areas, including the social sector.

In 2011, the Federal Board of Revenue disclosed that in a country of almost 200 million, only 1.7 million were registered income taxpayers. There has been no major change in the last five years.

The World Bank-IMF’s offer to help developing countries improve their tax systems comes ahead of the “Financing for Development” conference in the Ethiopian capital Addis Ababa next week, at which heads of state, CSOs, multilateral institutions and private sector representatives will discuss how to scale up finances to meet the Sustainable Development Goals (SDGs).

“A strong revenue base is imperative if developing countries are to be able to finance the spending they need on public services, social support and infrastructure,” said IMF Managing Director Christine Lagarde. “But experience shows that with well-targeted external technical support and sufficient political will, it can be done.”

“We very much want to help developing countries raise more revenues through taxes because this can lead to more children receiving a good education and more families having access to quality health care,” said World Bank Group President Jim Yong Kim. “If everyone pays their fair share — even while challenging the status quo — developing countries can close their financing gaps and promote inclusive growth.”

Responding to country demands, the IMF-World Bank initiative has two pillars: deepening the dialogue with developing countries on international tax issues, aiming to help increase their weight and voice in the international debate on tax rules and cooperation; and developing improved diagnostic tools to help member countries evaluate and strengthen their tax policies.

This builds on the World Bank’s current tax programmes in over 48 developing countries and the IMF’s technical assistance projects in over 120 countries.

By further leveraging their collective expertise, the Bank and the Fund aim to play a fuller role in helping all of their member countries achieve the ambitious goals that the world will be setting for itself later this year in New York.

Bringing the voice and interests of developing countries, particularly those too small to play a role at the G20 level, into the debate on international tax policy issues is a key priority for the Bank and the Fund.

The initiative will deepen the institutions’ ongoing collaboration with developing countries to identify key international tax policy concerns and potential solutions, both at the country level and in the context of the continuing international dialogue.

The institutions also plan to strengthen their diagnostic tools, developing new methodologies where needed, to enable member countries to identify priority tax reforms and design the requisite support for their implementation. This effort would complement the launch of the Tax Administration Diagnostic Assessment Tool (TADAT) in November.

In September 2013, the IMF agreed to lend $6.8 billion to Pakistan over three years under an arrangement that required the country to undertake major reforms, such as cracking down on tax evasion and privatising loss-making state companies.

Last week, the IMF issued the seventh review of this 36-month arrangement, which noted that Pakistan had missed indicative target on federal tax revenue by a small margin. This reflected legal challenges to some of the tax measures and the negative impact of lower global commodity prices.

The report, however, noted that Pakistani authorities had taken action to improve revenue and remained on track to meet their next fiscal deficit target.

The report also noted that Pakistan had met the end-March 2015 structural benchmarks, which also required it to draft legislation to remove the authority to grant new administrative tax exemptions and to conduct a review to simplify tax payment processes.

Going forward, Pakistani authorities proposed a new income tax on accumulation of arrears in the power sector and a new benchmark for tax administration.

Published in Dawn, July 12th, 2015

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