by Angel Gurría
13 July 2015
We are at a turning point. For the first time, we have the real possibility of ending abject poverty and laying the foundations for sustainable prosperity. This is the promise that must drive the ambition of the global community when it gathers in New York in September to agree the Sustainable Development Goals and, later, when it meets in Paris to strike an agreement on climate change at COP21.
That ambition should also be uppermost in the minds of delegates to the International Conference on Financing for Development (FfD) in Addis Ababa in July. But it must be allied to a tight focus on the concrete action that is already being taken – and that could be taken – to ensure the world’s poorest countries have the resources they need to meet their development and climate goals.
It is clear that aid alone will not be enough. This is despite the fact that official development assistance (ODA) now stands at historic highs, demonstrating the continuing commitment of advanced economies to meet development goals. Encouragingly, the past few years have also brought increasing support for developing countries from China, the Arab states, and Latin America.
But even if combined flows of aid and investment to developing countries have never been higher, they are still not enough. This is why developing countries must get better at mobilising their own financing, both through improved tax collection and increased domestic investment. And this, as the work of the OECD has shown, is an area where aid and global partnerships can make a huge difference.
Take taxation. As a percentage of GDP, developing countries raise only half what OECD countries collect in tax: around 17%, vs. 34%. What happens to the tax that isn’t collected? Much of it is lost abroad in illicit flows. Developing countries also lose tax revenue from aggressive tax planning by multinational corporations. This cannot go on. Those who owe taxes must pay them. But there is also the broader issue of the relationship between governments and the people they govern. In that relationship, taxation is key to promoting a shared interest in economic growth and prosperity, improving accountability and strengthening public administration.
The OECD is working with partners to address these issues on several fronts. The global standard for Automatic Exchange of Information (AEOI) for tax purposes is contributing to the fight against tax evasion. The Global Forum on Transparency and Exchange of Information for Tax Purposes, which now has 126 member countries, works with developing countries to ensure they can implement and benefit from the automatic exchange standard. In the OECD/G20 Base Erosion and Profit Shifting Project (BEPS), we are addressing loopholes in international tax rules that allow multinational companies to artificially shift profits to low or no-tax jurisdictions. The engagement of developing countries has already proved invaluable in this effort. The design of the BEPS Action Plan drew directly on input from more than 80 developing and non-G20/OECD countries.
Looking ahead, it is clear that many developing countries will require capacity support to participate fully in BEPS work. To that end, the OECD has worked with the United Nations Development Programme to develop an exciting new programme that will be formally launched at the Financing For Development conference. Tax Inspectors Without Borders will enable developing countries seeking audit expertise to connect with tax administrators from other countries. Joint teams will operate under local leadership in each country, developing capacity where it is most needed. Results are already being reaped from our pilot phase. In Kenya, for instance, each dollar of technical assistance provided has resulted in around a thousand dollars in additional tax revenue.
We are also encouraging our partners in the Development Assistance Committee (DAC) to invest more in the development of tax administrations in developing and emerging economies – relatively small investments that can bring enormous returns. For example, in the Philippines, donor support of just $500,000 for tax reforms yielded additional tax revenues of $1.18 billion in 2012.
Of course, tax is only part of the financing mix. Private investment is also key. It already represents the largest source of international capital flows to developing countries, and that share is likely to rise in the years to come. The quantity of such investment matters, but so too does the quality. To ensure such investments deliver maximum social, economic and environmental benefits, the right framework needs to be in place. That is why the OECD has just updated its Policy Framework for Investment, which provides a checklist for 12 policy areas related to investment, including taxation, corporate governance and investment in support of green growth. This last area will be of particular significance if we are to meet climate change goals.
There is also a role for aid in driving investment. As my colleague Erik Solheim, Chair of the OECD DAC, has noted, by reducing the risks facing investors, development assistance can mobilise extra private investment, for example by combining public with private investments. The European Union was able to use around €2 billion in aid to mobilise around €40 billion in investment in infrastructure projects in recipient countries.
The success of so many developing countries in mobilising domestic financing for development should give us all great encouragement about the potential to do even more. As the global community gets ready to set out its development and environment goals over the next few months, the OECD stands ready to support developed and developing countries in ensuring they have the resources needed to meet their ambitions.