Taxation of Government-to-Government Aid Projects

Developing countries generally need to broaden their tax base as part of their efforts to mobilize domestic resources to invest in the Sustainable Development Goals. Yet, the proliferation of special tax exemptions, including tax exemptions related to government-to-government aid projects, poses a serious obstacle to broadening the tax base. Donor countries are increasingly conscious of the difficulties that special tax exemptions for aid projects create for the tax authorities of developing countries. A number of them have reconsidered their policy in this area. 

The International Conference on Financing for Development held in Addis Ababa in August 2015 recognized that the pursuit of domestic resource mobilisation was central to achieving the 2030 Agenda for Development. It also welcomed continued efforts to adhere to agreed principles of effective development cooperation and, in that respect, emphasized the need to consider not requesting tax exemptions on goods and services delivered as government-to-government aid.

The issue of the tax treatment of government-to-government aid projects has been on the agenda of the United Nations Committee of Experts on International Cooperation in Tax Matters since the Committee’s first session (Geneva, 5-9 December 2005). The Addis Ababa Action Agenda and shared commitment to a global partnership for sustainable development gave new impetus to the work in that area and enabled the Committee to finalize and adopt, in 2020,  a set of Guidelines on the Tax Treatment of Government-to-Government Aid Projects.

These Guidelines, which are the result of multi-stakeholder discussions, address various considerations that should be taken into account when determining whether such exemptions should be requested.  They also provide guidance on the negotiation of any tax provisions related to government-to-government aid projects, the scope and implementation of these provisions, as well as the need for transparency in this area.

The Guidelines aim overall to assist donors and recipient countries in determining the appropriate tax treatment of government-to-government aid projects by facilitating their discussion of this issue.

The Committee also adopted a Recommendation on the Public Disclosure of Provisions Concerning the Tax Treatment of Government-to-Government Aid Projects. That recommendation, adopted at the same time as the Guidelines, supports the Guidelines and emphasizes the importance of transparency with respect to tax provisions related to government-government aid projects.