Background Note
Enhancing domestic revenue mobilization in a reformed international financial architecture

1    Introduction 

Domestic tax systems are the foundation of the social contract, where taxpayers contribute to societal welfare and governments provide essential public goods and services. Taxation is crucial for financing state operations. However, in today’s increasingly globalized and digital economy, strong international tax cooperation is essential to ensure that domestic tax systems function effectively and maintain their integrity.

The International Financial Architecture (IFA) and tax systems are closely interconnected, impacting one another significantly. Governments can plan and implement effective tax policies more successfully when there is economic stability. Predictable tax revenues depend on strong tax administration, efficient collection processes, and stable economic conditions. The IFA plays a critical role in promoting global economic stability.

The high levels of sovereign debt present in the global economy today can restrict fiscal flexibility, limiting governments' ability to adopt tax policies which are sustainable and equitable. Effective debt management is a vital aspect of the IFA. 

The lack of global tax cooperation and ongoing international tax abuse has hindered governments from implementing effective, progressive taxes that could reduce inequalities, especially regarding wealth and corporate income. In a recent study, experts estimated that close to USD 1 trillion in profits were shifted to tax havens in 2019, a fourfold increase since 1975. At the same time, the average corporate tax rate globally fell from 40% in 1980 to 23% by 2023, a decline of over 15 percentage points. Governments are increasingly moving away from taxing corporate profits, opting instead for consumption taxes like value-added tax (VAT), which has a high risk of being regressive, thereby worsening inequalities and disparities.

The recent and ongoing cuts to Official Development Assistance (ODA) further increase the relevance and importance of Domestic Resource Mobilization (DRM) in developing countries, critical for both the Financing for Development process and reforming the IFA. Weak Foreign Direct Investment (FDI) inflows and limited access to capital markets—due to weak credit ratings and high debt overhangs—further make DRM a pressing issue.  

Similarly, the need for financing to meet the Sustainable Development Goals (SDGs) and enable the climate transition is more important than ever. If we see domestic tax and the public debt as the two pillars for financing development, under the current constraints that developing countries face on the external front, the domestic pillar becomes the main vehicle for mobilizing resources. For the domestic pillar to play this key role, strengthening the capacities of revenue authorities and using tax instruments actively becomes an even more essential part of IFA than was previously the case. This enhancement underscores the importance of international tax cooperation in ensuring that developing nations can effectively combat tax evasion and achieve equitable economic growth.

International cooperation and coordination on tax policies must continue to be supported by a reformed IFA. Such collaboration is crucial for preventing tax evasion and avoidance, which enables countries to gather the necessary revenues for development. Initiatives that ensure multinational corporations pay their fair share of taxes in the jurisdictions where they operate demonstrate the benefits of international tax cooperation. When the IFA promotes fair financial practices, it creates an environment that supports equitable tax policies. In contrast, unfair tax systems can deepen global inequalities.

International financial institutions—such as the World Bank and the IMF—are vital in helping countries strengthen their tax systems and improve revenue collection through technical assistance, capacity building, and financial support. This assistance is essential for mobilizing domestic revenues, which are critical for funding public services and driving development.

There is broad agreement that the current framework for international tax cooperation needs substantial improvements to effectively tackle tax avoidance, evasion, and other illicit financial flows. These practices drain vital resources from nations that could otherwise be invested in sustainable development. In this Background Note, I explore international tax matters such as transparency, digital economy, and cross-border taxation before covering tax administration, non-compliance, and data, drawing from various inputs on tax and IFA.

2    Enhancing international tax cooperation

The IFA is closely associated with international tax collaboration. The existing global tax system, such as BEPS and Pillar 2, has not kept pace with globalization and digitalization, leading to high tax avoidance, tax evasion, and illicit financial flows. This puts substantial pressure on domestic tax administrations, particularly in developing countries. The international tax system requires reform to catch up with the globalization of economic production and the digital future of taxation, while being more inclusive and effective at benefitting developing countries.

The Global South has spearheaded a prolonged initiative to establish a central role for the UN in crafting global tax legislation. This initiative seeks to introduce a global tax on international capital movements and the coordination of taxes for multinational corporations. The process has brought together some countries, such as the Africa group, while simultaneously showing the vested interests in the governance of international finance.   

The UN Framework Convention on International Tax Cooperation represents progress. However, the negotiations are high stakes, especially on issues concerning the capacity to levy taxes on crucial sectors like digital services and international capital flows, the opportunity to impose taxes on multinational enterprises, and effective dispute resolution. Improved global tax coordination fosters a fairer distribution of global resources and enhances the impression that everyone contributes their fair share to the development effort. It also serves as an approach to look beyond official development assistance (ODA) to finance development.

The UN has also emphasized prioritising AI and data in international tax cooperation to create a more inclusive and equitable global tax system. Developments such as data, capacity, and AI are helpful for both domestic and international tax collection. I look at three aspects below: transparency, digitalization, and taxation.

2.1    International cooperation’s role in improving transparency

Effective implementation of international standards requires jurisdictions to exchange information for tax purposes. There has been progress in this area in the past 15 years, but much remains to be implemented in low and middle-income countries. Experts from the Global South point to major gaps. The current Automatic Exchange Information System provides insufficient details, particularly regarding ownership information, which limits tax authorities’ ability to reduce tax abuse. 

Global tax transparency and information-sharing frameworks benefit all countries. Experts recommend maintaining public registries on beneficial ownership—information on who enjoys the benefits of ownership such as income streams and voting rights—to enhance transparency and reduce tax abuse by the ultra-wealthy. UN experts also suggest that countries should strengthen beneficial ownership transparency systems by ensuring broader coverage, automated verification, and the publication of information. Such registries would advance efforts to tax high-net-worth individuals and multinational enterprises. 

Tax transparency and information exchange, along with stronger public accountability mechanisms, can improve enforcement of income and wealth taxation. To build public trust and uphold the rule of law, it is also important to enhance the capacity of revenue authorities to tackle tax evasion and illicit financial flows. Some also advocate for the inclusion of enforceable transparency standards in the UN Tax Convention.

2.2    The future of tax reform in a digital era

To improve global tax standards amid increasing digitalization and globalization, an inclusive approach is essential—one that considers the needs and capabilities of developing countries alongside other stakeholders. Implementing taxes on digital services is critical for capturing revenue from digital business models that often evade traditional tax frameworks. This initiative seeks to establish a fairer tax environment that aligns with the realities of today’s economy. 

Experts recognize that the existing tax architecture relies on principles that do not adequately address the challenges posed by digital business models. To support developing countries in combating tax base erosion and profit shifting, straightforward solutions must be developed. These countries tend to favour more uncomplicated strategies, such as digital services taxes or withholding taxes, over more complex alternatives. Although achieving this simplification is challenging, it is essential for enhancing the effectiveness and sustainability of the international tax system, benefiting all stakeholders. Therefore, advocacy for simplifying global tax rules is crucial to under-resourced tax administrations in developing nations.

2.3    Changing international standards without discouraging growth

The prevalence of large-scale illicit financial flows poses a serious challenge for countries, especially in the Global South, making it difficult for them to fulfil sustainable development goals (SDGs). The prevailing governing structure of tax instruments and stringent confidentiality requirements effectively precludes most developing nations from obtaining crucial information to enhance their capacity to tax high-net-worth individuals (HNWI) and multinational enterprises (MNE) operating within their jurisdictions. 

MNEs leverage discrepancies and inconsistencies in tax regulations to artificially allocate profits to jurisdictions with low or negligible tax obligations while transferring losses to those with higher tax rates, thereby circumventing or evading taxation. They have substantial resources for tax planning compared to the resources available to developing country governments trying to enforce, sometimes weak, tax legislation. At the same time, HNWIs use the lack of transparency on asset ownership and control of legal entities to shield their wealth and capital gains from the tax system. 

The current IFA has stringent confidentiality requirements and complex tax regulations, which hinder developing nations from effectively taxing HNWIs and MNEs, allowing these entities to continue exploiting regulatory gaps and evade taxation. Reform of international tax standards needs to continue to consider the potential harmful effect of disincentivising foreign investment in developing countries. 

Enhancing international tax cooperation is vital for creating a fairer and more effective global tax system that addresses the challenges of globalization and digitalization. By prioritizing transparency, adopting inclusive tax reforms, and fostering collaboration among countries, especially those in the Global South, we can combat tax evasion and ensure that all nations contribute their fair share to development efforts. The ongoing initiatives led by the UN represent important strides toward this goal, emphasizing the need for comprehensive frameworks that empower developing countries and promote equitable resource distribution in the pursuit of sustainable development. The necessary resources and infrastructure also need to be made available to developing countries to implement and enforce proposed tax reforms. 

Next, I turn to pressing local tax administration challenges that need to be addressed while international tax cooperation discussions move forward.

3    Enhancing domestic revenue mobilization

A vital measure for enhancing the international financial architecture is reinforcing tax administration systems and reducing non-compliance. This objective can be attained by developing the skills and capabilities of tax officials through targeted training and technical assistance. Attracting and retaining proficient tax officials who are well-versed in technology is essential to meet evolving challenges. As an example, taxing HNWI requires understanding a complex mix of individual, family, corporate, and investment portfolio structures, both international and domestic. Experts say stronger leadership, new skill sets, and better auditing are needed to address non-compliance.

Enhancing the skills of government officials, academics, and civil society is critical. The combination of South-South knowledge exchange and North-South technical assistance provides valuable opportunities for revenue authorities to develop their personnel further. Long-term, demand-driven collaborative projects can help address the changing landscape of taxation. Strengthening tax administration promotes better domestic revenue mobilization and contributes to establishing a more robust and transparent international financial system.

Minimizing non-compliance necessitates establishing clear, straightforward tax procedures and adopting information technology to lower compliance costs. Streamlining tax filing and payment processes can alleviate the burden on taxpayers, particularly small businesses, that often face outsized compliance costs. Reducing these costs supports an environment where businesses can operate and grow and ensures their ongoing participation as taxpayers. Conversely, elevated taxes and fees can deter small business participation in the tax system, ultimately shrinking the tax base.

Compliance costs can be reduced through clearer tax procedures and technology integration. VAT is an important source of revenue in developing countries, around 30% in sub-Saharan African countries. In a recent report for the G20, the IMF suggests improvements to VAT compliance to reduce gaps between potential VAT and actual collection. Guidance on how this can be materialized is lacking.

Advancing data analytics has the potential to uncover patterns in taxpayer behaviour. Leveraging this potential requires both high-quality data and skilled personnel. High-quality data remains ineffective unless paired with the right expertise and skilled professionals are often underutilized when data quality is subpar. Administrative data, encompassing tax records and social security information, can facilitate comprehensive research and policy analysis at a relatively low cost. Yet, this opportunity is frequently untapped across Global South nations. Thus, administrative data must be made accessible within secure environments— such as dedicated data labs—for governments, researchers, and civil society organizations. Collaborative models like UNU-WIDER's partnerships with African tax authorities exemplify how capacity development and secure data access can be effectively realized.

Investments in technology, advanced data analytics, and digital payment systems are critical to enhancing tax collection efficiency and fortifying the international financial architecture. Technology allows real-time cross-checking of information submitted to revenue authorities, enhancing transparency and accuracy.

Digital public infrastructure (DPI) holds considerable promise for improving tax administration in an increasingly digital landscape but governments in low-income countries face challenges in fully harnessing its potential. Recent discussions surrounding DPI underscore the specific data needs and systems required to facilitate voluntary compliance and accurately calculate tax liabilities. For example, digital payment systems can help reduce compliance costs and improve revenue collection while providing taxpayers a more streamlined experience. These technologies minimize the tax burden and curtail corruption opportunities, thereby contributing to a more robust and transparent international financial system.

Digital payment systems create clear and traceable transaction records, making tax evasion substantially more challenging. Additionally, automating payment processes diminishes the likelihood of errors and delays, resulting in a smoother and more convenient experience for taxpayers, ultimately boosting satisfaction and compliance rates. Technology integration within tax administration fosters a more efficient and inclusive global financial architecture.

Integrating Artificial Intelligence (AI) into tax systems is increasingly prevalent, automating processes, enhancing fraud detection, and providing real-time support to taxpayers. This technological incorporation streamlines tax administration and promotes efficient tax collection. The IFA is evolving to embrace AI and digital technologies, addressing structural deficiencies and enhancing global governance. AI has demonstrated potential in these areas. To use AI for efficient revenue collection will require a well-trained, forward-thinking revenue administration, mindful of how AI will change the landscape of tax evasion and avoidance.

3.1    Specific national tax instruments

Value Added Tax (VAT) is a crucial tax instrument to raise tax revenue, especially in developing countries. A recent study highlights the potential of VAT in bridging revenue gaps and enhancing compliance among small and medium-sized enterprises (SMEs) in Tanzania. The study reveals a substantial VAT gap due to under-reporting and evasion. An earlier study in Zambia estimates large tax gaps, indicating the potential for revenue generation from VAT if compliance improves. Both studies provide insights into the main compliance challenges, providing concrete evidence to tackle the issues with the resources at hand and the VAT rate intact.

Countries can tap into this underutilized revenue source by improving VAT administration and compliance, thereby increasing their fiscal capacity to fund essential social protection programs and public services. Additionally, efficient VAT refund processes can stimulate domestic investment and economic growth by ensuring timely refunds to businesses.

VAT plays a crucial role in stabilizing and integrating national economies within the global financial system. Since increasing VAT is likely regressive, it is the efficient collection and administration of VAT that can enhance a country's fiscal health, increasing its resilience to external financial shocks. Furthermore, VAT reforms can align with broader initiatives aimed at reforming the global financial architecture to promote equitable and sustainable development. For instance, by optimizing VAT, countries can bolster their revenue mobilization, reduce dependence on external debt, and contribute to a more balanced and inclusive global economic framework.

Personal income taxes (PIT) are essential for government revenue and can help address income inequality when funded through progressive rates rather than relying heavily on VAT. However, many countries struggle to increase the personal income tax’s share in total tax revenues due to issues like tax expenditures, non-compliance, and evasion.

South Africa's recent reform on top incomes illustrates the difficulties emerging economies face when taxing high earners while maintaining economic incentives. To broaden the PIT base, developing countries can implement progressive tax policies and enhance compliance through simplified procedures and technology.

Long-term impacts of tax policies must also be considered, as current trends like unemployment can affect future revenue. Monitoring and adjusting these policies is crucial for improving outcomes despite challenges in eliminating tax incentives.

Implementing progressive PIT rates can improve fiscal fairness and economic security, especially for low-income populations. By incorporating PIT into the global financial framework as raised earlier in relation to HNWIs, countries can achieve a more equitable distribution of wealth and resources, which supports SDGs and promotes global economic stability.

4.     Conclusion

Enhancing domestic revenue mobilization within a reformed International Financial Architecture (IFA) is essential for developing countries to effectively navigate the complexities of the global tax landscape. Strengthening international tax cooperation and addressing the inequities of the current system will empower nations to implement effective and progressive tax policies. A collaborative approach, led by institutions such as the United Nations, can facilitate fair taxation of multinational corporations and promote economic stability. By investing in robust tax systems and prioritizing equitable revenue collection, countries can better fund essential public services and drive sustainable development, ultimately reducing inequalities and fostering resilience in an interconnected world.

Improving collection through existing tax instruments such as PIT and VAT has potential, but not at the scale that revenues can be raised through improving the international tax system. Efforts to increase taxes through top-down reforms, often influenced by IMF conditions and lacking adequate public discussion, have eroded democracy and public trust. This is particularly concerning when taxpayers in highly indebted countries realize the extent to which their contributions go to external entities and foreign creditors.

The voices of developing countries in the discussion about reforming the IFA emphasize the necessity for international solidarity. An effective architecture should efficiently and fairly pool resources through reforms in international taxation and other areas. Developing nations must continue actively participating in international tax forums, such as the UN Tax Convention, to advocate for their fair share of tax revenues. The steps outlined to improve national and international taxation in this note are not exhaustive; they highlight key points in the discussion of IFA and taxation in support of achieving the SDGs.