The Japan International Cooperation Agency (JICA) has implemented various forms of cooperation for sound Public Finance Management in developing countries. One of these efforts is cooperation on tax administration, which aims to increase tax revenue and strengthen the financial basis by improving the government’s taxation and tax collection capacity. The Japan Journal reports.
Governments provide public services in a range of areas such as social security, education, and infrastructure to help people live healthy and prosperous lives. The financial resources (revenue) needed to provide these services are mainly collected through taxes and public bonds and, in the case of developing countries, through budget support from donors.
To continue providing sufficient public services to the nation, it is essential to have a strong financial base. However, the financial base in many developing countries is fragile. One of the factors is the lack of proper implementation of Public Finance Management (PFM) where governments strategically allocate and efficiently dispense funds while maintaining fiscal discipline.
For this reason, the Japan International Cooperation Agency (JICA) has implemented various forms of cooperation related to PFM in developing countries. One of these efforts is cooperation on tax administration, which aims to increase tax revenue and strengthen the financial base by improving the government’s taxation and tax collection capacity. With the cooperation of Japan’s National Tax Agency, JICA has brought staff at national tax authorities in various countries to Japan for training (Group and Region Focus Training Programs) since 1968. JICA also provides assistance by dispatching Japanese experts for the short or long term to more than ten countries for Technical Cooperation projects, by implementing Country Focus Training Programs in Japan according to the needs of individual countries, and by running Third Country Training Programs for the purpose of strengthening cooperation and sharing experience with emerging donors.
Developing countries, especially low-income countries, raise little tax revenue in their own countries and are to a large extent dependent on budget support from donors. In recent years, the ratio of public debt to GDP has been on the rise in both developing and developed countries. In addition, countries need to prepare for risks such as fluctuations in commodity prices or financial and disaster shocks. Developing countries are in a situation where it is increasingly important for them to expand the fiscal space to make the investments that are necessary for sustainable growth. Therefore, there is a growing need for developing countries to increase their domestic resource mobilization, including domestic tax revenues.
One of the targets for Goal 17 (Strengthen the means of implementation for sustainable development and to revitalize global partnerships) of the Sustainable Development Goals (SDGs), adopted by the United Nations in 2015, is to strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection. According to a report published by the IMF in 2016, having a tax revenue to GDP ratio of approximately 15% is an important factor for both economic growth and poverty reduction. However, many developing countries have tax revenues below 15% of GDP.
“Sufficient financial resources are necessary to achieve the various goals set out in the SDGs. Therefore, it is important to strengthen tax administration to increase revenue, and to mobilize private funds inside and outside the country,” says Kawabata Reiko of the Governance and Peacebuilding Department at JICA. “Furthermore, in order to promote private investment from abroad, it is important to implement efficient, fair, and equitable tax administration according to international standards. In that sense, we are providing support while keeping standard international practice in mind.”
The main elements of JICA’s cooperation for tax administration in developing countries are appropriate taxation and collection, business environment development, and improvement of taxpayers’ compliance. The support is broadly divided into three categories depending on the stage of the development of tax administration in each country. In the first stage, the aim is to transition from an official assessment system to a self-assessment system. JICA assists with improving the enabling environment to promote proper declaration and payment by taxpayers, tax audits, taxpayer management, and so on. In the second stage, in order to cope with the influx of foreign capital, assistance is provided to strengthen the capacity of tax authorities to deal with international taxation and large-scale taxpayers. Then, in the third stage, in response to advanced economic activity and increased income level, assistance is focused on electronic tax payment, taxation of micro enterprises, and strengthening the capabilities of the system to match the expanding powers of the tax authorities, including but not limited to inspections and asset seizures, and also remedies for taxpayer rights.
These forms of cooperation may be carried out simultaneously or in a different order depending on the circumstances and needs of each country. Characteristically, this form of cooperation is long-term since it is important to support and embed these systems, which will form the foundation for the nation, from a long-term perspective.
“International organizations have published a number of reports on improving tax administration in developing countries. However, in many of these countries, tax authorities experience great difficulties in finding ways to implement the suggested recommendations and advice,” says Kuge Tetsuya, Senior Advisor at JICA. “JICA emphasizes listening to the opinions of our counterparts. We first identify the issues together with our counterparts, consider how to make improvements based on the local situation, and then provide support to allow implementation on the frontlines. This type of cooperation is a key strength of JICA.”
Amending Tax Laws with Japanese Cooperation (Mongolia)
Mongolia is one of the countries where JICA has been providing tax administration cooperation for a long time. Mongolia moved from a centrally planned to a market economy in 1990, but since there had been no modern tax collection system under the socialist regime, the country was struggling with a chronic budget deficit due to a lack of revenue after the transition to a market economy. In this context, JICA started Technical Cooperation with the Mongolian General Department of Taxation in 1998 and has now been supporting development of the tax system and of human resources for more than twenty years.
During the first decade, JICA focused on supporting the development of the tax administration, improving tax collection processes, and institutionalizing training systems for tax officials. As a result, tax revenues increased due to significant improvements in, for example, corporate taxation arrears, which contributed to maintaining the increasing trend of tax revenue.
During the second decade, JICA focused on supporting the development of a new system of international taxation. Since 2010, many multinational and foreign-owned enterprises working in the mining sector have moved into Mongolia due to the natural resources boom. However, since the international taxation system was underdeveloped, countering tax avoidance by these companies became an urgent issue, which is why JICA supports the development of the system for international taxation and the development of human resources with the appropriate skills to interpret the law.
JICA continues to assist with the strengthening of tax collection functions. In 2019, JICA contributed to the amendment of major tax laws including the General Law of Taxation, the Corporation Tax Law, the Individual Income Tax Law, and the Added-Value Tax Law. One of the points of this amendment is that self-enforcement authority is now clearly stated in law.
“The Mongolian General Department of Taxation has been granted the authority to seize the assets of those who are in arrears, a power which was previously granted only to courts. As a result, the collection rate is expected to improve,” says Kuge. “JICA not only made recommendations for the amendments, but also helped prepare the relevant rules and manuals needed to properly enforce the amendments. At present, JICA is providing continuing support to ensure that the amended law is correctly enforced.”
An official at the Mongolian Tax Administration commented on the cooperation from JICA.
“We needed to develop the laws to approach the taxation level of Japan. With the present amendment to the law, we were able to introduce new provisions such as international taxation, transfer pricing, self-enforcement authority for tax collection, and tax priority rights. The amended law took two years to pass through parliament, but we were able to include all the advice from the Japanese experts in the tax reform. In the future, it will be important for the Tax Administration inspectors to correctly understand the content of the amended law and to enforce the law while respecting the rights of taxpayers. JICA is a trusted partner who has offered support and helped us from the stage of preparing the amendment to enforcing the law after the amendment.”
The Mongolian General Department of Taxation is developing the tax collection system under its ownership based on the results of the cooperation with Japan. One example is the electronic tax payment system, which was successfully introduced in recent years. Since Mongolia is a large country with low population density, the high cost of collecting taxes was an issue, but the introduction of electronic tax payment has significantly reduced tax collection costs and improved understanding of taxpayers and the status of taxation.
According to the World Bank’s World Development Indicator, the average tax revenues to GDP ratio for lower middle income countries, such as Mongolia, was 13.17 % in 2018, but the rate for Mongolia was 16.78%. In addition, there was a time when Mongolia was on the EU list of non-cooperative jurisdictions for tax purposes, but with the improvements in sharing information about international taxation the country was removed from the list in 2020.
Comprehensive Support from Introducing a Tax Declaration System to Dealing with International Taxation (Vietnam)
Since 2005 to the present, JICA has also supported tax administration reform in Vietnam with the General Department of Taxation (GDT) as its counterpart. To facilitate implementation of the self-assessment system that had been gradually introduced in Vietnam since 2004, JICA supported the construction of a taxation helpline and the creation of tax inspection guidelines by sectors under the Project on Tax Administration Reform, which ran from 2005 to 2008. In Phase 2, which started in 2008, taxpayer services were improved including introduction of tax education at educational institutions, implementation of the Tax Week Program, and the expansion of information available to taxpayers. JICA supported to strengthen the training system for staff at the GDT including introduction of general training for staff, formulation of long-term training plans, and update of training materials. Since 2011, JICA has also supported capacity building among staff with regard to international taxation and the transfer pricing tax system in view of the increase in foreign direct investment.
Kuge says, “In response to the rapid economic development in Vietnam, the tax administration support has also changed at a very rapid pace.”
Currently, JICA carries out projects on the themes of tax inspection, taxpayer management, and tax collection operations with the aim of promoting efficient, effective and fair tax administration to increase revenues. For example, in Vietnam, there was no system for effective collection of arrears that have not been paid by the due date. Therefore, building capacity among staff to properly and efficiently dispose of arrears was a challenge. To respond to this challenge, experts dispatched by JICA have provided training to share their knowledge of disposing of arrears in Japan. In addition, JICA produced and distributed a reference book on the administration of tax collection in Japan, which many tax officials found very helpful for routine tasks. In the future, JICA experts plan to train staff in local communities as well as the capital of Hanoi where the GDT is located. This is expected to reduce the balance of arrears across the country.
Aiming to Improve Tax Administration with Customer and Local Staff Orientation (Dominican Republic)
JICA also provides support in the Dominican Republic in the Caribbean region. The country is working on sustainable economic development and the redress of disparities based on a long-term national development strategy, but low tax revenue is one of the major reasons for the inability to secure the budget necessary for socio-economic development projects. In addition to the small scale of the tax base, low levels of awareness of tax payment in the nation, the complexity of the tax system, and the complexity of the operational processes are other reasons why tax revenue has not increased. To address these issues, the Directorate General of Internal Tax (DGII) has recently reviewed its organizational structure and tax strategies, and worked proactively to streamline tax exemption measures and all types of preferential policies, and to simplify taxpayer registration and other administrative procedures.
To support such efforts, JICA launched the Project for Institutional Strengthening and Modernization of the DGII in 2019. One of the features of this project is its focus on improving the quality of routine work done by staff at the DGII and local tax offices. The taxpayer- and local staff-oriented approach, which aims to improve service levels by optimizing the administration and carefully listening to the opinions of staff with regard to taxpayers, drives the reforms.
In addition, the DGII aims to introduce Digital Transformation (DX), a new system for tax administration and taxpayer services. The project aims to modernize DGII operations by providing advice on how to improve administrative processes in conjunction with the introduction of the system.
Under a training program in Japan, which is a separate framework with participants from multiple countries, DGII staff, who visited tax offices and the National Tax College in Japan to observe staff operations and training, commented, “I learned a lot about how to prevent non-payment of taxes,” and “I was impressed by the continuity of the training at the National Tax College.” JICA is also planning another training in Japan within the framework of the project, which has raised expectations from the counterparts.
“Experts from Japan are not able to travel to the Dominican Republic as easily as before due to the effects of the COVID-19 pandemic,” says Kawabata. “However, to keep the current project running smoothly, our experts have been using both email and online meetings in order to maintain regular contact with their counterparts. They highly appreciate the lengths we have gone through to continue our joint activities.”
Tax Administration Cooperation Will Be More Important in the Future
The COVID-19 pandemic has had a negative impact on the fiscal situation in many countries. The importance of boosting revenue to deal with diverse public spending is increasing worldwide, especially in developing countries. In recent years, the international community has also been engaged in discussions about the nature of international taxation in step with the globalization of corporate activities. As a result, there are moves underway to establish an international collaborative framework for Base Erosion and Profit Shifting (BEPS).
“From the perspective of improving the business environment, it is very important to implement tax administration in accordance with these international frameworks in developing countries. Taxation on multinational corporations providing digital services is also a hot issue around the world,” says Kuge. “JICA will continue to support the development and enforcement of laws to respond to these new taxes.”
Sawaji Osamu, The Japan Journal
Note: This article first appeared in the March/April 2021 issue of the Japan Journal.