The World Bank and the International Monetary Fund (IMF) have collaborated to launch several strategic recommendations for developing countries to mobilize domestic resources aimed at increasing tax revenues.
This strategy is formulated under the name of the joint domestic resource mobilization initiative (JDRMI). Tax revenues are the main focus of these two international bodies because their existence is very vital in order to meet state spending needs.
According to the IMF and World Bank, countries with a tax ratio below 15 percent are likely to be unable to meet their spending needs. As a result, these countries grow slower than countries with a tax ratio above 15 percent.
“To increase tax revenues, developing countries need to undertake medium-long-term reforms that cover all applicable tax provisions and administration systems,” wrote the IMF and World Bank report, on August 3, 2024.
The report contains six strategic recommendations for tax revenues in developing countries. First, increasing the effectiveness of tax incentives. The IMF and World Bank recommend that developing countries increase the effectiveness of tax incentives. They also said that tax holiday incentives offered in economic zones are not an effective instrument for attracting investment, and it needs to be simplified in the context of the global minimum tax and the need to counteract base erosion and profit shifting.
Second, broadening the Value-Added Tax (VAT) base. VAT incentives are seen as less cost-effective than providing similar benefits through other tax and expenditure policies. Because this policy does not depend on individual income, and benefits the richer. The need to broaden the tax base must include measures to moderate formality, which will improve fairness and reduce the tax burden for taxpayers in the formal sector.
Third, improving the design and expanding the scope of income tax. According to the World Bank and IMF reports, income tax revenues in developing countries are much lower than in developed countries, and have an impact on weakening tax redistribution. The World Bank and IMF considers reducing regressive taxes and improving the design of taxes on capital income.
Fourth, increasing the role of excise to support revenue. Developing countries need to increase the role of excise on several commodities, such as alcohol and tobacco.
Fifth, developing an effective property tax system to expand the tax capacity of local governments to meet local budget needs. In this report, WB and IMF stated that recurring real property tax is a tax that does not distort economic growth, because its base is not moving.
Sixth, the implementation of special taxes for certain economic sectors such as rental taxes on non-renewable natural resources and other sectors that have special location-related rents for markets, forestry, fisheries, telecommunications, and banking.
Meanwhile, the implementation of a broader tax on excess profits or profit tax can also be achieved through improving the design of profit tax or as a stand-alone tax, to increase state tax revenues.
