Commentary

Why Addis Ababa Matters For Latin America

On July 13 of the current year, Addis Ababa, Ethiopia saw the inauguration of the Third International Conference on Financing for Development.

The conference came in preparation for the newly agreed upon Sustainable Development Goals1, which are to set the structure in which international actors will work to achieve global development.

Organisations, institutions and countries all pledged to fund efforts to end poverty and achieve sustainable development2. The UN, World Bank and their partners made available USD$12 billion through a Global Financing Facility, to improve maternal health and reduce child mortality; similarly, the Bill & Melinda Gates Foundation alongside Canada, Japan and the United States, committed to a total of USD$214 million for development endeavours; other country groups and organisations followed suit.

More interestingly, the OECD and UNDP, under the same framework, announced the launching of the programme Tax Inspectors Without Borders. As opposed to pledging money, the programme is designed to help developing countries increase domestic revenues by strengthening their tax audit capacities3.

Why the OECD and UNDP’s commitment in Addis Ababa matters for Latin America is a loaded question.

Tax Inspectors Without Borders (TIWB) is a project that acknowledges what the Monterrey Consensus in 2002 and the Doha Declaration in 20084 advocated for:

Financing development is not only a matter of international aid and donations, but of a country’s own ability to fund, in a sustained manner, their own development projects.

In this vein, the TIWB programme will assist Latin America with targeted tax audit strategies and with matters of international taxation. The latter being a particularly interesting characteristic of the plan as the continent’s economic growth is increasingly threatened by the scale of illicit financial (out)flows – at around 3% of GDP5 – from tax evaders and criminals.

Improving tax-auditing capacities is an important tool to tackle tax evasion and thus increase a country’s revenues. In the early 2000’s, Chile was experiencing high Value Added Tax (VAT) evasion, with taxpayers blatantly avoiding payment by faking invoices. The country set on a reform venture of their auditing system: they increased the number of auditors and gave them specialized training, simplified the registration process and introduced electronic invoicing to their system.

The non-compliance rate fell from 20% to 15% in the course of 5 years6.

Recently, with one of the pilot projects of the TIWB programme in Colombia, positive results were evidenced when, after a series of tax audit advice and guidance were set in motion, tax revenue increased in the country USD$36.6 billion in 2011 to USD$47.7 billion in 20147.

A sound tax system that can efficiently mobilise national resources is essential for Latin America’s fight against poverty and subsequent development.

With 13.3% of the continent’s people living in poverty8 (around 80 million people), national programmes that target the poor, such as conditional cash transfers (CCTs), need a stable flow of income. CCTs in Latin America are financed by national governments, and have proven to have inequality-reducing effects in Chile, Mexico, and Brazil9. In the latter countries, their CCT programmes achieved to reduce overall inequality by 5%10.

Indeed, most of the world’s programmes targeted at the poor are actually funded by national governments11. This makes stable and sufficient tax revenues a moral imperative.

Increased revenues are not only beneficial for targeted programmes, they also augment the ability of governments’ to invest in the provision of public goods, such as infrastructure, education, health. The volatility inherent to Latin American countries’ tax systems12 due to high levels of tax evasion and implementation problems is therefore detrimental not only for the poor, but for society as a whole.

Tax Inspectors Without Borders is essentially tackling under-financing from the roots. It is offering Latin America and other developing regions the opportunity to strengthen one of its core institutions; successful pilot programs, such as the Colombian case cited above, certainly lift hope of the benefits that may arise for our continent once the programme is properly in place and full-fledged.


1 The adoption of the SDGs by Member countries is set to happen in September 2015. For the list of the 17 goals agreed upon, visit: http://www.un.org/sustainabledevelopment/sustainable-development-goals/

2 A concise article on the Conference’s highlights can be found here: https://storify.com/un/third-international-conference-on-financing-for-de

3 The full initiative can be found here: http://www.undp.org/content/undp/en/home/presscenter/pressreleases/2015/07/13/tax-inspectors-without-borders-oecd-and-undp-to-work-with-developing-countries-to-make-tax-audits-more-effective.html#

4 Both agreements highlight the importance of building local capacity to mobilise national resources. The OECD summarises what this means for trade: http://bit.ly/1fZ4vXj

5 For a panel report on illicit financial flows from Latin America and other developing regions, refer to the 2014 report of the Global Financial Integrity Institute: http://www.gfintegrity.org/report/2014-global-report-illicit-financial-flows-from-developing-countries-2003-2012/

6 Russell, Barrie (2010). Revenue Administration: Developing a Taxpayer Compliance Program. INTERNATIONAL MONETARY FUND: Fiscal Affairs Department. Pp.13.

7Source of total tax revenue in Colombia: Author’s calculations with data from Recaudo tributario http://www.dian.gov.co (DIAN: Dirección de Impuestos y Aduanas Nacionales) Exchange rate: end of period Banco de la República. Figures differ from the official numbers given in the TIWB press release at: http://www.undp.org/content/undp/en/home/presscenter/pressreleases/2015/07/13/tax-inspectors-without-borders-oecd-and-undp-to-work-with-developing-countries-to-make-tax-audits-more-effective.html#

8 For a full note dedicated to explaining poverty in Latin America: http://www.economist.com/blogs/americasview/2014/01/poverty-latin-america

9 For full study on CCTs in the three countries, refer to the working paper Conditional Cash Transfers in Brazil, Chile, and Mexico: Impacts Upon Inequality. Available at the International Poverty Centre’s website: http://www.ipc-undp.org/pub/IPCWorkingPaper35.pdf

10 Working Paper Conditional Cash Transfers in Brazil, Chile, and Mexico: Impacts Upon Inequality. (pp. 11). Available at the International Poverty Centre’s website: http://www.ipc-undp.org/pub/IPCWorkingPaper35.pdf

11 Banerjee, Abhijit and Duflo, Esther (2012). Poor Economics. Penguin Books. Pp. 5.

12 Gómez Sabaini, Juan Carlos & Jiménez , Juan Pablo. (2012). Tax Structure and Tax Evasion in Latin America. CEPAL. Online source: http://repositorio.cepal.org/bitstream/handle/11362/5350/S1200023_en.pdf?sequence=1

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  1. Pingback: Course Reviews: Master of Public Policy at the Hertie School of Governance | Development Intern

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