Domestic Resource Mobilization in Partner Countries of

Belgian Development Cooperation

Romain Houssa, & Roukiatou Nikiema

21 May 2017, Ouagadougou

Introduction

•Huge-resource gap required in LICs (DMDF, 2015)

•Focus on domestic taxation•enhance state building and strengthen the state-citizen relationships (Tilly 1975) •relatively more stable

Tax Revenue Across Income Groups

5

10

15

20

25

30

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

LIC LMIC UMIC HIC HIC_OECD

Tax Revenue Across WAEMU Members

-4

1

6

11

16

21

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Burkina Faso Benin Cote d'Ivoire Guinea-Bissau

Mali Niger Senegal Togo

Policy (Research) Objectives at BeFinD

•We analyze…• The principles of tax design & State of Domestic

Resource Mobilization (DRM) • Taxation of multilateral companies• The role of Value Added Tax (VAT) for DRM•Assessing rooms for improvement in VAT systems• The role of institutions for DRM

Research on Taxation at BeFinD• various (interlinked) studies on DRM capacities of DGD partner countries

(+) other developing countries…recent examples• Institutional quality, economic development and the performance of VAT, BeFinD

Working Paper N°15 (Romain Houssa and Kelbesa Megersa)• The Performance of VAT in DGD-partner Countries, BeFinD Working Paper N°16

(Mattéo Godin, Romain Houssa and Kelbesa Megersa)• .Taxpayer behaviour and institutions in Sub-Saharan Africa, BeFinD Working

Paper N°169 (Roukiatou Nikiema and Pam Zahonogo)• A Review of critical issues on tax design and tax administration in a global economy

and developing countries, BeFinD Working Paper N°7 (Mattéo Godin & Jean Hindriks)

• Follow you, follow me: public investment under tax competition, BeFinD Policy Brief N° 1 (Jean Hindriks and Yukihiro Nishimura)

…for more, visit http://www.befind.be/publications/taxes

Outline• I. Impact of VAT on DRM

• II. Role of institutional quality on DRM

• III. Sources of VAT Inefficiencies: Case study in Burkina Faso

• IV. Conclusing Remarks

I.

Impact of VAT on DRM

Why is VAT important?• VAT is relatively easy to administer Less prone to tax evasion• Suitable for developing countries

• less sensitive to the informal market • If well designed, it can even reduce the size of the informal sector

• Less distortionary among taxes • In comparison with income taxes, VAT does not change consumption decisions

relative to savings and investment decisions

• No cascading effects• Unlike other consumption taxes • Tax on a commodity is charged at separate stages of the production process without

deductions• Sellers or firms paying VAT, can receive credit for the VAT paid on intermediate inputs

VAT adoption across the world

Current state of DRM:Tax and VAT revenue in partner countries

33.0

23.1

21.6

19.7

18.1

18.0

14.3

14

.1

13.4

13.4

12.5

11.5

10.7

10.6

9.9

9.3

8.5

5.0

3.8

6.4

5.8

5.5 5.9 7.

0

5.5 6.

8

5.8 6.3

4.4

2.9 4.

6

7.8

3.1 4.

3

4.1

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Alg

eri

a

Sou

th A

fric

a

Mo

rocc

o

Vie

tnam

Bo

livia

Sen

ega

l

Pe

ru

Mal

i

Ben

in

Bu

run

di

Bu

rkin

a Fa

so

Mo

zam

biq

ue

Rw

and

a

Nig

er

Uga

nd

a

Tan

zan

ia

Ecu

ado

r

DR

C

Average Total Tax Revenue, % GDP (1990-2013)

Average VAT Revenue, % GDP (1990-2013)

High degree of correlation between Tax & VAT revenue in DGD partner countries

VAT, DRM and developing countries:The overall picture…across the developing world & elsewhere

• We estimate the following tax-effort equation

• 𝑋𝑖,𝑡 include: the level of development, size of the informal sector, country size, size of dependent population, institutional quality …

VAT, DRM and developing countries:The overall picture…across the developing world & elsewhere

•Data from 149 countries over the 1970 - 2013

•Developing countries

• Sub-Saharan Africa (SSA) and • Non-SSA Developing countries

•Developed countries

Marginal effects of VAT adoption (1970-2013)

Marginal effects of VAT adoption (1970-2013)

Performance of VAT in SSA

• Marginal effect of VAT adoption (i.e. relative contribution of VAT to tax revenue) is estimated to be strong for SSA and other developing countries

• The positive effect of VAT on tax collection in SSA is reassuring because some earlier studies were not able to identify an overall positive effect for the region

• We show that analysis of data over the recent period (where VAT has become more contributive) is important to highlight its positive role in SSA’s DRM efforts

II.

Role of institutional qualityon DRM

Taxation, Institutions & Economic Development

Economic Development

Tax collection

Institutions

Institutional quality & DRM

•A good-institutional environment should improve both the demand as well as the supply factors inherent to the performance of VAT.

• Including: the capacity of the tax administration, government effectiveness in providing public goods, trust in the government, …

•We provide micro and macro evidences

Institution & Taxes (Micro Evidence)

Institution & Taxes (Micro Evidence)survey in 29 SSA countries

please tell me whether you think the action is not wrong at all, wrong but understandable,

or wrong and punishable : Not paying the taxes they owe on their income

Observation Percentage

Not wrong at all 4,566 11.36

Wrong but understandable 14,362 35.73

Wrong and punishable 19,193 47.67

Do not know 2,108 5.24

Total 40,199 100,00

Institution & Taxes (Micro Evidence)

Institution & Taxes (Micro Evidence)• Taxpayer behaviour is affected by quality of institutions • Individuals’ attitudes towards paying tax are significantly dependent on the

quality of institutions

• When the quality of institutions is perceived as good, individuals are more likely to pay taxes

• Indirect effects of quality of institutions:• Individual’s perception of difficulty to evade taxes more likely to pay tax

• Quality of public services offered by the state: • Confidence in the tax authorities (partial or total) & transparency more likely to pay tax • perception of corruption, cheating, quality of health, quality of education, quality of

electricity, confidence , ethnic discrimination… have a significant effect on tax payment!

Institution & Taxes (Micro Evidence)

• Individuals are more likely to pay taxes if they have:•Perception of difficulties to evade taxes;•Better confidence in the tax authorities & transparency,

(less corruption, ethnic discrimination…); •Perception that the quality of public services is good:

health, education, electricity …

51

01

52

0

Ta

x re

ven

ue

as

% o

f G

DP

(lin

ea

r p

red

ictio

ns)

Pre-VAT Post-VATVAT regime

weak institutions strong institutions

weak institutions= (average PRS score<0.5)strong institutions= (average PRS score>=0.5)

unconditional marginsplot

51

01

52

0

Ta

x re

ven

ue

as

% o

f G

DP

(lin

ea

r p

red

ictio

ns)

Pre-VAT Post-VATVAT regime

weak institutions strong institutions

weak institutions= (average PRS score<0.5)strong institutions= (average PRS score>=0.5)

conditional marginsplot

Institution & Taxes (Macro Evidence)

III.

Sources of VAT Inefficiencies: Case study in Burkina Faso

0

10

20

30

40

50

60

70

80

90

100

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

VAT efficiency (Selected partner countries)

Benin

Bolivia

Burkina Faso

South Africa

Uganda

Vietnam

Sectoral Sources of VAT gap (1999-2014)

29

0 5 10 15

ACTIVITE D'ADMINISTRATION PUBLIQUE

INDUSTRIES ALIMENTAIRES

ELEVAGE

AUTRES ACTIVITÉS DE SERVICES MARCHANDS

FAB. D'OUVRAGES EN BOIS ET EN METAUX

RAFFINAGE DE PETROLE, FABRICATION DE…

HÔTELLERIE ET DE RESTAURATION

FAB. VERRE, POTERIE ET MATERIAUX POUR…

ACTIVITES FINANCIERES

INDUSTRIES DU PAPIER, DE L'ÉDITION,…

Top Sectors contributing to VAT gap

30

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014ACTIVITE D'ADMINISTRATION PUBLIQUE AGRICULTURE

INDUSTRIES ALIMENTAIRES COMMERCE

ELEVAGE TRANSPORTS, POSTES ET TELECOMMUNICATIONS

AUTRES ACTIVITÉS DE SERVICES MARCHANDS EGRENAGE DE COTON, FABRICATION DE TEXTILES ET ARTICL. D'HABILL..

FAB. D'OUVRAGES EN BOIS ET EN METAUX EXTRACTION

Sources of VAT gap

31

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013

compliance gap policy gap

IV.Concluding remarks

What role can donors (Belgium) play?•Conduct more (in depth) studies to identify sources of tax gaps and policy experiments

•Contribute to the capacity building of the taxauthorities and statistical offices

•Encourage/Support instutional reforms thatfacilitate good governance and the provision of public goods

33

Thank you!