On 22 February 2016 the IMF Managing Director spoke in Abu Dhabi on the issue of revenue mobilization and international taxation. A text of the speech has been published on the IMF’s website.

At the moment many countries need to generate higher and more reliable revenue. Owing to the low oil price the oil exporting-countries must adapt to low commodity prices while the developing countries need to raise more revenue to achieve the new Sustainable Development Goals. Some industrialized economies must raise higher fiscal revenue to support their economic recovery.

In addition to this the international tax system must be made to work for everybody. Mechanisms must therefore be designed to discourage the artificial shifting of profits and assets to low-tax locations. The international tax system must also discourage overly aggressive tax competition between countries. The ordinary citizens must be certain that high net wealth individuals and multinational corporations are paying their fair share of tax.

Gulf Cooperation Council

The IMF Managing Director considers that owing to their prudent polices most members of the Gulf Cooperation Council (GCC) can pace their fiscal adjustment over several years. The GCC countries need to strengthen their fiscal frameworks and boost non-hydrocarbon sources of revenues. This provides a unique opportunity to design tax systems that emphasize fairness, simplicity, and efficiency.

The GCC countries should begin by implementing a simple system with an initial focus on value added tax (VAT). This would ideally be a harmonized regional VAT. Even at a low rate the VAT could raise revenue amounting to around 2% of GDP. The GCC countries could also raise more revenue from their corporate income taxes, and property and excise taxes. The GCC countries should continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income taxes.

Middle income oil importers and low income countries

Many middle-income oil importing countries are facing significant challenges in revenue mobilization and in devising more equitable tax systems. The oil importing countries of the MENA region collect tax revenue of about 13% of non-oil GDP on average which is lower than the 17% of GDP average for other emerging and developing economies. There is further room for increasing tax revenue by widening the tax base, making the personal income tax more progressive and scrapping privileged corporate tax regimes.

Low-income countries

Domestic revenue mobilization is important for countries looking to achieve the Sustainable Development Goals. This involves the implementation of tax systems that are simple, broad-based and fair. Low income economies require additional fiscal room to create the opportunity for greater investment in human capital and infrastructure.

Research by the IMF indicates that real GDP per capita can increase quickly once the tax to GDP ratio reaches 12.5%. The low income countries should aim to be well above that threshold, for example at a tax to GDP ratio around 15%. This compares to a tax to GDP ratio of 18% for emerging economies and 26% for advanced economies.

International tax system

The global economy has been changing and in future more value added is likely to come from services and intellectual property as opposed to manufacturing or agriculture. The taxation of traded services and the shifting of intellectual property across borders are a challenge for the international tax system. The system must deal with the reality of the twenty first century economy.

The G20/OECD project on base erosion and profit shifting (BEPS) has made changes within the framework of the current international tax system. An effort has been made to include developing countries in the discussions leading to the BEPS rules but the measures decided do not completely deal with some of the specific needs of developing countries.

An estimate by the IMF suggested that potential additional tax revenues in developing countries from measures combating base erosion and profit shifting could amount to 1.3% of GDP, compared to 1% in developed countries. The developing countries are concerned with issues such as the indirect, offshore transfer of interests in some types of asset such as telecoms or mineral licenses which can lead to hundreds of millions of dollars of lost revenue. Countries with fragile public finances cannot afford this level of revenue loss.

The IMF aims to develop approaches to taxation issues that are important to the low income members. These approaches will be worked out in cooperation with other institutions such as the World Bank, the UN and regional development banks.