On 20 January 2022 the OECD announced the launch of a digital hub to bring increased transparency to the taxation of development aid. The Tax Treatment of Official Development Assistance Hub sets out the approaches taken by participating donor countries to making claims for exemption from tax on the goods and services financed by official development assistance.
Members of the OECD Development Assistance Committee provide resources to promote economic development in developing countries. The member countries of the Committee make requests for exemptions from customs duties, value added tax, other indirect taxes or income taxes in relation to the goods and services financed by overseas development assistance and supplied to their partner countries. There is sometimes a need for more clarity in relation to which of these goods and services are exempt from tax and it is not always clear which parts of the relevant legislation can be used to grant the exemptions. There is therefore a need for more transparency in relation to the process of requesting and obtaining tax exemptions.
Following the crisis caused by the pandemic, developing countries are under pressure to create more fiscal space to finance the drive towards the sustainable development goals. The need to raise more government revenue means that the tax treatment of overseas development aid is increasingly being examined. Overseas development assistance has become more critical for some countries and the tax treatment needs to be made more transparent. These countries cannot afford to allow the tax treatment to create distortions in financing or unnecessary compliance burdens, and they need to be clear about which goods and services are exempt from tax and on which legislation the exemption is based.
The Addis Ababa Action Agenda contained a reference to UN member countries giving consideration to not claiming exemptions in relation to goods and services supplied as aid, commencing by waiving refunds of value added tax or import levies.
In 2020 the member countries of the OECD’s Development Assistance Committee committed to strengthening domestic resource mobilization, and a number of countries have changed their tax treatment of overseas development assistance or have been considering making changes to their treatment.
Up to now the scarcity of comparable information about the policies pursued by countries providing development assistance has made it difficult for any of the countries to learn from the experience of other countries facing similar problems.
In April 2021 the UN issued the Guidelines on the Tax Treatment of Government-to-Government Aid Projects. These guidelines included an Annex with recommendations on the public disclosure of provisions relating to the tax treatment of government-to-government aid projects.
The OECD digital hub includes an overview of the tax treatment of overseas development assistance by a number of donor countries, including detailed summaries in relation to twelve member countries of the Development Assistance Committee.