On 28 April 2021 the UN Committee of Experts on International Cooperation in Tax Matters released the UN Guidelines on the Tax Treatment of Government-to-Government Aid Projects.
Developing countries frequently grant tax exemptions in relation to government-to-government aid projects. The exemptions are most often given in relation to value-added tax (VAT) and customs duties, but may also relate to corporate income tax, personal income tax and payroll taxes, including withholding tax. The UN Guidelines note that donors are free to establish the conditions on which aid is provided, but the giving of tax exemptions by developing countries does not help efforts to strengthen domestic resource mobilization.
The UN Guidelines apply to government-to-government aid provided by governments (including governments of political subdivisions and local governments) or their agencies, whether the government-to-government aid is provided directly or through international organizations.
Donors are advised in Guideline 1 that they should not require tax exemptions in recipient countries for the transactions carried out as part of the aid projects, unless the tax rules in the recipient country that would apply to the transactions are not in line with international tax principles.
In Guideline 2 recipient countries are advised to ensure that their tax treatment of the transactions carried out during aid projects is consistent with international tax principles, to limit the number of occasions when specific tax exemptions might be requested in relation to the projects. If specific tax exemptions are requested in relation to a project the Guidelines suggest that the tax authorities should be involved in negotiating and drafting the exemptions; and the exemptions should apply only to the donors and not to other parties such subcontractors or consultants.
They also recognise the role of transparency and accountability which also apply to the administration of government-to-government aid. For example, Guideline 5 recommends that recipient and donor countries, aid agencies and international organizations that are channels for aid should develop, review periodically and make publicly available their policies in relation to the payment of taxes arising from government-to-government aid projects.
According to Guideline 8 it is important for developing countries to forecast and analyse the amount of tax revenues lost by granting the tax exemptions. If a developing country does not have the administrative capacity to carry out this work technical assistance may be required.
Guideline 9 recommends that mechanisms should be put in place to minimize administrative burdens and reduce fraud in the application of the exemptions. Guidelines 10 to 12 are concerned with the drafting provisions giving relief from indirect taxes and customs duties.
In Guideline 10 there is a recommendation that when tax relief is to be given from indirect taxes or customs duties, the taxes covered by the relief should be clearly identified, and the relief should be restricted to clearly identified goods and services necessary for the project. Where the goods and services are acquired specifically for that project, the relief should be restricted to goods and services that are not available in the recipient country.