Domestic revenue generation in developing countries has been gaining prominence on research and policy agendas. The international community is increasingly active in underlining the importance of reliance on domestic revenue and in supporting developing countries’ efforts to improve tax policy and tax administration.
Why did taxation (re-)establish itself recently as a priority issue in the international debate after decades of living in the shadows of other, apparently more pressing, themes? There are at least five issues that can help answer this question, which are examined in this study. The potential benefits of taxation on statebuilding; long term independence and the shifting aid paradigm; trade liberalisation; the increased prominence of fiscal issues in the “West” due to the financial and debt crisis; and the continued huge financial needs of developing countries.
Taxation, evidently generates revenue, but it has also been pointed out that there is a clear link between taxation and governance in so far as taxation and the strengthening of tax administrations can significantly support a democratic state-building agenda. At the same time, the financial crisis has highlighted shortcomings in the international tax system and put the problems of international tax evasion and illicit capital flows on the international agenda. These practices are being increasingly recognised as both morally unacceptable and economically detrimental both to development and to initiatives to improve governance. The crisis has also underlined the importance of ensuring independence from foreign aid in the long run, as an aid scaling down scenario becomes more plausible.
Despite the widely recognised importance of tax revenue mobilisation and the increased international attention in this area, the level of domestic revenue remains low in developing countries as they still face great economic and political challenges. This study reviews the obstacles to tax revenue mobilisation and identifies the tax gaps that, if tackled, could lead to increased revenue. In this context European Institutions and Member States, as well as the broader international community, play an important role in supporting developing countries through financial aid, technical assistance, policy advice and international coordination activities on tax matters.