Finland’s development cooperation has helped developing countries to increase their tax revenue
A new evaluation commissioned by the Ministry for Foreign Affairs shows that Finland’s support has strengthened tax administrations and expanded tax bases of developing countries. This has increased the countries’ national public funding, which reduces their dependence on external aid.
Finland’s development policy supports developing countries’ efforts to increase their revenue. The term Domestic Resource Mobilisation (DRM) is used to refer to the process of strengthening national revenue base. A key to raising national public funding in developing countries is the development of taxation. Countries can use tax revenue to improve public services, such as education, health care and public safety.
The evaluation commissioned by the Ministry for Foreign Affairs’ Development Evaluation Unit shows that Finland has supported this work by various means successfully. The results of the evaluation were discussed at a joint event co-organized by the Ministry for Foreign Affairs and the United Nations University World Institute for Development Economics Research (UNU-WIDER).
Strengthening domestic resource mobilization central to breaking aid dependency
“The evaluation report examines the strengthening domestic resource mobilization as an important development policy priority for Finland in ending aid dependency. The report’s recommendations come at a good time in terms of planning the way forward. The Government Programme aims to reduce unhealthy political and economic dependence on foreign powers,” said Pasi Hellman, Under-Secretary of State for Development Policy at the Ministry for Foreign Affairs.
The private sector and Finnish companies play an increasing role in development cooperation. According to the evaluation report, companies supported by Finnfund have contributed to tax revenue of up to EUR 700 million annually in developing countries, of which EUR 553 million were collected in African countries in 2021.
Finland supports partner countries in international tax debate
The evaluation results show that Finland’s support to developing countries has given them more opportunities for contributing to and influencing the global tax debate. Cooperation with the African Tax Administration Forum (ATAF)(Link to another website.) has been particularly successful. With Finland’s support, the Forum has assumed a recognised lead role in representing African countries in international tax negotiations.
Other forms of cooperation have complemented Finland’s efforts to strengthen DRM. The evaluation shows success in support for civil society organisations, through the Tax Inspectors without Borders (TIWB)(Link to another website.) initiative by the UN Development Programme (UNDP) and the OECD, and as well as through influencing work in the World Bank.
Developing countries’ tax administration has been strengthened
In her presentation, Pia Rattenhuber, Research Fellow at UNU-WIDER, talked about UNU-WIDER’s research and development work in Uganda, Zambia and Tanzania. Rattenhuber emphasised that research and technical support to developing countries complement one other, and together, produce better results. It is very important for developing countries to learn from each other and cooperate to strengthen their taxation capacities. According to Rattenhuber, having a long-term perspective is necessary for building trust and competence in developing countries.
The Ministry for Foreign Affairs has cooperated with the Finnish Tax Administration to strengthen tax administrations of developing countries.
“We need political will, commitment and tax reforms, but we must also invest in tax administration,” said Eira Karppinen, representative of the Finnish Tax Administration. Improving the tax administrations of developing countries is important because they put tax system reforms into practice.
“Good tax policy and effective legislation alone are not enough without solid tax administration,” Karppinen emphasised.
One example of a country where good results have been achieved is Tanzania, Finland’s long-term partner country for development cooperation. A risk-based pilot project on tax supervision with the Finnish Tax Administration and the Tanzanian Revenue Authority resulted in an increase of around 15 per cent in taxable income of companies in the Dar Es Salaam region compared to regions where the pilot procedures were not in use.
Ministry for Foreign Affairs should strengthen strategy and resources of DRM
The viewpoint of civil society organisations was presented by Outi Hakkarainen, Adviser at Fingo, the umbrella organisation for Finnish development organisations. She called for a more active role for the third sector in DRM cooperation and in the preparation of the new action plan.
Emmi Oikari, Director of the Unit for Development Finance and Private Sector Cooperation at the Ministry for Foreign Affairs, stressed that DRM cooperation should draw on Finnish expertise and specifically focus on ending the aid dependence of developing countries.
The evaluation report recommends that the Ministry for Foreign Affairs draw up a rolling action plan based on realistic resource provision, building on Finland’s achievements to date, and taking into account the need for prioritisation and regular monitoring. According to the evaluation report, Finland will continue to be well placed to demonstrate its commitment to transparent, fair and equitable taxation systems worldwide through its development policy.
Evaluation reports are independent and impartial assessments of development policy and cooperation. They produce information on the achievement of development policy goals and help the Ministry for Foreign Affairs to understand what is working well in development policy and cooperation and what needs to be improved.