Background

One of the key conclusions in the 2002 Monterrey Consensus on Financing for Development has been the emphasis on domestic resource mobilization. Revenue-raising capacities need to be strengthened in order to promote a sustainable development process and to ensure fiscal independency.

Taxation is a key factor establishing mutual accountability between taxpayers and the government. The experience of paying taxes induces an increased demand for sound and transparent economic policies on the side of the taxpayers. At the same time, the necessity of raising taxes forces governments to respond to the demand of their citizens. In contrast, aid-dependency, debt-financing and reliance on resource rents shift the accountability relation away from the citizens.

At the Financing for Development conference in Doha, participants again highlighted the importance of mobilising domestic resources to finance development. Tax evasion and tax avoidance are significant impediments to development. Both developing and industrialised countries are losing enormous amounts of money every year as a result of tax evasion and avoidance. For developing countries in particular, this is money that could be used to build effective government structures and to finance pro-poor public services. Existing studies indicate that annual financial leakages from developing countries are substantial. To finance and maintain a certain level of pro-poor public spending, most developing countries are forced to resort to other financial sources like ODA, debt and natural resource rents.

The German Federal Ministry for Economic Cooperation and Development (BMZ) is therefore determined, in cooperation with its international partners, to intensify its support for transparent and effective tax systems in its partner countries. For this purpose, the BMZ proposed the idea at the Doha conference of launching an initiative designed to intensify international cooperation with partner countries on fighting tax evasion and avoidance, referred to as the ‘International Tax Compact’.

ITC Factsheet (0.9 MB PDF)