DOMESTIC RESOURCE MOBILIZATION IN DEVELOPING COUNTRIES Minister Pekka Haavisto Finland Addis Ababa University

Post-2015: How to finance? Millenium Development Goals (MDG’s) Millenium Development Goals (MDG’s) Post-2015: Sustainable Development Goals (SDG’s) Post-2015: Sustainable Development Goals (SDG’s) Funding challenges: Funding challenges: –Foreign Direct Investments (FDI) –Development Co-operation (ODA) –Domestic resource mobilization, e.g. developing taxation

Domestic Resource Mobilization The generation of savings from domestic reources and their allocation to socially productive investments The generation of savings from domestic reources and their allocation to socially productive investments The largest and most important part of any nation’s revenues The largest and most important part of any nation’s revenues Strenghtening the mobilization of domestic resources key element in state- building Strenghtening the mobilization of domestic resources key element in state- building

Challenges in raising resources Establish and maintain institutions for effective and equitable tax collection Establish and maintain institutions for effective and equitable tax collection Corruption Corruption Dealing with ”hard-to-tax” sectors Dealing with ”hard-to-tax” sectors Tax evasion Tax evasion State-owned enterprises State-owned enterprises Regional tax competition Regional tax competition

Different forms of taxation Value added taxes (VAT) Value added taxes (VAT) Corporate taxes Corporate taxes Personal income taxes Personal income taxes Environmental taxes Environmental taxes

Extractive Industries Transparency Initiative (EITI) EITI is a global standard overseen by a coalition of governments, companies and civil society EITI is a global standard overseen by a coalition of governments, companies and civil society Covers transparency and accountability of the full extractive value-chain Covers transparency and accountability of the full extractive value-chain In participating countries a multi- stakeholder group In participating countries a multi- stakeholder group

EITI in Ethiopia Ethiopia has renewed its request for a candidature status Ethiopia has renewed its request for a candidature status The proposal is based on ”Ethiopian Extractive Industries Transparency Initiative EEITI” The proposal is based on ”Ethiopian Extractive Industries Transparency Initiative EEITI” Broad support, but the critical issue is the role of civil society in the process Broad support, but the critical issue is the role of civil society in the process

Closing the loopholes Illicit financial flows a topic in the high- level political discussion, e.g. G8 and G20 summits Illicit financial flows a topic in the high- level political discussion, e.g. G8 and G20 summits Tax evasion and tax avoidance are problems Tax evasion and tax avoidance are problems

Reports from Africa Africa Progress Panel, led by former UN General Secretary Kofi Annan: ”Equity and Extractives” Africa Progress Panel, led by former UN General Secretary Kofi Annan: ”Equity and Extractives” UN Economic Commission for Africa (UNECA) has high level panel for illicit flows, led by Thabo Mbeki UN Economic Commission for Africa (UNECA) has high level panel for illicit flows, led by Thabo Mbeki

Categories of illicit financial flows 1) Tax-related components such as tax evasion 2) Proceeds from illegal activities such as the trading and selling of illegal narcotics, weapons etc. 3) Tax avoidance and exploitation of gaps in the tax systems between countries

Transfer mis-pricing Multinationals’ intra-group transactions within national borders and across borders Multinationals’ intra-group transactions within national borders and across borders Makes use of differences in corporate tax rates Makes use of differences in corporate tax rates Over-invoicing or under-invoicing taxable transfers Over-invoicing or under-invoicing taxable transfers

Lost revenues Global Financial Integrity (GFI) esitimation: Global Financial Integrity (GFI) esitimation: Developing countries have been loosing USD 858 – 1138 billion in 2010 due to tax evasion, fraud in international trade, drug trafficking and corruption Developing countries have been loosing USD 858 – 1138 billion in 2010 due to tax evasion, fraud in international trade, drug trafficking and corruption In Ethiopia USD 11,7 billion lost to illicit financial outflows (source: AfDB and GFI) In Ethiopia USD 11,7 billion lost to illicit financial outflows (source: AfDB and GFI)

The tax tree How public funds are collected and how they are spent?

Thank you.