In Developing Countries, Taxes Are an Opportunity for Growth

Millennium Challenge Corporation Chief Executive Officer Dana J. Hyde gave keynote remarks today at MFAN’s event on The United States and the Future of Development Financing, where she discussed how U.S. investments support developing countries in their effort to transparently raise and spend their own funds on much-needed infrastructure and public services for their people. In its economic analyses, MCC often finds that better resource management can be a key catalyst for economic growth. In the Philippines, for example, MCC has helped the government nearly double its annual tax collections from five years ago. By investing in tax administration and reducing opportunities for corruption, the MCC-Philippines Compact helped expand available domestic resources.

After visiting the Philippines in May, Hyde wrote a Medium post on the important role domestic resource mobilization plays in today’s development landscape, which we invite you to read below. To read Hyde’s full remarks from today’s event, visit MCC’s website.

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If you discovered an investment that returned $20 on the dollar, would you pursue it?

These type of returns are the reason international donors are increasingly focused on domestic resource mobilization (DRM), supporting countries in the effort to transparently raise and spend their own funds on infrastructure and public services for their people. In some cases, development programs that help governments mobilize domestic resources have returned $20 or more for every assistance dollar invested. And the world is taking note — at last summer’s Financing for Development conference in Ethiopia, 193 countries agreed to the Addis Ababa Action Agenda to strengthen domestic resource mobilization and help drive development outcomes.

This week, I am visiting the Philippines to celebrate the closeout of MCC’s $434 million compact investment, and domestic resource mobilization was a key pillar. Over the last five years, MCC worked closely with the government in support of its ambitious reform of the tax administration system. The result: MCC has helped the government nearly double its annual tax collections from five years ago. And since 2013, two innovative pilot programs have generated an additional $300 million in tax revenue, and figures continue to grow. The additional revenue means more funds are available for public investments like roads, hospitals, and schools that will promote economic growth and lift Filipinos out of poverty.

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Tackling Corruption

In the Philippines, our approach to mobilizing domestic resources began with tackling one of the leading impediments to growth in the developing world: corruption. Corruption and graft act like a hole in the revenue pipeline, leaking critical dollars that could be used to provide needed public services. As a recent International Monetary Fund report found, high levels of corruption can discourage citizens from paying their taxes and cut investor confidence in the business climate. As Secretary of State John Kerry said at the Anti-Corruption Summit in London earlier this month, “corruption tears at the entire fabric of a society.”

At MCC, accountability is at the core of our model, and fighting corruption is a key part of our approach to poverty reduction. Countries — including the Philippines — must first pass the control of corruption indicator on MCC’s scorecard to even be eligible for an MCC compact.

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The Philippine Bureau of Internal Revenue

In the Philippines, we saw potential to address corruption by supporting the government’s ambitious reforms at the Philippine Bureau of Internal Revenue and strengthening investigations at the Department of Finance. MCC invested $4 million to improve the technology and approach of the anti-corruption team, and the initial results suggest the reforms have been successful. As of the end of 2015, the number of public officials and employees investigated had risen four-fold since the start of the compact.

One investigation resulted in the dismissal and imprisonment of a customs collector. His individual lifestyle check revealed assets including two mansions, a home, two residential lots, a 5.5 hectare plantation with another mansion and pool, and 16 automobiles — all despite a reported annual gross income of less than $12,000. Thanks to the anti-corruption team, the customs employee was prosecuted and forced to forfeit his unexplained wealth.

Building Capacity

At the heart of our program was ambitious reform at the Bureau of Internal Revenue. When we talk about domestic resource mobilization, some envision new taxes or higher tax rates, but DRM can also mean narrowing the gap between potential and actual tax collections. MCC supported the adoption of a new automated tool to manage auditing and worked with the International Monetary Fund to provide technical support to help the bureau improve revenue collections and reduce non-compliance.

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Improving the process for collecting and auditing taxes at the individual level.

Until recently, the bureau had conducted tax audits by hand, opening the door for human error, corruption, and bias. Amid a government-wide effort to increase the use of technology, the digital auditing tool is raising the bureau’s workload capacity and minimizing human error and corruption. And it already appears to be making a significant difference. The average amount captured by the bureau per audit has gone from roughly $54,000 in 2011 to nearly $400,000 in 2015.

Raising Awareness

Finally, in many developing countries, potential taxpayers don’t know where or how to pay their taxes. A study in the Philippines found, for example, that only one quarter of self-employed professionals like doctors, lawyers and entrepreneurs were paying their taxes, while salaried workers carried most of the tax burden.

So MCC supported a public awareness campaign to underscore why and how people should pay their taxes. A step-by-step educational video showing how to file taxes received more than one million views ahead of the 2014 tax deadline, and registration among self-employed professionals jumped 17 percent with a corresponding 8 percent increase in tax revenue in the first half of 2014.

The following year, the team launched the Angat Pa Pinas–Soar Higher Philippines–campaign, which illustrated the vital role citizens and their tax dollars play in building critical infrastructure and providing social services like healthcare and education. Today, the video has more than 700,000 views on YouTube.

As our Philippines compact comes to a close, I couldn’t be more excited about what we have accomplished. As with all of our projects, MCC has commissioned an independent evaluation of our work in the Philippines that will be conducted in the months and years to come. While that effort will surely provide additional insights on how we can optimize our assistance in domestic resource mobilization, the early returns are quite compelling. The work we have done is already having a profound impact, and it can serve as a valuable model for us and others as more and more countries gain the resources to invest in their own development.

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This is an updated version of a piece by Dana Hyde, CEO of the Millennium Challenge Corporation, that originally appeared on MCC’s Medium page on May 24.

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