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At the forthcoming Third Financing for Development Conference taking place in Addis Ababa, governments will be urged to tax more effectively and donors will be called on to help them do so, in order to resource ambitious new development frameworks. There is considerable evidence that donors can help build tax capacity in developing countries, but they must recognise trust as a critical factor.

Building relationships of trust

Capacity building is centrally about building relationships of trust. This is a key recommendation of new analysis in an IDS Policy Briefing, Building the Tax Capacity of Developing Countries, written by Mick Moore, Jan Isaksen, Olav Lundstøl, Odd-Helge FjeldstadWilson Prichard and Rhiannon McCluskey.

By placing a strong emphasis on trust, including being sensitive to local context and needs and a commitment to building long-term relationships, donors can avoid many of the mistakes common to tax capacity building programmes. These include giving priority to those problems for which they have ready-made solutions; inflexibility, especially in the supply of personnel services; and excessive emphasis on installing new IT systems, which are frequently over-designed or otherwise locally inappropriate.

Facilitating South-South Cooperation and supporting mentoring

The briefing also highlights growing South-South cooperation and how donors can support this. First, through ‘triangular cooperation’: whereby a richer nation provides the finance for a middle-income country to support tax capacity building in a poorer country. Second, donors could establish an independent fund devoted to financing South-South cooperation on a demand-led basis.

Mentoring is also key, as demonstrated by the example of Norwegian Tax Administration staff providing support to the Zambia Revenue Authority, working jointly with them, on specific problems and audit cases, and helping them to learn by doing. The briefing authors argue that this should be a large and growing component of capacity building support in the revenue field as it directly addresses the problem of internal scarcity of advanced professional skills in areas like accounting, IT and auditing.

Looking beyond tax administrations

Finally, the analysis suggests that donors need to look beyond their normal focus on the organisations that actually assess and collect taxes to other important institutions, including the legislative and court systems and tax policy units within ministries of finance. Donors seeking to improve tax capacity should start with an open mind about the organisations they might support. Measures to inform and empower parliamentarians, parliamentary committees and voters over taxation issues might also be an effective route to building sustainable long-term revenue collection capacity.

Read the Policy Brief Building the Tax Capacity of Developing Countries