This evaluation undertook in-depth case studies of World Bank–supported domestic revenue mobilization (DRM) interventions in seven countries (Chad, Colombia, Guatemala, Kenya, Madagascar, Pakistan, and Rwanda). This was augmented by a review of Project Performance Assessment Reports undertaken by the Independent Evaluation Group for six DRM-related interventions. The findings were used to help identify examples of good practice and areas where there may be scope for improvement.

The World Bank mostly identified major constraints to improved DRM correctly in case study countries, drawing on a range of analyses, including the Tax Administration Diagnostic Assessment Tool (tax administration), Public Expenditure and Financial Accountability, and International Monetary Fund analysis.

Challenges faced in the six World Bank projects and operations reviewed included addressing political economy constraints, learning from experience, matching the right intervention to the problem, leveraging donor support, and preparing an appropriate results framework.

World Bank effectiveness was modest in strengthening tax administration in the case study countries. Progress achieved, particularly from development policy operations, was often reversed over time, even for operations that recorded significant achievements shortly after closing.

The World Bank was more effective in pursuing DRM objectives in the six operations and projects reviewed when (i) it worked in coordination with development partners (and especially the International Monetary Fund) in the context of clear division of labor; (ii) complementary instruments were mobilized (for example, investment project financing and development policy financing); and (iii) tax reforms involved engagement with civil society.

The World Bank was less successful in articulating relevant results indicators to track progress toward DRM objectives as a result of DRM-related prior actions. This was the case in some International Development Association–eligible countries, which had weakly relevant indicators and unrealistic targets.

The Global Tobacco Control Program has proved a useful tool for identifying concrete opportunities to generate revenue and contribute to longer-term health outcomes. Guatemala and Pakistan benefited from assessments of tobacco taxation, including the formulation of recommendations for tobacco tax reform. Global Tobacco Control Program recommendations informed a prior action on tobacco taxation in a development policy operation for Colombia.

Country case studies and Project Performance Assessment Reports provided a more granular picture of World Bank strategies, activities, and interventions to help countries enhance DRM. Seven country cases were selected: Chad, Madagascar, and Rwanda (low-income countries); Colombia, Guatemala, Kenya, and Pakistan (middle-income countries; see appendix A for details on the selection criteria used). These studies sought to assess the extent to which World Bank interventions were appropriate to country conditions and priorities and their impact. Evidence is supplemented with insights from several Project Performance Assessment Reports on tax-centered projects and operations.11 This chapter reviews the use of diagnostics and analytical underpinnings to inform DRM priorities, the choice of results indicators, World Bank coordination with development partners, and the impact of World Bank support on DRM. The World Bank drew on analysis in Systematic Country Diagnostics, TADATs, Public Expenditure and Financial Accountability assessments, and other ASA to identify DRM constraints. To varying degrees, diagnostics informed World Bank strategy, lending, and nonlending engagements in case study countries (table 4.1).

Table 4.1. Analytical Underpinnings of Domestic Revenue Mobilization Engagement at Country Level

Source: Independent Evaluation Group.

Note: CEM = Country Economic Memorandum; CEQ = Commitment to Equity; CPF = Country Partnership Framework; CPS = Country Partnership Strategy; DRM = domestic revenue mobilization; IMF = International Monetary Fund; PEFA = Public Expenditure and Financial Accountability; PER = Public Expenditure Review; SCD = Systematic Country Diagnostic; TADAT = Tax Administration Diagnostic Assessment Tool.

Chad

The World Bank identified major DRM challenges in Chad, drawing on analysis produced by development partners (particularly the IMF). These included overreliance on the oil sector, a lack of capacity to manage petroleum sector revenue in a transparent manner, and broader weaknesses in the capacity of tax administration.

The World Bank approved two DPOs for Chad with DRM content (FY16 and FY17). The objectives were to (i) broaden the tax base by assisting the government with registering taxpayers, (ii) build the capacity of staff to manage oil revenues, (iii) provide tools and information technology systems to increase the effectiveness of revenue collection, and (iv) reduce massive tax exemptions. The FY16 Fiscal Consolidation DPO supported the creation of the taxpayer database to increase the number of taxpaying firms. The prior action supporting this reform required the Ministry of Finance to adopt the results of the nationwide enterprise census for taxpayer identification and registration. The second prior action required Chad’s Council of Ministers to adopt and submit a tax code to the national assembly consolidating all tax-related fiscal regulations, leading to a more comprehensive and transparent tax system. This directly addressed constraints on budget instability caused by the narrow tax base.

However, the procedures and systems available for the payment of tax became cumbersome. According to Doing Business 2020, firms on average made 54 tax payments a year; spent 834 hours a year on filing, preparing, and paying taxes; and paid total taxes amounting to 63.5 percent of profits (World Bank Group 2020). Efforts to resolve these challenges included the development of an integrated tax management system (Standard Integrated Government Tax Administration System) in 2015 and the provision of unique tax identification numbers. These have not been successful in changing the direction of tax-related indicators.

Elimination of tax exemptions also had little success. Under the Chad Emergency DPO (FY17), the government put a freeze on new exemptions (except for those under the Vienna Convention) and studied tax expenditures. However, the freeze on new exemptions was repealed by the end of 2017, and a prior action under the First Economic Recovery and Resilience DPO to reduce the number of tax exoneration agreements followed in 2018. The government committed to enhancing transparency by issuing an inventory of tax exemptions and derogations as an appendix to the 2020 Finance Law. However, without a results indicator tracking the magnitude of tax expenditures, it is difficult to assess the efficacy of World Bank support to bring about a reduction in tax expenditures. In the end, non-oil revenue increased modestly, from 8.4 percent of non-oil GDP in 2016 to 8.8 percent in 2019. Though some progress was achieved, Chad continued to underperform relative to other countries in the Central African Economic and Monetary Community) with the share of tax revenue to GDP at 7.5 percent in 2018, compared with 9 percent in Central African Economic and Monetary Community countries.

The World Bank, in its annual assessment of the quality of policies and institutions for revenue mobilization in the country (Country Policy and Institutional Assessment), upgraded Chad’s CPIA (Country Policy and Institutional Assessment) rating from 2.5 (out of 6) in 2014 to 3.0 in 2017, but its rating returned to 2.5 in 2019.

Colombia

The World Bank identified the main DRM challenges in Colombia as low taxation on high incomes, tax evasion, weakness in custom administration, low overall VAT and excise revenue collection, a shrinking tax base, tax system complexity discouraging formalization with distortions created by the ad hoc granting of favorable tariffs and tax treatment, and overreliance on commodity revenue. Under pillar 3 of the FY16–21 CPF (supporting fiscal sustainability and productivity), DRM-related objectives were to (i) improve fiscal management to increase non-oil revenues and accommodate associated expenditures under the medium-term fiscal framework by 2017, and (ii) improve the business environment and innovation to boost productivity to improve tax registration.

The World Bank produced influential diagnostics on tobacco taxation. These informed prior actions for the Fiscal and Growth Development Policy Loans 1 (FY17) and 2 (FY19). The provision of technical support to strengthen the policy framework for trade facilitation, business regulation, innovation, and green growth led the government to adopt the following tax reforms: (i) implementing the 2016 tax reform, which among other things increased the general sales tax (VAT) rate from 16 to 19 percent, and (ii) increasing the rates of tobacco and alcohol tax. The government also adopted a carbon tax on fossil fuels proportional to their carbon dioxide emissions and a tax on plastic bags.

At the request of the National Directorate of Taxes and Customs, the World Bank, in collaboration with the OECD, provided capacity-building support on transfer pricing under the Colombia Fiscal Consolidation Programmatic Approach (FY16–18). This supported the development of a macroeconomic and fiscal model for the Ministry of Finance with a detailed module to encourage tax compliance and equity and the effectiveness of the tax system to reduce tax evasion, avoidance, and tax base erosion. According to interviews with World Bank staff, the model helped determine tax rates and decrease expenditures. As a result, the Ministry of Finance was in a better position to make improvements to its fiscal rules and fiscal transparency legislation.

The World Bank also contributed to improving tax registration, despite shortcomings in project design. The project Tax Simplification for the City of Cali (FY16–18) modernized the management process and consultation and tax payments for the municipality of Cali, its companies, and its citizens. Among the project’s successes were strengthening the security of information, reducing the risk of corruption, shortening the time for the execution of tax processes, eliminating in-person taxpayer lines to receive tax forms, and improving overall attention to citizens and taxpayers.

Guatemala

Guatemala has one of the lowest revenue-to-GDP ratios in the world (10 percent) and widespread tax evasion. The World Bank correctly identified the following DRM constraints limiting fiscal capacity to deliver basic public goods and services: low tax rates, absence of a broader tax base, poor compliance with existing tax laws by firms and individuals, high tax expenditures (exemptions), and weak capacity for tax administration.

These challenges informed the CPF for FY17–20 under pillar 2, which aimed “to improve public resource management and accountability.” Under the CPF, the World Bank designed two programs that focused on tax administration: (i) the Improved Governance of Public Resources and Nutrition DPF (FY17–20), which aimed to strengthen the regulatory framework to enhance tax administration, and (ii) the Transparency and Efficiency in Tax Administration Project (FY17–23), which aimed to modernize tax collection processes and strengthen tax and customs procedures. The latter was dropped after Guatemala’s legislature failed to approve the project more than 18 months after Board approval. An ASA activity on Guatemala in 2018 addressed the introduction of fiscal rules, tax compliance, and tobacco taxation (World Bank 2018b). A regional ASA, Fiscal Management in Central America (FY15–17), was provided to improve fiscal rules and tax compliance. These projects were aligned with the government’s K’atun 2032 National Development Plan to improve the regulatory and institutional challenges impeding improvements in tax administration, transparency, control, and accountability.

World Bank effectiveness was modest in strengthening tax administration. Under the First Improved Governance of Public Resources and Nutrition DPF, a prior action to support amendments to the organic Law of the Tax Administration Superintendence (including provisions to limit bank secrecy to enhance tax collection compliance) helped reduce noncompliance as a share of potential VAT revenues from 34.2 percent in 2015 to 26.3 percent in 2019, surpassing the CPF target of 29 percent. In 2020, tax revenue to GDP was less than 11 percent. As part of technical assistance under the ASA Fiscal Rules in Central America, the World Bank—in partnership with the United Kingdom’s Behavioral Insights Team—supported the government in applying behavioral insights to motivate citizens to pay their taxes. Tax reminders sent by the Guatemalan Tax Authority were initially effective at increasing citizen tax declarations and payment, but interviews with stakeholders indicated that results were not sustained.

Guatemala was also the focus of Global Tobacco Control Program–supported analytical work on tobacco taxation, which recommended, among other things, changing the ad valorem excise system for cigarettes to a specific excise system with a uniform excise rate in monetary terms. It also recommended that the specific excise rate be increased annually to ensure a reduction in tobacco affordability and an increase in excise revenues (World Bank 2019b).

Kenya

The relevance of the World Bank’s support to address DRM issues in Kenya was low at the outset of the evaluation period. The Country Partnership Strategy (FY14–21) failed to recognize early signs of sliding revenue performance and did not have explicit DRM-focused objectives, pillars, and interventions or associated results indicators. One reason was a view held within the World Bank that the priority at that time was to support a transition from public sector–driven growth toward private sector–driven growth, and that fiscal consolidation should be driven by rationalizing public expenditure. Still, the World Bank pursued extensive analytical and advisory work on DRM. Topics that were tackled later informed lending operations and government reform regarding revenue forecasting and reduction of income tax and VAT exemptions.

In August 2018, at the government’s request, a retreat was organized to support research on tax expenditure, simplification of the tax regime, and revenue forecasting. World Bank’s knowledge product Kenya Tax Policy Studies on Value-Added Tax and Corporate Income Tax, published in 2017, was effective in driving discussion on tax exemptions and their cost in foregone revenue collection. However, it did not result in increased revenue collection.

Only modest progress was made, despite the World Bank’s extensive production of 13 DRM-relevant ASA, to inform operations supporting DRM. The Kenya Petroleum Technical Assistance Project (FY15), which provided training for staff at the Kenya Treasury and the Kenya Revenue Authority in forecasting, collecting, and managing oil revenues, had limited relevance to the DRM agenda. However, according to government officials, the capacity-building activities enhanced revenue collection through withholding taxes from subcontractors working on associated projects. The Governance for Enabling Service Delivery and Public Investment Project (FY18), a Program-for-Results, provided training to 11 staff of the Kenya Revenue Authority on revenue modeling and forecasting. The project aimed to reach a target of 94 percent of domestic revenue collection as a percent of the annual budget, but it fell short, partly because of the COVID-19 pandemic.

The Kenya Inclusive Growth and Fiscal Management DPF was a breakthrough in DRM. The DPF included prior actions to enact the Finance Act 2018 to remove VAT exemptions on petroleum products and adopt a governance framework for granting tax exemptions to avoid the creep in tax exemptions and arrest the decline in tax revenues. The act introduced an 8 percent VAT on petroleum products that yielded additional revenue estimated at 0.15 percent of GDP over the first seven months of implementation. Despite these efforts, according to the IMF, VAT and income tax as percentage of GDP decreased from 11.8 percent in FY18/19 to 10.7 percent in FY19/20, falling short of the 2021 target of 12.1 percent.

Madagascar

The World Bank contributed to modernizing Madagascar’s tax and customs administrations, improving revenue collection (particularly from natural resources), and boosting local capacity to manage revenues from mining operations. It identified weak DRM as a major development constraint (World Bank 2015c), with root causes in weak tax and customs administration, noncompliance and tax evasion, a narrow tax base, limited fiscal decentralization, and extensive tax exemptions. The World Bank increased its lending in coordination with the European Union. Two TADAT assessments (2015 and 2021) informed the World Bank’s engagement during the evaluation period, and two customs reform ASA activities guided the client’s adoption of performance management and risk-based auditing within its customs administration. Other nonlending support included a 2014 DRM Policy Note and influential ASA in 2019 on combating corruption and tariff evasion (World Bank 2022b).

The Public Sector Performance Project (FY16–22) included support to improve and consolidate taxpayer registration and identification, modernize the country’s integrated tax administration system, strengthen risk-based audit function and controls, introduce performance-based management to the tax and revenue agencies, and improve revenue collection in the mining sector. The Public Sector Performance Project was instrumental in piloting TADAT. More than 100 tax officers were trained and certified in TADAT, at central and local levels. This increased capacity to conduct TADAT self-assessments led to the design of a strategic tax reform plan, the adoption of an annual review process, and increased ownership of reform efforts. The three-operation programmatic DPO series supported prior actions to disclose the list of enterprises granted tax benefits under the free-zone regime, tighten the scope of customs exemptions, and boost customs administration by expediting the customs clearance process and establishing performance contracts for customs inspectors at Toamasina port.

Several interventions to support DRM were unsuccessful. Although the World Bank supported disclosure of a summary of all tax expenditures in the annual budget law, this did not contribute to a significant increase in revenue. Far from supporting the government in meeting its targeted reduction of about $24.8 million in tax exemptions, tax expenditures eliminated during the Public Finance Sustainability and Investment DPO series (2016–18) were less than $0.4 million, and in 2017, the government approved additional tax benefits for special economic, industrial, and agriculture zones. Additionally, the World Bank dropped the establishment of a single administrative identification number to inform revenue mobilization because of lack of progress on the client side. Implementation was delayed due to difficulties in appointing the entity in charge of managing the identifier during a politically unstable period (elections).

Pakistan

Over several years, both the IMF and the World Bank undertook significant diagnostic work to address persistently low DRM in Pakistan, which was characterized by distortive, inequitable, and tax base–reducing special regulatory orders and exemptions. This was the main mechanism for granting exemptions.

Pakistan’s revenue performance improved significantly under two DPOs. The First and Second Programmatic Fiscally Sustainable and Inclusive Growth Development Policy Credits (FY14–15 and FY15–16, respectively) aimed to “mobilize revenue while expanding fiscal space to priority social needs” (World Bank 2020c, 1). Through a prior action to support a legal amendment to permanently eliminate the discretion of the Federal Board of Revenue in issuing special tax exemptions, overall tax collection reached 12.4 percent of GDP in FY15–16, a significant improvement over the target of 11.5 percent of GDP. The government was also able to curtail the Federal Bureau of Revenue’s use of special regulatory orders. IEG found that the Fiscally Sustainable and Inclusive Growth program contributed to a significant improvement in Pakistan’s revenue performance over the review period (World Bank 2020c). The Federal Bureau of Revenue no longer had the discretion to issue special tax exemptions, and proposing exemptions was now subject to parliamentary approval. There was a significant reduction in tax concessions and exemptions, as well as improvements in tax compliance and enforcement, both of which caused the tax-to-GDP ratio to increase by nearly 2.5 percentage points over 2013–17.

Building on this achievement, the Competitiveness and Growth DPF operation (FY16–17) included prior actions to eliminate the discriminatory tax concessions granted through statutory regulatory orders, estimated at 1 percent of GDP. These prior actions were as follows: (i) the recipient has posted improved processes to simplify and streamline the payment of taxes on the website of the Federal Board of Revenue, and (ii) the recipient has started to implement a new audit policy that includes risk profiling of taxpayers for improved tax compliance. The Federal Board of Revenue did implement an audit policy that included risk profiling of taxpayers by initiating 40 comprehensive audits of large taxpayers.

The Fiscally Sustainable and Inclusive Growth program contributed to a significant improvement in Pakistan’s revenue performance, but this gain was not sustained. The tax-to-GDP ratio increased by nearly 2.5 percentage points of GDP during 2013–17, exceeding the Fiscally Sustainable and Inclusive Growth program target because of a significant reduction in tax concessions and exemptions, increased rates on withholding taxes (income taxes), and improvements in tax compliance and enforcement. Progress in tax policy and administration was made at both the federal and provincial levels. After reaching its peak of 12.9 percent of GDP in FY17–18, tax collection deteriorated to about 11.6 percent in FY18–19 because of a major reemergence of tax expenditures. Critical reforms stalled because of opposition from privileged interest groups, and Pakistan’s tax revenue remains substantially below 15 percent of GDP.

Pakistan benefited from analytical work on tobacco taxation though the Global Tobacco Control Program, which recommended, among other things, to increase the excise rates annually by at least 30 percent for lower tier cigarettes and by at least 15 percent for higher tier cigarettes to ensure a reduction in cigarette consumption as well as growth in tobacco revenue.

Rwanda

A 2015 TADAT assessment in Rwanda identified a weak taxpayer database, inadequate risk management practices, weak VAT administration, and tax arrears. TADAT and Public Expenditure and Financial Accountability assessment results informed the Public Sector Governance Program-for-Results (FY15–18). The Program-for-Results supported activities related to the removal of nonfilers and nonpayers, and taxpayers registering under the correct VAT codes broadened Rwanda’s tax base and strengthened tax compliance. These efforts led to a 27 percent increase in the number of taxpayers between 2016 and 2019 (Rwanda Revenue Authority 2019).

Program-for-Results support for the implementation of the electronic billing machine improved VAT revenues and tax compliance. According to the Rwanda Revenue Authority (2019), the number of electronic billing machines grew by 45 percent from 2016 to 2019. This helped modernize the tax system, which resulted in a continuous increase in tax revenues during the evaluation period, according to the Completion and Learning Review for Rwanda’s Country Partnership Strategy FY14–18. By the end of the project, all 30 districts in Rwanda had adopted the e-tax platform. Between 2016 and 2019, tax revenue increased by 29 percent. Similarly, local government taxes and fee collection increased by 27 percent. The time spent paying taxes was reduced significantly, from 109 hours in 2016 to 91 hours in 2019 (World Bank Group 2019).