White Paper: Enhancing Domestic Resource Mobilization through Customs and Trade Facilitation Reforms

  • Date Posted: September 23, 2022
  • Authors: TCA EMD Webinars
  • Document Types: Primer or Brief
  • Donor Type: U.S. Agency for International Development

Domestic resource mobilization (DRM)—the process through which countries raise their own funds to provide for their people—is critical to the Journey to Self-Reliance. DRM not only provides governments with funds to alleviate poverty and deliver public services such as health and education; it also is a critical step on the path out of aid dependence. Amid a decades-long wave of trade liberalization and economic integration, DRM assistance has tended to focus on helping developing countries implement the policy and administrative reforms needed to replace taxes on international trade with domestic taxes. Despite reductions in tariffs and duty rates over time, many developing countries still obtain a sizeable percentage of revenues from taxes collected at the border, including customs duties, excise taxes, and value-added tax (VAT) on imports. While there is potential to increase revenues greatly from expanding the domestic tax base, there is also an opportunity to increase efficiency and mobilize domestic revenues through customs reform without compromising trade facilitation priorities.

Considerable evidence shows that governments can sustainably increase revenues by improving internal taxation. Less attention has been paid to the role of customs and trade facilitation in advancing a country’s revenue mobilization objectives. A better understanding of how customs reforms can reduce operational inefficiencies and improve the volume of trade presents an opportunity for USAID to provide enhanced technical assistance. While the primary focus of customs assistance should continue to be reaching trade facilitation goals, those goals need not be detrimental to a government’s revenue objectives. In fact, revenues may even grow with improved trade facilitation, as a more competitive economy leads to greater trade volumes, higher incomes, and ultimately larger tax bases.

This white paper provides USAID, host countries, private sector stakeholders, and the broader development community with a business case for accelerating DRM through trade facilitation and customs reforms. The theory of change proposed here posits that the revenue lost to trade liberalization can be recouped, at least in part, through enhanced trade facilitation, which contributes to increased imports and exports, better compliance, more effective enforcement, and ultimately higher revenues. Addressing DRM improvements through a trade facilitation lens presents new opportunities to stimulate trade and economic growth while meeting the revenue needs of the public sector in developing countries.


 

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