## btcgdea

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### Executive summary — key findings and context
- Tax capacity is central to state capacity and sustainable development.
- International anchor: developing countries should aim for a tax-to-GDP ratio of at least 15 percent (the UN Compromiso de Sevilla).
- Today, 71 developing countries have tax-to-GDP ratios below 15 percent.
  - Of these, 23 are fragile and conflict-affected states (FCSs), 38 are resource rich, and 40 are in the low-income group.
- Estimates suggest that low-income developing countries could on average mobilize about 5 percent of GDP in additional tax revenues through comprehensive reform of their tax system.
- Many low-income developing countries, especially FCSs, will need to further improve institutional capacity to reach a 15 percent tax-to-GDP ratio.
- The Compromiso de Sevilla was formally adopted by United Nations Member States at the Fourth International Conference on Financing for Development in Seville, June 30–July 3, 2025.

### Medium-Term Revenue Strategy (MTRS) and the tax systems approach
- Effective revenue mobilization requires integration of tax policy, tax law, and revenue administration—termed the “tax system approach.”
- The MTRS offers a comprehensive reform path to achieve tax ratios of at least 15 percent of GDP.
- For many low-capacity countries, especially FCSs, a pragmatic, sequenced approach to reform may be required.
- MTRS features:
  - Country-owned, whole-of-government approach linking taxation and spending.
  - Sustained political commitment and clear performance indicators.
- For low-capacity contexts:
  - Tax policy: prioritize simple tax handles and broad-based indirect taxes with few exceptions.
  - Tax administration: focus on core functions, skilled human resources, adequate infrastructure, leadership, and integrity.
  - Customs administration: plays a key revenue role and requires targeted capacity building.

### Tax design: options, priorities, and quantified impacts
- Base broadening and tax expenditures
  - Revenue is best mobilized by broadening the tax base—rationalizing tax expenditures, improving VAT design, and limiting exemptions—rather than raising already high statutory tax rates.
  - Estimates of tax expenditures (averages 2014–23 for samples of 21 LIDCs and 13 EMEs with tax-to-GDP ratio below 15 percent):
    - Total tax expenditures amount to about 19.7 percent of tax revenue in LIDCs.
    - Total tax expenditures amount to about 27.7 percent of tax revenue in EMEs.
- VAT improvements
  - More than 160 countries have a VAT; it generates about a quarter of total tax revenue worldwide.
  - Average C-efficiency in 2022: 0.27 in LIDCs and 0.40 in EMEs.
  - The average VAT rate in 2022 is approximately 13 percent in EMEs and 16 percent in LIDCs with tax-to-GDP ratio below 15 percent.
  - If LIDCs moved their C-efficiency to the level of EMEs (40 percent), VAT revenue would increase by approximately 2.3 percentage point of GDP, an increase of 75 percent relative to its 2022 level.
  - VAT compliance gaps in LICs average 41 percent of potential VAT revenue—or 3 percentage points of GDP.
- Excises and other bases
  - Excises are administratively straightforward and justified by health/environmental goals; scope exists to raise excise revenue.
  - Recurrent property taxes raise about 0.15 percent of GDP in LIDCs, 0.30 percent in EMEs, and more than 1.5 percent of GDP in AEs.
  - PIT: sub-Saharan African countries collected 2.6 percent of GDP in PIT revenue in 2021, 1.1 percentage points more than in 1995.
  - Tariffs often raise more than 2 percent of GDP in some developing countries but are inefficient and should be phased down as capacity improves.
- Investment tax incentives
  - Investment tax holidays and exemptions are often ineffective and costly.
  - Cheaper alternatives include investment tax credits and accelerated depreciation.
  - The Global Minimum Tax may reduce the effectiveness of tax exemptions, creating an opportunity to reconsider incentives.

### Estimating tax potential and tax gaps (key figures)
- Tax potential definition: estimated maximum possible tax revenue given income per capita, economic structure, openness, and institutions.
- Baseline model estimates (2021):
  - Tax potential in LIDCs: 17.7 percent of GDP.
  - Tax potential in EMEs: 21.5 percent of GDP.
  - Implied tax gap (baseline, compared to actual tax ratios): about 5 percent of GDP for both LIDCs and EMEs.
- Baseline model controlling for natural resource rents:
  - Tax potential in LIDCs: 17.3 percent of GDP.
  - Tax potential in EMEs: 21.3 percent of GDP.
- Average gaps over 2017–21 (annual estimates):
  - Under the baseline model (panel 1): 4.9 percent of GDP for LIDCs, 4.6 percent for EMEs, and 3 percent for AEs.
  - Under the control for natural resources rent model (panel 2): 4.5 percent of GDP for LIDCs and EMEs, and 2.9 percent for AEs.
- Institutional improvement scenarios:
  - If public institutions in LIDCs were improved to mimic EMEs (and EMEs to mimic AEs), estimated additional revenue:
    - LIDCs: 1.2 percent of GDP additional revenue.
    - EMEs: 0.5 percent of GDP additional revenue.
  - Text notes an additional figure in an alternate specification but the source is truncated for that value.
- Resource-rich benchmark: 9 percent of GDP (75th percentile for natural resource rents).
- Sample inclusion threshold noted: countries with tax-to-GDP ratio below 15 percent.

### Sustaining revenue gains: episodes and dynamics
- Definition: an episode of tax increase (or loss) is at least three consecutive years of increase (decrease) in tax revenue-to-GDP during 1990–2022.
- Empirical patterns:
  - Most countries with sustained revenue gains experience one, two, or three episodes of increase.
  - Median cumulative gain in tax revenue rises with the number of episodes:
    - Less than 2 percent of GDP for occasional increases.
    - More than 6 percent of GDP for four episodes of increase.
  - Countries with tax revenue declines:
    - Those with zero episodes of decline tend to have the highest and most volatile losses.
    - Countries with one episode of sustained underperformance show a median tax revenue loss of about 2 percent of GDP with small dispersion.
- Policy implication: tax reform should be structured as a process with sustained, sequenced reforms rather than one-off measures.
- Crossers vs non-crossers (empirical evidence cited):
  - Crossers that persistently build capacity ("long-haulers") typically reach 13–16 percent of GDP within a decade and achieve per capita income growth 16 percent higher than non-crossers over 10 years.
  - Temporary increases ("bouncers") show little difference from countries that never crossed.

### Revenue administration, compliance, and governance — diagnostics and quantified effects
- Revenue administration improvements can yield material revenue gains:
  - Comprehensive strengthening of revenue administration can raise tax revenue by 1 to 3 percentage points of GDP (evidence from ISORA, ECLAC, and other studies).
- VAT and TADAT linkages:
  - If LICs increased their overall TADAT score from approximately a D+ to a C+, the VAT compliance gap could decrease by 7.3 percentage points, equivalent to 0.6 percent of GDP.
  - Including spillover effects on CIT compliance, total revenue gain from such TADAT improvements could reach 1.3 percent of GDP.
- Compliance gaps and governance constraints:
  - VAT compliance gaps in LICs average 41 percent of potential (3 percentage points of GDP); some countries reach almost 60 percent.
  - ECLAC (2020) estimates an average CIT compliance gap of 52 percent of potential, equivalent to 3.3 percent of GDP for Latin American EMEs.
  - Low-capacity countries can fall into a “low compliance trap” where pervasive noncompliance, weak RAs, and constrained policy reforms reinforce one another.
- Diagnostic tools:
  - IMF tools cited: TADAT, RA-GAP, ISORA; these provide diagnostics and benchmarks to identify weaknesses and priorities for reform.

### Practical RA reforms, segmentation, CRM, and digitalization
- Short-term priorities for very low-capacity countries:
  - Focus on basics: accurate and complete taxpayer registration; on-time filing; on-time payment; effective audit and enforcement.
  - Objectives: broaden taxpayer base, establish tax presence nationwide, extend RA services and control, and build voluntary compliance via perceived fairness.
- Compliance Risk Management (CRM)
  - CRM aims to improve compliance across registration, filing, payment, and reporting.
  - 75 percent of tax administrations declare a formal CRM strategy, but TADAT scores show risk management is the weakest area.
  - Practical steps: simplified CRM approaches, cross-checking data between tax and customs, use external wealth indicators, and prioritize sectors with higher noncompliance risk.
- Taxpayer segmentation and Large Taxpayers Offices (LTOs)
  - LTOs help focus scarce resources on largest revenue risks.
  - LIC LTOs monitor about 5 percent of corporate taxpayers and generate 63 percent of revenues.
  - Policy implication: adopt full CRM practice, and expand focus to medium taxpayers (Medium Taxpayers’ Offices) for untapped revenue.
- Digitalization as an enabler
  - Evidence: electronic fiscal devices in Peru increased reported firm sales by 5 percent in the year following adoption.
  - E-invoicing can improve revenue mobilization by 0.7 percent of GDP in developing countries (Nose and Mengistu 2023).
  - Challenges: countries below 15 percent often lack internet and electricity access; many RAs cannot finance continuous tech investments or hire tech-skilled staff.
  - Guidance: adopt cost-effective, scalable technologies that support core functions (registration, return filing, payments), expand data exchange with third parties, and integrate systems gradually.

### Case study — Guinea-Bissau digitalization (Kontaktu)
- Context before digitalization:
  - Tax administration collected about 4 percent of GDP; filing and payments were manually processed.
- Kontaktu (Minimum Viable Product)
  - An open-source website for electronic filing and payment accessible on computers and smartphones; can be hosted on commercial clouds or government servers.
  - Initial rollout targeted large taxpayers and expanded since 2022 to medium-size taxpayers.
  - Payment channels through banking system and telecoms were introduced and increased.
- Outcomes and metrics
  - Collections by the tax administration increased from an average of 4.3 percent of GDP before Kontaktu to 6 percent of GDP in 2023.
  - Tax revenue collected by customs decreased from an average of 5.8 percent of GDP to 5.1 percent of GDP in the same period.
  - Manual processing of returns and payments ended; core processes and governance improved.
- Governance lessons
  - Digitalization must be paired with governance strengthening to avoid rent seeking, corruption, and erosion of public trust.
  - ISORA and TADAT diagnostics show governance and public trust are weak areas in LICs; the IMF is developing RAGIA (planned introduction in 2026) to help address RA governance issues.
- Capacity building and international support
  - Digitalization was implemented as part of broader capacity building on policy design, process design, institutional structure, and reform management.
  - IMF capacity development (CD) metrics:
    - CD makes up 37 percent of the IMF’s country operations and is integrated with surveillance (38 percent) and lending (24 percent).
    - Total annual expenditure on public finance CD is about $128 million, of which about $98 million was financed by external donors.
    - Tax policy and revenue administration CD accounted for almost half of public finance CD expenditure.
    - In FY2025 FAD provided CD support to 148 countries; the majority focused on low-income and fragile economies.
    - LEG provided legislative drafting CD to more than 70 countries, amounting to more than 200 tax laws and regulations.
  - The Global Public Finance Partnership (GPFP), launched in 2024, is a funding vehicle supported by 15 bilateral partners to deliver coordinated revenue and spending CD focused on developing and fragile economies.

### Policy recommendations and priorities (summary bullets)
- Anchor reform around a medium-term, country-owned MTRS that integrates tax policy, law, and administration.
- Prioritize base broadening—rationalize tax expenditures, reduce exemptions, and improve VAT design—over increases in statutory rates.
- Strengthen revenue administration using diagnostics (TADAT, ISORA, RA-GAP) and pursue reforms expected to raise revenue by 1 to 3 percentage points of GDP.
- Reduce VAT compliance gaps by improving RA performance (example: moving overall TADAT from D+ to C+ could cut the VAT gap by 7.3 percentage points and yield 0.6 percent of GDP, with total gains including CIT of up to 1.3 percent of GDP).
- Use pragmatic sequencing in low-capacity and fragile contexts: focus first on registration, filing, payment, audit, and enforcement; then scale CRM, LTOs/MTOs, and digital solutions.
- Leverage low-cost, high-impact taxes and instruments: excises, area-based property taxes, simplified PIT regimes for micro-enterprises, and strengthened taxation of natural resources (royalty + resource rent tax + CIT).
- Invest in governance, transparency, and public trust to sustain compliance gains.
- Align capacity development with broader fiscal and macroeconomic reforms and coordinate international support (for instance through GPFP) to maximize impact.

*Source: IMF staff summary and excerpts from “BUILDING TAX CAPACITY FOR GROWTH AND DEVELOPMENT: EVIDENCE-BASED ANALYSIS FOR MOBILIZING DOMESTIC REVENUE” (btcgdea).*

### Executive Summary ......................................................................................................

### Executive Summary

### Key findings and context
- Tax capacity is central to state capacity and sustainable development.
- Developing countries should aim for a tax-to-GDP ratio of at least 15 percent (the UN Compromiso de Sevilla).
- Today, 71 developing countries have tax-to-GDP ratios below 15 percent.
  - Of these, 23 are fragile and conflict-affected states (FCSs), 38 are resource rich, and 40 are in the low-income group.
- Estimates suggest that low-income developing countries could on average mobilize about 5 percent of GDP in additional tax revenues through comprehensive reform of their tax system.
- Many low-income developing countries, especially FCSs, will need to further improve institutional capacity to reach a 15 percent tax-to-GDP ratio.

### Tax system approach (medium-term revenue strategy)
- Effective revenue mobilization requires close integration of tax policy, tax law, and revenue administration—known as the “tax system approach.”
- The medium-term revenue strategy (MTRS) offers a comprehensive reform path to achieve tax ratios of at least 15 percent of GDP.
- For many low-capacity countries, especially FCSs, a pragmatic, sequenced approach to reform may be required.

### Tax design: options and priorities
- Base broadening
  - Revenue is best mobilized by broadening the tax base—through rationalizing tax expenditures, improving VAT design, and limiting exemptions—rather than by raising already high statutory tax rates on compliant taxpayers.
- Improving indirect taxes
  - VAT often underperforms in low-tax countries where rationalizing exemptions and preferential rates could nearly double revenue.
  - Excises are easy to administer and justified by health or environmental goals, with untapped potential in developing economies.
- Reforming tax incentives
  - Investment tax holidays and exemptions are often ineffective and costly.
  - Cheaper alternatives include investment credits and accelerated depreciation.
- Simple taxes
  - Initial tax design could prioritize simplicity and feasibility while administrative capacity is developed (for example, taxes with a few collection points and final withholding taxes).
- Diversifying revenue sources
  - Personal income tax expansion, stronger natural resource taxation, and property taxes can mobilize revenue in equitable ways.

### Tax compliance: strategies and administrative practices
- Cultivating tax compliance
  - Establish administrative presence nationwide, invest in tax education programs, partner with other government agencies and civil society, and promote open communication on tax issues.
- Simplicity and practicality
  - Adopt clear norms, transparent rulings, simple tax forms, harmonized procedures, user-friendly IT systems, and easy collection entry points.
- Compliance risk management
  - Differentiate taxpayers by size and compliance behavior, combining large taxpayer offices to secure revenue with streamlined administration for small taxpayers to encourage formalization and “normalize” compliance.
- Digitalization
  - Adopt simple and flexible digital solutions that are expandable over time, starting with core functions (registration, return filing, payments) for large taxpayers, especially in low-capacity environments.
- Governance
  - Promote capable and consistent leadership; adopt clear rules governing integrity; engage in financial management and reporting; implement strong internal and external oversight; recruit and train people based on meritocratic principles; and manage through goal setting and performance monitoring to encourage tax morale and compliance.

### Building tax capacity and international support
- Building tax capacity is ultimately a domestic political process, rooted in each country’s social contract.
- Capacity development—through technical advice, training, and peer learning—has proven effective in strengthening tax systems, particularly in low-income and FCSs.
- Tax capacity building is central to the IMF’s work and integrated with surveillance and lending.
- To maximize impact, capacity building should be comprehensive, country-led, and aligned with broader fiscal and macroeconomic reforms.
- The new Global Public Finance Partnership coordinates international support to help countries mobilize domestic revenue and advance the Sustainable Development Goals, as emphasized in the Compromiso de Sevilla.
- The United Nations Member States formally adopted the Compromiso de Sevilla at the Fourth International Conference on Financing for Development in Seville, June 30–July 3, 2025.

*Source: Executive Summary.*

### Introduction

### btcgdea - Introduction

### Introduction: context and objectives
- Strengthening tax capacity has long been a central priority for developing countries and is explicitly called for in the UN Sustainable Development Goals (SDGs) as “improved domestic resource mobilization, including through enhanced capacity for tax and other revenue collection.”
- Rationale: an adequate tax capacity is a critical foundation for financing public services, infrastructure, and social development and a key aspect of state building to support the economy.
- Recent context increasing urgency:
  - Official Development Assistance to low-income developing countries (LIDCs) has fallen in recent years.
  - Net inflows from private and bilateral creditors have weakened.
  - High public debt ratios and rising associated debt service costs are adding to pressures on essential spending on health, education, and infrastructure.
- Policy objective: explore how developing countries can build tax capacity to mobilize revenue beyond the 15 percent tax-to-GDP threshold.
- Analytical approach:
  - Short review of empirical evidence on the 15 percent threshold, drawing on IMF research (Gaspar, Jaramillo, and Wingender (2016a); Bellon and Warwick (forthcoming)) and a novel IMF revenue data set (Mansour and others 2025).
  - Stylized facts on revenue performance and new estimates of countries’ tax potential and tax gaps (following Benitez and others (2023)).
  - Examination of policy and administrative reforms using a “tax systems approach” highlighting complementarities between tax policy, the legal framework, and revenue administration.
  - Anchored in core principles of good taxation and evidence-based insights to guide mobilizing reliable and equitable revenues.
- Complementarity: paper complements IMF reports to the G20: “Alternative Options for Revenue Mobilization” (IMF 2024a) and “Enhancing Domestic Revenue Mobilization through Strengthening Tax Administration” (IMF 2025b), focusing specifically on countries below 15 percent.

### Why 15 Percent Matters: evidence and mechanisms
- International anchor: Compromiso de Sevilla (Fourth Financing for Development Conference, June 30–July 3, 2025) emphasizes ensuring DRM becomes “a reliable, sustainable, and equitable source of financing for development” and calls for doubling support to countries aiming to increase tax-to-GDP ratios, “especially those seeking to increase their ratios to at least 15 percent.”
- Nature of the 15 percent benchmark:
  - Described as a widely cited benchmark for the minimum tax-to-GDP ratio; “not based on exact science” but supported by empirical literature indicating a tipping point beyond which growth tends to accelerate.
  - Emphasis that persistence of higher tax ratios matters more than temporarily exceeding them.
- Theoretical foundations:
  - Tax capacity as cornerstone of state capacity; links to Joseph Schumpeter’s ideas that the modern state is a “tax state” and that economic progress requires resources and finance.
  - Complementarity between public and private sectors: state derives revenues from private activity while providing public goods that enable private-sector growth and financial stability.
- Empirical findings on a taxation tipping point:
  - Gaspar, Jaramillo, and Wingender (2016b) using regression discontinuity and historical data (1800–1980 for 30 countries; 1965–2011 for 139 countries) identified a threshold with persistent growth acceleration after crossing it.
  - Replications and extensions: Choudhary, Ruch, and Skrok (2024) and Bellon and Warwick (forthcoming) reinforce evidence for a tax-to-GDP tipping point.
  - Footnote on estimates: Gaspar, Jaramillo, and Wingender (2016b) and Choudhary, Ruch, and Skrok (2024) locate the tax tipping point at about 13 percent of GDP; Bellon and Warwick (forthcoming) using an updated data set re-estimates the tax tipping point at slightly above 10 percent of GDP.
- Institutional prerequisites:
  - Strong institutions are critical for building tax capacity and sustaining growth (Besley and Persson 2011, 2014).
  - Case studies (China, Colombia, Nigeria, Spain) show improvements in tax capacity can catalyze broader state capacity development (Gaspar, Jaramillo, and Wingender 2016a).
- Empirical comparisons of crossers vs non-crossers (Bellon and Warwick, forthcoming):
  - Crossers (countries that successfully crossed the tipping point) show GDP per capita rising significantly faster than non-crossers, with GDP increasing by about an additional 10 percentage points after a decade.
  - Crossers exhibit meaningful improvements in government effectiveness and financial development relative to peers.
- Importance of sustained progress:
  - Distinction between “long-haulers” (continued build-up after crossing) and “bouncers” (slip back below threshold).
  - Both groups start at about 8 percent of GDP and cross the tipping point within three years; divergence occurs afterward:
    - Long-haulers typically reach 13–16 percent of GDP within a decade.
    - Bouncers stagnate after crossing.
  - Growth impacts over 10 years:
    - Long-haulers achieve per capita income growth 16 percent higher than non-crossers.
    - Bouncers show little difference from countries that never crossed.
  - Conclusion: temporary/unstable increases in tax capacity yield no durable benefits; sustained progress is required for a transition to a high-growth path.
- Mechanisms for growth gains:
  - Evidence suggests growth gains arise from better public governance and more effective public expenditure.
  - Long-haulers use additional revenue to increase public investment; bouncers do not.
  - Effective delivery of public goods may improve tax morale and compliance, supporting sustained revenue mobilization.
  - Consistent with IMF October 2025 Fiscal Monitor (IMF 2025a): enhancing spending efficiency and reallocating resources strategically can improve growth prospects without increasing overall spending.
- Tax capacity and financial markets:
  - Brollo (forthcoming) finds a strong link between tax capacity and domestic government bond markets (1990–2020):
    - In developing economies, a one standard deviation increase in the tax-to-GDP ratio is associated with an increase of nearly 14 percentage points in the ratio of domestic public securities to GDP.
    - Relationship remains robust controlling for other drivers of financial development.

### The Size of the Global Challenge: revenue patterns and country groupings
- Data source: IMF World Revenue Longitudinal Database (WoRLD) (Mansour and others 2025).
- Total revenues and tax revenues (1995–2022):
  - Total revenues in 2022:
    - EMEs: approximately 29 percent of GDP.
    - LIDCs: approximately 25 percent of GDP.
    - Levels somewhat higher than 1995 but relatively stable since 2010.
  - Tax revenues (excluding social security contributions) are the primary budgetary source:
    - Account for nearly two-thirds of total revenues in advanced economies (AEs).
    - Account for slightly more than 50 percent of total revenues in EMEs and LIDCs.
  - Tax revenue ratios increased between the early 2000s and 2010 but have since stabilized.
  - The average tax-to-GDP ratio in LIDCs remains below 15 percent.
- Role of resource wealth:
  - Distinguish groups by natural resource rents (75th percentile benchmark = 9 percent of GDP):
    - Resource-rich LIDCs and EMEs: average natural resource rents above 9 percent of GDP.
    - Non-resource-rich LIDCs and EMEs: below that benchmark.
  - For resource-rich developing countries:
    - Tax revenue has remained broadly stable and low, at about 8 percent of GDP, since the early 1990s.
    - Non-tax resource revenue is an important government fund source, though it has declined somewhat since the early 2000s.
  - For non-resource-rich developing countries:
    - Experienced an increase in tax revenues of approximately 2 percentage points of GDP, primarily driven by growing contributions from taxes on sales and production.
    - Non-tax revenues in this group mainly consist of grants, which may face increasing constraints due to declining official development assistance.
- Distribution of tax-to-GDP ratios across country groups:
  - EMEs distribution centered at about 17.5 percent of GDP.
  - AEs distribution centered at about 27.5 percent of GDP.
  - LIDCs distribution tightly centered at about 12.5 percent of GDP:
    - Only 18 out of 58 LIDCs collect more than 15 percent.
  - FCSs LIDCs distribution centered at about 10 percent of GDP:
    - Only 6 out of 26 FCSs LIDCs collect more than 15 percent of GDP.
    - Among the 20 FCSs LIDCs with a tax-to-GDP ratio below 15 percent, 13 are resource-rich.
- Notes on specific observed spikes in data:
  - Observed spike in nontax resource revenue in 2006 driven by a large increase in oil related revenue in São Tomé and Principe and Sudan.
  - Spike in grants around 2007 in non-resource-rich LIDCs attributed to IMF Heavily Indebted Poor Country completion point in some countries, including Niger in 2004 and São Tomé and Príncipe in 2007.
  - Tuvalu was an outlier for several years and was removed from the sample in one panel.

*Source: IMF staff summary of “Introduction” from btcgdea - Introduction (btcgdea - Introduction, btcgdea - Introduction).*

### 1. Tax Revenue

### 1. Tax Revenue

### Country dispersion around tax revenue, 2021
- Data cover 2021 and exclude social contributions.
- Figures are simple averages across countries.
- Countries with a tax-to-GDP ratio below 10 percent are either fragile and conflict-affected or resource-rich with ample non-tax revenue.
- Abbreviations: AEs = advanced economies; EMEs = emerging market economies; FCS = fragile and conflict-affected state; LIDCs = low-income developing economies.

### Estimating tax potential
- Tax potential is defined as the estimated maximum possible level of tax revenue in a country, given its conditions in terms of income per capita, economic structure, openness to trade, and institutions.
- The tax gap is defined as tax potential minus actual revenue collection levels; it measures the remaining space for tax revenue mobilization through reform of policy and administration.
- Baseline model estimates:
  - Tax potential in LIDCs: 17.7 percent of GDP.
  - Tax potential in EMEs: 21.5 percent of GDP.
  - Implied tax gap (baseline, compared to actual tax ratios): about 5 percent of GDP for both LIDCs and EMEs.
- Baseline model extended to control for natural resource rents (total natural resource rents in percentage of GDP from the World Bank World Development Indicators):
  - Tax potential in LIDCs: 17.3 percent of GDP.
  - Tax potential in EMEs: 21.3 percent of GDP.
- Notes on interpretation:
  - Results confirm the importance of resource wealth for tax revenue mobilization.
  - Estimates are highly sensitive to the selected specification and should be interpreted with caution; they serve as broad indications of long-term revenue mobilization potential rather than as policy targets.
  - References to methodological detail: Benitez and others (2023) describes the econometric specification and estimation methodology in Annex 1; Mansour and others (2025) and various studies (Badunenko and Kumbhakar (2016); McNabb, Danquah, and Tagem (2021); Van Nguyen and others (2021)) discuss sensitivity and interpretation.

### Increasing tax potential
- For countries with tax ratios below 15 percent:
  - Many have an estimated tax potential between 15 and 20 percent of GDP, indicating a feasible path to surpass the 15 percent threshold through tax policy and administration reform.
  - Some countries have an estimated tax potential well below 15 percent; for these countries, mobilizing tax revenue through tax policy and administration reforms will be more challenging.
- Institutional improvements:
  - If public institutions in LIDCs were improved to mimic the level in EMEs (and EMEs to mimic the level of AEs), the estimates suggest additional revenue:
    - LIDCs: 1.2 percent of GDP additional revenue.
    - EMEs: 0.5 percent of GDP additional revenue.
  - In the specification with natural resource rents, the additional revenue is estimated at (text truncated in source).

*Source: Authors based on IMF 2025 and Mansour and others (2025).*

### 2.0 and 0.8 percent of GDP for these respective groups.

### btcgdea - 2.0 and 0.8 percent of GDP for these respective groups.

### Tax potential, tax gaps, and estimated distances to potential
- Estimates and figures referenced:
  - Figure 7: Tax Potential and Tax Gap Estimates (Percent of GDP).
    - Sources: Benitez and others 2023; Mansour and others 2025; and IMF staff estimates using IMF 2025.
    - Note: The grey area denotes the tax gap, the difference between potential and actual taxes. The additional gain from institutional improvement (blue area) is obtained using a different econometric specification wherein actual values for low-income developing countries (LIDCs) are replaced by values for emerging market economies (EMEs) and actual values for EMEs are replaced by values for advanced economies (AEs).
    - All estimates are for 2021.
    - Annual estimates of tax potential vary; the average gaps over 2017–21 were:
      - under the base line model (panel 1): 4.9 percent of GDP for LIDCs, 4.6 percent for EMEs, and 3 percent for AEs;
      - under the control for natural resources rent model (panel 2): 4.5 percent of GDP for LIDCs and EMEs, and 2.9 percent for AEs.
  - Figure 8: Tax Potential Estimates and the Compromiso de Sevilla (Percent of GDP).
    - Sources: Benitez and others 2023; Mansour and others 2025; and IMF staff estimates using IMF 2025c.
    - Note: The distance to potential is based on Mansour and others (2025) and Benitez and others (2023). Actual tax revenue is for 2022. Countries without data for 2022 are excluded. The estimated distance to potential is the average estimated value over 2020–22.
    - Resource-rich countries defined using natural resource rents with the 75th percentile benchmark equal to 9 percent of GDP. Resource-rich countries are those with an average ratio of natural resource rents over the period above 9 percent of GDP.
    - The sample includes countries with a tax-to-GDP ratio below 15 percent.
- Specific numeric references in the text:
  - "2.0 and 0.8 percent of GDP for these respective groups." (opening line)
  - Resource-rich benchmark: 9 percent of GDP.
  - Sample inclusion threshold: below 15 percent (tax-to-GDP ratio).

### Sustaining tax revenue gains and patterns of episodes (Figure 9)
- Definitions and measurement:
  - An episode of tax increase (or tax loss) is defined as a period of at least three consecutive years of increase (decrease).
  - Episodes of gains (losses) are consecutive increases (declines) in tax revenue-to-GDP for at least three years during 1990–2022.
- Key empirical findings:
  - Most countries with a sustained revenue gain experience one, two, or three episodes of increase; countries with a sustained loss mostly experience one or two periods of decline.
  - For countries that gain, median cumulative gain in tax revenue rises with the number of episodes:
    - from less than 2 percent of GDP for those with occasional revenue increases
    - to more than 6 percent for those with four episodes of increase.
  - Variability in the gain narrows with a larger number of episodes.
  - Among countries with tax revenue declines:
    - Those with zero episodes of decline tend to exhibit the highest and most volatile losses.
    - Countries with one episode of sustained underperformance show the smallest median tax revenue loss of about 2 percent of GDP with a small dispersion.
- Implication:
  - These findings underscore the importance of structuring tax reform as a process rather than a one-off intervention.

### Tax systems approach: principles and implications
- Overarching approach:
  - Builds on Slemrod’s tax systems approach emphasizing that tax policy (tax law) and revenue administration are inseparable.
  - Emphasizes administrative feasibility, compliance costs, and taxpayer behavior as determinants of which policies can work in practice.
  - Particularly relevant for LIDCs with tax-to-GDP ratios below 15 percent.
- Evaluation criteria for tax systems:
  - Effectiveness: extent to which tax measures are implemented as prescribed by law.
  - Efficiency: minimizing economic distortions (investment, savings, employment, productivity, consumption).
  - Equity: progressivity and horizontal equity (similar treatment for equivalent circumstances).
  - Compliance: administrative capacity to implement and sustain the tax and to reinforce the relationship between tax administration and the universe of taxpayers.
- Key messages:
  - In low-capacity countries, strong tax administration is fundamental for effective, efficient, and equitable revenue mobilization.
  - “Tax policy is tax administration”—administrative capacity often binds what policy is feasible.
  - Better tax administration can attenuate the productivity gap of small and young firms relative to larger and older firms, contributing to efficiency, productivity, and growth (Dabla-Norris and others 2020).

### Components of the tax systems approach: tax design, legislative framework, and revenue administration
- Tax design:
  - Administrative constraints may justify simple tax handles and broad-based indirect taxes with few exceptions and low rates.
  - Examples of administratively straightforward measures:
    - Excises on fuel or addictive consumption.
    - Area-based property taxes.
    - A VAT with limited exemptions and an effective refund system.
  - Trade-offs: some easy-to-administer taxes (transaction taxes, trade taxes, flat final withholding taxes) can be relatively distortive or limit rate differentiation.
- Legislative framework:
  - Tax laws should be designed using four principles: (1) understandability; (2) organization; (3) effectiveness; and (4) integration.
  - Substantive tax laws and tax procedures laws should conform to international good practices, provide tax certainty, and secure taxpayers’ trust.
  - Laws should enable routine data collection from third parties, support digital innovations (electronic data exchange, digital signatures, electronic invoicing), and include modern debt management and robust enforcement provisions.
  - Clear dispute resolution mechanisms and transparent law-making and monitoring processes are critical.
- Revenue administration:
  - Revenue administrations (tax and customs administrations) are central to executing tax laws and shaping tax capacity.
  - Failure of revenue administrations undermines revenue mobilization, equity, and the legitimacy of the tax system and the state.
  - Effective and transparent public spending, clear reporting and accountability, and merit-based public administration are enablers of higher tax morale and stronger tax compliance.

### Medium-Term Revenue Strategy (MTRS) and pragmatic sequencing
- MTRS features:
  - A country-owned, whole-of-government approach linking taxation and spending, emphasizing sustained political commitment and interdependencies between tax policy, revenue administration, and legal framework.
  - Demands sustained commitment to reforms and clear performance indicators to provide certainty and transparency for stakeholders.
- Practical considerations for limited-capacity contexts:
  - MTRS may be too demanding for administrations with limited capacity.
  - Sequencing reforms to match fragile contexts and maintaining flexibility amid political and economic disruptions is essential.
  - For low-capacity countries:
    - Tax policy: employ simple tax handles where appropriate.
    - Tax administration: focus on core administrative functions, sound processes and systems, skilled human resources, adequate infrastructure, and organizational culture grounded in leadership, vision, and integrity.
    - Customs administrations often play a key role in revenue collection and require effective capacity building.
  - A pragmatic approach can be a starting point, later supplemented by an MTRS to manage sustained progress and achieve the 15 percent tax revenue threshold.

### Improving tax design: base broadening, tax expenditures, and incentives
- Base broadening and tax expenditures:
  - Successful reforms often rely on broadening the tax base rather than increasing statutory rates.
  - Rationalizing or reducing tax expenditures (reduced rates, exemptions, tax holidays, deferrals) can mobilize revenue and simplify administration.
  - Estimates of tax expenditures:
    - Total tax expenditures amount to about 19.7 percent of tax revenue on average in LIDCs and 27.7 percent in EMEs.
    - Averages during 2014–23 for samples of 21 LIDCs and 13 EMEs with tax-to-GDP ratio below 15 percent.
  - Tax expenditure reviews can be undertaken with less costly alternative methods that still materially inform policy debates.
- Investment tax incentives:
  - Full exemption from CIT or PIT (including in special economic zones or tax holidays) is common but often ineffective in attracting FDI and imposes significant fiscal costs.
  - Other incentives (investment tax credits, accelerated depreciation, expensing) tend to deliver more investment per dollar of foregone revenue.
  - The Global Minimum Tax may reduce the effectiveness of tax exemptions, providing an opportunity to reconsider incentives.
  - Complex rules and administrative challenges can be especially problematic for countries below the tipping point.
- Value-added tax (VAT):
  - More than 160 countries have a VAT; it generates about a quarter of total tax revenue worldwide.
  - VAT performance measured by C-efficiency (actual VAT revenue as a share of potential).
    - Average C-efficiency in 2022: 0.27 in LIDCs and 0.40 in EMEs.
    - The average VAT rate in 2022 is approximately 13 percent in EMEs and 16 percent in LIDCs with tax-to-GDP ratio below 15 percent.
  - Low C-efficiency reflects a policy gap (extensive VAT expenditures like reduced rates and exemptions) and a compliance gap.
  - If LIDCs moved their C-efficiency to the level of EMEs (40 percent), VAT revenue would increase by approximately 2.3 percentage point of GDP, an increase of 75 percent relative to its 2022 level.
- Excise taxes:
  - Commonly levied on alcohol, tobacco, unhealthy food and energy products.
  - Motivations include correcting bounded rationality and lack of self-control among households, improving health outcomes, and raising revenue.
  - Excises on energy products have both revenue and policy rationales.

*Italic: Source: IMF, "BUILDING TAX CAPACITY FOR GROWTH AND DEVELOPMENT: EVIDENCE-BASED ANALYSIS FOR MOBILIZING DOMESTIC REVENUE" (excerpts provided).*

### 1. VAT Revenue

### 1. VAT Revenue

### VAT revenue levels and C-efficiency
- VAT compliance gaps and revenue performance:
  - VAT compliance gaps in low-income developing economies (LICs/LIDCs) are on average 41 percent of potential VAT revenue—or 3 percentage points of GDP.
  - Some countries have VAT compliance gaps that reach almost 60 percent of potential.
- Empirical link between administration capacity and VAT compliance:
  - If LICs were to increase their overall TADAT score from approximately a D+ to a C+, the VAT compliance gap could decrease by 7.3 percentage points, equivalent to 0.6 percent of GDP.
  - Including spillover effects on corporate income tax (CIT) compliance, the total revenue gain from such TADAT improvements could reach 1.3 percent of GDP.
- Evidence from broader assessments:
  - Comprehensive strengthening of revenue administration can raise tax revenue by 1 to 3 percentage points of GDP (drawing on ISORA, ECLAC, Adan and others, Atsebi et al. findings).

### Context: other tax bases and complementarities
- Excise taxes:
  - Excise revenue yields have been stable at a low level, suggesting scope for increases.
  - Excises (notably on fuel products) are easier to collect in developing countries due to concentrated production and high import shares.
  - There is scope to increase revenue from excises without adverse distributional effects.
- Real property taxes:
  - Recurrent property taxes raise about 0.15 percent of GDP in LIDCs, compared to 0.30 percent in EMEs and more than 1.5 percent of GDP in AEs.
  - Reforms to raise revenue: raise tax rates, update property values to market prices, improve cadasters, scale up administrative capacity, and leverage aerial and satellite imagery or area-based valuation where capacity is limited.
- Personal income taxes (PIT):
  - PIT revenue is much lower in developing countries compared to AEs but has grown in some regions.
  - In 2021, sub-Saharan African countries collected 2.6 percent of GDP in PIT revenue, 1.1 percentage points more than in 1995.
  - Measures to expand PIT base: simplified regimes for micro-enterprises and the self-employed; rationalize PIT allowances and deductions that disproportionately benefit higher-income individuals.
- Resource taxation:
  - Strengthening taxation of natural resources is critical for resource-rich countries.
  - Recommended fiscal regime components: a moderate ad valorem royalty, a resource rent tax, and the standard CIT to capture location-specific rent while maintaining investor viability.
- Import tariffs:
  - Tariffs remain an important revenue source for many developing countries—often more than 2 percent of GDP—but are generally inefficient and tend to increase inequality and administrative complexity.
  - As institutional capacity improves, tariffs are typically phased out in favor of more efficient and equitable taxes.

### Tax compliance: magnitude of gaps and governance constraints
- Scale of noncompliance:
  - VAT compliance gaps in LICs average 41 percent of potential (3 percentage points of GDP); some countries nearly 60 percent.
  - Available estimates show large CIT compliance gaps; ECLAC (2020) estimates an average CIT compliance gap of 52 percent of potential, equivalent to 3.3 percent of GDP for Latin American emerging market economies.
- Institutional and environmental constraints:
  - Effective revenue administration depends on an enabling environment (informality, education, technology access, financial sector depth, accounting standards, governance).
  - Low-capacity countries face a “low compliance trap”: pervasive noncompliance, weak revenue administrations, and constrained tax policy reforms can create a vicious cycle and multiple equilibria (countries termed “bouncers” that struggle to sustainably exceed minimum thresholds for tax revenue and governance).
- Diagnostic and reform tools:
  - The IMF’s tools (TADAT, RA-GAP, ISORA) provide diagnostics and benchmarks to identify weaknesses and priorities for reform.
  - Evidence shows that improved RA performance measured by TADAT correlates with reduced compliance gaps and material revenue gains.

### Policy implications and priorities
- Strengthen revenue administration capacity:
  - Raise TADAT scores (from D+ to C+ as an example) to materially reduce VAT compliance gaps and achieve revenue gains (7.3 percentage points reduction in VAT gap; 0.6 percent of GDP; total gains including CIT up to 1.3 percent of GDP).
  - Pursue comprehensive RA reforms informed by ISORA and related diagnostics to achieve increases of 1 to 3 percentage points of GDP in tax revenue.
- Broaden tax bases and improve tax design:
  - Expand VAT coverage and compliance alongside targeted reforms in PIT, property taxes, and excises to exploit low-cost collection bases.
  - For property taxes: update valuations, improve cadasters, and adopt cost-effective digital mapping or area-based systems where capacity is limited.
  - For resource-rich countries: adopt fiscal regimes combining royalties, resource rent taxes, and CIT to capture natural resource rents while maintaining investor incentives.
- Shift away from reliance on tariffs:
  - As administrative capacity improves, phase down tariffs and replace them with more efficient and equitable taxes.
- Leverage technology and data:
  - Use satellite and aerial imagery for property identification and valuation; deploy administrative digitalization to support compliance efforts.

*Source: Excerpt from “1. VAT Revenue” (IMF Building Tax Capacity for Growth and Development: Evidence-Based Analysis for Mobilizing Domestic Revenue).*

### Box 2. Escaping the Low Compliance Gap

### Box 2. Escaping the Low Compliance Gap

### The challenge: low maturity–low compliance trap
- Low-income developing countries (LIDCs) must increase revenue administration (RA) institutional maturity while creating structural conditions that enable higher tax compliance.
- Changing societal attitude toward compliance (“tax morale”) is difficult; pervasive noncompliance can invert the standard compliance pyramid, creating an environment where most of the population does not comply due to ignorance, marginalization, state absence, or intentionality.
- Informality thrives in contexts of fragility; operating outside the formal economy is often the only way to secure livelihood (ILO 2019).
- Escaping the trap requires a whole-of-government approach beyond the RA, but the RA plays a central role through instruments from tax education to targeted enforcement, implemented under a clear and sequenced strategy.

### Revenue administration capacity and diagnostics
- Building capacity requires a holistic and sustained approach to improve key functions and enabling factors across the board, rather than piecemeal measures.
- Data references:
  - TADAT suggests tax administrations in LIDCs generally exhibit weak performance in all common performance outcome areas—with the lowest scores reported in FCSs.
  - ISORA indicates FCSs and small developing states perform poorly across several RA institutional and operational indicators.
  - ISORA (2024) collected data from 37 advanced economies, 80 emerging market economies, and 47 low-income developing countries.
- ISORA digitalization indicator:
  - ISORA uses a compendium of 42 questions about the use of digital technology by tax administrations, with scores on a scale from 0 to 100, to estimate the indicator on digitalization.
  - Advanced e-signatures for customs transactions are used in 11 percent of total transactions in LICs versus nearly 80 percent in AEs.
- Reverse IMF Revenue Administration–Gap Analysis Program finding:
  - Compliance gaps decreased in low-income developing economies during 2010–23 by an average of 4.5 percentage points.

### Short-term priorities for very low-capacity countries
- For countries with the weakest administrative capacity, early efforts should focus on the “basics” to improve tax compliance rather than attempting a comprehensive approach immediately.
- Priority core administrative functions:
  - accurate and complete taxpayer registration
  - on-time filing
  - on-time payment
  - effective audit and enforcement processes
- Objectives:
  - broaden the taxpayer base and establish “tax presence” across the country
  - extend RA services and control throughout the territory
  - ensure implementation is perceived as fair, encourage tax education and voluntary compliance
  - use digitalization (including mobile-enabled virtual transactions) as a complement to physical presence

### Compliance risk management (CRM)
- CRM aims to optimize revenue collections by improving compliance across four basic tax obligations: registration, timely filing, timely payment, and correct reporting.
- CRM is a methodology to systematically identify compliance risks and determine mitigation in an effective and efficient way.
- Despite wide adoption, CRM practices are largely ineffective in LICs:
  - 75 percent of tax administrations declare having a formal CRM strategy.
  - TADAT scores on risk management have the worst performance across all assessed areas.
- Common shortfalls:
  - CRM applied narrowly (primarily to select taxpayers for audit) without yielding a better understanding of taxpayer behavior for resource allocation and strategy design.
- Practical steps for low-capacity settings:
  - Implement simplified CRM approaches with capacity development support (for example, data cross-checking between tax and customs administrations; use of external wealth indicators for certain self-employed categories).
  - Prioritize resource allocation to sectors, activities, and taxpayer types more prone to noncompliance.

### Taxpayer segmentation and Large Taxpayers Offices (LTOs)
- Segmenting taxpayers by size (large, medium, small) is a widespread trend and an entry point to CRM.
- IMF support since the 1990s has helped establish LTOs in many LICs to focus scarce resources on largest revenue risks and pilot modernization.
- Key observations and figures:
  - LIC LTOs monitor about 5 percent of corporate taxpayers and generate 63 percent of revenues.
  - LICs assign considerably more resources to their LTOs compared to AEs, but higher resource allocation does not guarantee effective CRM application.
- Policy implications:
  - RAs must adopt the full practice of CRM, not only organizational segmentation in form.
  - Focus on medium taxpayers offers untapped revenue potential via Medium Taxpayers’ Offices, streamlined procedures, digital solutions, and clearer communication channels (help desks, accessible educational materials).
- LICs have introduced presumptive or simplified tax regimes more than AEs and EMEs to manage many small taxpayers.

### Digitalization as an enabler
- Digitalization can revamp outdated processes, modernize core functions, and improve integrity by reducing face-to-face interactions.
- Evidence on digital tools:
  - Electronic fiscal devices in Peru increased reported firm sales by 5 percent in the year following adoption (Bellon and others 2022).
  - Adopting e-invoicing can improve revenue mobilization by 0.7 percent of GDP in developing countries (Nose and Mengistu 2023).
- Challenges for low-tax-ratio countries:
  - Countries below a 15 percent tax-to-GDP ratio often lack internet access and adequate electricity infrastructure, contributing to low ISORA digitalization scores.
  - Many LIC RAs cannot finance continuous investments in new technology and lack staff with technology skills, risking further lag as technologies (including artificial intelligence) evolve.
- Practical guidance:
  - Adopt cost-effective technologies that support core functions and efficient processes.
  - Expand capacity to exchange and analyze data through robust information systems integrated with third-party and governmental institutions.
  - RAs can spearhead broader state modernization efforts through inter-linkages with banks, notaries, border agencies, and tax intermediaries.

*Source: Box 2, "Escaping the Low Compliance Gap," from the provided IMF content unit.*

### Box 3. Digitalizing from Scratch in a Country of Low Tax Capacity: The Case of

### Box 3. Digitalizing from Scratch in a Country of Low Tax Capacity: The Case of Guinea-Bissau

### Background and context
- Prior to digitalization, the tax administration:
  - Collected about 4 percent of GDP.
  - Relied exclusively on face-to-face services; all tax filing and payments were manually processed.
  - Faced an impasse during the COVID-19 pandemic when offices were closed, halting interactions with taxpayers.

### Implementation: Kontaktu (Minimum Viable Product)
- Kontaktu characteristics:
  - An open-source website for electronic filing and payment.
  - Accessible via computers and smartphones.
  - Can be hosted on commercial clouds or government servers.
- Rollout and segmentation:
  - Started with a focus on large taxpayers.
  - Since 2022 it has expanded to all medium-size taxpayers, demonstrating the use of segmentation in adopting major IT solutions.
- Payment channels:
  - Payment through the banking system and telecoms has been introduced and is steadily increasing.

### Outcomes, metrics, and key statistics
- Major operational changes:
  - Ended manual processing of returns and payments.
  - Helped revamp core processes, reduce face-to-face interactions, and improve governance.
- Revenue collection indicators:
  - Collections by the tax administration increased from an average of 4.3 percent of GDP before Kontaktu to 6 percent of GDP in 2023.
  - Tax revenue collected by customs decreased from an average of 5.8 percent of GDP to 5.1 percent of GDP in the same period.
- Related figures and figures referenced:
  - Box Figure 3.1: Guinea-Bissau: Tax to GDP Ratio.
  - Box Figure 3.2: Guinea Bissau: Monthly Electronic Tax Returns Received.

### Governance considerations
- Good governance underpins effective and fair revenue administration:
  - Establishing core functions in tax and customs administration without addressing governance weaknesses, increasing transparency, and strengthening public trust risks failure.
  - Ignoring governance factors has led to rent seeking, corruption, and abuse of the state’s taxing power, damaging public trust and the culture of compliance.
- Key governance elements for revenue administrations (RAs):
  - Establish clear rules governing institutional integrity and financial management.
  - Implement strong oversight functions and effective reporting mechanisms.
  - Safeguard RAs from political interference to enable independent decision-making, including in the audit function.
- Diagnostic findings cited:
  - ISORA composite indices for “Governance” and “Public Trust” show a sizable gap relative to good practices in LICs.
  - TADAT indicates weakest performance areas: public confidence in tax administration, publication of strategies and plans, and investigating wrongdoing and maladministration.
- Ongoing work:
  - The IMF is developing the Revenue Administration Governance and Integrity Assessment (RAGIA) framework (planned for introduction in 2026) to help countries identify weaknesses and strengthen RA governance.

### Customs administration and risk management (related context)
- Customs relevance and performance:
  - Customs collect on average almost 40 percent of total revenues in LIDCs (mainly VAT on imports and tariffs).
  - Despite 90 percent of LIDCs declaring they have risk management procedures in place, their customs agencies still apply documentary and physical examination to 83 percent of goods during the clearance process, compared to 12 percent in AEs.
  - Failure to apply risk management slows customs procedures and can weaken governance through increased red tape and opportunities for bribes.
- Importance of collaboration:
  - Good collaboration between customs and tax authorities is critical, including exchange of third-party (customs) data for detecting noncompliance with domestic tax obligations.

### Capacity building and international support
- Rationale:
  - Digitalization through Kontaktu was conducted within broader capacity building supporting strategic and operational functions of the tax administration—appropriate for countries with low capacity.
  - Technical advice, training, and peer learning on policy design, process design, institutional structure, reform management and leadership support country-led reforms.
- IMF capacity development (CD) role and financing:
  - CD makes up over a third (37 percent) of the IMF’s country operations and is closely integrated with surveillance (38 percent) and lending (24 percent).
  - Total annual expenditure on public finance CD is about $128 million, of which about $98 million was financed by external donors.
  - Tax policy and revenue administration CD accounted for almost half this expenditure.
  - In FY2025 the IMF Fiscal Affairs Department (FAD) provided CD support to 148 countries across all regions and income categories; the majority focused on low-income and fragile economies.
  - The IMF Legal Department (LEG) has provided legislative drafting CD to more than 70 countries, amounting to more than 200 tax laws and regulations.
- Programmatic approaches and partnerships:
  - Tax capacity CD should be integrated within a programmatic public finance approach that accounts for linkages between policy and administration and between revenue and spending, be medium-term, and incorporate political-economy conditions and the social contract.
  - The Global Public Finance Partnership (GPFP), launched in 2024, is a funding vehicle supported by 15 bilateral partners to deliver coordinated revenue and spending CD, focusing on developing and fragile economies and working closely with multilateral partners.

### Implications and lessons
- Digitalization can be transformative even in fragile, low-capacity environments when:
  - Implemented as part of a coherent and scalable strategy.
  - Paired with broader capacity building and governance strengthening.
  - Applied using taxpayer segmentation (e.g., starting with large taxpayers, expanding to medium-size taxpayers).
- Attribution caveat:
  - It is not possible to pinpoint single factors behind the increase in revenue mobilization; digitalization occurred alongside broader capacity building and reforms.

*Source: Authors based on IMF 2025c, and Guinea-Bissau authorities.*

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_Source: https://www.imf.org/-/media/files/publications/dp/2025/english/btcgdea.pdf_