Recovering from COVID-19: How to enhance domestic revenue mobilisation in small island developing states

 SIDS’ unique characteristics and development challenges

SIDS vary in terms of population size and densities, geographical spread and relative development progress. They include some of the world’s smallest, most remote and geographically-dispersed countries and territories, particularly in the Pacific, such as Kiribati, consisting of 33 coral atolls spread over 3.5 million square kilometres of ocean – an area larger than India – or the Solomon Islands, with a population of half a million people dispersed across 90 inhabited islands. By contrast, SIDS in the Latin America and the Caribbean (LAC) are closer to international markets and tend to have larger and more concentrated populations, with Haiti’s population exceeding 10 million. While some SIDS are experiencing rapid population growth, others are facing large emigration. They also present different economic structures and income levels. Some are largely service-based, such as Cabo Verde and the Maldives; others are natural resource based, such as Papua New Guinea and Timor-Leste; and still others, such as Comoros, Kiribati, Micronesia and Tuvalu, display a high reliance on agriculture and fishing. Among the SIDS eligible to receive ODA, most are upper middle-income countries,3 while most non-ODA eligible SIDS are high-income countries (the others are territories or constituent countries of high-income countries)4 (OECD, n.d.[5]).

Despite these specificities, SIDS share strong commonalities that considerably hinder their development prospects (see Box 2), making SIDS the most vulnerable group of developing countries, as measured by the Economic Vulnerability Index (EVI), which takes into account both economic and environmental vulnerabilities, factoring in the impacts of economic and natural shocks5 as well as the determinants of exposure to shocks (including small population size and remoteness from world markets)6. According to this metric, SIDS are significantly more vulnerable than larger countries with similar income levels (Figure 1). In particular, upper middle-income SIDS are estimated to be 73% more vulnerable than larger countries in this same income group (OECD, 2018[12]).

 

Figure 1. Vulnerability across income groups and SIDS measured by the Economic Vulnerability Index (EVI), 2016

Note: The categories in this chart are not mutually exclusive, as SIDS cut across income levels. In particular, of the 34 ODA-eligible SIDS considered, 9 are least developed countries, 5 lower middle-income countries and 20 upper middle-income countries.

Source: Calculations based on FERDI (n.d.[13]), FERDI Build Your Own Index, http://byind.ferdi.fr/en/indicator/evi/results/ac935b884e0fa703d33d414eb5501fffcfeafc5c.

Key sources of vulnerability for SIDS include their small, undiversified economies, which make them highly vulnerable to fluctuations in global markets and external shocks, such as the COVID-19 crisis, their small populations, which prohibit economies of scale in productive activities and limit private sector development; as well as their remoteness, which reduces the scope for integrating global value chains, implying high production and trading costs, and limiting competitiveness. Combined with often limited resource bases, these factors mostly result in a concentration of economic activities in a faint number of sectors, most often tourism, services, agriculture and fishing, and natural resource extraction. This explains why, among developing countries, SIDS were hit the hardest by the 2008‑09 global financial crisis (OECD, 2018[12]) and why they are hit the hardest also during the COVID-19 crisis. SIDS’ over-reliance on one or two key economic sectors determines that when such sector is affected, this can translate into an economy-wide knock-out.

During both the 2008‑09 crisis and the COVID-19 crisis, the contraction in the tourism sector, which is a critical sector in many SIDS, has been a key transmission channel of the crises to the whole economy.

The geography of SIDS puts them at the forefront of extreme weather events, natural disasters and the impacts of climate change.Many are located in regions with a high density of tropical cyclones. In addition, their small economies and in many cases dispersed and remote geographies make them poorly equipped to respond to these extreme weather events. As in other developing countries, rapid urbanisation, population growth and climate change are increasing the exposure of SIDS to disaster risk (Mimura, 2007[14]). Climate change is creating new development challenges due to sea level rise, changing rainfall patterns, coastal erosion, coral bleaching, and the degradation of the natural ecosystems upon which these countries depend for food and tourism.

While absolute losses7 from natural disasters and climate-related events are dwarfed by those in larger economies, the relative impacts on SIDS are often far greater (Figure 2). Given the small size of SIDS economies, the effects of a single natural disaster can be huge and devastating in national terms, wiping out large parts of key industries, affecting swathes of the country or whole islands rather than isolated regions, or damaging critical pieces of infrastructure for which there are few or no local alternatives.8 Often times, natural disasters have translated into losses of up to 200% of GDP for SIDS, as was the case for Grenada with hurricanes Ivan and Emily in 2004‑05, for Dominica with tropical storm Erika in 2015 (90% of GDP damages) and with hurricanes Irma and Maria in 2017 (220% of GDP losses). Globally, SIDS make up two thirds of the countries that suffer the highest relative losses from natural disasters – between 1% and 9% of their GDP each year (OECD/The World Bank, 2016[15]). They are also 14 out of the 20 countries with the highest average annual disaster losses as a share of their GDP (World Bank, 2012[16]). Further, the costs of humanitarian assistance and reconstruction are comparatively higher in SIDS given their reliance on imported materials and the logistics of reaching populations that are often remote and spatially dispersed. As such, natural disasters contribute to aggravating SIDS’ ballooning debt by requiring large financial commitments to periodically address post-disaster reconstruction efforts and to finance climate adaptation measures (OECD, 2018[12]).

 

Figure 2. Losses from natural disasters across income groups and SIDS, 2000‑15

Source: OECD (2016[15]), Climate and Disaster Resilience Financing in Small Island Developing States, https://dx.doi.org/10.1787/9789264266919-en.

 Financing for sustainable development in SIDS

External finance

The structural characteristics described above result in significant challenges for SIDS to mobilise both the public and private domestic resources required for achieving the 2030 Agenda on Sustainable Development (United Nations, 2015[18]).

More than other developing countries, SIDS face challenges in attracting significant and stable flows of private finance.

Foreign investments are low and volatile and often weigh lightly on SIDS’ overall external financing. From 2015 to 2018, foreign direct investments and other private finance flows represented on average 8% of external finance9 to SIDS from DAC countries, compared to 19% across all developing countries (OECD, 2018[12]). External private finance flows to SIDS have become particularly volatile after the global financial crisis of 2008‑09. Thirteen SIDS experienced negative net private flows over the biennium 2008‑09, with more private finance flows leaving than entering these economies.10 These trends are due to the formidable barriers to access international capital markets through bonds, other securities or debt, caused by the perception of risk and the limited size of possible transactions. SIDS also have limited appeal to foreign investors due to their remoteness from markets and shipping lanes and their poor penetration in global value chains. Finally, many SIDS (especially in the Pacific) lack the creditworthiness to raise funds in capital markets, while many others (especially in the Caribbean) have recently experienced a deterioration in international capital-market ratings due to their large debt burdens. These challenges persist even if some SIDS have been pioneers in using new financing instruments to attract private finance, and despite new instruments are becoming available to attract sustainable finance.11

Therefore, external finance to most SIDS is dominated by remittances and ODA, which represent the two largest sources of external finance for SIDS as a group. Figure 3 shows that remittances from DAC countries accounted for 62% of external finance to SIDS on average between 2015 and 2018 (USD 45.1 billion). This compares to 33% across all developing countries over the same period and is largely due to large diasporas and brain drain in many SIDS. Remittances accounted for even larger shares of external financing for the Dominican Republic, Jamaica and Guyana, reaching above 70% on average between 2015 and 2018 (OECD, 2020[3]).

ODA from bilateral providers of development co-operation and multilateral organisations represents the second largest external flow for SIDS as a whole, at 28% of total external finance between 2015 and 2018, or USD 20.7 billion. For 15 SIDS, ODA accounted for the largest external finance flow from 2015 to 2018. However, ODA may represent a less certain source of external finance for SIDS in the near future, as several of them have already or are about to reach high-income status, thus becoming ineligible for ODA (see ODA eligibility criteria in Box 1). That said, SIDS’ economic and climate vulnerabilities that derive from their geophysical characteristics do not diminish with the rise of GNI per capita levels (OECD, 2018[12]). Therefore, most SIDS have greater difficulty than larger economies with similar income levels to diversify their economies and find alternative sources of financing. Many continue to remain structurally dependent on external finance from other countries and the international community.

Scarce ODA resources can be used more strategically to support mobilisation of public and private resources in SIDS, including by strengthening governments’ tax collection capacity and by mobilising private capital for sustainable economic activities.

Between 2017 and 2018, providers of development co‑operation have already invested USD 105 million of ODA to improve the efficiency of revenue collection and enhance domestic revenue mobilisation in SIDS. There is scope for increasing this support to a larger number of SIDS, as these amounts were largely concentrated (76%) in Papua New Guinea and represented only 1.1% of the total ODA to SIDS in this period. Between 2013 and 2015, providers of development co‑operation have also mobilised USD 701 million of private finance in SIDS (USD 175 million on average per year) (OECD, 2018[12]; Benn, Sangaré and Hos, 2017[19]) through the use of grants, guarantees and other instruments for improving the risk-return profile of investments for private investors, as well as for absorbing the costs of project preparation and for the identification of pipelines of bankable projects.

 

Figure 3. Total external financing to SIDS, 2008‑18

Note: Remittances only include flows from DAC Countries. Remittance data are unavailable for the Cook Islands, Cuba, Nauru, Niue, and Montserrat.

Source: OECD (2020[3]), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.

 Domestic resources: Tax and non-tax revenues

The unique characteristics and development challenges faced by SIDS affect the stability of their public revenues and generate higher public sector expenditure needs. As discussed above, SIDS are more likely than other developing countries to rely for public revenues on a few key economic sectors that are more vulnerable to external shocks. This is particularly apparent in the COVID-19 crisis that is deeply affecting overall economic activity, international trade, tourism flows and international commodity prices, especially in SIDS that depend on the tourism sector and/or on commodity exports. At the same time, in many SIDS the high costs of providing services to small and scattered populations results in higher average public sector expenditures than other developing countries (on average, 29% of GDP, compared to 22% in other developing countries in 2014 (Horscroft, 2014[20])). The extreme weather and natural disasters to which SIDS are exposed also tend to have heavy fiscal impacts. One extreme climate event can swipe out entire economic sectors in SIDS, halting or disrupting future development. Further, SIDS often lack financial buffers, such as cash surpluses and international reserves, for responding to shocks, and the costs of humanitarian responses, recovery and reconstruction are often higher due to, again, their small, scattered and remote populations.

These combined factors lead to high levels of public debt in many SIDS that reduce the scope for SIDS governments to invest in development. Debt-to-GNI ratios were 57% on average for SIDS compared to 47% on average for all developing countries in 2015 and are particularly high in middle-income SIDS, largely in LAC. Debt-servicing costs account for a high share of public expenditure and of GDP in many SIDS, especially middle-income countries with a larger share of commercial debt (rather than concessional debt) (OECD, 2018[12]).

To offset the combined impact of narrow and exposed economies, vulnerability to natural disasters and climate change, and higher public expenditure, tax revenue mobilisation is critical in SIDS. Tax revenues represent a significantly larger and more stable source of government resources than ODA and official non-concessional flows, as indicated for the 14 ODA-eligible SIDS in the OECD’s Global Revenue Statistics Database in 2018 (Figure 4). This is particularly true for Pacific SIDS in Revenue Statistics (Figure 5).12

 

Figure 4. Total tax revenues, ODA and official non-concessional flows in selected SIDS, 2008‑18

Note: Data for 14 SIDS in Revenue Statistics which were ODA-eligible in 2018 (Belize, Cabo Verde, the Cook Islands, Cuba, the Dominican Republic, Fiji, Guyana, Jamaica, Mauritius, Papua New Guinea, Saint Lucia, Samoa, the Solomon Islands, Vanuatu). It excludes Nauru as tax revenue data for this country is only available from 2014. ODA and official non-concessional flows include both official grants and loans, therefore net flows can be negative when reimbursement of loans is higher than grants and provision of loans in a given year.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL, and ODA/DAC, Flows by Provider and Recipient, https://stats.oecd.org/.

 

Figure 5. Total tax revenues, ODA and official non-concessional flows in selected Pacific SIDS, 2008‑18

Note: Data for six Pacific SIDS in Revenue Statistics which were ODA-eligible in 2018 (the Cook Islands, Fiji, Papua New Guinea, Samoa, the Solomon Islands and Vanuatu). It excludes Nauru as tax revenue data for this country is only available from 2014. ODA and official non‑concessional flows include both official grants and loans, therefore net flows can be negative when reimbursement of loans is higher than grants and provision of loans in a given year

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL, and ODA/DAC, Flows by Provider and Recipient, https://stats.oecd.org/.

 Tax levels and composition in SIDS

Tax-to-GDP ratios in 2018

On average, tax-to-GDP ratios in the ODA-eligible SIDS covered in Revenue Statistics are higher than in Africa and in LAC. In 2018, the average tax-to-GDP ratio for this group of SIDS was 25.1%. This was above the LAC average (23.1%) and the Africa (30) average (16.5%).15 Most ODA-eligible SIDS in Revenue Statistics were able to mobilise significant amounts of tax revenues in comparison to averages for other regions: 9 out of the 15 SIDS had tax-to-GDP ratios above the LAC average and 13 out of 15 had ratios above the Africa (30) average. Tax-to-GDP ratios varied widely among them, from 42.3% in Cuba and 35.4% in Nauru – above the OECD16 average – to 13.2% in the Dominican Republic and 12.1% in Papua New Guinea – below the Africa (30) average (Figure 6). No marked regional difference can be observed in tax-to-GDP levels across SIDS.

 

Figure 6. Tax-to-GDP ratios (total tax revenue as percentage of GDP) in SIDS and regional averages, 2018

Note: SIDS average calculated as unweighted average for 15 ODA-eligible SIDS in OECD (2020[8]), Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

Source: Calculations based on Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

In 2018, ODA-eligible SIDS with tax-to-GDP ratios higher than the group average were typically those that implemented tax policy and administration reforms in previous years, sometimes combined a favourable economic context (see further details on past reforms in the section “Tax revenue trends in SIDS over time”). These SIDS have been able to mobilise increased tax revenues over the past years – leading to higher tax-to-GDP ratios – despite their small size: many of them have small populations (less than 1 million people) and/or small GDP at purchasing power parity (PPP) exchange rates (less than USD 10 billion) (see Table 3).

Unlike the broader group of 109 economies included in the OECD Global Revenue Statistics Database, tax‑to-GDP ratios across ODA-eligible SIDS are not strongly correlated with income level (Figure 7). In 2018, for all economies in the Global Revenue Statistics Database, there was a positive correlation between GDP per capita (in PPP) and tax-to-GDP ratios (a correlation coefficient of 0.64). For ODA‑eligible SIDS, the correlation was much weaker and slightly negative (a correlation coefficient of ‑0.08).17

 

Figure 7. Tax-to-GDP ratios and GDP per capita (in PPP) in SIDS, Asia-Pacific, LAC, OECD and African economies, 2018

Note: Excludes economies for which GDP per capita PPP is not available (the Cook Islands, Cuba and Tokelau) or for which 2018 tax-to-GDP ratios were not available at the time this paper was prepared (Venezuela).

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

Tax structures in 2018

While tax revenue levels across ODA-eligible SIDS vary, there is greater similarity in the composition of their tax revenues. In 2018, taxes on goods and services (including value added taxes (VAT)) were the most important source of tax revenues in all but two ODA-eligible SIDS in Revenue Statistics (Figure 8). This result is consistent with Africa (30) and LAC, where taxes on goods and services also represent an important share of tax revenues. On average, taxes on goods and services accounted for 62.6% of total tax revenues in ODA-eligible SIDS in 2018, while they represented 51.9% in Africa (30) and 50.1% in LAC, on average. One notable distinction is the share of VAT in total tax revenues: VAT was less significant on average in ODA-eligible SIDS (26.5% of total tax revenues, on average) than in Africa (30) (29.7%) and in LAC (27.8%) in 2018. Other taxes on goods and services18 therefore represented, on average, 36.1% of total tax revenues in ODA-eligible SIDS while they made up 22.2% of total tax revenues in Africa (30) and in LAC (Table 1).

The smaller relative importance of VAT in the ODA-eligible SIDS included in this paper is partially explained by the fact that three of them have not yet adopted VAT (Cuba, Nauru and the Solomon Islands, the latter of which is studying its implementation), by the importance of taxes on specific goods and services in these economies, and by the fact that VAT is under-utilised in some SIDS. The introduction of VAT has been the cornerstone of tax reforms introduced by many SIDS over the past decades (Greenidge, McIntyre and Yun, 2016[21]; Murray, Oliver and Wyatt, 2014[22]; Schlotterbeck, 2017[23]) (see the discussion on recent reforms in the section “Tax revenue trends in SIDS over time”): the majority of ODA-eligible SIDS introduced VAT prior to 200019 with a handful introducing it afterwards20. As a result, in 2018 VAT revenues were the largest share of total taxation for half of the ODA-eligible SIDS that have a VAT system. However, VAT revenues are still lower than their potential in several SIDS due to a combination of policy settings (e.g. exemptions, reduced or zero-rates, low thresholds) and administrative challenges (e.g. filing rates, inaccurate reporting, non-payment of liabilities) (Schlotterbeck, 2017[23]).

Taxes on specific goods and services were an important source of revenue in many ODA-eligible SIDS in 2018: on average, they represented 29.1% of total tax revenues and 7.1% of GDP in SIDS, a higher average than in Africa (30) (20.8% total taxation, 3.4% of GDP) and in LAC (16.7% of total taxation, 3.8% of GDP). The main taxes on specific goods and services applied in ODA-eligible SIDS are:

• Excises (e.g. on alcohol, sugary drinks, tobacco, oil and petroleum, motor vehicles, imports, domestic excises, and environmental taxes), which represented 12.8% of total tax revenues in ODA-eligible SIDS on average.

• Customs and import duties, amounting to 11.6% of total tax revenues in ODA-eligible SIDS on average.

• Taxes on specific services, including tourism (departure tax, hotel, travel), telecommunications (telephone, messaging), insurance, bank and other asset tax, financial services, betting and gaming, at 3.8% of total tax revenues in ODA-eligible SIDS on average.

• Taxes on exports, which are only significant in the Solomon Islands at 26.5% of total tax revenues (from export duty on minerals, shells, fish, timber/log and other products).

 

Figure 8. Tax structure as percentage of total tax revenue in SIDS and regional averages, 2018

Note: SIDS average calculated as unweighted average for 15 ODA-eligible SIDS in Revenue Statistics. Other taxes include taxes on payroll and workforce as well as taxes on property.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

In 2018, the relative share of income taxes (personal and corporate) on total taxation in ODA-eligible SIDS was lower, on average, than in Africa (30) and in the OECD, but above LAC (Table 1). In most of them (13 out of 15), income tax revenues represented less than 40% of total taxation, with one (Vanuatu) levying neither personal nor corporate income taxes. The highest share of income taxes as a proportion of total taxation was observed in Nauru and Papua New Guinea. Income tax revenues in ODA-eligible SIDS are often affected by many factors common to other developing countries, including the level of informality in their economies as well as tax holidays and incentives that narrow the tax base (IMF, 2013[24]; PFATC, 2017[25]; Schlotterbeck, 2017[23]), even after reforms introduced in the past decades to reduce rates and broaden the base (Greenidge, McIntyre and Yun, 2016[21]; Murray, Oliver and Wyatt, 2014[22]).

The share of revenues from corporate income taxes (CIT) in total taxation in ODA-eligible SIDS (14.5%) was lower than the LAC average (15.5%) and the Africa (30) average (19.2%), but above the OECD average (10.0%). However, among ODA-eligible SIDS,21 CIT revenues represented a higher share of total taxation than revenues from personal income taxes (PIT) on average. CIT was more important than PIT in most upper-middle income SIDS (Belize, Cuba, the Dominican Republic, Fiji, Guyana, Mauritius) as well as in ODA-eligible SIDS in LAC (Belize, Cuba, the Dominican Republic, Guyana).

The share of PIT revenues in ODA-eligible SIDS was on average 13.0% of total taxation, lower than the Africa (30) average (17.5%) and the OECD average (23.5%), but higher than the LAC average (9.6%). For ODA-eligible LAC SIDS, the share of PIT revenues in total taxation was even lower, at 10.6% on average, closer to the LAC average. This may be partly due to the fact that ODA-eligible LAC SIDS have a relatively high share of social security contributions in comparison to other ODA-eligible SIDS. In addition, complex PIT systems in several LAC SIDS can discourage voluntary compliance and increase administration costs to assist taxpayers and facilitate PIT collection (Schlotterbeck, 2017[23]). Among ODA-eligible SIDS, PIT was more important than CIT in all lower middle-income SIDS (Cabo Verde, the Solomon Islands, Papua New Guinea) and in most Pacific SIDS (except Fiji). This contrasts with the respective shares of PIT and CIT in the broader group of economies in the OECD Global Revenue Statistics Database, where lower-income countries are more likely to rely on CIT, and the large majority of OECD countries relies more on PIT. While ODA-eligible SIDS rely more on consumption taxes, the PIT are typically more progressive, with the potential to promote income redistribution and decrease post-tax income inequality.

Finally, social security contributions played a small role in total taxation in ODA-eligible SIDS (on average, 2.7% of total taxation in 2018), relative to Africa (30) (7.2%), LAC (17.1%) and the OECD (25.7%). There is however a marked regional difference among ODA-eligible SIDS in Revenue Statistics: only those SIDS in LAC22 and Africa (Cabo Verde and Mauritius) collect social security contributions, while the ones in the Pacific do not. The relatively high share of PIT in ODA-eligible SIDS on average – and in Pacific SIDS in particular – in comparison to the LAC average reflects the financing of social services from general revenues rather than from social security contributions.

 

Table 1. Tax categories as percentage of total tax revenue in SIDS and regional averages, 2018

	Value added taxes	Other taxes on goods and services	Personal income taxes	Corporate income taxes	Unallocable between PIT and CIT	Social security contributions	Other taxes
Belize	28.0	35.1	8.6	15.6	1.0	7.6	4.1
Cabo Verde	38.7	27.8	17.7	13.7	0.0	0.2	1.9
Cook Islands	44.6	16.8	23.5	15.1	0.0	0.0	0.0
Cuba	0.0	51.9	9.5	16.8	0.0	12.3	9.5
Dominican Republic	34.9	29.4	9.2	15.8	5.6	0.5	4.6
Fiji	28.8	39.8	8.2	19.9	0.0	0.0	3.3
Guyana	21.9	29.4	14.2	21.3	0.2	9.9	3.2
Jamaica	32.7	27.9	11.1	11.1	8.5	3.7	4.8
Mauritius	34.5	30.7	10.0	14.0	1.5	3.8	5.6
Nauru	0.0	29.8	..	..	70.2	0.0	0.0
Papua New Guinea	16.2	21.4	31.1	30.2	0.0	0.0	1.1
Saint Lucia	31.7	40.0	10.8	9.1	5.9	..	2.5
Samoa	40.1	36.9	11.9	11.2	0.0	0.0	0.0
Solomon Islands	0.0	73.2	16.7	9.6	0.0	0.0	0.5
Vanuatu	45.8	51.0	0.0	0.0	0.0	0.0	3.1
SIDS average	26.5	36.1	13.0	14.5	6.2	2.7	0.9
Africa (30) average	29.7	22.2	17.5	19.2	3.3	7.2	0.8
LAC average	27.8	22.2	9.6	15.5	2.5	17.1	5.2
OECD average	20.4	12.3	23.5	10.0	0.8	25.7	7.2

Note: SIDS average calculated as the unweighted average for the 15 ODA-eligible SIDS in Revenue Statistics. Other taxes include taxes on payroll and workforce as well as taxes on property. Fields are marked as ("..") where data is not available.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

 Tax revenue trends in SIDS over time

The average tax-to-GDP ratio for the group of ODA-eligible SIDS was increasing after the global financial crisis and before the COVID-19 pandemic, driven by a series of tax policy and administration reforms and favourable economic conditions in many of them. Between 2008 and 2018, the average tax-to-GDP ratio for this group of SIDS increased by 2.2 percentage points (p.p.), more than the Africa (30), LAC and OECD averages (Figure 9). The greatest increases were observed in the Solomon Islands (8.9 p.p.) and in Samoa (7.1 p.p.), while the largest decrease occurred in Papua New Guinea (6.5 p.p.). Most ODA‑eligible Pacific SIDS (except Papua New Guinea and Vanuatu) saw increases in their tax-to-GDP ratios over the period. Tax-to-GDP ratios across ODA-eligible SIDS in Revenue Statistics diverged during the period, with the standard deviation across all SIDS increasing from 5.92 in 2008 to 7.56 in 2018.23

 

Figure 9. Changes in tax-to-GDP ratios in SIDS and regional averages, percentage points, 2008‑18

Note: SIDS average calculated as unweighted average for 14 ODA-eligible SIDS in Revenue Statistics. Data refer to the changes between 2008 and 2018 except for Africa (30) average which refers to the change between 2010 and 2018 due to data availability. Nauru is excluded from this figure as it only has data between 2014 and 2018.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

Over this period, higher revenues from taxes on goods and services (including VAT) were the main driver of increases in tax-to-GDP ratios, while income taxes (especially CIT) were the main driver of the biggest decreases (Figure 10). This has led to a general shift from direct to indirect taxation, as a result of economic conditions as well as a series of tax policy and administration reforms undertaken by many ODA-eligible SIDS. These reforms have largely focused on taxes on goods and services, in particular by moving away from trade taxes and introducing and/or changing rates of VAT (David and Leigh, 2018[26]; Gómez-Sabaíni and Morán, 2014[27]; Greenidge, McIntyre and Yun, 2016[21]; Murray, Oliver and Wyatt, 2014[22]; OECD, 2020[10]; OECD et al., 2020[11]; Schlotterbeck, 2017[23]). The reforms in LAC SIDS started earlier, in the 1990s and 2000s, while the Pacific SIDS introduced reforms after 2000. In both cases, the reforms were often part of a broader move towards trade liberalisation: in the case of the Caribbean, they accompanied the introduction of the Caribbean Community (CARICOM) Common External Tariff (Greenidge, McIntyre and Yun, 2016[21]) and, in the Pacific, they were a result of membership of the World Trade Organization and two regional agreements: the Pacific Island Countries Trade Agreement (PICTA) and the Pacific Agreement on Closer Economic Relations (PACER) (Murray, Oliver and Wyatt, 2014[22]). Many LAC and Pacific SIDS have also lowered PIT (via reduction in marginal rates or increases in tax free threshold) and CIT throughout the 2000s (Greenidge, McIntyre and Yun, 2016[21]; Murray, Oliver and Wyatt, 2014[22]).

Even after several reforms over the past decades which have improved taxation systems, ODA-eligible SIDS still face challenges to mobilise additional tax revenues, several of which are common to other developing countries. These include: high levels of informality, low administrative capacity, low tax compliance (an even greater challenge in geographically dispersed SIDS), continued reliance on tax incentives and exemptions across different tax types (Greenidge, McIntyre and Yun, 2016[21]; IMF, 2013[24]; Murray, Oliver and Wyatt, 2014[22]; Schlotterbeck, 2017[23]; Tumbarello, Cabezon and Wu, 2013[28]).

Between 2008 and 2018, tax-to-GDP ratios were most impacted by changes in the numerator (nominal tax revenues) rather than the denominator (nominal GDP) in ODA-eligible SIDS with the biggest increases (Samoa and the Solomon Islands) and decreases (Papua New Guinea); i.e. nominal tax revenue growth exceeded nominal GDP growth in most countries, but grew more slowly than GDP growth in countries that experienced decreases in their tax to-GDP ratios over the period (see Annex 1.A):

• In the Solomon Islands, robust economic growth and increased exports of timber and log (logging is the country’s main economic sector), combined with tax policy and administration reforms have generated additional revenues from both income taxes and taxes on goods and services (Murray, Oliver and Wyatt, 2014[22]; OECD, 2020[10]; OECD, 2019[29]).

• In Samoa, major tax policy and administrative reforms have broadened the tax base, removed exemptions, and improved tax administration efficiency and compliance, contributing to an overall rise of tax revenues over the years. This included: modernising the tax administration act; adopting a new VAT law; increasing the threshold of VAT and excise tax rates; creating new tax administration units and improving taxpayers’ services; implementing an online system for registration, filing and payment (Murray, Oliver and Wyatt, 2014[22]; OECD, 2020[10]; OECD, 2018[30]).

• In Papua New Guinea, declining natural resource prices have reduced the profitability of companies in the mining and oil sector, decreasing CIT revenues. Between 2008 and 2018, Papua New Guinea’s tax-to-GDP ratio decreased significantly, from being the 2nd lowest (at 18.6%) in 2008 to the lowest among SIDS (12.1%) in 2018 (OECD et al., 2019[31]; OECD, 2020[10]).

 

Figure 10. Net changes in tax-to-GDP ratios by main type of taxes in SIDS and regional averages, percentage points, 2008‑18

Note: SIDS average calculated as unweighted average for 14 ODA-eligible SIDS in Revenue Statistics. Data refer to the changes between 2008 and 2018 except for Africa (30) average which refers to the changes between 2010 and 2018 due to data availability. Nauru is excluded from this figure and SIDS average as it only has data between 2014 and 2018.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

The economic crisis generated by the COVID-19 pandemic may endanger the progress in tax revenue mobilisation made by SIDS since the global financial crisis.

SIDS economies are expected to be hit harder by the current crisis than the broader group of developing countries and emerging economies for a variety of reasons. The downfall is expected to be most pronounced in SIDS economies dependent on tourism and, to a lesser extent, in resource-rich SIDS (OECD, 2021[1]):

• According to the UN World Tourism Organization, international tourist arrivals decreased by 72% in SIDS between January and August 2020 (UNWTO, 2020[32]).This sharp decrease is likely to affect economic activity in most of the ODA-eligible SIDS in Revenue Statistics particualrly those eight economies highly dependent on tourism (Belize, Cabo Verde, Fiji, Jamaica, Mauritius, Saint Lucia, Samoa, Vanuatu) (Table 3). Belize, Fiji and Saint Lucia may be among the most affected, with an expected GDP contraction of up to 16% or more (OECD, 2021[1]).

• For resource-rich SIDS, the impact will differ depending on the type of commodity they export. The fall in energy commodity prices in 2020 is likely to affect economic performance of oil-rich countries such as Papua New Guinea in that year,24 and once again hit CIT revenues as was the case between 2008 and 2018. However, this negative impact is expected to be smaller than in SIDS economies dependent on tourism. The rise in the other commodity prices, such as precious metals, will benefit some SIDS such as Guyana, where record economic growth is expected thanks to gold exports (OECD, 2021[1]).

The economic downturn combined with tax-relief measures and amplified by the sharp reduction in tourism flows and volatility of commodity prices have the potential to reduce tax revenues in SIDS across the board, from corporate and personal income taxes to taxes on goods and services, which respond to the largest share of tax revenues and drove increases in tax-to-GDP ratios in many ODA-eligible SIDS between 2008 and 2018. The full extent of the decline in SIDS’ tax revenues is yet to be measured but examples from a few countries can be illustrative:

• In Cabo Verde, tax revenues in 2020 are projected to be the lowest in three years (below 20% of GDP) driven by sharp declines in CIT and VAT revenues following tax-relief measures postponing CIT payments, contraction of economic activity, weaker domestic demand and lower imports, among other factors (IMF, 2020[33]).

• In Fiji, total revenues (tax and non-tax) are expected to decline by 33.3% in the fiscal year 2021 (ending on 31 July), as a result of lower revenues from VAT (decrease of 8.2%) and custom duties (decrease of 44.2%) (Asian Development Bank, 2020[34]).

• In Papua New Guinea, total revenues (tax and non-tax) are projected to decline by 2.9% of GDP in 2020 (Asian Development Bank, 2020[34]).

• In LAC SIDS, VAT and income revenues were largely affected in the first half of 2020. VAT revenues contracted by 22.1% in Saint Lucia (cumulative January to June 2020), by 16.8% in Jamaica, and by 16.3% in the Dominican Republic (cumulative January to September 2020). Income tax revenues dropped by 25% in Saint Lucia (cumulative January to June 2020), by 9.7% in the Dominican Republic, and by 2.2% in Jamaica (cumulative January to September 2020) (Economic Commission for Latin America and the Caribbean (ECLAC), 2021[35]).

 Volatility of tax revenues in SIDS

Recent studies have considered how SIDS’ unique development challenges generate greater revenue volatility than in other countries. This is due to SIDS’ greater exposure to external shocks as well as their small, undiversified economies, making their domestic public revenues more volatile than those of other developing countries (Cabezon, 2016[36]; Cabezon, Tumbarello and Wu, 2015[37]; IMF, 2013[24]; Tumbarello, Cabezon and Wu, 2013[28]; World Bank, 2016[38]). SIDS which are fragile states, commodity exporters and microstates are particularly susceptible to revenue volatility (Cabezon, Tumbarello and Wu, 2015[37]; Tumbarello, Cabezon and Wu, 2013[28]). Pacific SIDS, and in particular microstates, are also more vulnerable to revenue volatility, particularly from non-tax revenues (e.g. fishing licence fees) (Cabezon, 2016[36]) (Tumbarello, Cabezon and Wu, 2013[28]). These studies have measured revenue volatility in SIDS by using standard deviation25 or coefficient of variation. The standard deviation measures the dispersion of a data set from its mean, and is measured in the same unit as the data. The coefficient of variation standardises the standard deviation by dividing it into the mean, giving the estimate of dispersion as a percentage of the mean.

The analysis in this section focuses on the coefficient of variation of tax-to-GDP ratios as a measure of volatility of tax revenues in SIDS.26 The advantage of the coefficient of variation is that it standardises the measure of dispersion for countries with very different levels of tax-to-GDP ratios, and as it shows the variation in tax revenues for an individual country as a percentage of that country’s mean tax-to-GDP ratio over the period, indicating essentially the fluctuation in the tax revenues available to the government as a percentage of the tax revenues the government has received on average.27 The analysis finds that tax-to-GDP ratios were more volatile on average in ODA-eligible SIDS than in other economies in the OECD Global Revenue Statistics Database. SIDS in the Pacific, with lower income levels and with a high share of commodities in their exports displayed higher coefficients of variation among ODA-eligible SIDS, suggestive of greater volatility of tax-to-GDP ratios between 2008 and 2018. This section also considers how the COVID-19 crisis may affect tax revenue volatility in SIDS in the future, via shocks to GDP growth, international tourism and commodity prices.

Tax revenue volatility in SIDS between 2008 and 2018

Between 2008 and 2018, tax-to-GDP ratios varied more strongly on average in ODA-eligible SIDS than in other economies in Revenue Statistics, with the exception of African countries. This nuances the analysis of recent studies that pointed to greater volatility of revenues in SIDS compared to other countries (Cabezon, 2016[36]; Cabezon, Tumbarello and Wu, 2015[37]; IMF, 2013[24]; Tumbarello, Cabezon and Wu, 2013[28]; World Bank, 2016[38]). The average tax-to-GDP ratio for the group of ODA-eligible SIDS ranged from a low of 21.9% to a high of 24.4%, with an average of 22.8%. The average coefficient of variation of tax-to-GDP ratios for ODA-eligible SIDS (9.28%) was higher than the average for other economies in Revenue Statistics (7.11%), including LAC countries (6.03%) and OECD countries (4.14%).28 However, it was lower than the average of the coefficients of variation of tax-to-GDP ratios of African countries (10.96%). Figure 11 shows the evolution of average tax-to-GDP ratios for the group of ODA-eligible SIDS in comparison to regional averages.

Tax-to-GDP ratios in ODA-eligible Pacific SIDS were the most volatile among SIDS and in comparison with other regional groups, a finding consistent with recent studies (Cabezon, 2016[36]; Cabezon, Tumbarello and Wu, 2015[37]; IMF, 2013[24]; Tumbarello, Cabezon and Wu, 2013[28]). Between 2008 and 2018, ODA-eligible SIDS Pacific average tax-to-GDP ratio varied more strongly than other ODA-eligible SIDS, ranging from 20.4% to 23.3%, with an average of 21.9%; whereas the average tax-to-GDP ratio for the group of ODA-eligible LAC SIDS ranged from 23.8% to 26.7%, with an average of 24.8%. The average coefficient of variation of tax-to-GDP ratios for ODA-eligible Pacific SIDS (14.46%) was higher than for ODA-eligible LAC SIDS (4.78%). It was also higher than for African countries (10.96%) and LAC countries (6.03%).

 

Figure 11. Comparison of SIDS and regional averages tax-to-GDP ratios, 2000‑2018

Note: SIDS average, SIDS Pacific average and SIDS LAC average are unweighted averages for ODA-eligible SIDS in Revenue Statistics. Nauru is excluded from this figure and SIDS average as it only has data between 2014 and 2018.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

Data for ODA-eligible LAC SIDS indicate that the impact of the global financial crisis in tax-to-GDP ratios mirrored the impact seen more broadly in the LAC region: the average tax-to-GDP ratio for the group of ODA-eligible LAC SIDS declined to 24.4% in 2009 from 24.8% in 2008, while at the same time the LAC average tax-to-GDP ratio fell to 20.9% in 2009 from 21.7% in 2008. For OECD countries, the average tax-to-GDP ratio first fell from 33.2% in 2007 to 32.6% in 2008 and then to 31.8% in 2009. This is consistent with the observation that LAC SIDS – which are almost all high-income and upper middle-income countries29 – were the most affected by the crisis, reflecting their greater integration in the global economy (through financial services, tourism, remittances and exports) (OECD, 2018[12]).30 The average tax-to-GDP for the group of ODA-eligible LAC SIDS ratio only returned to pre-crisis levels in 2016, a longer length of time than for LAC and OECD averages, which returned to pre-crisis levels in 2011 and 2014, respectively. This may be linked to the fact that for LAC SIDS, GDP growth rates remained lower than before the crisis (OECD, 2018[12]).

Over the period, volatility of tax-to-GDP ratios was also higher on average in SIDS with lower income levels. Upper-middle income SIDS had an average tax-to-GDP ratio of 23.8% in the period, with an average coefficient of variation of 8.90% and an average standard deviation of 2.09. Lower-middle income SIDS presented higher volatility, with an average tax-to-GDP ratio of 19.9%, average coefficient of variation of 10.35% and average standard deviation of 2.07.

Looking at individual ODA-eligible SIDS in Revenue Statistics confirms that tax-to-GDP ratios varied more strongly among those in the Pacific as well as those with a high share of commodities in their exports, which is consistent with the recent literature (Cabezon, 2016[36]; Cabezon, Tumbarello and Wu, 2015[37]; IMF, 2013[24]; Tumbarello, Cabezon and Wu, 2013[28]; World Bank, 2016[38]). Coefficients of variation of tax-to-GDP ratios were higher among ODA-eligible Pacific SIDS (all except Vanuatu) and in four ODA‑eligible SIDS with a high share of commodities in their exports (Nauru, Papua New Guinea, Samoa and the Solomon Islands). ODA-eligible SIDS with the highest coefficients of variation of tax-to-GDP ratios were Nauru, Papua New Guinea and the Solomon Islands (from highest to lowest) (Table 2).

 

Table 2. Variation of SIDS and regional tax-to-GDP ratios, 2008‑18

Ordered from larger to smaller coefficient of variation

	Coefficient of variation	Standard deviation	Minimum tax-to-GDP ratio (year)	Maximum tax-to-GDP ratio (year)	Average tax-to-GDP ratio
Nauru	42.81%	9.54	8.4 (2014)	35.4 (2018)	22.3
Papua New Guinea	16.73%	2.73	11.9 (2017)	20.0 (2011)	16.3
Solomon Islands	11.69%	3.20	21.5 (2009)	30.4 (2018)	27.4
Samoa	9.69%	2.19	18.8 (2008)	25.8 (2018)	22.6
Cook Islands	7.72%	2.03	22.1 (2014)	29.8 (2018)	26.3
Cabo Verde	7.09%	1.35	16.9 (2014)	21.2 (2008)	19.0
Fiji	6.68%	1.47	19.9 (2009)	24.2 (2017)	22.1
Belize	6.25%	1.65	24.0 (2008)	29.7 (2018)	26.5
Vanuatu	5.88%	1.00	15.3 (2016)	19.2 (2008)	17.0
Guyana	5.80%	1.39	22.5 (2012)	27.4 (2018)	24.0
Cuba	5.25%	2.07	36.5 (2013)	42.4 (2018)	39.4
Jamaica	4.27%	1.09	24.5 (2011)	27.8 (2018)	25.5
Dominican Republic	3.97%	0.52	12.3 (2010)	14.2 (2008)	13.1
Saint Lucia	3.15%	0.63	19.3 (2010)	21.3 (2008)	20.1
Mauritius	2.28%	0.44	18.7 (2008)	20.4 (2018)	19.4
SIDS averages
All ODA-eligible SIDS	9.28%	2.09	21.9 (2010)	24.4 (2018)	22.8
ODA-eligible LAC SIDS	4.78%	1.23	23.8 (2011)	26.7 (2018)	24.8
ODA-eligible Pacific SIDS	14.46%	3.16	20.4 (2009)	23.3 (2018)	21.9
Upper-middle income SIDS	8.90%	2.09	22.0 (2014)	26.8 (2018)	23.8
Lower-middle income SIDS	10.35%	2.07	18.4 (2009)	21.2 (2011)	19.9
Other regional averages
Africa (30) average	10.96%	1.48	15.1 (2010)	16.5 (2018)	16.1
LAC average	6.03%	1.25	20.9 (2009)	23.1 (2018)	22.0
OECD average	4.14%	1.29	32.2 (2009)	34.4 (2016)	33.3

Note: Data for Nauru cover the years 2014 to 2018. For regional and income level groups, the coefficients of variation and standard deviations are calculated as averages of the individual country coefficients of variation and standard deviations of tax-to-GDP ratios.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

The coefficient of variation can hide trends in the data series and should be interpreted in light of the overall evolution of tax-to-GDP ratios over the period (Figure 12). Among the three ODA-eligible SIDS with the highest coefficients of variation, Nauru and the Solomon Islands had an overall increase in tax-to-GDP ratios over the period and Papua New Guinea had an overall decrease:

• Nauru’s tax-to-GDP ratio increased four-fold between 2014 and 2018 thanks to wide-ranging tax policy and administration reforms (e.g. introduction of employment, business and service taxes and increase of their rates over time; establishment of a revenue office; improvement in customs and tax administration) (Murray, Oliver and Wyatt, 2014[22]; OECD, 2020[10]).

• In Papua New Guinea the decline in prices of non-renewable commodities has negatively impacted businesses and overall economic activity, and consequently the levels and volatility of tax revenues, particularly from income taxes and VAT (OECD, 2020[10]; 2019[29]; 2018[30]; UNCTAD, 2019[39]).

• The Solomon Islands has experienced important increases of tax-to-GDP ratios due to robust economic growth, increased exports of timber and log (the country’s main economic sector), and tax policy and administration reforms (Greenidge, McIntyre and Yun, 2016[21]; Murray, Oliver and Wyatt, 2014[22]; OECD, 2020[10]; OECD, 2019[29]; UNCTAD, 2019[39]).

 

Figure 12. Minimum and maximum tax-to-GDP ratios in SIDS, 2008‑18

Note: Nauru’s data refer to 2014 to 2018. SIDS are ordered from the highest to the lowest median tax-to-GDP ratio between 2008 and 2018.

Source: Calculations based on OECD (2020[8]) Global Revenue Statistics Database, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

 Tax policy and tax administration reforms: building on past experiences and exploring additional revenue streams

In the first decades of the 21st century, ODA-eligible SIDS made important efforts to strengthen tax revenue mobilisation. Many SIDS reformed their tax systems, in particular by moving the focus from trade taxes to VAT, in addition to implementing tax administration reforms to increase efficiency. These yielded positive revenue outcomes helped by an overall positive international economic environment. Nominal tax revenues increased faster than GDP on average, leading to higher tax-to-GDP ratios.

In the aftermath of the COVID-19 crisis, SIDS will need to once again focus on enhancing domestic revenue mobilisation to strengthen their capacity to finance their own development. This can be done is several ways.

First, SIDS who, so far, have only adopted limited tax policy and administration reforms may consider learning from the experience of SIDS with similar characteristics who have implemented a wide-range of reforms to strengthen domestic revenue mobilisation (for example, see the discussion on past reforms and ongoing challenges in the section “Tax revenue trends in SIDS over time”). These reforms could be complemented by strengthening efforts to digitalise the delivery of tax services, which can have a positive impact on compliance rates while reducing administrative costs (OECD, 2021[45]).

Second, SIDS could also consider revenue streams currently not explored, for instance sectors in the sustainable ocean economy (further discussed below) or environmentally-related taxes,31 fees and charges (including via carbon pricing). In 2018, most ODA-eligible SIDS for which data on environmentally related taxes are available in Revenue Statistics focused on one or two types of taxes,32 often on energy and/or transport (OECD/AUC/ATAF, 2020[9]; OECD, 2020[10]; OECD et al., 2020[11]). On average, these revenues reached 1.9% of GDP in ODA-eligible SIDS, less than the average for OECD countries (2.2% of GDP), but more than the average for Africa (30) (1.1%) and LAC (1.0%). Further use of environmentally-related taxes – including on pollution and on resources – would have the advantage of both increasing domestic revenues and incentivising the more sustainable use and conservation of natural assets, by encouraging consumers to consider the environmental cost of their behaviour.

Finally, the integrity and performance of VAT regimes is crucial for domestic resource mobilisation in SIDS operating a VAT. The growth of e-commerce in SIDS, which is expected to continue accelerating, may have significant implications for VAT policy and administration. These may notably include potentially significant threats for VAT revenues where online sales by offshore sellers remain untaxed under existing VAT systems as well as distortion of competition for compliant domestic suppliers. SIDS are therefore encouraged to assess the potential need for policy action to ensure that their VAT systems are adequately equipped to address the implications of e-commerce growth. In this context, the internationally agreed standards and guidance for addressing the VAT challenges of digital trade developed by the OECD33 may provide the appropriate basis for VAT policy reform in SIDS, as appropriate (OECD, 2021[46]; 2019[47]; 2017[48]). This guidance includes rules and mechanisms to collect VAT from foreign online sellers, which have already been implemented with considerable success in more than 70 economies that have implemented them, including in developing economies. It also points in particular to the considerable opportunities created by the role of e-commerce platforms in enhancing the efficiency of VAT collection and of big data for greater visibility and traceability of economic activity and for formalisation of previously informal economic activity. It therefore holds considerable “quick-win” opportunities for domestic resource mobilisation in SIDS. SIDS could further consider these opportunities in light of their national circumstances, administration capacities and policy priorities towards identifying tailored solutions that will allow them to enhance the efficiency and effectiveness of their VAT systems.

Development partners should ensure that support is available to assist SIDS in such reforms, as many ODA-eligible SIDS have been receiving very small volumes of bilateral assistance in support of domestic resource mobilisation over the past years, with several of them receiving no support in 2019, for instance.34

 Enhancing the management of existing ocean economy sectors and harnessing new opportunities from an expanding global ocean economy

Many ocean economy sectors, such as tourism and fisheries, already constitute the backbone of the economies of many SIDS, accounting for important shares of GDP, jobs and foreign exchange. However, the management of many of these sectors could be enhanced so as to improve the domestic revenue mobilisation associated to them. Among existing ocean-based sectors, tourism accounts for a significant share of GDP in SIDS, but the limited forward and backward linkages of this industry to the rest of the economy (e.g. with food and agriculture, consumer goods and construction) and the repatriation of profits earned by foreign investors (i.e. the so-called ‘financial leakages’) diminish its positive impact on SIDS’ domestic revenues. SIDS governments, with the support of providers of development co-operation, could foster backward and forward linkages with the rest of the economy and enhance local ownership, for instance through support to education, training and the introduction of specific local-sourcing requirements, as well as training and support to local tour operators, locally owned businesses, and local suppliers in other sectors such as agriculture, food processing, handicrafts, trade, transport, and recreation and entertainment (OECD, 2021[1]).

In addition, new ocean-based sectors - such as marine biotechnologies, off-shore wind energy, agriculture – now being developed thanks to technological improvements, could contribute to expanding and diversifying the economies of SIDS, potentially resulting in broader taxable bases and in an overall more stable flow of domestic revenues. For SIDS, ocean resources are on average more than 2 000 times35 the size of their land masses, which makes them home to vast untapped reserves of oil, minerals, marine algae and microorganisms that could have biotechnological and pharmaceutical uses, and other marine resources that could effectively be the basis for a larger set of economic activities and a more resilient economy.

SIDS’ governments and providers of development co-operation could partner up to ensure that new and traditional ocean-based economic activities use ocean resources sustainably and conserve them. Development co-operation approaches could enable SIDS to fully assess the potential costs and benefits associated to these new sectors, and to develop them sustainably as to ensure they generate high domestic returns and catalyse long-term inclusive development. This could require new development co‑operation schemes as illustrated in (OECD, 2020[8]), such as schemes designed to: i) strengthen developing countries’ expertise and access to policy evidence and science for the integrated and cross‑sectoral management of ocean resources; ii) adequately assess the risks and rewards of economic opportunities, especially emerging ones, so as to effectively integrate from the outset community interests and environmental concerns in decision-making and achieve sustainable use of resources; iii) provide international cost-sharing mechanisms to conserve ocean resources and compensate SIDS for the foregone revenues from industrial activities (such as deep seabed mining and others) with potentially high destructive environmental impacts extending well beyond SIDS’ national borders, and global consequences for the ocean’s ability to regulate climate, store carbon, and provide livelihoods and food (OECD, 2020[8]).

 Curbing illicit, unreported and unregulated fishing

Among ocean-based sectors, the improved management of fisheries, and in particular curbing illicit, unreported and unregulated (IUU) fishing activities, could be particularly beneficial for SIDS. Licence access fees from foreign vessels represent a significant source of domestic revenue for several SIDS. Kiribati’s public revenues, for instance, depend on revenues from licence access fees from foreign vessels for up to 75% (ESCAP, 2020[49]). At the same time, SIDS’ vast Exclusive Economic Zones (EEZs) are often hard to monitor and subject to IUU fishing activities. While there are no estimates available specifically for SIDS, it is estimated globally IUU is so widespread that one in every five fish sold is stolen (FAO, 2017[50]). This represents lost revenue equivalent to roughly USD 23 billion each year.

SIDS governments, with the support of providers of development co-operation, can work to improve the national and international enforcement of standards on origin and traceability, as well as on human and labour rights. They can also improve sea surveillance and monitoring in response to widespread piracy and illegal activity at sea, through training for coast guards and maritime authorities and support to implement vessel monitoring systems and space technologies for mapping ocean resources. The fisheries sector is also vulnerable to a wide range of tax crime, and as such, tax administrations should assess their vulnerabilities to tax crime within the fisheries sector and related service providers, and the effectiveness of existing legal powers and procedures in preventing, detecting and investigating these crimes (OECD, 2013[51]). Tax Inspectors Without Borders (TIWB) has recently expanded to assisting countries in combatting tax crimes, and it may be an option for it to provide assistance in this area.

It is positive that providers of development co-operation are also supporting the use of innovative technologies such as blockchain to increase traceability of fish, help combat IUU fishing and curb human rights violations, including human trafficking and slavery on fishing boats. A good example is a pilot project in the Pacific islands tuna industry launched by the World Wildlife Fund in Australia, Fiji and New Zealand; ConsenSys, a technology innovator based in the United States; the technology implementer, TraSeable; and Sea Quest (Fiji) Limited, a tuna fishing and processing company. The partnership will use blockchain technology to track tuna from bait to plate. Similarly, US Agency for International Development (USAID) has partnered with the Walton Family, Packard and Moore Foundations on the Seafood Alliance for Legality and Traceability, or SALT, a global alliance that brings together industry, governments, traceability technology companies and civil society to accelerate learning and support collaboration around traceability approaches to legal and sustainable seafood.