Official development assistance (ODA) is a financial resource provided by the members of the OECD Development Assistance Committee (DAC) that seeks to promote the economic development and welfare of developing countries. DAC members often request exemptions from indirect taxes (e.g. customs duties, Value Added Taxes) or income taxes (e.g. Personal Income Tax and Corporate Income Tax) for the ODA-financed goods and services they provide to their partner countries. It has, however, not always been clear which ODA-financed goods and services are exempt from taxation, or in some cases the precise legal basis by which such exemptions are granted. Greater transparency is a priority for all actors involved.
Tax treatment of official development assistance
Launched in January 2022, the Tax Treatment of Official Development Assistance Hub is the first public resource of its kind to improve the transparency around the taxation of development aid. It presents approaches taken by participating donor countries to claiming tax exemptions on goods and services funded by official development assistance (ODA) and provides links to additional resources.
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Why is transparency of the tax treatment of ODA important?
Like tax exemptions and incentives for investment, the tax treatment of ODA is under increasing scrutiny: seeking to improve fiscal space to finance the 2030 Agenda, developing countries need clarity on how they affect tax systems, tax administration and markets. As the COVID-19 pandemic shrinks fiscal space and depresses levels of external private finance, ODA is an even more critical resource. Policies and practices on the tax treatment of ODA should thus be clear and transparent, and not cause unnecessary financing distortions or administrative burdens. Hence the importance of casting light on which ODA-financed goods and services are exempt from taxation, or on which legal basis.
Legal frameworks governing the tax treatment of ODA often lack transparency. This is most apparent in the context of blended finance schemes, where the policy guiding the extension of tax exemptions to private firms undertaking work on behalf of the ODA provider and their sub-contractors if often unclear. This can lead to significant revenue losses where such extensions were not intended, or to risks of double taxation (or double non-taxation) and/or potentially long and administratively burdensome disputes with tax authorities for private companies. Greater transparency over policy and intended beneficiaries increases clarity for all parties, eases administration and reduces disputes.
The 2019 edition of the OECD Global Outlook on Financing for Sustainable Development revealed that a number of DAC members have either changed their policies about the tax treatment of ODA, or indicated a willingness to explore the issue further. However, the lack of comparable evidence has been hindering their ability to learn from the policies and practices of peers.
The Addis Abba Action Agenda (AAAA) called on UN member states to (re)assess their policies relating to the tax treatment of ODA, stating: “We will also consider not requesting tax exemptions on goods and services delivered as government-to-government aid, beginning with renouncing repayments of value-added taxes and import levies.”
In 2017, the UN Committee of Experts on International Co-operation in Tax Matters established a sub-committee on the issue of the Tax Treatment of ODA projects in which the OECD participated. To help countries review their policies, and where agreed, negotiate exemptions, the sub-committee adopted the UN Guidelines on the Tax Treatment of ODA in October 2020 and they were published in April 2021.
At the 2020 OECD DAC High Level Meeting, members recommitted to align their support to strengthen domestic resource mobilisation and fulfil the Addis Agenda.
The Addis Tax Initiative (ATI) also discussed the issue as part of the commitment of signatories to policy coherence in domestic resource mobilisation and development.
Overview of the tax treatment of ODA by donor countries
The table below provides an overview of the tax exemption policies followed by participating DAC members, as well as detailed country sheets for 22 DAC members which participated in the survey. Unless otherwise stated, the policies refer to arrangements where the DAC member has sufficient autonomy to implement the policy (e.g. bilateral funding arrangements).
Providers of ODA not currently listed are encouraged to participate by contacting TaxandDevelopment@oecd.org and DAC.Contact@oecd.org.
How can the OECD help?
For over 60 years, the OECD has been monitoring the quality and timeliness of official development assistance (ODA) reporting by DAC members. It thus has the tools, data and policy information to help improve the transparency around ODA taxation, and help countries meet their Addis commitments
The Organisation is also a centre of expertise on matters of global taxation, serving as secretariat for the Inclusive Framework on Base Erosion and Profit-Shifting (BEPS) – an initiative with over 140 member countries and jurisdictions collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax – and the Global Forum on Transparency and Exchange of Information for Tax Purposes – the leading international body with over 160 members working on the implementation of global transparency and exchange of information standards around the world.
Additional information
These links to reports, papers, presentations on the tax treatment of ODA-funded goods and services are provided to facilitate research on, and understanding of the issue. The OECD does not take responsibility for the content of links owned by third-parties.
- OECD Global Outlook on Financing for Sustainable Development 2019: Time to Face the Challenge
- UN Guidelines on the Tax Treatment of Government-to-Government Aid Projects
- UN Committee of Experts on International Cooperation in Tax Matters recommendation on public disclosure
- Presentation by Elfrieda Stewart Tamba, Former Commissioner General, Liberia Revenue Authority, member of UN committee of experts sub-committee on the Tax Treatment of ODA Projects
- PCT commissioned report on tax treatment of aid in recipient countries (Benin, Cameroon, Kenya)
- The paradox of tax exemptions of Official Development Assistance in developing countries, Caldeira, É., A. Geourjon and G. Rota-Graziosi (2018), Ferdi.
- The Taxation of Foreign Aid: Don’t Ask, Don’t Tell, Don’t Know, Steel, I. et al. (2018), Overseas Development Institute and African Tax Administration Forum.
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