COVID-19 has left Asia and the Pacific facing a financial double whammy. Governments have been left little choice but to raise spending for critical social services, such as healthcare, while also relaxing certain taxation to allow businesses to stay afloat during the economic downturn.
But with a nascent recovery taking shape, policymakers now face a challenge for how best to bridge the gap in revenues in a way that helps the short-term recovery from the pandemic and continues to pay for longer term investment priorities. The Asian Development Bank is working with developing member countries on so-called domestic resource mobilization (DRM), to ensure the region gets the balance right.
ADB has joined with the governments of New Zealand and Australia to help Solomon Islands overhaul its tax system to expand and secure the country’s revenue base. Approved last year, the $20.1 million, 5-year Domestic Resource Mobilization Project is critical in supporting Solomon Islands move to more modern tax arrangements, ensuring the Inland Revenue Division (IRD) can raise revenue for critical expenditure, and help the recovery from COVID-19.
ADB Team Leader and Principal Country Specialist Matthew Hodge discusses the benefits of a fairer and more transparent tax system in Solomon Islands and the challenges of developing these reforms during the pandemic.
How has the COVID-19 pandemic impacted and even necessitated this project?
The COVID-19 pandemic has had a devasting impact on Solomon Islands. Like other countries in Asia and the Pacific, the economy has contracted, reducing revenues for the government. At the same time, expenditures have increased to pay for necessary healthcare and to help prop up the economy. So ADB’s project will support the government’s efforts to raise more domestic revenue to help fund development activities critical to both recover from the pandemic and to also boost sustainable long-term growth.
How have you overcome the challenges the pandemic has inflicted on the project?
Comprehensive tax reform is never easy, let alone in a small island developing state that is fragile and still trying to fight a global pandemic. The Solomon Islands government has been courageous to embark on such an ambitious reform program at this time, knowing that while it will be challenging, there are long-term benefits for the people of Solomon Islands. The government’s policy and legislative reforms have been implemented slower than they otherwise might have, and that’s to be expected given the enormous burden of needing to respond to the pandemic. Despite that, this project has the potential to be transformative by implementing a tax system which will help raise revenue to meet the country’s development financing needs, and doing so in a way that is efficient, fair, and supports growth. Even though the requisite laws are still to be passed by Parliament, considerable capacity-building work in IRD is needed to get it ready to implement the new laws. The next challenge will be ensuring the long-term advisors, who will support IRD, are able to enter Solomon Islands. ADB is working with the government to ensure the team can enter safely.
Why does the Solomon Islands tax systems need a make-over?
The current tax structure in Solomon Islands constrains economic growth and limits development. The structure of the tax system is outdated, inefficient, complex, expensive to administer, and anti-competitive. The tax system imposes high compliance costs and is open to tax avoidance and evasion activities. A better tax system will actively support growth by raising revenue efficiently without discouraging individuals and businesses from contributing to the national economy. A reformed tax system will improve and stimulate private sector growth, including attracting foreign investors, which is critical for a diversified economy.
What does the project hope to achieve?
ADB has supported the government since 2017 with policy work and legislation preparation that provides a framework for the government’s tax reform program. For example, a Tax Administration Bill and a new Value Added Tax Bill, should be introduced to Parliament in the first half of 2022. The Domestic Resource Mobilization Project will support the IRD to implement these new laws which will go a long way to reforming the tax system. The project’s three focus areas are: one, supporting the restructure Solomon Islands’ IRD, including training and upskilling staff; two, installing a new tax administration information system; and three, delivering a public information campaign to increase taxpayer understanding and compliance. The project is in the start-up phase and the next critical steps are procuring a tax administration information system and selecting a firm to provide the advisors. Once this is done and the advisors are in-country, a comprehensive workplan will begin.
Women in particular will benefit from the project. How so?
This is one area where the reforms will be really felt. Few women in Solomon Islands participate in the formal labor force. Instead, they do unpaid family work such as childcare and gardening.
The project will benefit women by encouraging their participation in tailored tax education outreach programs, especially micro and small entrepreneurs. Within IRD, female staff will receive leadership training and gender equality, and social inclusion practices will be mainstreamed into IRD’s human resource management system.
How important are partnerships to the success of this project?
The project would not have been possible without the support of the Australian and New Zealand governments. Not only have they provided significant cofinancing (New Zealand is providing NZD10 million and Australia AUD5 million), but they have provided valuable input into the project’s design. The support of these important partners means this project is more comprehensive, able to meet the specific needs of the government, and will contribute to greater sustainability of the tax reforms.