Foreign aid is often exempt from taxation in recipient countries. Research on the topic is sparse, debate infrequent, and the system has become entrenched over 70 years.
A renewed focus on taxation for development has re-opened the debate on Official Development Assistance (ODA) tax exemptions. The Addis Tax Initiative (ATI) goals on capacity building and policy coherence are potentially inconsistent with ODA tax exemptions. Two ATI members – the Netherlands and Norway – have unilaterally decided to refrain from requesting some ODA tax exemptions. The Platform for Collaboration on Tax (PCT) – a joint effort of the IMF, OECD, UN and World Bank – has committed to review current practice and issue guidance and recommendations (see PCT, 2018). This follows a similar effort around 10 years ago by the UN Committee on Experts on International Tax Cooperation in Tax Matters to review and issue guidelines (see Thuronyi (2005); Thuronyi (2006); and International Tax Dialogue (2007).
This briefing note is intended to contribute to the discussion on the rationale for ODA tax exemptions by setting out the arguments for and against them.