People in developed economies struggling to close burgeoning deficits incurred in the crisis by raising taxes or cutting spending could be forgiven for thinking that developing countries are concerned with the same priorities. But even in good times, dealing with fiscal challenges is an ordeal. Forget about tax rates or tranches, poor countries often quite simply lack the resources and capacity to build effective tax-collection systems. Despite some recent improvements in revenue-raising efforts, half of sub-Saharan African countries still mobilise less than 15% of their GDP in tax revenues, as against an average of around 35% in OECD countries and 23% in Latin America. This makes it difficult for the state to function properly, let alone to deliver on wider roles, such as social services or a better business environment. Developing countries know that, for their economies to grow and to attract business and jobs, and ultimately eliminate poverty, they must build capacity, strengthen infrastructure, combat corruption and develop transparent financial systems. They also need to work on a global level if they are to retain their already scarce resources by combatting illicit financial flows and reduce the impact of tax havens. Tax revenue is central to achieving all these objectives. It is about providing a stable and predictable fiscal environment to promote growth and, in the longer term, reducing dependence on development aid. Taxation is also about "good governance", because tax systems work as vehicles for enhancing state-society relations and improving public accountability. In other words, how taxes are raised matters as much as how much. What is more, the evidence shows that reforms which begin in tax administration may inspire the reform process in other parts of the public sector, which would be good news for those developing countries wishing to jumpstart their reform efforts. Making tax systems work is easier said than done. Attitudes have to be changed. Ordinary people may be unwilling to pay tax, frequently reflecting an accurate perception that officials themselves may be corrupt, and that governments consistently misuse public funds. Elites are equally hard to tax and may be able to use havens or evade taxation. It is also difficult to collect tax from low-income, agrarian economies with large informal sectors or to avoid coercion to raise those taxes by local officials. The external environment also poses new challenges. There has been an international shift away from taxes on trade, and this has added to the problems of domestic revenue-raising (African countries typically rely for more than 40% of their revenue on trade taxes). Striking the right balance between an attractive tax regime for investment and growth, and securing the necessary revenues for public spending is a key policy dilemma. Globalisation may also exacerbate fiscal problems, as internationally mobile capital becomes more difficult to tax. Large firms and investors have increased their bargaining power over governments, forcing a "race to the bottom" among developing countries competing to provide the most attractive tax incentives. At the same time, governments are under pressure from trading partners and local citizens to ensure their tax systems are transparent and fair. These challenges have created major new capacity needs in developing countries that the donor community has yet to fully recognise. Up to now, support for revenue and customs sectors has attracted a minimal share of aid, of around 0.1% of official development assistance annually. Donors could increase that amount and see aid as a way to kick-start the move towards sustainable tax systems. Such assistance should be seen as an investment in the future of these countries. Despite these challenges--and also because of them--now is a good time for tax reform. A shift away from indirect trade taxes in favour of VAT has made tax more visible and consequently provided a base for direct interaction (and formalisation) between state and small businesses. We now know more about how to make tax systems simpler and more transparent, about encouraging more compliance and about effective tax revenue solutions, such as broadening the base for taxation of financial sector profits rather than imposing financial transaction taxes, and so on. There is now a growing international consensus around these policy themes, backed up by an increasingly powerful and well-organised global community of tax professionals. The call for action is increasingly coming from developing countries themselves. In Africa, the creation of the African Tax Administration Forum, driven, managed and, over time, operationally funded by Africans, provides a key platform for peer learning, capacity development and dialogue on domestic and international tax issues. The other good news is that there is evidence to show that aid directed at capacity development in the revenue and customs sectors in the developing world is money well spent--an important consideration given the mixed record of technical assistance and donor fatigue in many other areas. With the economic crisis, the G8 and the G20 have made considerable advances with the assistance of the OECD, IMF and others towards addressing illicit flows, tax evasion, avoidance and tax havens. With more than 300 exchange agreements being signed in 2009, more progress has been made on this front in the last year than in the last decade. Nearly one hundred countries are now committed to transparency and exchange of information standards and are in the process of implementing them. This number will grow quickly as developing countries become directly involved in the debate. The key issue now is how developing countries can best be supported to take advantage of the more transparent international environment to strengthen their tax systems. If they can achieve that, they will strengthen their development potential significantly. Visit www.oecd.org/tax References Brautigam, Deborah, Odd-Helge Fjeldstad and Mick Morre, eds. (2008), Taxation and State-Building in Developing Countries, Capacity and Consent, Cambridge University Press, Cambridge. OECD (2009), Taxation, State Building and Aid, Factsheet, Updated December 2009, Paris. Available at www.oecd. org/dac/governance OECD (2008), Governance, Taxation and Accountability: Issues and Practices, DAC Guidelines and Reference Series, Paris. Owens, Jeffrey and Richard Parry (2009), "Why tax matters for development", in OECD Observer, No 273 June 2009, available at www.oecdobserver.org/tax For information on the OECD Global Relations Tax Programme, see www.oecd.org/tax/globalrelations For information on the OECD's work on countering tax avoidance, see http://www.oecd.org/ dataoecd/25/61/44431069.pdf Jeffrey Owens, Director, OECD Centre for Tax Policy and Administration, and Richard Carey, Director, OECD Development Co-operation Directorate