Mapping Taxation in Selected Asian Developing Countries

Transcription

Mapping Taxation
in Selected Asian Developing Countries
Summary Report
Imprint
The International Tax Compact (ITC) is an international development
policy initiative to fight against tax evasion and inappropriate tax
practices in developing countries. The German Federal Ministry for
Economic Cooperation and Development (BMZ) has launched the
initiative and commissioned GIZ and KfW to support the implementation.
Commissioned and supervised by
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
on behalf of the Federal Ministry for Economic Cooperation and
Development (BMZ)
Published by
Deutsche Gesellschaft für
Internationale Zusammenarbeit (GIZ) GmbH
Roland von Frankenhorst
Head of Sector Project International Tax Compact (ITC)
Dag Hammarskjöld Weg 1-5
65760 Eschborn
T +49 6196 79-0
F +49 6196 79-801639
I www.giz.de
Authors
Wolfgang Büttner
Dr Barbara Dutzler
Dr Ute Eckardt
Mark Hallerberg
Dr Michael Kobetsky
Dr Hyun- Ju Koh
Prof. Dr Victor van Kommer
Nina Korte
Bart Kosters
Udo Lautenbacher
Dr Anke Scholz
Jana Seehof
Astrid Templin
Bruno Webers
compilation: Dr Ute Eckardt
Design and layout
Gudrun Barenbrock, Cologne
Photos
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5/1-3, 51, 64: Bruno Webers
5/4, 34, 42, 56: Ute Eckardt
8: Udo Lautenbacher
16, 20: Nina Korte
64: Gudrun Barenbrock
65/1-5, 66/1-5, 67/1-2, 4-5: private
67/3: Fotostudio Knipper, Jena
Bonn, December 2013
Mapping Taxation
in Selected
Asian Developing Countries
Identification of experiences and
lessons to learn in six Asian countries
Summary Report
final version:
December 2013
Table of Contents
Executive summary
8
1. Introduction
16
2. Overview of the tax systems
20
2.1
Regulatory conditions
21
(a) Legal framework
21
(b) Major taxes
22
(c) Case Study: Legal framework for
23
combating tax evasion and avoidance
(d) Tax incentive schemes
24
2.2
Distributive effects of the tax system
27
2.3
The political economics of taxation
28
(a) Governance framework conditions
28
(b) Financial control of tax issues
31
(c) Drivers of change
33
3. Tax administration
34
3.1
Organisation of the institutions
35
3.2
Status of main business processes
37
3.3
Human Resource Capacities
41
4. Regional cooperation and coordination on tax issues
42
4.1
Tax Matters in the ASEAN regional integration process
43
4.2
Tax treaty network
45
4.3
ASEAN Forum on Taxation
47
4.4
Other fora of interchange
(a) Study Group on Asia Tax Administration and Research
49
(SGATAR)
(b) Other regular events
49
5. Donor support and coordination
51
6. Conclusion and recommendations
56
Annexes
62
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Boxes, Figures and Tables
Box 1:
The huge flood – tax measures
26
Box 2:
The difficult political economy of tax reform,
32
an example from the Philippines
Box 3:
Tax potential in Indonesia
36
Figure 1: Tax to GDP ratios for 2010
22
Figure 2: Shadow economy estimates (as % of GDP)
30
Figure 3: Intra-ASEAN trade in 2009 (as % of total trade)
44
Figure 4: DTA Network of ASEAN Members (Oct. 2011)
46
Figure 5: Age profile of intra-ASEAN DTAs
46
Figure 6: ODA and Investment flows 2010
52
Figure 7: ODA and tax ratio 2010
53
Table 1: Legal frame to combat tax evasion and avoidance
23
Table 2: Regional comparison of WBGI in 2010
29
Table 3: Corruption Perception Index 2011
29
Table 4: Population, tax administration staff and registered taxpayers
35
Table 5: Ratings of tax indicators in PEFA-reporting
38
Table 6: Tax treaties among ASEAN countries
45
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Acronyms and Abbreviations
ADB
Asian Development Bank
AFT
ASEAN Forum on Taxation
AFTA
ASEAN Free Trade Agreement
APTF
Asia-Pacific Tax Forum
ASEAN
Association of Southeast Asian Nations
AIPA
ASEAN Inter-Parliamentary Assembly
ATAF
African Tax Administration Forum
BIR
Bureau of Internal Revenue
BMZ
Bundesministerium für Wirtschaftliche Zusammenarbeit
und Entwicklung
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CIAT
Inter-American Center of Tax Administration
CMLV
Cambodia, Myanmar, Lao PDR, Vietnam
DoF
Department of Finance
DTA
Double Taxation Agreement
EC
European Commission
EU
European Union
FDI
Foreign Direct Investment
GDC
German Development Cooperation
GDP
Gross Domestic Product
GIZ
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
IAI
Initiative for ASEAN Integration
IMF
International Monetary Fund
IOTA
Intra-European Organisation of Tax Administrations
ITC
International Tax Compact
KfW
German Development Bank
MoF
Ministry of Finance
NORAD
Norwegian Agency for Development Cooperation
ODA
Official Development Assistance/Overseas Development Assistance
OECD
Organisation for Economic Co-operation and Development
PD
Paris Declaration
PEFA
Public Expenditure and Financial Accountability
PFM
Public Financial Management
acronyms and abbreviations
PHP
Philippine pesos
PI
Performance Indicator
SAI
Supreme Audit Institution
SGATAR
Study Group on Asia Tax Administration and Research
TA
Technical Assistance
THB
Thai Baht
TIN
Taxpayer’s Identification Number
UK
United Kingdom
US
United States
USD
United States Dollar
VAT
Value Added Tax
WGI
World Wide Governance Indicators
acronyms and abbreviations
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Executive Summary
The ITC is an initiative to strengthen international cooperation with developing and
transition countries, with the objective of enhancing domestic resource mobilisation. Since 2009 the ITC has worked as an informal and action-oriented platform
for dialogue and the exchange of experiences in order to promote effective, fair and
efficient tax systems and combat tax evasion and inappropriate tax practices on a
global scale.
The present report summarises the findings from six country studies: Cambodia,
Indonesia, Lao PDR, the Philippines, Thailand, and Vietnam. The six ASEAN
countries in our sample are extremely different in terms of their political systems
and economic situations, as well as their historical and cultural backgrounds.
Consequently, they mirror the enormous task that the ASEAN has set itself with the
goal of merging into the ASEAN Economic Community (AEC) by 2015. The AEC
will require harmonisation and reciprocity not only in the area of customs, where
this is already widely the case, but also in tax matters.
The ITC Core Group Meeting in February 2012 emphasised in its concluding communiqué the willingness of ITC partners to further strengthen their support for
regional tax and development organisations in Latin America, Africa and Asia.
Based on this concern, the present study has been initiated in order to gain deeper
insight into and understanding of the major factors contributing to progress and
challenges for taxation in ASEAN countries. This should lead to the identification
of areas for ITC pilot activities in the region and possibly enable the countries concerned to identify areas in which regional and international dialogue could help to
develop effective solutions and provide information so that international assistance
can be effectively organised.
The present summary report is based on the findings of six expert missions held
between September and December 2012 as well as ample country data. It summarises the findings in four areas: (a) tax policy related matters, (b) tax administration assessments, (c) regional cooperation issues, (d) and aid-related issues. The
last chapter then draws conclusions and develops recommendations.
(a) Tax systems
The general legal framework for taxation in most countries of our sample is in
general terms consistent with the requirements of an efficient tax system – the
main challenges for reform do not derive from fundamental legal issues: all countries have introduced modern tax practices – even if these are not always consistent
with international best practices. All provide the legal grounds for taxing the
incomes of individuals, enterprises and corporations, and all countries impose VAT
and excise duties on specific items. Even considering in greater detail the legal
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provisions to control tax evasion and avoidance, most countries provide at least
some of the necessary regulations including the adoption of transfer pricing guidelines following OECD standards.
The legal obligations are not presented clearly to the taxpayer everywhere and in
some countries the tax appeals systems are legally deficient. Meanwhile, in others,
there is no independent judiciary system in general and no tax appeals system in
particular. In some countries with existing appeals systems the practice is rather
difficult for the taxpayer, given the high complexity of tax law and regulations and
the relative lack of transparency in terms of obligations.
The major taxes are in principle suitable to cover the required resources to finance
the budgets. The predictability of tax revenues is excellent in all countries but
Vietnam, where actual tax revenues regularly and significantly exceed the forecast.
However, tax to GDP ratios are mostly – and in some cases, extremely – low and
certainly not adequate to finance fair and extended education and health systems
or higher infrastructure development needs. The potential for improvement is high,
not only in small countries in the course of developing their tax systems such as
Lao PDR, also for the high performers in administrative terms such as Thailand,
which faces the highest shadow economy in the sample, or economically potent
Indonesia, which has the second lowest tax to GDP ratio after Cambodia.
One common reason for the tax gaps are the widespread tax incentive schemes that
all countries maintain with the main objective of attracting foreign direct investments. In our country sample tax incentive policies are mostly not under the control
of the Ministries of Finance and are usually not monitored for impact. Using highly
individualised tax exemption rules for high potential taxpayers is only to a limited
extent compatible with the objectives of efficient tax systems such as raising
revenues, broadening the tax base and generally lowering taxes. There is significant
room for closing gaps and working towards a balanced form of investment policy
that serves both budgetary and private sector development objectives. This issue
would certainly benefit from dialogue under the ASEAN umbrella.
Regarding the distributive effects of the tax systems, most countries also provide the
legal grounds for a fair tax system, but its effects are counteracted by large shadow
economies and injustices resulting from the highly arbitrary powers of tax officials
as well as widespread tax evasion and avoidance, in spite of existing regulations.
Probably the main common reason for tax gaps is this lack of balance between
general legislation and its transfer into reality – of course to a differing extent
among the various countries. In most countries there is – in addition to the many
exemptions to the law through tax incentive schemes – far too much scope for arbitrary behaviour on the part of tax officers and, as we shall see, no less scope for the
undetected non-compliance of taxpayers. Development of control systems for
administrative performance and internal control mechanisms is one of the main
common challenges for reform.
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executive summary
Furthermore, the improvement of external financial control in tax issues is
necessary in all countries. Independent external control is limited in all cases. The
ASEAN offers sound opportunities for dialogue on improvement on these issues
through the ASEAN Organisation of Supreme Audit Institutions (ASEANSAI) and
the ASEAN Inter-Parliamentary Assembly (AIPA), which also maintains a group of
Public Accounts Committee Members.
Reforms in the area of taxation will need strong political leadership, which could be
supported by the ASEAN through the requirement of common practice standards,
much work on procedures and reducing challenges on the administrative side is
needed.
(b) Tax Administration
Considering the enormous differences between the tax administrations in our
country sample, their general organisation seems relatively homogenous: all
administrations (except Lao PDR) maintain a mostly function-based organisation
and all but Indonesia are a Department under the Ministry of Finance. All have
established units or offices to address the issues of large taxpayers, although of
course the spectrum of performance is extensive. Although all tax administrations
use the support provided by Information and Communication Technology (ICT),
the results and impacts are quite different. Some tax administrations are able to
manage high performance ICT systems, while others dispose of limited ICT support.
With their given resources the administrations achieve very different results. For
example, those countries with the highest number of tax officers per population
reach by far the largest tax to GDP ratio, although the number of staff per registered
taxpayer is relatively low. Some administrations boast an extremely well-equipped
organisation with a large number of provincial and district offices but nevertheless
do not achieve much in terms of tax/GDP-ratio. Of course also the infrastructure
requirements are very different between the countries, but the countries with the
highest tax to GDP/ratio are also those with fully working taxpayer registration
systems.
Measuring and comparing cost-benefit performance among the administrations
could be a productive field for exchange within the ASEAN, because our studies
show that there is no easy correlation between the economic and administrative
development of a country when assessing the potential for reducing tax gaps. For
example Lao PDR certainly has the least developed tax legislation and administration but ranks third in our sample regarding tax to GDP and the estimated shadow
economy share.
In most countries there is still some way to go to a modern, effective, and efficient
tax administration. Only Thailand operates an overall strategic framework that
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addresses the taxpaying citizens as customers and provides the service needed for
good taxpayer relations (but even Thailand does not capture much of its large
shadow economy). All other countries need to improve relations with the taxpayers.
Indonesia has worked with taxpayer education programmes but long years of corruption and collusion with tax officers have affected public and business attitudes.
Regarding the main business processes we have of course also noted many
differences in performance levels. Taxpayer registration needs improvement in all
countries. Even in Thailand, Vietnam and Indonesia, all of which run fully functional
taxpayer registration systems, improving the scope of datasets is a challenges. The
main issue regarding coverage of systems is the missing relation between various
government data sets, especially the missing link between business and taxpayer
registration.
All countries work largely with self-assessment systems, but inspection of selfassessed tax returns is fragmented in most countries – if it occurs at all. For taxpayers the risk of tax evasion being discovered is low, and mirroring that, the risk of
being discovered when making arbitrary decisions is equally low for the tax officers.
Moreover, in-depth auditing is not implemented systematically. In some countries
audit departments are fully occupied with VAT return control. Due to combined
assessment and corresponding payment procedures, the majority of payments are
received by the administration on time. Additional payment obligations and arrears
are created especially by audit measures. Risk management systems that would
allow for the efficient planning of auditing processes are mostly not in use.
In summary, it can be said that the combination of self-assessment systems based
on largely voluntary taxpayer registration with limited inspection and incomplete
auditing procedures probably leaves large scope for increasing tax revenues without adapting the legal framework. And again in a quite broad sense, there is no
country in the sample that would not profit from improvements in those areas.
There is scope for improvement even in basic procedures such as taxpayer
registration, inspection and audit issues, although most of the administrations can
look back on a long history of developing the tax administration including the
development of procedures and information systems.
Human resource development is reported to be a challenge in many of our sample
country administrations. This limits rapid returns on investment in improved technical solutions – capacity development needs to address systematic problems with
education and training in tax matters as well as help tax officers keep up with
progress. The reported aid absorption capacity constraints are observed in many
countries to be based on constraints within the work force.
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executive summary
(c) Regional cooperation
One of the most surprising findings in almost all country studies has been the lack
of importance given in the tax administrations to intra-ASEAN coordination and
cooperation in tax issues. Similarly, explicit references to tax issues on the ASEAN
agenda are limited. The ASEAN Charter as of 2008 does not mention taxation at
all. The ASEAN Economic Community Blueprint with its roadmap to an ASEAN
community 2009–2015 refers to taxation regarding the bilateral double taxation
agreements network to be created, the elimination of differences in withholding
taxes and technical assistance on tax structure enhancement to CLMV for eventual
harmonisation with other ASEAN member countries’ tax systems. The awareness of
the upcoming need to observe and to harmonise VAT systems, excise duties, capital
taxation etc. as well as awareness of the need to create the adequate communication channels must be further developed.
The tax treaty network within ASEAN does exist, but it is largely outdated. Some
countries are highly cross-linked in tax matters internationally, others not at all.
And the internationally interlinked countries tend to foster the relations with nonASEAN countries rather than with the other member countries, thus mirroring trade
relations, which are also more significant with external partners. Three quarters of
the thirty intra-ASEAN Double Taxation Agreements (DTA) were approved at least
11 years ago, half even 15 years ago.
With the ASEAN Forum on Taxation (AFT) in 2011, tax officials have started to
concretely work together for the first time. The main issues – represented in two
subgroups – are double taxation and withholding taxes and exchange of views and
dialogue. The dialogue subgroup aims to: (i) share experiences on best practices in
taxation systems; (ii) debate strategies in areas of cooperation in taxation; and
(iii) build capacity support and training for tax administrations and other areas of
mutual interest among tax authorities. The treaty subgroup started with the agreement on a model treaty and with the classification of member countries into four
groups related to the development of capital markets and their related tax regimes.
With AFT, the basis for intra-ASEAN exchanges on tax matters has been created.
Other exchange forums exist, such as the Study Group on Asia Tax Administration
and Research (SGATAR), the Asia-Pacific tax Forum (APFT) and other more or less
regular events. But ASEAN needs a forum for continuous dialogue, not only on the
political level but also in respect of the concrete administrative issues, in order to
merge into a powerful economic community for the benefit of all member countries.
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(d) Aid-related issues
Aid and its coordination are most relevant for Cambodia and Lao PDR. In all other
countries it is not as urgent a topic as in other regions of the world: Thailand is
itself a donor country, while the Philippines, Indonesia and Vietnam work with significant donor contributions, but have much more important other capital inflows
or their own significant resources.
Most of the countries follow an explicit reform agenda in PFM including taxation
that is supported by multilateral and bilateral donors. The most important donors
in the region are Japan and ADB, support in the area of taxation in all countries is
led by the World Bank and IMF, while Japan is also the most important bilateral
donor in taxation.
In the area of taxation support is often found to be fragmented and may lack
coordination even in terms of technical basics (such as the compatibility of systems
introduced). This has been assessed in all sample countries, although in the
majority of the countries donor coordination is organised along a formal framework
of regular working groups and reviews, and despite the fact that donor coordination
is reported as showing some progress by the Paris Declaration monitoring framework.
In some areas further support is needed, but the countries closer to the aid systems
already face significant absorption capacity constraints. There is therefore little
scope for broadening or speeding up reform processes in taxation through more aid.
Increased or more intensive aid can only lead to the expected impact if the coordination of donor contributions improves further, and the countries improve strategic
planning of reforms and thus support the potential impact of coordinated aid efforts.
(e) Conclusions and Recommendations
Finally, we conclude from our study that the following issues require further
monitoring:
• The legal adaptations recommended are mostly related to the modernisation
or simplification of existing tax laws. Legal adaptation is also required in
most countries for regional (AEC) and global issues, for example in order to
harmonise withholding taxes on capital markets. But all in all, there are
more critical needs for improvement than fundamental legal issues.
• The main challenge is much greater than introducing new legislation: it is
necessary to transform existing tax policy into efficient tax systems in practice through a modern, efficiently and loyally performing tax administration
that earns the trust and compliance of the taxpayers.
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executive summary
• Here, strong political will is needed, but support on technical issues is also
possible – even crucial in some areas: Closing the gaps between voluntary
tax registration, self-assessments with fragmented inspection and audit
applications is important, and human resource development is a challenge
for many of the administrations.
• Cooperation on tax matters within ASEAN needs to develop further. ASEAN
as a joint organisation should provide a forum for dialogue, exchange and
peer learning as well as opportunities for education and training in tax matters.
• While following the ASEAN path to the AEC, collaboration in tax matters
among the ASEAN member states will need to be intensified, the existing
treaty network needs in particular to be amplified and modernised.
• Donor contributions need to strictly avoid fragmented approaches and overburden tax administrations already facing severe capacity constraints.
Based on these recommendations, it follows that potential ITC support should
concentrate especially on supporting further regional exchange, mainly through
organising the transfer of experience. Ideally this would support the ASEAN coordination process, possibly through the ASEAN Forum on Taxation, in growing into an
effective forum for inter-change for the member countries’ tax administrations.
In the framework of the ASEAN roadmap, scope for support is also given for
technical assistance on tax structure enhancement – mainly addressing CMLV, but
for specific matters also including other countries. The recommendations in our
country studies for issues to be supported at country level, possibly through ITCpilot activities, cover the following topics:
• improving management and steering of reform processes,
• improving taxpayer relations
• strengthening audit functions
• strengthening of human resources and capacities
• further development of IT-support
If assistance is integrated into already existing aid and dialogue schemes at country
level, and capacity constraints are recognised and adequately responded to, then
there is further potential for successful support for tax reforms.
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1 Introduction
Background to the studies
The International Tax Compact (ITC) is an initiative introduced by the German
Federal Ministry for Economic Cooperation and Development (BMZ) in 2009 at the
Doha Conference on International Financing for Development to strengthen international cooperation with developing and transition countries, with the objective of
enhancing domestic resource mobilisation. The ITC aims to promote effective, fair
and efficient tax systems and combat tax evasion and inappropriate tax practices
on a global and regional scale.
In its concluding communiqué, the ITC Core Group Meeting in February 2012
emphasised the willingness of ITC partners to further strengthen their support for
regional tax and development organisations in Latin America, Africa and Asia.
Among the many ITC activities, two large mapping studies in the area of taxation
have been developed. The first issue elaborated – on a very broad worldwide basis
– the development policy support for the area of taxation, while the second sought
ways to provide information on a regular basis about the support for tax policy and
administration reforms through existing information channels. One of the important
lessons learned from both studies is that mapping development support for taxation
can be made more meaningful and concrete by addressing the right intervention
level – exchanging regionally and coordinating at national level. This experience is
the background to the development of the present regional mapping process.
Since 2009, the International Tax Compact has built up close relations with African
and Latin American tax administrations and their umbrella organisations CIAT and
ATAF. Asian countries have been very actively participating in ITC international
workshops from the outset, but there is still room for development regarding
concrete cooperation and the development of pilot measures on the ground.
Against this background it was decided that existing challenges and practices
should be analysed, and that solutions and perspectives to support effectiveness
and efficiency of taxation in the ASEAN region should be discussed. This also
1
BMZ (2011)
reflects the BMZ priorities for the region,1 which, among other things, focus on
enhancing good governance and especially strengthening transparency, the rule of
law and the respective administrative capacities.
The present study was initiated in order to gain deeper insight into and understanding of the major factors contributing to progress and challenges for taxation in
Asian countries. This should also lead to the identification of areas for ITC pilot
activities to enhance the exchange and sharing of South–South experiences in
strengthening tax systems. Moreover, the outcome should enable the countries
concerned to identify areas in which regional and international exchanges could
help to develop effective solutions and provide information so that international
assistance may be effectively organised in order to support them.
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Participating countries
Many of the Asian countries working with German Development Cooperation are
ASEAN members. Against the background of the ASEAN integration process, it was
also planned to provide a contribution to the tax issues planned for in the Roadmap
for an ASEAN community 2009–2015, especially referring to the needs of technical
assistance by CMLV. The selection of the countries for the present study was mostly
based on pragmatic reasons such as the potential support for the undertaking by
GDC decentralised structures at country level. Consequently, six countries were
selected: Cambodia, Indonesia, Lao PDR, the Philippines, Thailand and Vietnam.
Work process
The work process began by compiling ample country information in the ‘Country
Briefs’ and the elaboration of an analytical framework for all studies. Between
September and November 2012, six study mission teams were sent to the countries. Most were formed of three members (some four) with complementary profiles:
one senior international expert on international tax issues, one expert with leading
position in German tax administration and a development expert with a public
financial management background (see Annex 2).
Two joint workshops with all team members outlined the country work: an introductory workshop in September 2012 in order to create a joint view of the task and the
way of working, and a summary workshop in December 2012 to present the
findings and exchange results. By end January 2013 the country reports were drafted
and a reconciliation process with the partner countries had been started.
Methodology of the summary report
The summary report is mainly based on two sources: (a) the findings of the country
studies and (b) the compilation of information from the Country Briefs – including
statistical data and the summary of PEFA-information on taxation – for all countries.
The findings of the teams reflect the interviews that it was possible to arrange, and
also the experiences and special fields of working of the team members.
The present report merges the findings in six countries into assessments in four
areas: tax policy-related matters (chapter 2), tax administration assessments
(chapter 3), regional cooperation issues (chapter 4), and aid-related issues (chapter 5). The last chapter then summarises the conclusions and recommendations.
The summary of findings is to a large extent driven by the topics the teams were
able to investigate. This report concentrates on those issues that were analysed
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introduction
by most teams, so that a set of comparable information might lead to broader
conclusions. The specific country reports provide much more specific information.
For in-depth country-related reading it is therefore recommended to consult the
country reports at www.taxcompact.net.
In addition Lothar Bublitz has contributed a compilation of legal provisions to
combat tax evasion and tax avoidance in all countries that are taken here as case
studies related to tax policy. Special thanks go to Nina Korte, who generously
shared her experience from her dissertation on ‘The Political Economy of Public
Administration Reforms in Southeast Asia: A Comparative Analysis of the Tax
Administration in Indonesia and the Philippines’ (forthcoming).
The way ahead
Together with other interested international development partners, ITC conducted
a regional networking workshop in order to present and discuss the country studies,
verify the conclusions, and support the creation of a regional perspective on the
issue. The summary report was shared with all participants for comments and
discussion. The open format of the event was designed to enable delegates to share
lessons learned from reform approaches. Based on the results of the discussion,
ITC intended to identify pilot activities to enhance the exchange and sharing of
South–South experiences in strengthening tax systems. Particular emphasis was
placed on exploring options for continued regional exchange through a professional
network and a community of practice.
The seminar was conducted with approximately 30 participants, including highranking officials from the Ministries of Finance and Tax Administrations of the six
study countries as well as international experts who delivered inputs on subjects
related to the studies, international development partners, and German international development staff.
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2 Overview of the Tax Systems
The six ASEAN countries in our sample vary widely in terms of their political
systems and economic situations, as well as their historical and cultural
backgrounds. Consequently, they mirror the enormous task that ASEAN has set
itself with the goal of merging into the AESEAN Economic Community by 2015.
Tax systems are one aspect of overall governance systems, and of course their
performance depends largely on its character, from practical questions on the
organisation of the public service up to rather political issues such as the accountability system, which sets the incentives for the State to act more or less for the
benefit of its citizens. The broad variety of governance systems in ASEAN is a
special challenge also for working together in tax issues.
2.1 Regulatory conditions
(a) Legal framework
The legal framework for taxation in general is comprehensively established in most
countries. The legal formats of personal and corporate income taxation or Value
Added Tax (VAT) are seen mostly as a good base for administration. Thailand has a
comprehensive and well-publicised tax system; the legal quality of the Cambodian
system is also reported as being comprehensive and not too complicated. For
Vietnam, the expert team assessed the tax system to be extensive, although the
quality of legislation was not always adequate because of partial conflicts between
2
For example regarding the
internal legislation and international obligations.2 Lao PDR’s tax legislation still
foreign contractor tax
needs to be adapted to international standards in many aspects; there are too many
exemptions and too many arbitrary powers in terms of policy and administration.
However, VAT has been introduced recently (2010) on modern terms and further
reform is planned.
Essential for the relations between the State and the taxpayer is the clarity of the
taxpayer obligations and the possibility to appeal against administrative decisions.
In our sample countries a rather mixed picture emerges. Apart from Lao PDR all
countries provide at least some scope to appeal against tax bills. Most do not have
a specific financial court system; only the Philippines and in Indonesia have a
Court of Tax Appeals under the Supreme Court. In Vietnam, appeals can be
addressed to the Administrative Court system.
Nevertheless, in most countries, the objection does not pre-empt the tax payment,
and in some countries – such as Indonesia – the penalties on disapproved appeals
are extremely high – up to 100% at the second level of appeal. The number of
appeals is therefore usually quite low, as fighting tax issues through the court
system is costly and time consuming and usually successful only for large, and
possibly international, firms.
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PEFA reports are available for almost all countries.3 The ratings reflect a more
positive picture than our country studies, although caution is necessary when
comparing PEFA-results among countries: Only Lao PDR and Vietnam received a
‘D’ and ‘C’; all others were rated ‘A’ or ‘B’ under the performance indicator (PI)
PI–13(iii) ‘existence and functioning of a tax appeals mechanism’. The clarity and
3
All countries except Cambodia,
comprehensiveness of tax liabilities (PI–13[i]) seems to be rather difficult; here
where only the ratings are given
Thailand and Vietnam rate ‘B’, all others ‘C’ and ‘D’.
(see Table 4, p. 35)
(b) Major taxes
All countries levy an individual income tax and income tax for corporations and
enterprises. Since Lao PDR introduced VAT in 2010, all countries also now levy
VAT, some with a very high threshold, which effectively makes VAT a tax for large
enterprises and international corporations. All countries4 also raise a significant
portion of their tax revenues from excises, including import and export duties.
Some countries still receive large revenues from natural resources, but this is of
shrinking importance, as in Indonesia and Lao PDR. In terms of direct and indirect
taxation, Cambodia and Lao PDR receive only a small share of their revenues from
direct taxation; Indonesia, the Philippines and Thailand have a slightly higher share
of direct taxation.
Most countries devolve the possibility to collect their own taxes to lower levels of
government. In most cases, these form only a small portion of overall governmental
revenues: 5% in Cambodia, 6% in the Philippines and 10% in Indonesia. Thailand
also gives the provinces the additional right to raise certain taxes such as property
and land taxes, local development rates and a signboard tax, as well as the possibility to collect a surcharge tax of 10% on all central government taxes.
Figure 1:
Tax to GDP ratios for 2010
Source: IMF data, see country briefs
22
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overview of the tax systems
4
No data available for Vietnam
Interestingly, all countries in the sample, except Vietnam, are rated ‘A’ under the
indicator 3 in the PEFA-reporting system,5 which measures the aggregate revenue
outturn compared to the original approved budget (see Table 5, page 38). This
5
6
Public Expenditure and
means, on the revenue side there is a high credibility of the budget data. Vietnam
Financial Accountability, see
– with a ‘D’-rating – systematically underestimates the tax collection for budget
www.pefa.org and
forecast. However, Vietnam also collects more taxes as a share of GDP than any
the explication in chapter 3.2
other country in the region.
See Lothar Bublitz (2013),
(c) Case Study: Legal framework for combating tax evasion and avoidance6
Legal framework directed at
combating tax evasion and
All countries in the sample have developed basic legal frameworks to manage tax
avoidance, side study to the
offences and more or less elaborate schemes to counter tax avoidance. Most diver-
mapping of taxation in selected
gences can be observed in the field of anti-tax-avoidance rules: some countries
Asian countries, January
have established a consistent sophisticated system of regulations in order to curb
tax dodging; others have refrained from regulating this matter at all. However, most
countries have adopted the OECD transfer pricing guidelines either by law or by
decree. The mechanism and effects of ‘thin capitalisation’ have been referred to in
some of the country studies.
Table 1:
Legal frame to combat tax evasion and avoidance
Source: Bublitz, L., Legal Basics of Combating Tax Avoidance and Tax Evasion in
South-East Asia in the framework of tax mapping studies
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23
In general terms, the regulation of administrative penalties varies among the countries only in certain details. Generally the same structure is used, although this is
not always clear and sometimes the correlation to tax crimes is not precisely determined. Surcharges for late payment or underpayment are aligned with the amount
of unpaid tax and assess the penalty as a certain percentage of the unpaid tax. This
system is easy to handle but tends to overlook the particular circumstances of each
case (except in Vietnam). Some penalties appear to be rather harsh. Double sanctions
occur when surcharge and interest are levied simultaneously. If an honest businessman is willing to pay his tax debt but is not able to do so due to economic straits,
he has little chance to improve his situation if high surcharges increase his debt.
By contrast, the definition of tax evasion in the law reveals considerable differences. In some cases descriptions of the intentional and objective elements of the
crime are unclear. All systems are inclined to be ‘too perfect’ with the result of
excessive regulation. Nevertheless, in general the penal provisions dealing with tax
crime prosecution provide a sufficient basis to carry out prosecution procedures
including a conviction at the penal courts. However, it seems to be difficult in all
countries to convert statutory regulations into reality; sometimes the will to do so
appears to be lacking, as the low number of convictions shows. A few spectacular
tax evasion cases are unlikely to lead to a general change in taxpayers’ behaviour.
All in all, tax criminal law as such suffices to combat tax evasion in most countries.
Challenges arise rather from the lack of a necessary prosecution of criminal tax
offences7 – there is too much scope for arbitrary interventions. A sound and consis-
7
Exception: Cambodia
8
No data available for Vietnam
tent legal system is only one condition for combating widespread tax evasion. More
important is awareness on the essential role of taxation for shaping a State and its
development, and the importance of the relation between tax officials and taxpayers,
as well as of horizontal and vertical tax equity. Achieving this can result only from
deep changes in vision and attitude and is much more problematic than legal
adaptations.
(d) Tax incentive schemes
All countries in our sample use widespread tax incentive schemes for investment
promotion.8 Such promotion, especially to attract foreign direct investment, is one
of the major issues in economic development strategies and tax incentives are the
most important instruments in achieving this goal. Thailand boasts the longest
history in this respect: since 1954 it has offered a variety of tax holidays as
instruments for investment promotion.
Most common are export processing and special economic zones as well as tax
reductions to specific industries such as in the Philippines for oil, ecological solid
waste management, agriculture and fisheries since 2006. In respect of the
Philippines incentive schemes, the World Bank has estimated that the tax difference between firms on incentive scheme and those without is around 20%, which
24
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is among the highest in the world. The Philippines also recognise tax reductions for
specific citizen groups, as senior citizens, armed forces, national athletes, coaches,
and trainers.
Lao PDR has a general tax incentive scheme related to investment promotion law,
organising incentives mainly along regional priorities – in order to drive investment
to poorer regions – and the size of the investment or firm. Besides this, there is a
highly individualised system for large investors to arrange packages with possible
necessary licenses, construction permissions, and mining rights in combination
with tax holidays and/or specific tax rates. These packages are decided by the
National Assembly – or its responsible commission – as law. There are reported to
be hundreds of such package laws.
In all countries, the responsibility for designing and possibly negotiating tax
incentive schemes lies not with the Ministry of Finance but with the Ministry in
charge of investment promotion, usually Economic Planning or Industry. How far
the Ministries of Finance are involved in development of the rules and possibly
individual negotiations is not spelled out in the majority of the country reports, but
we can suppose that the administration and implementation of tax incentives is
usually the responsibility of the tax administration. The Indonesian tax administration and independent scientists provide calculations on the economic impact of tax
incentive schemes, but they do not usually enter into the political priorities.
However, widespread tax incentives – very individualised rules for high potential
taxpayers – are only to a limited extent compatible with the objectives of an efficient tax system such as rais-ing revenues, broadening the tax base and generally
lowering tax rates. These objectives are important to all countries and form part of
their strategies, because of the anticipated necessity to bridge the revenue gap
when customs are reduced with the ASEAN economic community, even if intraASEAN-trade is currently not so significant. Tax incentives should therefore follow
a clear and monitored investment promotion strategy that thoroughly balances cost
and benefits. Tax incentive competition to attract FDI is a topic of regional dialogue
on tax matters within the ASEAN, while the AEC blueprint requires the member
countries to remove non-tariff trade barriers.
Tax incentives are therefore a risk to the public purse as well as to the sense of
fairness in society. In very special situations, they also might serve as instrument
for stabilisation in economically difficult situations and even contribute to social
cohesion, as the example below of the incentives schemes after the huge flood in
Thailand shows.
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25
Box 1:
The huge flood – tax measures
In 2011, vast parts of Thailand and especially Bangkok were hit by severe flooding. Around
18% of the population – 12.8 million people – were affected. Total damage was estimated at
USD 45 billion, and in total 7,548 factories were damaged. GDP shrunk by 3– 4.5%. Still, the
unemployment rate rose only insignificantly and factories dismissed only a few people. The
government of Thailand introduced various measures to relieve this burden on individuals and
companies in order to kick-start the economy again and to promote investments.
For individuals, income tax was exempt for subsidies or donations received from government and
from other sources. Furthermore, costs for housing renovation not exceeding THB 100,000
(USD 3,200) and also car repairs not exceeding THB 30,000 (USD 940) were deductible from
income tax.
Companies were granted a tax exemption for subsidies or donations which they received from
government and other sources. In addition, claims received under insurance in excess of the cost
of assets after deducting depreciation were tax exempt. As a very unique measure, the government granted a 125% depreciation of all replaced machinery, therefore not only relieving the
burden of the flood, but also granting a further subvention in order to stimulate replacements and
also the economy. To prevent severe damage by floods in the future, companies received an
income tax exemption for 8 years with a limit of 200% of the capital invested for all industrial
zones which construct flood prevention infrastructures.
On the other hand, all donations in cash were tax deductible at 150% (so if USD 100 was donated,
USD 150 was deductible) during a four-month period in order to generate sufficient funds for ad
hoc repairs. Furthermore donated assets were VAT exempt.
Concerning property tax, land owners received full tax exemption until full renovation was
completed. Local maintenance tax for agriculture land was reduced depending on the degree of
damage. As a further measure, import duties for machines and equipment imported to replace or
repair the damaged machinery were exempt.
These far-reaching tax measures can be viewed from various angles. One reason given by the
government of Thailand was that it was trying to relieve the financial burden on the economy and
to prevent future floods, but another reason was mentioned in several interviews conducted under
this mission: since companies tried to keep the society in balance by keeping staff instead of
dismissing the employees, the government of Thailand felt the need to reward this behaviour with
tax relief.
Of course, as a consequence external debt rose from USD 75.3 billion to USD 100.6 billion from
2009 to 2010.
Source: Country Report Thailand
26
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2.2 Distributive effects of the tax system
The Thai example underlines the social function that can be attributed to a tax
system. The country teams in our study were also asked to assess at least broadly
the distributional effects of the respective tax systems. As these studies do not rely
on data sets, this is mostly an exercise of analysing directions of effects. The
following key points were taken into consideration:
• the relation between indirect and direct taxation, supposing that indirect
taxation tends to give rather regressive results and direct taxation rather
progressive, which of course depends on the specific form of tax rates and
bases;
• the progressive form of income taxation and whether it falls rather on
business or individual taxation;
• the extent of withholding taxation in income taxation – discriminating
middle incomes in formal sector;
• the volume and target of tax holidays – in most cases these are addressed at
large rather than small firms;
• the VAT threshold and rate;
• the spread of tax evasion.
The results are rather mixed, for example the Philippine constitution requires the
tax system to be progressive, uniform, and equitable. And the tax code indeed
seems largely progressive, but in reality the system is anything but, as big firms
enjoy many advantages over small ones, and low and middle incomes pay a greater
share of the income than high incomes.
Thailand is assessed by the country team to be a rather fair system, with a relatively
high share of direct taxation, a very high threshold for VAT and a low VAT rate, but
the shadow economy is the largest in the region (see Interestingly, neither the WGIindicator ‘control of corruption’ as shown in Table 2 nor the CPI as in Table 3 show
any relation with the dimension of the shadow economy. Thailand displays the
highest values for the shadow economy and Vietnam the lowest, Lao PDR ranks in
the middle. Figure 2, page 30).
The shadow economy is an indicator – and a measure – for tax evasion; but
considering that a large part of the shadow economy is formed by micro and small
enterprises in the informal economy, it also means from a distributive perspective
that the poorest mostly do not pay taxes. Nevertheless, it is clearly preferable to
achieve this by tax exemptions for low income than through informality. In
Indonesia the picture is also mixed: income tax falls more on businesses than
individuals, but personal income tax falls mostly on those paying withholding tax
from salaries – a general problem. International firms incur more taxes than other
firms, but ultimately the wide-spread tax evasion benefits rather the rich.
distributive effects of the tax system
|
27
In Cambodia, large tax holidays for investors and a high share of indirect taxation
also create a large tax burden for middle incomes. Additionally there is another
interesting distributive aspect: most small and medium taxpayers fall under a socalled ‘estimated tax regime’, meaning the administration estimates the taxes to be
paid. 53,000 of a total of 72,000 tax-payers fall under this regime, which is rather
open to arbitrary taxation. Only 19,000 use the self-assessment that is, given the
lack of a regular auditing procedure, probably more advantageous for taxpayers
than the estimated regime. Furthermore the Lao PDR country study reveals extreme
9
The WGI report six aggregate
arbitrariness in the system, and given the lack of an appeals system, this favours
governance indicators for over
those with good networks and strong resources.
200 countries and territories
over the period 1996– 2011,
In summary it can be said that in most countries, the legal grounds are in place for
covering
a fair tax system, but its effects are counteracted by large shadow economies, and
injustice through high arbitrary powers of tax officials (also see Chapter 3) as well
i) Voice and Accountability,
as widespread tax evasion and avoidance.
ii) Political Stability and
Absence of Violence,
iii) Government Effectiveness,
iv) Regulatory Quality,
v) Rule of Law, and
vi) Control of Corruption.
2.3 The political economics of taxation
The Worldwide Governance
Three aspects were examined in the context of our studies: the financial control
Indicators (WGI) are a research
system, anti-corruption issues and the question of how and by whom tax policy is
dataset summarising the views
influenced. These are summarised below, following an overview of key governance
on the quality of governance
indicators.
provided by a large number of
enterprise, citizen and expert
survey respondents in industrial
(a) Governance framework conditions
and developing countries.
The case study on the legal framework designed to counter tax evasion and tax
These data are gathered from
avoidance showed that tax laws do not necessarily reflect tax reality. Tax policy and
a number of survey institutes,
tax administration are embedded in the governance system including the respective
think tanks, non-governmental
checks and balances. Taxpayer willingness to fulfil their duties is dependent on the
organisations, international
trust of taxpayers in the governmental system – including a responsible tax admin-
organisations, and private
istration – and the effective delivery of public goods and services by governmental
sector firms.
institutions.
The scoring shows the country's
9
The Worldwide Governance Indicators (WGI) provide a comparable picture of the
percentile rank on each of the
governance situation in many countries. In our sample, Thailand scores the best
six governance indicators.
assessments on all indicators regarding the administrative performance and its
Percentile ranks indicate the
framework, but political stability is a problem and possibly as a result the ratings
percentage of countries world-
for voice and accountability are not very high either. Political stability is highest in
wide that rank lower than the
the two socialist countries, but voice and accountability are correspondingly low.
indicated country, so that
Lao PDR still has some way to go in terms of ‘regulatory quality’ – thus confirming
higher values indicate better
our findings for the regulatory framework in tax matters. Lao PDR and Cambodia
governance scores.
28
|
also lag behind on government effectiveness and the control of corruption, and to
conclude that control of corruption would make an important contribution to
government effectiveness is probably no exaggeration. Fighting corruption is one of
the core issues in increasing tax revenues.
The ratings of the Corruption Perception Index mostly match the WGI ranking on
control of corruption. Here, it can be seen that the differences in corruption
perception are huge between our sample countries – from rank 80/183 (Thailand)
to 164/183 (Cambodia) – but apart from Indonesia they have one point in common:
corruption perception increased in the five years between 2006 and 2011.
Table 2:
Regional Comparison of WGI in 2010
Source: http://info.worldbank.org/governance/wgi/mc_countries.asp / see country briefs
Table 3:
Corruption Perception Index 2011
10
164/183 ready: rank 164
of 183 countries ranked.
Source: Country Briefs, http://www.transparency.org/research/cpi/overview
the political economics of taxation
|
29
The reports of the Business Anti-corruption Portal11 amongst other things specifically address corruption in tax administration. The latest reports match the picture
under WGI and CPI – corruption in tax administration is a major issue in Cambodia,
the Philippines, and Vietnam. There is no report on Lao PDR; and for Indonesia and
11
Thailand corruption in tax administration is considered in the reports to be less
The Business Anti-Corruption
Portal provides information
12
high than in other Southeast Asian countries.
targeted to SMEs in order to
help them avoid and fight
However, all countries will benefit from addressing the issue. Interestingly, neither
corruption. The portal is a tool
the WGI-indicator ‘control of corruption’ as shown in Table 2 nor the CPI as in
referred to by several major
Table 3 demonstrate any correlation with the dimension of the shadow economy.
international organisations,
Thailand sees the highest values for the shadow economy and Vietnam the lowest,
including the OECD,
Lao PDR ranks in the middle.
the UN, the World Bank,
the International Finance
Corporation (IFC) and
Transparency International.
It is financed by the
Austrian Development Agency,
Figure 2:
Shadow economy estimates (as % of GDP)
the British Department for
Business Innovation and Skills,
the Danish, German,
Norwegian and Swedish
Ministries for Development
and the European Commission.
12
Source: Country Briefs, based on Schneider, Buehn, Montenegro, (2010)
The size of the shadow economy is one major indicator measuring tax gaps.
Schneider and Buehn (2012) have shown, in respect of high income European
countries between 1999 and 2010, that indirect taxes had by far the largest
relative impact (29.4%) on the size of the shadow economy, the influence of
personal income taxes was 13.1% and tax morale 9.5%. For our sample, we note
to a limited extent a parallel between tax ratio and the shadow economy: Vietnam
scored lowest in terms of shadow economy and had the highest tax to GDP-ratio of
30
|
Without stating a clear value.
all countries. Thailand, which has an astonishing low tax to GDP ratio considering
its level of development,13 has an extremely high shadow economy. For the other
countries this is not so obvious. All in all, the conclusion is that although for differ13
The average OECD tax ratio
ent reasons and to a varying extent, all the countries visited face issues in terms of
has been 33.8% in 2010,
governance framework conditions that need to be addressed further in order to
see:
strengthen effectiveness in tax administration.
http://www.oecd.org/ctp/taxpolicy/revenuestatisticstaxratio
schangesto20102012
(b) Financial control of tax issues
edition.htm
External and internal financial control mechanisms are important factors in
securing the regularity and transparency of budget planning and execution. External
financial control through Supreme Audit Institutions in ASEAN received a major
impetus through the foundation of the Organisation of Supreme Audit Institutions
14
see:
(ASEANSAI) in November 2011.14 In controlling and auditing tax administrations
http://www.aseansai.org/home/
SAI have in ASEAN – as in many countries – rather limited possibilities because in
most countries they are not allowed to access individual tax files. This limits
external audits to broader and macroeconomic analysis and the control of
procedures and institutional settings plus the scope for uncovering corruption
remain narrow. This is also the case even in Thailand and Indonesia, where institutionally strong SAI in principle would be prepared to audit tax administrations.
Indonesia’s SAI for example is a clear leader in the ASEANSAI process and the
Indonesian Anti-corruption Board is recognised worldwide for its work. The SAI
exercises control over the tax administration; but cannot look into taxpayers’ filings
15
It is possible for special cases
on a regular basis,15 so that revelations of arbitration are rather limited. But the
and with special procedures.
Indonesian control institutions are aware of the problem and financial controls as
well as anti-corruption are topics discussed between SAI and Ministry of Finance.
Since the decree of 2011, the control of the economic situation of tax officers has
increased – they must deliver now wealth reports and account for unusual income.
Also in the Philippines, the Supreme Audit Institution cannot look into tax files –
it is empowered only to evaluate the revenue administration’s expenditures and
16
The International Organisation
process management. There is a unit in charge of this task on a permanent basis
of Supreme Audit Institutions
within the SAI, but it appears too understaffed to cope with the task. The revenue
(INTOSAI) is the worldwide
administration is subject to further control: it must report to the Congressional
umbrella organisation on SAI
Oversight Committee every six months, and there is the institution of an independ-
and their regional groups.
ent Ombudsman promoting integrity among government officers which also can be
The Mexico Declaration sets
addressed.
the standards for SAI
independence:
The Vietnamese SAI is preparing to become institutionally independent so as to
http://www.intosai.org/en/
meet INTOSAI standards,16 but here too the scope for the control of tax administra-
documents/intosai/general/
tion is still technically limited. Similarly, in Lao PDR, the formal institutions to exe-
declarations-of-lima-and-
cute control functions are in place – the National Assembly, the Supreme Audit
mexico/mexico-declaration-
Institutions and the Anti-Corruption Organisation – but their effectiveness still
on-sai-independence.html
requires significant strengthening, as also shown by the WBGI.
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31
Box 2:
The difficult political economy of tax reform,
an example from the Philippines
In the autumn of 2012 the Philippine government proposed the introduction of ‘sin taxes’ – an
increase in taxes on alcohol and tobacco that the government estimated would yield approximately
PHP 60 billion a year. The House Ways and Means Committee passed a version of the tax that cut
the total to 31 billion a year and reduced the tax burden on alcohol in particular. The press
claimed that both the brewer San Miguel, which is chaired by businessman and representative
Eduardo ‘Danding’ Cojuangco Jr and Lucio Tan, owner of the Asia Brewery Inc. pushed through
the tax increase reduction in the bill.
Similarly, the Senate Ways and Means Committee Chairman at the beginning of October proposed
a bill that cut the burden on tobacco. Here, a key player is Philip Morris Fortune Tobacco Inc., also
related to Lucio Tan, which controls about 90% of the Philippine market. A reconciliation committee did produce a common bill, which President Aquino signed on 20 December, 2012, and which
as we have seen took effect on 1 January, 2013. The final target was PHP 33-34 billion, only
slightly higher than that proposed by the House Ways and Means Committee.
The experience of the sin tax also says something about the timing of reforms. Legislative
elections are held in May every three years, and the passing of reforms is quite difficult in the
months leading up to an election and impossible in the final three months before an election when
Congress is adjourned. There are therefore three-year cycles for the reforms of a sitting President.
Presidents cannot run for office over consecutive terms. Interviewees noted that the scope for
possible reforms is known through 2016, but after that there will be a new President. What they
will want is anyone’s guess.
More generally, one would expect with a particularistic electoral system and a particularistic party
system that tax legislation that originates in Congress to be targeted at specific groups or even
individual firms. An analysis of tax-related Republic Acts for the period 1998– 2009 showed that
of the 57 RAs passed, 46 were revenue-eroding measures.
Source: Country Report The Philippines
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(c) Drivers of change
Finding drivers of change for tax reform is no easy task and depends heavily on a
country’s political constitution. The major role in initiating and driving reform
projects lies with the executive and for tax administration with the administration
itself. For this reason, international exchange at the high ranking executive level is
expected to impact on local reform.
Parliaments as well as national assemblies in Communist systems also have a role
in driving change through discussing and deciding on legal projects and possibly
administrative reforms. Perhaps even greater is the influence on the taxation framework conditions through the many committees concerned – from driving and
controlling budget planning and execution up to committees deciding on tax
exemptions for private sector development or family policy. The fulfilment of this
role is often constrained by the personal interest of parliamentarians. For Indonesia,
for example, it is reported that many parliamentarians place special interest above
the public good. Worse still, the existing high ranking officials driving reforms, such
as the Vice President and Finance Minister have come under high political pressure,
to the point of being forced to resign, because reforming tax administration and
financial control affect individual rent-seeking behaviour.
Tax administration reforms require high policy backing inside and outside the
administration. If this is missing and, worse, undermined by the personal interest
of high ranking officials, this not only directly hampers reform projects – it also
17
Tax morale is actually the third
undermines the policy trust of the population and with that the tax morale.17
important tax related driver into
shadow economy in the study
The Philippines, like all other states, are aware of the powerful influence of private
of Schneider/Baehn 2012.
over public interest in taxation (see Box 2). In the Philippines, tax laws can be
changed by presidential decree, while the revenue administration enjoys a great
deal of discretion in the interpretation of tax law. The many changes to tax laws over
the year offer tax inspectors the option of arbitrary decisions.
Even in Thailand, generally a high performer in the overall ranking of the WBGI, the
schism between political parties renders the driving of reform programmes through
parliament difficult.
On the subject of drivers of change, there are also external actors with influence,
such as – in countries with high aid inflows – the donors involved in policy dialogue
on public financial management (PFM) reforms. The International Monetary Fund
(IMF), as lead organisation in these issues, is reported in some of our country
studies to be one of the supporters of change. Especially where drivers of change
exist and reform projects are on the table, IMF pressure has helped governments in
some cases to push through reforms against domestic resistance to change.
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33
3 Tax Administration
Many challenges remain facing the tax administrations of our country sample. In
the following section we look at the findings on the organisation, the main business
processes and the human resource situation of these institutions.
3.1 Organisation of the institutions
Most of the tax administrations in our country sample have been described as
function-based organisations. Only Lao PDR’s administration is organised on the
basis of numbers of taxpayers’ at regional levels: with the largest enterprises
managed at central level, medium-sized enterprises at provincial level, and small
enterprises at district offices. Vietnam has introduced a broad function-based
organisation irrespective of personal income tax. Indonesia has a function-based
three-tier organisation, where the offices are organised by taxpayer type. All administrations also maintain a large taxpayer unit, apart from Lao PDR, which is in any
case organised in terms of taxpayer segmentation. All tax administrations have the
legal form of a directorate within the Ministry of Finance. Indonesia has a slightly
more independent tax administration with a Director General appointed by the
President on the recommendation and under the supervision of the MOF. Thus, in
very general terms, the organisation of the administration shows significant similarity.
It is difficult to measure the effectiveness of tax administration organisation, and
this was beyond the scope of the present study. However, the available data makes
it possible to compare some indicators:
Table 4:
Population, tax administration staff and registered taxpayers
Source: (1) Country Briefs: IWF data est. for 2012, (2) Country Reports
organisation of the institutions
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35
The staff per population of course varies greatly between the countries. Where
Vietnam has a tax to GDP ratio of 24.10% with just 5 tax officers per 10,000
population and 3.3 tax officers per 1,000 registered taxpayers – Lao PDR has a tax
to GDP ratio of 14.50% with 3.2 tax officers per 10,000 population but almost 30
tax officers per 1,000 registered taxpayers.
Interestingly, those countries with the highest number of tax officers per
population – Thailand and Vietnam – reach by far the largest tax to GDP ratio,
although the number of staff per registered taxpayer is relatively low. This might
mirror the infrastructure situation and – relative to Indonesia and the Philippines –
a comprehensive country shape, but at least for Thailand certainly reflects the
efficient IT system. Thailand and Vietnam also capture the highest share of their
population as registered taxpayers, and both have fully working, unified TIN
registration systems.18
18
Source for Vietnam:
PEFA-Report
The most costly administrations in terms of staff per taxpayer in relation to the tax
ratio are Cambodia and Lao PDR. Lao PDR also maintains the broadest administrative structure with 800 provincial and 1100 district offices. Vietnam, with a much
higher population and almost 1,000 times more registered taxpayers, needs 63
provincial offices and 694 district offices. A reorganisation would seem beneficial.
Box 3:
Tax potential in Indonesia
By 2011, of Indonesia’s 240 million inhabitants, 110 million were in actively employment, of
which 60 million earned an income higher than the tax exemption threshold, yet only 19.9 million
were registered taxpayers and only 8.8 million filed their tax returns. Of Indonesia’s 22.6 million
formally registered medium-sized, or large, corporations, 12.9 million were active and 5 million
were estimated to have capital large enough to pay taxes, yet only 1.9 million were registered
taxpayers and 520 thousand finally filed a tax return. The Indonesian authorities are aware of the
large tax gap and the tax potential they have to achieve in the future.
Source: Country Report Indonesia
36
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tax administration
3.2 Status of main business processes
Taxpayer registration
Taxpayer registration is a key issue in all the countries – except for Thailand, which
is assessed to have a well implemented system with personal identification
numbers for individual persons (PIN) and taxpayer identification number (TIN) for
enterprises. However, even Thai-land only ranks ‘B’ in all registration related
indicators (PI-14) in the PEFA assessment, whereas almost all other issues are
rated ‘A’ (see Table 5 below).
The main challenge found in the country studies is that taxpayer registration
systems are usually not connected to other government data or at least do not use
such data, even if such connections are available, for example when registering as
a business. In Cambodia the business registration process is so complicated that
this in itself is a disincentive to leave the informal sector, before even considering
taxes. There is not even a unified registration system for the whole tax administration, meaning that taxpayers can disappear when crossing the district border. In the
other countries ‘tax registration requires the pro-active participation of the tax19
Formulation from
payers’19, meaning that those taxpayers who do not actively approach the he the
Country Reports Indonesia
administration to apply for a TIN or do not receive one automatically because of
and the Philippines
withholding taxation do not appear in the system.
Not everywhere are databases are unified and technically integrated. In Lao PDR
there are a least two sets of data bases developed with the support of different
donors, neither of which are either complete or compatible. Indonesia has seen
large progress in taxpayer registration – since 2002 the base has been enlarged
almost tenfold. However, unfortunately, this has not been reflected in a similar
increase in tax revenues.
PEFA measures the effectiveness of measures for taxpayer registration through two
indicators: one is the controls in the taxpayer registration system (PI-14 [I]), where
good practice requires that all taxpayers have a unique tax identification number
(TIN), and that the relevant TIN-database is linked to all other related databases.
The other criterion is the effectiveness of penalties for non-compliance with
registration and tax declaration (PI-14[II]), where good practice requires the
deployment of a system of sanctions to give taxpayers an incentive to register with
tax authorities and thus make full declarations and timely payments of their tax
liabilities.
The PEFA results match the findings of our country studies: Vietnam and Thailand
have relatively advanced registration systems, but are not fully compliant with the
benchmark, whereas the other countries have registration systems but with limits
in coverage and linkage with other systems. Furthermore, the penalty systems do
not in most cases reach the benchmark. The PEFA-assessment of the Lao PDR
status of main business processes
|
37
Table 5:
Ratings of tax indicators in PEFA-reporting20
20
In development policy, PEFA (Public Expenditure and Financial Accountability) is a well recognised instrument
to benchmark the public financial management performance of governments (see http://www.pefa.org/).
The system consists of 28 performance indicators (PI) plus 3 PI on donor practices.
4 of the indicators relate to public revenues. The scoring spreads from A to D, where A is best and D worst.
* The Cambodian PEFA report has been elaborated in 2009, it is not publicly available.
The data has been taken from Annex 14 in World Bank (2011).
38
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tax administration
penalty system should be seen against the background that there is no tax appeals
system at all in Lao PDR, so that penalties are high but no appeals are possible.
Moreover, in other countries, the appeals and penalty systems do not contribute to
the improvement of taxpayer relations, as described above (see chapter 2.1.[a]).
In summary we may conclude that taxpayer registration and its control, the most
basic function in tax administration, is in need of improvement in all countries in
the sample.
Assessment, payment and audit
Most of our sample countries rely on self-assessment systems – Vietnam,
Indonesia, the Philippines, and Thailand. Here, payments can also be made
through the bank system. In Lao PDR self-assessment is in its infancy, but further
development is planned, and in Cambodia there is a threefold ‘real, estimated, and
simplified’ system that gives many arbitrary powers to tax officers.
Inspection of the self-assessed tax returns is no easy task. In Vietnam, for example,
inspection is a relatively recent phenomenon. Only 3% of the administration’s staff
is currently assigned to that task and only since 2011 have there been inspections
21
PEFA report Vietnam 2013,
on common risk factors.21 Recently in November 2012 the Law on Tax Admin-
p. v
istration was amended by a clear reference to risk management. In the Philippines
97.6% of taxes are collected from voluntary payments, against only 2.1% from
assessments.
All in all, in most countries the inspection and audit of self-assessment tax returns
requires improvement. This is matched by the results of the PEFA assessments on
the planning and monitoring of audit programmes. All countries’ tax administrations include audit departments in their organisational structure, but the effectiveness of the audit work is mostly rather limited, primarily because of limited
personnel. Another important constraint is the preoccupation with VAT refunding.
In the country studies of Indonesia and in Lao PDR the auditing capacity is reported
to be mainly preoccupied with VAT refund controls – those are compulsory by law
in Indonesia. In Lao PDR the private sector institutions and tax consultants interviewed reported that VAT refunds have not occurred once since the introduction of
VAT in 2010.
Only Thailand manages tax audits and fraud investigations based on ‘a documented
audit plan, with clear risk assessment criteria for audits in at least one major tax
area that applies self-assessment’ – the benchmark for the PEFA rating B under the
indicator PI-14 (iii) on the ‘planning and monitoring of tax audit programmes’.
However, even Thailand does not audit all self-assessed taxes regularly and comprehensively. All the other countries run continuous programmes of tax audits and
status of main business processes
|
39
fraud investigations, but these are not based on clear risk assessment criteria,
although Vietnam is starting to develop these. Only Lao PDR manages audits on an
exclusively ad hoc basis.
Interestingly, against the background of limited auditing capacities, almost all our
sample countries have adopted the OECD Transfer Pricing guidelines, which
requires advanced auditing capacities for implementation. Although Thailand and
Vietnam have introduced Transfer Pricing Units, none of the others have and the
issue will raise several implementation challenges for all administrations.
IT-systems
Although all tax administrations use the support of Information and Communication Technology (ICT), the results and impacts are quite different. Most countries
can look back at a long history of developing IT-systems – since the 80’s and 90’s.
In many cases this shift was linked to a broad range of donor support:
While computerisation began in the 1980s in Indonesia, even now the administration is far from having a fully computerised tax system, and the technical
possibilities to use third party data are reported in the country study as being at
their infancy.
Since the 1990s Lao PDR has been developing with the support of different donors
two different and differently structured systems that are not linked, so that there
are two different sets of TINs in use.
The Philippines first tried to build an integrated information system in 1993, but
expectations have not been fulfilled mainly because not all the modules and
functions have been implemented – the audit module for example has remained
unused. Further system developments have led since 2000 to an advanced system
also including third party information, but taxpayer registration is still not connected
to other government data, the audit module needs to be activated and only large
taxpayers can submit data electronically. Thailand has built a strong IT system; its
connectivity and integrity is fully given and used and it even won an award in the
country as the best IT system in all public institutions.
All in all, the picture is heterogeneous: some tax administrations are able to
manage a high performance ICT system, while others dispose of limited ICT support
and capacity to develop it. Consequently, most country teams have recommended
addressing the information systems as a key issue.
40
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tax administration
3.3 Human resource capacities
The various administrations face very different staffing situations – where Vietnam
employs almost 5 officers per 10,000 inhabitants, and Lao PDR and Thailand more
than 3, Indonesia, Cambodia and the Philippines employ little more – or even less –
than one person. This seems to go hand in hand with the tax to GDP ratios:
Vietnam, Thailand and Lao PDR also have the three highest tax to GDP ratios.
However, staffing alone, of course, does not solve the situation: Cambodia has the
second most tax administration staff per registered taxpayer, but the lowest tax to
GDP ratio.
However, human resources are reported to be scarce in most country studies. In
view of its particular historical background, the most urgent situation is that of
Cambodia, where the entire middle-aged generation of the sort required to resume
management tasks based on long years of experience is missing. However, the
shortage of personnel is also a challenge for the tax administration in the
Philippines.
In all countries recruitment is based on regular recruitment procedures, mostly
integrated in the Ministry of Finance’s general recruitment procedures.
Education and further training for tax officers seems to be an issue for most
countries. Some run specific tax schools or colleges: Vietnam provides a tax
academy or tax college for the basic and further education of tax officers. In
Indonesia education for tax officers is provided by the National Finance Education
and Training Agency, which trains all finance-related profiles. Since 2007 civil
servants under MoF – including the tax administration – have been better paid than
other departments.
The other countries use a variety of training opportunities as training on the job, inhouse and external training. Thailand and the Philippines mostly recruit graduates
from Universities for higher technical positions, for example from law schools,
public administration or accountants and information technologies, which are
trained on the job after an introductory training of several weeks.
Human Capacity Development has been assessed by the country studies to be one
of the major issues for bringing reform forward in Indonesia, Cambodia, Lao PDR
and Vietnam, and in the Philippines. In some countries the progress of reform is
reported to be strongly limited by absorption capacity constraints of staff responsible
for implementation of reforms, capacity shortfalls also hampers reform processes
by limitations to adapt to change. In this field support to education and training
seems to be an adequate assistance, and have consequently been recommended by
most teams.
human resource capacities
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41
4 Regional Cooperation
and Coordination on Tax Issues
4.1 Tax Matters in the ASEAN regional integration process
The progress of the ASEAN Economic Community will require the compatibility and
suitability, in some cases even the harmonisation of the individual national tax
22
Harmonisation of VAT
systems. This will be most needed for indirect taxation, especially VAT22, and the
legislation means, inter alia,
taxation of capital. The establishment of adequate communication tools and
the harmonised definition of
channels to exchange information is also needed.
the taxability, of the right
of taxation (defined by
However, explicit references to tax issues on the ASEAN agenda have been limited
corresponding principles:
to date: the ASEAN Charter (2008) does not mention taxation at all. The ASEAN
country of origin, country
Economic Community Blueprint with its roadmap to an ASEAN community
of destiny), considering
2009 –2015 refers to taxation in three respects:
adequately the peculiarities
of B2B, B2C, the harmonised
definition of goods and services
(ICT products, electricity etc.)
(a) create a comprehensive bilateral double taxation agreements network
among the ASEAN member states;
the specific treatment of
(b) eliminate differences in withholding taxes;
specific goods (such as
(c) technical assistance on tax structure enhancement to CLMV for the eventual
vehicles, alcohol, tobacco) etc.
harmonisation with other ASEAN member countries’ tax systems.
The latter is spelled out by the Initiative for ASEAN Integration (IAI), geared to the
needs of the CMLV countries (Cambodia, Myanmar, Lao PDR, and Vietnam).
However, the CMLV Priority Action List of October 2012 contains only two tax
related proposals by Vietnam: to define a procedure for applying the Agreement for
Avoidance of Double Taxation and to develop a mechanism for exchanging information. This suggests that tax is a high-priority topic for CMLV.
Two aspects should be considered in relation to regional cooperation in tax matters:
First, sizeable negative impacts on regional integration can be expected to result
from non-cooperation, stemming from:
• tax competition, i.e. reduction in statutory and effective corporate tax
rates to attract foreign investors;
• loss of revenue for tax authorities due to tax avoidance; and
23
ASEAN Tax Regimes (2006)
• higher transaction costs for businesses and investors in the region.23
A second reason to expect more dynamism in ASEAN tax policy is that regional
integration, leading to increased inter-regional trade, coupled with lower incomes
for national authorities due to lower customs rates, should exert pressure on
national budgets and increase the need for cooperation on the tax side.
tax matters in the ASEAN regional integration process
|
43
The ASEAN Free Trade Area (AFTA) foresees zero tariff rates on all products by
2015 for the region. This will lead to significant reductions in revenues from
customs operations. The present country studies do not suggest that this issue is
driving Ministries of Finance to enhance coordination and alignment in tax matters
in order to increase tax revenues through combating tax evasion and avoidance.
Figure 3:
Intra-ASEAN trade in 2009 (as % of total trade)
Source: Puah (2011)
One reason might be that intraregional trade has in the past been rather low (see
Figure 3) and possibly has not yet significantly increased – on average, around
25%; in other words, three quarters of trade takes place with non-ASEAN member
countries. By contrast, there is twice as much intra versus extra EU trade, i.e. twice
as much trade between EU members than between EU and third countries
(Koopmann/Vogel 2011).
The ASEAN integration process is speeding up, and this will be probably reflected
in rising internal trade data. It is most probable that the need for coordination and
cooperation in tax matters among ASEAN member countries will soon increase.
44
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regional cooperation and coordination on tax issues
4.2 Tax treaty network
In the area of taxation the ASEAN Economic Blueprint foresees that the network of
bilateral agreements on avoidance of double taxation among all Member Countries
24
ASEAN Economic Community
is completed by 2010, to the extent possible (emphasis added).24
Blueprint (2008), Jakarta,
under A3, free flow of
investment, Action 29,
and B5 Taxation, Action 58
25
Table 6:
Tax treaties among ASEAN countries
(x- in negotiation)
Source: Puah 2011 and Country Reports 25
This table compiles evidence
Progress in this respect has been rather limited. Countries such as Vietnam and
for existing DTAs in the country
Indonesia are highly cross-linked in tax matters, while not at all in others.
studies with information in the
Cambodia does not have one tax treaty with another ASEAN member country,
presentation of Puah 2011
whereas Lao PDR, and the Philippines have a few. Most ASEAN Members have pre-
based on IBFD data.
ferred to conclude treaties with non-ASEAN members (see Figure 4) – an accurate
reflection of the trade situation (see Figure 3, p. 44).
tax matters in the ASEAN regional integration process
|
45
Figure 4:
DTA Network of ASEAN Members (Oct. 2011)
Source: Puah (2011)
Although several treaties exist, many of them require modernisation. Of the existing
30 DTA between ASEAN member states almost half date back more than 15 years.
Figure 5 also shows that the dynamics of entering into agreements have not
increased with the advances in the ASEAN integration process.
Figure 5:
Age profile of intra-ASEAN DTAs
Source: based on Table 6
46
|
If regional integration is to be positively affected by DTAs they should treat some
important issues, including the introduction of:
• information sharing and/or dispute settlement mechanisms between
ASEAN member Country tax administrations;
• a non-discrimination rule between a country’s own tax subjects and
ASEAN member Country tax subjects;
• a most favoured nation principle, i.e. to offer ASEAN member countries
at least the same tax arrangements as third countries; and
• the introduction of a maximum withholding tax rate between ASEAN
member countries.
Obstacles to such potential future areas of tax cooperation in ASEAN lie in
particular in the different bargaining position of ASEAN countries in tax matters.
One first step towards better integration in tax matters could be the joint decision
on a treaty model to be used, which was in fact decided at the last ASEAN Forum
on Taxation meeting in 2011 in the Philippines.
4.3 ASEAN Forum on Taxation
With the ASEAN Forum on Taxation (AFT), for the first time, tax officials have started
to work concretely on the treaty agenda. The cooperation, however, can be expected
to remain limited to specific issues related to DTAs and capital markets for the near
future. The AFT was founded in 2011 under the Indonesian Presidency of ASEAN.
It aims at a
‘full exchange of information on tax regimes and instruments among member
states, as well as work on the particular issues raised by the avoidance of double
taxation and withholding taxes, so as to further support the building of a competi26
Joint Media Statement
tive ASEAN Economic Community.’26
of the 15th ASEAN Finance
Minister’s Meeting, Indonesia,
In order to achieve this objective, in accordance with its Terms of Reference, the
8 April 2012, para. 17
AFT is composed of two sub-forums:
• Sub-forum 1 on Double Taxation and Withholding Tax, with the aim of delivering
a comprehensive treaty network and a favourable regime as well as timetable for
reduction of withholding tax rates among ASEAN member countries; and
• Sub-forum 2 on Enhancing Exchange of Views and Dialogue, resulting in a set
of recommendations, measures and actions regarding (i) sharing experiences on
best practices in taxation systems; (ii) debating strategies on areas of
cooperation in taxation; and (iii) building capacity support and training for tax
27
AFT ToR, Annex 18,
administrations and other areas of mutual interest among tax authorities.27
7 April 2012,
ASEAN Document
ASEAN member countries were asked to assign officers from their relevant departments to the work of the AFT.
ASEAN forum on taxation
|
47
The first meeting was held in September 2011. Chaired by the Philippines, current
tax regimes were presented and background work was commissioned regarding
existing DTAs (administrative impediments, need for renegotiation). Those ASEAN
member countries without tax treaties with other ASEAN member countries were
asked to start or complete negotiations and a standard template for bilateral tax
treaties, on the initiative of the Philippines, was agreed.28
28
Progress Report of AFT,
September 2011,
An initial work plan was drafted, designed to examine options to address withhold-
ASEAN Document
ing tax and double taxation issues in the region. Countries were classified into four
groupings:
• advanced tax systems in relation to capital markets without the taxation
of dividends and capital gains (Singapore, Malaysia);
• well-established tax systems, taxation of income generated on capital
markets (Indonesia, Philippines, Thailand, Vietnam);
• taxation of only interest from foreign loans (Brunei);
• starting to build the tax system, with no taxation of capital markets
(Cambodia, Lao PDR, Myanmar).
The report proposes to develop group 2 to bring it into line with group 1, which
together with group 3 will not need to be touched. Group 4 would follow later.
Group 2 is therefore being called upon to develop such a system of taxation on
capital market transactions so that taxes on dividends and capital gains are neutralised. The harmonised rate is intended to be achieved by 2014.29 Information on
progress will be subject of the next AFT meeting, still to be convened by the chair.
The AFT foresees – as do most ASEAN institutions – decision-making based on
consensus and strict inter-governmentalism, giving the ASEAN Secretariat a
coordinating role. With this concept, the role of the chair is key in setting the
dynamics for the future development of the AFT and – also as in other ASEAN
bodies – can differ widely depending on the chair’s terms without the possibility of
being seconded by a secretariat, bridging capacity gaps between administrations in
the various chair positions. If continuous and faster progress in tax matters is
planned, the introduction of a secretariat for the mid-term would be helpful.
48
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29
Progress Report of AFT,
September 2011, p.2
4.4 Other exchange fora
(a) Study Group on Asia Tax Administration and Research (SGATAR)
The Study Group on Asia Tax Administration and Research (SGATAR) was established in 1970. The annual SGATAR meetings are intended to share information
about new tax policy and tax administration trends and to exchange experience
among tax officials working in various fields of tax administration (i.e. direct taxes,
indirect taxes, tax audits, transfer pricing, human resources, etc.).
The 16 current member states are: Australia, China, Hong Kong SAR, Indonesia,
Japan, Korea (Rep.), Macao SAR, Malaysia, Mongolia, New Zealand, Papua New
Guinea, Philippines, Singapore, Chinese Taipei, Thailand and Vietnam. Lao PDR is
30
The Lao PDR country study
no longer a member of SGATAR.30
does not report on the reasons.
Unlike professional tax administrator bodies such as CIAT, ATAF or IOTA, there is
no permanent secretary in one of the SGATAR member states and SGATAR does not
have its own staff. In additional to the yearly general meeting, there has since 2002
been a further biannual ‘Meeting of Heads of SGATAR Training Institutions’ (MHTI)
specifically addressing training issues.
In spite of the long history of SGATAR networking, none of the present country
studies mentions SGATAR as an important platform for the exchange of experience.
This might reflect the fact that SGATAR does not provide services such as
31
The ninth annual meeting
handbooks, training or peer consultancy, unlike other more institutionalised tax
was held in Manila (from
administration organisations and thus feeds knowledge into all levels of the tax
3– 5 October 2012), shortly
administrations. Neither was any mention made of the need for further regional
before our Tax Mapping
exchange, although almost all country studies recommend intensifying regional
Mission. The Philippine
cooperation among the tax administrations.
Department of Finance (DoF)
and the Bureau of Internal
Revenue (BIR) jointly opened
proceedings.
(b) Other regular events
For the documentation of
the 9th APTF meeting in the
• Asia-Pacific Tax Forum (APTF)
Philippines see
Since 2005 the Asia Pacific Tax Forum has held annual meetings hosted by
http://www.iticnet.org/Public/
rotation and an ongoing research programme has been developed.31 The
PublicDocLanding.aspx?id=
International Tax and Investment Centre (ITIC)32 and the Philippines Public
59&type=Atf
Finance Institute, both based in Manila, jointly serve as the Secretariat to the
Asia Pacific Tax Forum. The harmonisation of tax policies as preparation for the
ASEAN Integration 2015 is one of the topics dealt with in the APTF. Special
32
See
events were organised during 2012 dealing with ‘Global and Regional Tax
http://www.iticnet.org/
Trends’ and ‘Transfer Pricing’ and during the ninth annual meeting a ‘Special
Home.aspx
Session to Discuss ASEAN Excise Tax Reform’ was suggested.
other exchange fora
|
49
• Japan/ ADB
Since 1991, ADB has provided an annual tax conference programme in cooperation with the Ministry of Finance in Japan. In August 2012, the Nineteenth Tax
Conference33 was the fourth and last of the sub-regional tax treaty series, which
33
targeted the Central, West, and East Asian regions.
http://www.adb.org/projects/
documents/nineteenth-taxconference-completion-report
• OECD
OECD regularly holds training courses on various issues, i.e. tax treaties and
transfer pricing and also events on dispute resolution, where exchange among
participants is also fostered. These events are attended by officers from all
countries involved in the current mapping process.
• Japan/ IMF
In 2009, 2011 and 2012 IMF and the Japanese Ministry of Finance invited to
a High Level Tax Conference for Asian and Pacific Countries covering broadly
tax policy and administration reform topics in the region.34 The 2012 conference featured presentations amongst others from Cambodia, Indonesia, the
Philippines and Thailand.
34
The 2012 conference can be
found here:
http://www.imf.org/external/
np/seminars/eng/2012/
asiatax/index.htm
• Asian Tax Authorities Symposium (ATAS)
The Asian Tax Authorities Symposium has been held twice – 2010 and 2012 –
in Kuala Lumpur, Malaysia, hosted by the Malaysian Inland Revenue Board,
supported by the International Bureau of Fiscal Documentation (IBFD), the
Financing for Development Office (FfDO) of the United Nations, the Organisation for Economic Co-operation and Development (OECD) and sponsored by
the Royal Norwegian Ministry of Foreign Affairs (MFA) and the ITC. ATAS should
contribute to enhance and promote developing country participation in developing international tax norms and in dealing effectively with such issues.
50
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5 Donor Support and Coordination
Aid and its coordination is most relevant in Lao PDR and Cambodia, as ODA
finances the major part of the capital balance and ODA contributes significantly to
the financing of public responsibilities. For all other countries in the present study
sample, as in the ASEAN in general, aid and consequently donor coordination are
hardly significant topics.
Thailand has itself evolved into a donor country, for the Philippines and Indonesia,
where many donors actively support the relationship between ODA and private
inflows (see Figure 6) and even more so the relationship between the ODA and tax
ratio (see Figure 7) shows, that the countries do receive aid, but that other sources
for investment and budget financing are much more important.
Figure 6:
ODA and investment flows 2010
Source: Country Briefs, OECD DAC Aid Statistics
In Vietnam, ODA is an important source in the capital balance, but – as Vietnam
has the highest tax ratio in the sample – it represents only a minor contribution for
budget financing.
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donor support and coordination
The political background to aid and especially to the area of public financial
management (PFM) is clear in most countries. All governments, including Thailand,
are working with a PRSP (Poverty Reduction Strategy) or a National Development
Plan that can serve donors as a reference for the relevance of their contributions.
All development plans except the Vietnamese specify reforms in the area of taxation
as a major reform objective, some very specifically, others rather generally. All
35
There is no data for Thailand.
countries35 also work with a PFM reform plan and all the PFM reform plans include
tax related reforms, mostly substantial. Only in Lao PDR is the agenda yet to be
developed and the PFM plan only includes first measures in enhancing taxpayer’s
registration for the tax area. Thus, it can be stated that, in all countries, taxation is
a relevant topic on the official political reform agenda and in most countries there
are ongoing reform programmes in taxation, as has been the case for many years in
some countries.
Figure 7:
ODA and tax ratio 2010
Source: Country Briefs, OECD DAC Aid Statistics,
*IMF data, Indonesia: Data from country report
Nevertheless, the country studies also show that strategic planning of the concrete
reforms could be improved. In spite of the macro-level political backup, in some
countries reforms seemed to the teams to be supply-driven by donors rather than
reflecting the needs expressed at the operational level of the administration.
|
53
In all countries donor support to taxation is led by World Bank and IMF. The next
most important donors in taxation are Japan (in Cambodia, Philippines, Vietnam
and until 2010 also in Thailand) and South Korea (in Vietnam and just entering in
Lao PDR), and there are contributions in individual countries from the US, Australia,
Canada, France, UK, Germany and the ADB. In financial terms the biggest contributor to ODA in all countries is Japan, followed by the ADB. This shows that aid
is strongly supported by interregional relations, but the tax area is kept clearly in
the hands of World Bank and IMF.
Donor coordination is organised based on a formal coordination framework in most
countries, although not in Thailand. Indonesia had a consultative group on tax
issues until recently.36 So, in four countries (Cambodia, Philippines, Lao PDR,
36
Vietnam) the dialogue structure implemented includes working groups and regular
working.
joint reviews. In Cambodia and Vietnam taxation is included in the working group
on PFM, in Lao PDR it is part of the macroeconomic group and in the Philippines
there is no formal coordination at all for taxation, but it is reported that informal
coordination by the resident IMF advisor – a former Indonesian tax administrator –
works well.
Even the presence of a formal framework in most countries does not mean that
donor coordination is evaluated to be working effectively. Some of the criticisms are
common to several countries: coordination measures do not match the needs of
both sides (donors and government), require many resources, and result in much
talking and little effect.
However, the progress shown in the OECD Monitoring reports for the Paris
Declaration (PD) applies to all countries but Thailand and is rated as satisfactory
for most countries. Difficulties remain almost everywhere in the application of joint
missions and joint analytical frameworks (PD indicators 10a and b) which probably
reflects the felt reality of donor coordination under the existing frameworks.
For the other indicators the challenges are rather mixed across the individual
countries. The critical factors appear to be the low rating and slow progress for
indicator 7 – the predictability of aid – in all countries, most importantly in the two
heavily aid-dependent countries Lao PDR and Cambodia.
For Indonesia and the Philippines the country studies report that the support available for the area of taxation is sufficient to cover the needs. In Cambodia and most
for Lao PDR, there is room for further support but absorption capacity has already
reached a critical level. In the case of Vietnam absorption capacity constraints of
staff are also reported in project management and implementation units.
54
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It is commented why it stopped
In summary, it appears that:
• aid and its coordination is not as urgent a topic in the ASEAN and also in the
country study sample as in other regions of the world;
• taxation is an important topic on the government’s reform agenda and many
countries follow on an explicit reform agenda in PFM including taxation;
• in the main, donor coordination is organised along a formal framework of
regular working groups and reviews;
• the most important donors in the region are Japan and ADB, support in the
area of taxation in all countries is led by the World Bank and IMF, while
Japan is also the most important bilateral donor in respect of taxation;
• donor coordination shows progress in some countries, others less, and
coordination is not reported to be very effective;
• although further support is needed in some areas, the countries close to aid
already face significant absorption capacity constraints.
For potential ITC support this means that pilot activities should be organised along
the reform priorities of the partner countries and in close coordination with existing
support initiatives.
The organisation of the transfer of experiences should be possible and helpful as
long as capacity constraints are respected. Furthermore an assessment should be
made of whether capacity constraints stemming from individual constraints could
not be eased by enhancing the capacities in project management and implementation of key persons and potential future key persons out of the reform agenda
process in partner administrations.
Potential ITC support could be useful to assist covering the awareness gap related
to the ASEAN Economic Community and indirect taxation – possibly in cooperation
with an existing regional platform. In addition, technical assistance is required to
support development of the CMLV tax administrations.
|
55
6 Conclusion and Recommendations
Finally, we can conclude from our study process that the following issues require
further action:
• Legal adaptations are recommended mostly in relation to the modernisation or
simplification of existing tax laws. Legal adaptations are also required in most
countries for regional (AEC) and global issues, for example in order to
harmonise withholding taxes on capital markets. However, generally speaking,
the need for improvement is more critical than fundamental legal issues.
• The main challenge is much more difficult than introducing new legislation:
it is necessary to transform existing tax policy into efficient tax systems in
practice through a modern, efficiently and loyally performing tax administration
that earns the trust and compliance of the taxpayers.
• Here, strong political will and support is needed: ‘the single most important
ingredient required for an effective tax administration is a clear recognition at
high political levels of the importance of the task and willingness to support
37
Vietnam Country Report,
good administrative practices – even if political friends are hurt.’37
Chapter 6
• But support on rather technical issues is also possible, even crucial in some
areas: closing the gaps between voluntary tax registration, self-assessments and
fragmented inspection and audit applications is important, and human resource
development is a challenge for many of the administrations.
• Cooperation on tax matters within ASEAN needs to develop much more broadly
in terms of in topics and more in-depth. ASEAN as a joint organisation should
provide a forum for dialogue, exchange and peer learning as well as
opportunities for education and training in tax matters.
• Collaboration among ASEAN member states should be intensified while
merging into the ASEAN Economic Community – not only the customs duties
systems (broadly in place), but also the systems of VAT and excise duties need
to be harmonised. The existing DTA treaty network needs to be modernised and
expanded where necessary, the required communication channels and networks
need to be established.
• Donor contributions strictly need to avoid fragmented approaches and overburden tax administrations already facing severe capacity constraints.
Most country reports have developed detailed recommendations for further
development of tax administration and to some extent tax policies. In terms of
common topics that can be treated jointly and benefit from exchange among the
administrations, the following areas can be summarised:
conclusion and recommendations
|
57
Tax policy recommendations
Legal issues are not the main reflection in most reports, as we have seen. For some
countries the simplification of tax legislation is recommended – the Philippines –
while others are also being urged to develop further, as in the case of Cambodia and
Lao PDR.
Some of the more detailed recommendations also will imply legislative adaptations,
especially the reduction of possibilities for discretion and the strengthening of the
tax appeals systems.
Furthermore, some reports recommend improvement in tax administration and tax
policy through the broad but indispensable development of other governance agendas: to enhance external financial control through the Supreme Audit Institutions –
especially their competencies in tax matters – and public service reform.
Improve management and steering of reform processes
In some of the country studies a range of recommendations hint at improving the
management of reform processes, including:
• basing reform on adequate strategic and operational planning,
and attributing responsibilities;
• creating an adequate vision of reform sequencing – including
the full implementation and termination of started programmes;
• enhancing management capabilities through training and
performance-oriented appointment of management positions.
These issues may also lead to improved steering of donor support and help to overcome absorption capacity constraints.
Strengthen human resource capacities
In some of the reports, human resource mobilisation is central to the recommendations, including significantly amplifying the budget of the tax administration and
the staff. No less important is increasing skill levels in general and particularly
certain kinds of expertise such as sector know-how for auditing and international
taxation issues.
For some countries the establishment of a tax academy is recommended.
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Improving relations with the taxpayer
In many of the sample countries relations between administration and taxpayers are
characterised by distrust. Recommended measures to improve this situation are
• implement effective anti-corruption measures
• strengthen tax appeals systems
• reduce compliance costs
• improve access to information tax liabilities
• provide taxpayers services (especially for small and medium enterprises)
• invest in taxpayer education
• improve and broaden tax consultancy.
Strengthen audit functions
Several recommendations in all country reports concern the strengthening of audit
functions, reflecting the fact that auditing is not sufficiently developed in most
countries.
• First of all, it is recommended to develop risk management systems suited to
the operational capabilities of the audit unit. Risk management systems do not
have to be highly complex, but even with a limited amount of indicators they
need to be sector-specific, therefore the tax administration should be able to
use sector know-how for the development. If possible and certainly for the more
sophisticated tax administrations audit-software should support risk management.
• As far as possible, audit of low-risk cases should be automated, for example
low-risk VAT-refunds, as in a couple of our sample countries administration VATrefunding uses most of the capacity of the respective audit units.
• Audit units should intensify the use of third party data, first of all internally
through customs departments and through information exchange with the
Supreme Audit Institution – for example regarding state owned enterprises),
and also with other agencies and possibly internationally.
• Further, it is recommended to broaden the tax base through amplifying the audit
of small and medium enterprises (SME), if possible through the creation of
SME-units.
• Tax evasion should be addressed towards the high end – multinational enterprises
and low end – the informal sector.
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• For some countries it is first recommended to develop auditing experience in
general before entering in depth into transfer pricing issues.
• The implementation of anti-money laundering measures is also recommended.
Further develop IT-support
• Increasing information system-based automation at all levels is recommended
as one of the most important measures in order to manage effectively the
increasing data streams and to combat corruption in tax administration.
• In some countries development of comprehensive registration systems is still
necessary. Here, it is recommended to study systems in the regions and from
the outset to provide opportunities to use other governmental data, especially
through business registration.
• For most country administrations it is recommended to broaden the sources of
information of all types in order to support taxpayer registration and auditing.
This refers not only to the exchange of information with other government
agencies or with other countries – cooperation between tax and customs
administration is far from established in some countries.
Regional cooperation
The recommendations related to regional cooperation concentrate on:
• Amplification and actualisation of double taxation agreements among
the ASEAN member countries;
• Harmonisation of VAT and excise duties systems;
• Dialogue related to the taxation of capital;
• Dialogue on incentive policies and exchange of information, including
the establishment of the necessary communication channels and
networks; and
• Exchange on administrative and technical reforms.
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Joint approaches within ASEAN to education and training issues probably are limited by language constraints. Training for specific purposes, especially if concerned
with international issues, can be developed in English for all administrations.
For potential ITC support it should be considered that in all countries – except
Thailand – ample donor support is already provided, and the administrations are
facing absorption capacity constraints partly caused by fragmented aid provision
and capacity constraints in the administrations.
However, the issues derived from the country report recommendations above can
guide priorities and instruments for exchange. Ideally ITC would support the
ASEAN coordination process, possibly through the ASEAN Forum on Taxation,
in growing into an effective forum for exchange for the member countries’ tax
administrations.
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Annexes
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annexes
Annex 1: References
ADB (2012), Institutional arrangements for Tax administration in Asia and the
Pacific, in: The Governance Brief, Issue 19
ASEAN Economic Community Blueprint (2008), Jakarta
BMZ (2011), Deutsche Entwicklungspolitik in Asien – Ein strategischer Rahmen,
Bonn, August
Joint Media Statement of the 15th ASEAN Finance Minister’s Meeting, Indonesia,
8 April 2012
Koopmann, Georg; Vogel, Lars (2011), Globalisierung, Regionalisierung und die
Handelspolitik der Europäischen Union, HWWA Policy Paper
Mapping Taxation in Selected Asian Countries – Country Briefs (all June 2012):
Lao PDR, Cambodia, Thailand, Indonesia, Vietnam, The Philippines
Mapping Taxation in Selected Asian Countries – Draft Country Reports as of:
• Cambodia (December 2012)
• Indonesia (January 2013)
• Lao PDR (December 2012)
• Thailand (January 2013)
• The Philippines (January 2013)
• Vietnam (January 2013)
Phua, Stephen (2011), ASEAN Integration: Double Taxation and FDI, presentation
held at the 8th APFT, 16–18th Nov. 2011, Bali, Indonesia
Progress Report of AFT, September 2011
Schneider, Friedrich; Buehn, Andrea; Montenegro, Claudio E, (2010), New
Estimates for the Shadow Economies all over the World, International Economic
Journal, Vol. 24, No. 4, 443–461, December
Schneider, Friedrich; Buehn, Andrea; Keppler, Johannes (2012), Shadow
Economies in Highly Developed OECD Countries: What Are the Driving Forces?
Institute for the Study of Labour, Discussion Paper No. 6891, Bonn
Tohari, A., Retnawati, A. (2010), Is there Tax Competition in ASEAN? Bulletin for
International Taxation, Vol. 64, No. 1, 2010, p.51–60
World Bank (2011), Cambodia – More Efficient Government Spending for Strong
and Inclusive Growth, Integrated Fiduciary Assessment and Public Expenditure
Review (IFAPER) Report No. 61694–KH, November
annex 1
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Annex 2:
The country teams
Dr Lothar Bublitz
Country Team Indonesia and the Philippines
Director of the Tax Office in Hamburg-Altona;
Consultant on Taxation Issues for GIZ and
other International Organisations
Wolfgang Büttner
Country Team Thailand
German Federal Ministry of Finance, Berlin,
former Senior Advisor OECD on Transfer Pricing
Dr Barbara Dutzler
Country Team Indonesia
GIZ Senior Advisor,
Head of the ITC Secretariat
Dr Ute Eckardt
Country Team Lao PDR
Consultant on public finance issues
in development economics
Dr Mark Hallerberg
Country Team Indonesia and the Philippines
Professor of Public Management and Political Economy
at the Hertie School of Governance and
Director of Hertie's Fiscal Governance Centre, Berlin
annex 2
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Dr Michael Kobetsky
Country Team Lao PDR
Associate Professor at the University of Melbourne,
Melbourne Law School and Visiting Fellow at the Australian National University,
ANU College of Law
Dr Hyun-Ju Koh
Country Team Vietnam and Cambodia
GIZ Planning Expert for Tax Reform,
managing GIZ’s bi- and regional projects in the area
of tax reform worldwide
Victor van Kommer
Country Team Cambodia
Member of the Executive Board and Director Tax Services of the International
Bureau of Fiscal Documentation in Amsterdam, Professor of Tax Policy at the
Utrecht University School of Economics (USE), Chairman of the Supervisory Board
of the Knowledge Institute for Independent Professionals, visiting professor at the
universities in Lodz, Poland, Riga, Latvia and the Tax Academy in Kuala Lumpur
Nina Korte
Country Team Indonesia and Philippines
Research Fellow, GIGA German Institute of Global and Area Studies, Hamburg,
focusing on State and Public Administration in Southeast Asia
Bart Kosters
Country Team Vietnam
Senior Principal Research Associate, Tax Services Department,
International Bureau of Fiscal Documentation, Amsterdam
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annexes
Udo Lautenbacher
Country Team Lao PDR and Thailand
Director of the Tax Office in Bayreuth;
consultant in the areas “Good Financial Governance“ and “Decentralization“
for GIZ and other organizations since 1986
Dr Anke Scholz
Country Team Philippines
GIZ Deputy Programme Manager “Good Financial Governance (GFG)“
Jana Seehof
GIZ–Advisor of the Serbian Tax Administration on implementation
of a management information system and reform of the
administrative structures, procedures, and processes
Astrid Templin
Country Team Thailand
Former German Tax Inspector,
GIZ advisor on tax issues,
consultant
Bruno Webers
Berlin Tax Administration Lawyer,
Tax Consultant,
Certified Fraud Examiner Lecturer on Tax Audit and Tax Investigation
annex 3
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Annex 3:
Main findings on the level of corruption in tax administration
in the Business Anti-Corruption country reports
Country
Classification
in report
Main findings
Cambodia
widespread
• Estimation: Tax Department collects only 25% of
potential tax revenue
• Household level: more than half of the households
report paying bribes
• Business level: usually connected with tax inspections,
which are frequent
Indonesia
not as high
as in other
ASEAN
countries
• Estimation: Tax Department loses half of
its revenue collections due to rampant corruption
• Household level:
bribes are not a major individual problem
• Business level: large variation among regions,
discrimination through political connections widespread,
over 10% of enterprises estimated to be involved
in tax fraud
Lao PDR
no report
The
Philippines
alarmingly
widespread
• Estimation: Between 2000 and 2009 estimated
USD 142 billion in illicit financial outflows
• Household level: one out of ten report on bribing
• Business level: gifts for tax inspectors widespread,
Tax Department is ranked as second most corrupt
institution in the country
Thailand
not as high
as in other
ASEAN
countries
• Estimation: one 5th of the tax revenues is estimated
to be lost by corruption
• Household level: still existent but decreasing
• Business level: complex compliance with many
tax payments gives opportunities, e-filing has helped
Vietnam
widespread
• Estimation: major cause for tax collection losses,
especially in small towns and remote areas
• Household level: estimated 20% having paid bribes
• Business level: high degree of discretion,
SME especially vulnerable, highly complex regulations,
missing internal supervision in tax admin.
Source: Country reports under http://www.business-anti-corruption.com/country-profiles/east-asia-the-pacific/
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annexes
international tax compact
initiative to strengthen international cooperation with developing countries to fight tax evasion and tax avoidance

Mapping Taxation in Selected Asian Developing Countries

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