- The COVID-19 pandemic has imperiled development progress in Asia and the Pacific
- Tax reforms and improved budgeting can boost resources for a sustainable recovery
- Carbon and environmental taxes can broaden the existing tax base
- A multi-lateral system for taxing the digitalized economy will avoid double tax threats
- Addressing tax loopholes and cracking down on evasion can improve compliance
- Making tax systems progressive and fair increases community confidence in them
- ADB’s regional tax hub will help member countries strengthen tax and revenue systems
After spending heavily to support their economies during the COVID-19 pandemic, countries in Asia and the Pacific need to look to tax and financial management reforms to mobilize resources for a sustainable, equitable recovery.
“The health crisis offers a unique opportunity for countries to mobilize domestic resources and reshape their tax systems to create more equitable and environmentally sustainable societies for the long term.”
Since early 2020 the COVID-19 pandemic, the worst health crisis in a century, has forced governments in Asia and the Pacific to carry out unprecedented1 levels of spending to try to preserve services, prop up businesses, and protect jobs as economies slumped and tax revenue plummeted.
In developing Asia, alone, governments had committed close to $3.7 trillion2 to respond to the pandemic as of March 2021 but even with this eye-wateringly large sum, economic losses for the region are estimated by the Asian Development Bank (ADB) at between $1.4 trillion to $2.2 trillion for 2020 alone.3 ADB also estimates the region will lose up to 167 million jobs with 78 million more people falling into extreme poverty, undoing several years of progress in poverty reduction.4 Income inequality, already, a significant problem in the region, has become even more marked as the vulnerable, including women and informal workers, have suffered job losses and slumping incomes at a faster rate than other groups.
The rollout of vaccines is providing some light at the end of the COVID-19 tunnel, but it will take time for economies to gear back up to their pre-pandemic growth rates. Many fiscally fragile nations, which have already spent heavily to shore up their economies, will face a prolonged period of low revenues, while further borrowing to fund short-term needs will exacerbate that fragility.
Higher tax yields would boost government coffers
If the region is to make up lost ground and continue progress towards meeting the Sustainable Development Goals in areas from poverty reduction to climate change and gender inequality, governments need to find new ways to mobilize domestic resources through the likes of reshaped tax systems, deeper local currency bond markets, and financial and spending reforms.
This is no easy task. Tax yields in developing Asia average about 17.6% of gross domestic product (GDP), well below the Organisation for Economic Cooperation and Development (OECD) average of 24.9%,5 with many economies below the 15% threshold6 required to drive sustainable development. Even before the pandemic slashed government revenue, many economies had low levels of tax income with inequitable tax systems, high levels of tax evasion, and weak tax administration.
Tax hub to help find collective solutions
Sweeping reforms, however, are not easy for countries to carry out on their own, so the ADB in September 2020 announced it would set up a regional tax hub for sharing knowledge and experiences, strategic dialogues, and development coordination to improve domestic resource mobilization and international tax cooperation.
“Putting in place progressive tax systems, cracking down on tax evasion and adopting carbon and environmental taxes can provide fresh resources that governments need for long term development programs.”
One of the pressing issues the hub aims to address is stronger international cooperation to reduce or eliminate aggressive forms of tax planning by multinational enterprises which seek to exploit gaps in tax systems to artificially reduce their taxable incomes. This practice is known as base erosion and profit shifting, or BEPS. At present, many of Asia and the Pacific’s developing member countries do not participate in an initiative to address this issue—the Inclusive Framework on BEPS, or another to reduce tax evasion—the Global Forum on Transparency and Exchange of Information for Tax Purposes.
In providing a venue for collaboration with international organizations like the International Monetary Fund, the OECD and the World Bank and regional tax associations, the hub will, among other things, help countries develop medium-term revenue-raising strategies. It will also support tax administrations to digitalize their systems and to design International Tax Cooperation programs.7
Many options for broadening revenue
The options for cash-strapped governments to mobilize fresh resources are wide. Removing exemptions for personal income tax, imposing wealth and intergenerational taxes and putting in place, or strengthening, carbon and environmental taxes will all help expand a country’s tax base. In, addition shifting to a multilateral consensus-based system for taxing the digitalized economy will provide resources, while avoiding the potential for double, or even triple, taxation.
Establishing more progressive tax systems and cracking down on tax evasion will strengthen compliance and tax equitability. This will go a long way to building trust and support amongst groups who often feel the richest citizens don’t pay their fair share.
Property taxes in particular offer significant scope for raising revenue. In the Philippines, the national government is carrying out a property valuation reform program which is expected to boost real property tax collections by local government by 25% from 2023.8 This offers a model for potential replication by other developing countries in the region.
“An overriding principle must be to ensure tax systems are equitable, particularly as countries move from crisis to recovery and many groups remain highly vulnerable.”
To strengthen compliance, governments need to make it easier for unregistered businesses and individuals to get onto the tax roll. They can also make greater use of online tools to smooth and speed up the tax lodgment and payment processes, while increasing supervision of the wealthiest taxpayers, including multinational enterprises and high net worth individuals.9
COVID-19 pandemic brings fresh challenges and opportunities
A fresh challenge for governments comes from changing global trends that have accelerated as a result of COVID-19, such as the shift towards cashless digital financial transactions and the rise of online businesses and independent gig economy workers.
“Tax actions while vital on their own, need to go hand in hand with other measures, including improving financial management and developing medium-term budget plans to reduce resource wastage, and lessen reliance on external borrowings.”
A number of developing economies in the region have been responding to these changes already by taxing domestic e-commerce businesses, as well as drawing up or imposing taxes on foreign-based technology companies which provide digital products and services. For example, Thailand now requires foreign digital platforms that lack a local subsidiary company and make more than $57,000 a year to pay a 7% value-added tax on sales, which could generate $96 million in annual revenue for the government.10 Scaling up this source of income can make up for shortfalls from traditional tax sources but at the same, imposing taxes on offshore entities needs to be carefully designed or it could invite harsh reciprocal action in overseas markets.
“Stressed economies will need support to move forward and ADB is providing wide-ranging assistance to its developing member countries to help them transition from crisis to recovery.”
Tax authorities can also do more to use big data and advanced analytics to pinpoint noncompliant individuals and companies to either encourage them to meet their obligations, or, if necessary, deploy auditing teams for high-risk cases.11
These tax options need to be tailored to the needs of each country, reflecting their national circumstances. An overriding principle must be to ensure tax systems are equitable, particularly as countries move from crisis to recovery and many groups remain highly vulnerable.
Coordinating revenue-raising with targeted spending
“Developing more progressive and comprehensive tax systems, strengthening financial management and working with partners will give developing economies in Asia and the Pacific the fiscal resources they need to hold fast on a path to a greener and more equitable future.”
Tax actions while vital, need to go hand in hand with other measures, including improving financial management and developing medium-term budget plans to reduce resource wastage.
There is also a need to lessen reliance on overseas borrowing, and for governments to provide policies that encourage more investment. These measures need to be supported by strong communications so that tax reforms are accepted and complied with.
Developing more progressive and comprehensive tax systems, strengthening financial management, and working with partners, including ADB, will help give developing economies in Asia and the Pacific the resources they need to remain on a path toward a more sustainable, and inclusive future.
1McKinsey article: Reimagining tax authorities for the future
2COVID-19 Policy database
3ADB Brief: The Impact of COVID-19 on Developing Asia: The Pandemic Extends into 2021
4ADB Annual Report 2020
5Video: What is the Asia Pacific Tax Hub?
6Publication: Strengthening Domestic Resource Mobilization in Southeast Asia
7Video: What is the Asia Pacific Tax Hub?
8Blog: How governments can use tax policy to speed pandemic recovery
9Publication:Strengthening Domestic Resource Mobilization in Southeast Asia
10Bloomberg story, 27 November, 2020
11McKinsey article: Reimagining tax authorities for the future