Rising public debt, as a result of large fiscal measures to mitigate the impact of COVID-19, and shrinking tax revenues due to the pandemic have hit fiscal balances and created debt sustainability challenges for several developing countries in Asia and the Pacific.
Domestic resource mobilization (DRM) is not only pivotal in providing a direct and sustainable financing source to fight the spread of COVID-19, procure safe and effective vaccines, and get the economy back on track, it also offers governments the tool to achieve the Sustainable Development Goals (SDGs). For example, governments can adopt a more progressive tax system to address the worsening income inequality due to COVID-19. Carbon tax or other environmental taxes can also incentivize economic activities to achieve a green recovery and promote adaptation and resilience.
Proactive participation in international tax initiatives is another area which is needed to help developing countries effectively enforce their tax policies as well as regulate cross-border activities by multinational corporations and high net worth individuals wanting to avoid paying the right taxes.
There are three approaches and tools that are needed for effective tax policy and administration reform. These are taken from the Revenue Statistics in Asia and the Pacific Chapter 2, contributed by Daisuke Miura and Go Nagata.
1. What is medium-term revenue strategy (MTRS)? How can it help developing economies attain sustainable and effective tax system reforms?
An MTRS, which was developed in 2016 by the Platform for Collaboration on Tax, can help developing countries come up with medium-term solutions (ranging from 5 to 10 years) to progressively reach their revenue objectives needed to achieve their 2030 SDGs. It can also serve as foundation for development coordination, not just among government agencies, but also with different development partners.
ADB developing member countries need to seek reforms to balance their tax systems, which include raising their tax-to-GDP ratio sufficient for delivering public services to all citizens. Now is that time to consider MTRSs. At this time, the capacity to formulate and implement MTRSs is limited in many developing Asia and Pacific countries. It is thus essential for external support to assist the governments in establishing their MTRSs.
2. How can digitalization help improve tax administration?
Digital transformation and adoption in Asia and the Pacific tax administration is as diverse as the level of capacity in each economy. Some technologically advanced economies have already integrated the use of artificial intelligence and predictive technologies, with their audit and risk functions.
In parallel, many tax administrations in this region have recently employed digital solutions to provide an accessible environment, including the promotion of e-filling. We hope that most tax administration will be able to embed integrated, digitized solutions and functions which can collect data from various sources, clean and filter it, and store it for taxpayers to manage their tax compliance matters. To this end, we consider it is essential for our developing member countries to develop a roadmap for the automation of tax administration.
3. How can the international community help Asia and Pacific economies in their tax reforms?
International tax cooperation is crucial for developing countries to be able to access information from other jurisdictions for effective tax enforcement, as well as coordinate rules to regulate cross-border activities, especially for multinational enterprise, to limit opportunities for tax avoidance. While globally there has been a dramatic increase in international cooperation on tax issues since the global financial crisis in 2008, progress in this region is still lagging. Many economies are still not participating in the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and the Global Forum on Transparency and Exchange of Information for Tax Purposes.
Stepping away from international tax cooperation for the sake of protecting sovereignty will erode sovereign powers by making BEPS and tax evasion easier. A failure to engage in international tax cooperation will also give rise to more unilateral tax measures, increasing the occurrence of double taxation, and undermining cross-border trade and investments.
These are the three key foundation blocks of ADB’s Asia Pacific Tax Hub. The Tax Hub will assist each ADB developing member country to define differentiated DRM and ITC goals.
ADB HQ calls for medium-term revenue strategies, digital transformation of tax administrations, and participation in international tax initiatives for Asia and Pacific economies to improve domestic resource mobilization.
Daisuke Miura is a Public Management Specialist on Taxation at the Asian Development Bank.