Remarks by Masatsugu Asakawa, President, Asian Development Bank at the Webinar on Domestic Resource Mobilization and International Tax Cooperation, 17 September 2020
Governor Aso, thank you for introducing this important topic and framing the course of our discussions. Thank you, Minister Indrawati, Mr. Saint-Amans, and Mr. Gaspar, for your insightful views and opinions. I also appreciate Ms. Ferguson for facilitating this panel discussion.
I. Challenges to achieving the Sustainable Development Goals (SDGs)
As we all know, the COVID-19 pandemic has brought to light serious vulnerabilities across Asia and the Pacific: global poverty is increasing; public services are strained, especially in health and education; economic growth is shrinking; and inequality is rising. ADB expects that the economies of 33 out of our 46 developing members will contract this year.
Governments face increased pressure on their budgets and public debt due to an increase in large-scale countercyclical expenditure programs and a decrease in tax revenues.
At the same time, governments must secure additional financial resources to brace themselves for potential subsequent waves of the pandemic while also getting their growth trajectory back on track to achieve the Sustainable Development Goals (SDGs). Further investments in education, health, and combatting climate change are much needed.
This brings me to the subject that has brought us together today. I firmly believe that one of the keys to success in achieving the SDGs in a world reshaped by COVID-19 will lie in strengthening domestic revenue mobilization, or DRM, and international tax cooperation, or ITC.
II. Key domestic resource mobilization and tax cooperation challenges in Asia and the Pacific
Let me now describe some of the key challenges for domestic resource mobilization and tax cooperation in the region.
First, even before the COVID-19 crisis, revenue generation efforts have not kept up with the increased economic growth of most countries.
Tax yields across developing Asia are, on average, substantially lower than those across OECD countries: 17.6% compared to 24.9%, excluding revenue from social security. If you look at the average of countries in South East Asia, the tax-to-GDP ratio is even lower than 15%—a level that is now widely regarded as the minimum required for sustainable development.
It should also be noted that countries in developing Asia continue to face rather volatile tax yields with large variability across time.
Furthermore, due to decreasing tax revenues and increasing expenditures as a result of the pandemic, many of our developing members have little room to increase their external debt further.
These figures remind us of the importance of broadening the tax base and enhancing tax compliance. At the same time, we must also address the issue of DRM from a wider perspective.
To start, tax policy must walk a fine line between raising tax revenues and promoting investments that can contribute to a robust recovery from the pandemic. To accomplish this, governments can adopt targeted policy instruments such as more tailored and cost-effective tax incentives.
Second, let us leverage tax policy measures to recover economic growth so that it remains on track to achieve the 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.
And third, let us strengthen our joint efforts to protect the tax base from base erosion and profit shifting, often referred to as “BEPS.” Through BEPS practices, some multinational corporations doing business in developing countries move taxable profits to low- or even zero-based tax jurisdictions. This challenge becomes more imminent given the digital transformation, which has accelerated due to COVID-19 mobility restrictions.
BEPS is an especially relevant issue for ADB’s developing members because their large markets and growing purchasing power draw large investments from multinational corporations, which will make the countries more vulnerable to BEPS practices unless proper measures are in place.
Let me also offer a few words on tax evasion. Unlike BEPS, tax evasion is clearly illegal. Nevertheless, tax evasion is becoming more difficult for governments to identify and address, because evasion can be facilitated by sophisticated technologies and an increasingly interconnected global financial network.
These developments demonstrate an urgent need for joint action to combat both BEPS and tax evasion practices—but cooperation in the Asia and Pacific region is lagging.
Out of ADB’s 46 developing members, 27 are not yet participating in the existing Inclusive Framework on BEPS; while 19 are not yet members of the Global Forum on Transparency and Exchange of Information for Tax Purposes, and have therefore not committed to the automatic exchange of information, which is crucial for tackling tax evasion.
Moreover, Asia and the Pacific is the only region that does not have a pan-regional tax association to exchange ideas and facilitate agreements on international and regional tax matters. Because taxation is traditionally seen as a uniquely sovereign matter, governments are often reluctant to have their hands tied, including by international agreements.
But this is a false choice, because stepping away from international tax cooperation for the sake of protecting sovereignty will serve to erode sovereign powers by making BEPS and tax evasion easier. . The failure to engage in international tax cooperation will result in unilateral tax measures by many governments, which can lead to an increased chance of double or triple taxation. This will definitely undermine cross-border trade and investments.
III. A call to action for domestic resource mobilization and international tax cooperation during the COVID-19 crisis and recovery
Let me offer some proposals to address these challenges, which will assist countries as they rebuild their tax base for the future.
First, I would like to call for the establishment of an effective regional hub on domestic resource mobilization and international tax cooperation in Asia and the Pacific. This hub will serve as an open platform where countries and development partners can collaborate closely to share experiences and practical knowledge, and coordinate on development support.
Starting with a high-level regional conference, we will seek to bring together practitioners from both tax policy and tax administration agencies. I believe promoting stronger collaboration and coordination between a country’s tax policy and revenue administration bodies is needed to improve the transparency and predictability of tax systems. This will contribute to an enabling environment for businesses and a strengthening of institutions to address BEPS and tax evasion.
Second, under the hub, ADB will facilitate knowledge sharing between developing members on how to balance raising tax revenue while promoting economic activity, and how to adopt international standards on anti-BEPS practices and tax transparency.
Third, ADB will mainstream DRM and ITC in our operations. We will proactively use our technical assistance and financial instruments, such as policy-based lending (PBL), to promote DRM and adoption of international tax standards. We will support the formulation of national action plans to set direction under a country-specific, medium-term revenue strategy that includes planning for eventual fiscal consolidation over the medium term. ADB can also help revenue agencies make stronger investments in technology for tax administration.
Before I close, let me highlight the most critical key to success in DRM, and that is earning the trust of taxpayers. As many of you may remember, the OECD-G20 BEPS initiative was ignited by public demands for equity and transparency in fiscal affairs after the global financial crisis. The initiative resulted in a greater understanding and sense of purpose on the part of governments to close tax loopholes and ensure a stronger commitment to tax payment by multinational businesses.
Ladies and gentlemen, throughout my career, I have witnessed firsthand the tremendous benefits of international tax cooperation initiatives.
It is vital that we move forward together on these issues with a sense of urgency. Through our efforts on DRM and ITC, we can lay the foundation for a robust, resilient, and sustainable recovery from the challenges of the COVID-19 pandemic—and we will achieve the Sustainable Development Goals.
Let me stop here, and I would be pleased to take up any further points under our proposed action plan or other issues you may wish to discuss.