Developing Countries’ Progress in Strengthening their Tax Systems and Recent Developments on Addressing the Tax Challenges of Digitalization - John Versantvoort
Speech | 10 June 2021
Opening remarks by John Versantvoort, Head, Office of Anticorruption and Integrity, ADB, at the Regional Consultation on Base Erosion and Profit Shifting (BEPS), 10 June 2021
Distinguished participants, colleagues, ladies, and gentlemen, welcome!
My name is John Versantvoort and I am the Head of the Office of Anticorruption and Integrity. On behalf of the Asian Development Bank, it is my pleasure to welcome you to this Regional Consultation on Base Erosion and Profit Shifting.
I am delighted to learn that over 250 participants from more than 40 jurisdictions are present here today. Let us seize this opportunity to stay abreast of the fast-moving developments in international tax, learn from each other, and engage in meaningful dialogue.
But first, let me thank the Organisation for Economic Co-operation and Development (OECD), the Commonwealth Association of Tax Administrators (CATA), Pacific Islands Tax Administrators Association (PITAA), and the Study Group on Asian Tax Administration and Research (SGATAR) for co-hosting this consultation.
II. BEPS initiatives and developing countries
In 2015, the BEPS Action Plan proposed 15 deliverables to better align taxing rights with underlying economic activities, and to prevent the erosion of tax bases and the artificial segregation of profits to jurisdictions where they would be subject to low or no taxation. This was also a significant milestone for developing countries, which can reap significant benefits from measures to prevent aggressive tax planning practices.
The establishment of the BEPS Inclusive Framework in 2016 represented a new landmark for global tax cooperation to address harmful tax practices. It enables developing countries to participate in international tax dialogue and carry out the necessary reforms in their domestic laws and international tax agreements.
Today 139 countries and jurisdictions are part of the Inclusive Framework, a majority of which are coming from developing countries. Unfortunately, participation of developing countries from the Asia-Pacific region is still lagging in comparison to other regions. Our hope is to change this and here is why.
III. Tax challenges of the digitalized economy
International dialogue on the tax challenges arising from the digitalization of the economy are reaching a pivotal point. With the Asia-Pacific region increasingly driving global economic growth and many countries prominent buyers and sellers of goods and services online, digitalization played an important part in economic development in the region well before the pandemic. Restrictions on physical movement of people and goods during the COVID-19 pandemic have accelerated the trend towards digitalization. This has exacerbated the imbalances and inequities resulting from an outdated international taxation system unsuited to the digital economy. Today, many countries in the region struggle to generate the necessary resources to fight the economic, health and social impacts from the pandemic and finance the implementation of the Sustainable Development Goals.
Since 2019, an international effort is underway on a proposal for more equitable taxing rights based on two pillars:
- Pillar One creates a new taxing right that will allow a share of residual profits of multinational groups to be allocated to market jurisdictions;
- Pillar Two provides for a global minimum tax to ensure that multinational groups pay a minimum level of taxation regardless of where they operate and earn profits.
Things are coming to a head. Late last year – with the release of the Pillar One and Pillar Two blueprints – significant progress was made in the design of a possible solution. Last weekend, the G7 nations reached a historical agreement to subject multinational enterprises to a global minimum tax rate of 15%. In just a few weeks, the Inclusive Framework will be asked to deliver a political agreement on the key features of taxing in a digitalized economy.
If a solution is not reached by the Inclusive Framework by early July, it is likely that more and more jurisdictions will move ahead with unilateral actions, creating unintended effects such as double or triple taxation and tax-related trade tensions that will impede cross-border trade. A multilateral, consensus-based solution by the Inclusive Framework would certainly be preferable.
Therefore, now more than ever, it is important that developing countries from this region have a seat at the table. Let’s start today by assessing what has been achieved so far, what are the main challenges faced by developing countries, and what opportunities lie ahead for strengthening domestic resource mobilization.
IV. ADB Asia Pacific Tax Hub
Let me say a few words here about the Asia Pacific Tax Hub, which ADB officially launched during its 54th Annual Meeting last May. Among many other things, the Tax Hub will assist interested developing member countries to participate in the Inclusive Framework and to build the necessary technical capacity to discuss and implement multilateral, consensus-based solutions to taxation in the digitalized economy.
However, aggressive tax planning practices and digitalization of the economy are not the only tax challenges facing the Asia-Pacific region. With public debt rising and the tax-to-GDP ratio of many countries below the level necessary to support a sustainable level of development, work on many fronts is needed to strengthen domestic resource mobilization.
Of course, we need to do so in a manner that makes sense for our developing members. The Tax Hub will provide an open and inclusive platform for policy dialogue, knowledge sharing, and development coordination among the ADB, its member countries and the broader development community. That is why your views during consultations like today matter.
Let me thank you all for joining this regional consultation. I am sure that the expert presentations and your contributions over the next hours will help us gain a better understanding of the role that the Inclusive Framework can play in improving domestic resource mobilization, the current status of the proposals for taxing the digital economy and your perspectives on how these must be given further shape to benefit all of us.
I wish you all a very productive meeting.