Expanding the tax base, maximizing tax compliance, and simplifying the compliance process will significantly boost governments’ revenue and better position them to finance pandemic recovery.
Strengthening domestic resource mobilization to revive the economy is one of the key strategies for a resilient recovery from the COVID-19 crisis.
The pandemic has battered public finances and revenues pushing countries into a recession and deeper into debt. In trade-dependent Southeast Asia, economies contracted by 4.0% in 2020 after borders and markets closed around the world to prevent the spread of the disease. Revenues were reduced by about 14% last year.
Countries in the region hope to bounce back this year with the rollout of mass vaccinations and improving international and domestic demand. Restoring public finances, however, is a major challenge for governments that were struggling to improve their tax collection even before the pandemic when economic prospects were brighter.
A report from the Asian Development Bank (ADB) notes that tax yields in many countries in Southeast Asia have not increased in proportion to their economic gains before the crisis. Their tax yields have not reached 15% of their gross domestic product (GDP), which is considered the minimum requirement for sustainable development.
ADB’s analysis identified six common problems besetting tax administration in the region:
- low revenue and expenditure autonomy at the local government level,
- lack of equity in the distribution of the tax burden,
- a large informal economy,
- international tax avoidance,
- underreporting and misrepresentation of business income,
- lack of administrative capacity, and
- overly burdensome tax requirements.
Policy actions are recommended in four areas to strengthen tax systems in the region.
1. Expand the tax base. Policy options include removing exemptions, increasing property taxes, imposing wealth and intergenerational taxes (e.g., inheritance tax), and taxing environmental externalities (e.g., carbon taxes) and digital services.
2. Increase compliance. Measures include leveraging emerging technologies, such as mobile applications to reach rural areas better, tax intelligence software, and blockchain technology to tracking and monitor taxable assets and transactions.
3. Improve tax administration. Simplify tax compliance, especially for micro-, small, and medium-sized enterprises. Technology can help ease the tax burden through tax portals that provide information and allow taxpayers to file their returns and make payments online. Messaging services may be used to send updates and reminders to taxpayers.
4. Support international tax cooperation. This includes addressing tax avoidance by multinational enterprises and wealthy individuals through such practices as base erosion and profit shifting. These are tax planning schemes, which may or may not be legal, and that entail using deductible payments (e.g., interest, royalties) to erode tax bases or artificially shifting profits to low or no-tax locations.
This year, ADB established the Asia Pacific Tax Hub to promote dialogue and knowledge sharing on domestic resource mobilization and international tax cooperation in the region. With support from international organizations, the digital tax hub will help countries strengthen their tax systems and develop strategies for raising revenues in the medium term.