A Comprehensive Assessment of Tax Capacity in Southeast Asia

By Asian Development Bank

As Southeast Asia reels from the impacts of the coronavirus disease (COVID-19), domestic resource mobilization (DRM) has never been more challenging or more critical. Prior to the pandemic, many countries in the region were not achieving a tax yield of 15% of gross domestic product—the level considered to be the minimum for sustainable development. The pandemic has further reduced tax revenues and public expenditures are facing increasing pressure. This publication identifies technical, policy, and administrative tax capacity issues faced by ten countries in Southeast Asia. It also explores potential policy and administrative measures to strengthen DRM.

• Language: English
• Publisher: Asian Development Bank
• Release date: Dec 1, 2021
• ISBN: 9789292628352

Book preview

A COMPREHENSIVE ASSESSMENT OF TAX CAPACITY IN SOUTHEAST ASIA

Aekapol Chongvilaivan and Annette Chooi

DECEMBER 2021

Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

© 2021 Asian Development Bank

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Some rights reserved. Published in 2021.

ISBN 978-92-9262-834-5 (print); 978-92-9262-835-2 (electronic); 978-92-9262-836-9 (ebook)

Publication Stock No. TCS210243

DOI: http://dx.doi.org/10.22617/TCS210243

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On the cover: Taxes are fundamental to the provision of services by governments. Many elements must come together to create an inclusive, broad-based tax system and it requires the contributions of individuals, communities, and sectors.

Cover design by Cleone Baradas.

Contents

List of Figures

Foreword

Prior to the coronavirus disease (COVID-19) pandemic, tax revenues in Southeast Asia were already insufficient to achieve the Sustainable Development Goals (SDGs). In 2018, the average tax-to-gross domestic product (GDP) ratio in the region stood at 14.8%, well below the average of 17.6% for developing Asia and 24.9% for members of the Organisation for Economic Co-operation and Development. Many economies in Southeast Asia are experiencing declining tax-to-GDP ratios and are failing to achieve a tax effort of 15% of GDP—the level considered to be the minimum for sustainable development.

High levels of public debt coupled with fiscal pressures induced by the pandemic mean many Southeast Asian countries are struggling to finance their COVID-19 response and recovery efforts in areas such as public health, education, and infrastructure. Domestic resource mobilization (DRM)—the ability of a government to mobilize its own resources and collect taxes—is suffering from a plunge in economic activities and trade as the pandemic continues to unfold. Various tax relief measures introduced to reduce the burden on taxpayers and to enhance cashflow for businesses are also contributing to lower tax revenue. Resource-dependent countries in the region face an additional challenge as non-tax revenues decline due to lower demand and prices for commodities. It is likely that low DRM will persist for some time in Southeast Asia as COVID-19 containment measures continue to suppress economic activity.

These developments offer a stark reminder of why it is essential to strengthen DRM and foster international tax cooperation in Southeast Asia. At the same time, the issue of tax revenue mobilization and administration, including institutional capacity, needs to be addressed from a longer-term perspective. Under its Strategy 2030, the Asian Development Bank (ADB) is committed to help its developing member countries build resilience and respond to economic shocks through support to strengthen governance and institutional capacity. Addressing emerging and evolving issues around DRM and international tax cooperation is crucial to foster a sustainable and inclusive economic recovery from the pandemic.

A Comprehensive Assessment of Tax Capacity in Southeast Asia examines technical, policy, and administrative tax capacity issues in ten countries and provides insights on potential capacity, institutional, policy, and legal reforms. The report underscores that there is no one-size-fits-all tax policy for Southeast Asia. Each country has a unique tax system with a distinct social and economic context and differing institutional and political settings. Therefore, customized and sequenced tax policy and administration reform options are required to strengthen tax capacities and address other emerging DRM and international tax cooperation challenges. These challenges include large informal sectors, high costs of tax compliance, overly complex tax systems, base erosion and profit shifting by multinational enterprises, and the digital transformation of tax authorities.

I believe this report will serve as a valuable reference for tax authorities, policymakers, researchers, and other stakeholders to better understand tax policy and administration issues and challenges in the region, as well as