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ASEAN 2015 is fast approaching. The implications for taxation are diverse, touching not only
upon tax composition, but also revenue, redistribution and repricing, and the representation of
and relationship between tax regulators and taxpayers. Based on this framework, this study
provides the following recommendations for the Philippines, Indonesia, and Singapore, which
are derived from both qualitative and quantitative analysis.
Revenue
§ Harmonize upper and lower bounds of corporate income tax, value-added tax, and excise tax
§ Coordinate regional foreign direct investment tax incentives and establish public-private
dialogue with relevant business stakeholders through transparent information portal
Redistribution
§ Raise awareness of redistributive effects of overreliance on indirect taxation
§ Eliminate VAT exemptions on high-end goods, particularly in Indonesia
Repricing
§ Standardization of tax base for excise taxation
Representation
§ Establish trust-based tax compliance model
§ Build internal administrative capacity through employee professionalization
§ Institutionalize assistance to taxpayers
Titolo originale
ASEAN Economic Community 2015 - A Framework for Taxation
ASEAN 2015 is fast approaching. The implications for taxation are diverse, touching not only
upon tax composition, but also revenue, redistribution and repricing, and the representation of
and relationship between tax regulators and taxpayers. Based on this framework, this study
provides the following recommendations for the Philippines, Indonesia, and Singapore, which
are derived from both qualitative and quantitative analysis.
Revenue
§ Harmonize upper and lower bounds of corporate income tax, value-added tax, and excise tax
§ Coordinate regional foreign direct investment tax incentives and establish public-private
dialogue with relevant business stakeholders through transparent information portal
Redistribution
§ Raise awareness of redistributive effects of overreliance on indirect taxation
§ Eliminate VAT exemptions on high-end goods, particularly in Indonesia
Repricing
§ Standardization of tax base for excise taxation
Representation
§ Establish trust-based tax compliance model
§ Build internal administrative capacity through employee professionalization
§ Institutionalize assistance to taxpayers
ASEAN 2015 is fast approaching. The implications for taxation are diverse, touching not only
upon tax composition, but also revenue, redistribution and repricing, and the representation of
and relationship between tax regulators and taxpayers. Based on this framework, this study
provides the following recommendations for the Philippines, Indonesia, and Singapore, which
are derived from both qualitative and quantitative analysis.
Revenue
§ Harmonize upper and lower bounds of corporate income tax, value-added tax, and excise tax
§ Coordinate regional foreign direct investment tax incentives and establish public-private
dialogue with relevant business stakeholders through transparent information portal
Redistribution
§ Raise awareness of redistributive effects of overreliance on indirect taxation
§ Eliminate VAT exemptions on high-end goods, particularly in Indonesia
Repricing
§ Standardization of tax base for excise taxation
Representation
§ Establish trust-based tax compliance model
§ Build internal administrative capacity through employee professionalization
§ Institutionalize assistance to taxpayers
ASEAN 2015 is fast approaching. The implications for taxation are diverse, touching not only upon tax composition, but also revenue, redistribution and repricing, and the representation of and relationship between tax regulators and taxpayers. Based on this framework, this study provides the following recommendations for the Philippines, Indonesia, and Singapore, which are derived from both qualitative and quantitative analysis. Revenue ! Harmonize upper and lower bounds of corporate income tax, value-added tax, and excise tax ! Coordinate regional foreign direct investment tax incentives and establish public-private dialogue with relevant business stakeholders through transparent information portal Redistribution ! Raise awareness of redistributive effects of overreliance on indirect taxation ! Eliminate VAT exemptions on high-end goods, particularly in Indonesia Repricing ! Standardization of tax base for excise taxation Representation ! Establish trust-based tax compliance model ! Build internal administrative capacity through employee professionalization ! Institutionalize assistance to taxpayers
ASEAN ECONOMIC COMMUNITY BLUEPRINT
The ASEAN Vision 2020 seeks to establish the ASEAN Economic Community (AEC), The ASEAN Security Community, and the ASEAN Socio-Cultural Community, which will be the three integral pillars of the ASEAN Community. This was the vision of the ASEAN Leaders at the 1997 Summit in Kuala Lumpur. The establishment of the ASEAN Economic Community has been the focus since 2003 and aims to achieve regional economic integration by 2015 with clear targets and timelines for implementation of various measures as well as pre-agreed flexibilities to accommodate the interests of all ASEAN member countries (Secretariat, 2008). The key characteristics envisaged are (a) a single market and production base, (b) a highly competitive economic region, (c) a region of equitable economic development, and (d) a region fully integrated into the global economy. To: Professor Mark Hallerberg and GIZ From: Francisco Baechler, Paulyn Duman, Priscilla Hermann, Georg Wagner Topic: Economic and Administrative Implications of ASEAN Economic Community 2015 Date: 16 May 2014
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Ultimately, the goal is to transform ASEAN into a region with free movement of goods, services, investment, skilled labor, and free flow of capital (Secretariat, 2008). Critical to this discussion are the implications of this integration on tax administrations across the ASEAN region. This paper analyses the possible implications of the AEC on the 4 Rs of taxation: Revenue, Redistribution, Repricing, and Representation across Singapore, Indonesia, and the Philippines. Section 1 addresses revenue, specifically providing the breakdown of the tax composition and tax revenues as well as the tax implications associated with shadows economies and foreign direct investment. Section 2 will discuss the redistributive effects with regard to personal income tax, value added taxes, and energy subsidies. Section 3 deals with repricing in the context of excise taxation using the example of tobacco across the three countries. Section 4 will discuss representation analyzing the factors that affect the taxpayers and tax regulators. Lastly, Section 5 will provide this studys recommendations across each of the four Rs. This paper does not aim to discuss all taxation areas that are affected by the AEC, but only to provide a framework on some key issues, which the authors deem important in economic integration.
1. REVENUE
In general terms, developing countries systemically collect less tax revenues than OECD countries if measured as a proportion of GDP. This observation also holds true for the three countries that are examined in this paper, even though Singapore should not be seen as a developing country. According to the World Bank, Singapores tax revenues amounted to 14.5 percent of GDP in 2012, outperforming the Philippines (12.9 percent of GDP) and Indonesia (11.4 percent of GDP, latest data from 2009). As taxes are the main source of revenue for any state, and the described countries are facing significant challenges with regard to social policy and infrastructure, an increase of the tax revenue to GDP ratio is a legitimate and sensible policy goal. With respect to ASEAN 2015, the %
importance of tax collection becomes even more urgent, as the elimination of tariffs constitutes the loss of a reliable source of income (even if not extremely high when intra-ASEAN trade is considered). In the following chapter, we will outline the major sources of revenue for these three countries, discuss the implications of shadow economies, and take a closer look at foreign direct investment as it relates to corporate income tax and withholding taxes on dividends. 1.1 Tax Breakdown
In developed countries the majority of government revenue is collected through the direct taxes on personal income from labor, payroll taxes as well as indirect taxes on consumption such as value- added taxes (VAT). In developing countries, however, the sources of revenue generation do not follow this logic and analysis shows that the corporate income tax constitutes a much larger component of the tax system. This difference in taxation strategy is often linked to regulation enforceability and implementation challenges as well as the size and scope of informal economies (Gordon and Li, 2005). The ASEAN member states are not isolated from such challenges.
As countries across the ASEAN region work towards completion of the AEC 2015 noticeable trends in taxation have arisen. In particular, corporate income tax (CIT) rates have been decreasing over the last 15 years. Today the average rate hovers at around 23 percent. These decreasing CIT rates are largely the result of countries seeking to attract greater foreign direct investment (FDI), a topic, which will be examined in Section 1.3. With declining regional corporate tax rates, countries will need to rely on other forms of taxation for revenue generation. Taxes on consumption are predicted to help shoulder this revenue burden. Nevertheless, as Table 1 below illustrates, large variance continues to exist across the different tax rates on a country-specific level. There is a 13 percent spread in CIT rates between Singapore and Philippines, respectively as well as 12 percent spread between personal income tax rates. Although more marginal, differences in VAT rates are also present. In all three tax categories, Singapore has the lowest rates of all three countries.
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Table 1: Cross-country Comparison of CIT, PIT, and VAT Rates
Singapore Indonesia Philippines Corporate Income 17% 25% 30% Value-Added 7% 10% 12% Personal Income 20% 30% 32% Source: KPMG Corporate Tax Tables
Figure 1, below, provides a closer look at the tax revenue generation by tax category in 2012. At the macro level, the following pie charts immediately indicate the heavy reliance on both corporate and personal income taxation in all countries. A breakdown is provided for both Singapore and the Philippines, yet for Indonesia income revenue is generated via taxes on gas and oil and non- gas and non-oil, therefore greater comparative analysis of this tax category is not possible. 1 In Singapore, the CIT tax revenue accounted for a 31 percent share (there are no corporate withholding taxes), while personal income and personal withholding taxes claimed a 21 percent combined share. Withholding taxes will be discussed in greater detail in Section 1.6. In the Philippines, the breakdown is significantly different with both corporate and personal withholding tax shares exceeding revenue generated through standard PIT and CIT rates. In fact, personal income tax only generated an approximate 2 percent of total revenue. In total, withholding taxes in the Philippines accounted for a combined 39 percent of total 2012 tax revenue.
All three countries equally show heavy reliance on indirect forms of taxation. Notably, in Singapore Goods and Services Tax (GST) accounted for 22 percent of total revenue. Meanwhile, in the Philippines and Indonesia the VAT claimed respective shares of 22 and 33 percent.
1 Tax revenue generation provided by the Bank of Indonesia does not provide greater granularity into the tax breakdown. No corporate income or personal income revenue is provided. '
Figure 1: Tax Revenue Generation 2012, by Tax Category
Sources: Inland Revenue Authority (Singapore); Bureau of Internal Revenue (Philippines): Bank of Indonesia (Indonesia).
The following tax categories were subsumed under Other for the purposes of this analysis: Singapore included Property Tax (9%), Stamp Tax (10%), Betting Tax (6%), and Estate Tax (0%). In the Philippines included was Percentage tax (5%) and Other category (10%). Lastly, for Indonesia the Other category combined Land and Building Tax (3%), Other Domestic Taxes (5%), and Internal Trade Taxes (5%). 1.2 Shadow Economy
Much of the economic activity in AEC countries is untaxed as it is not officially recorded or, to put it differently, part of the shadow economy. Although exact numbers are very difficult to pin-point, (
current estimates from Bloomberg suggest that the informal sector amounts to 48.8 percent and 14.3 percent of GDP in the Philippines and Singapore, respectively. The German-Indonesian Chamber of Commerce estimated a percentage of around 50 percent of GDP for the size of informal economy in 2008. Keeping this estimation constant over the time period 2009 to 2012, 2 the following estimated values are produced for Indonesias informal economy.
Source: Bloomberg (2014), Deutsch-Indonesische Auenhandelskammer, 2009; World Bank (2014)
A key insight from the above graph is that a huge amount of economic activity remains untaxed and is therefore a missed opportunity for tax collectors in the respective countries, as is depicted in Figure 2. Another primary takeaway of Figure 2 is that Singapore outperforms both the Philippines and Indonesia with regard to the approximate size of its shadow economy.
As Figure 2 provides a very rough approximation of the respective sizes of the informal economies, these absolute values are not provided with the intent to enable a calculation of potential additional revenues, rather to indicate the levels of untaxed economic activity. The latter should not be confused with forgone tax revenues, which would equate to a certain percentage of the untaxed
2 In fact, there is little evidence that the level of the shadow economy has decreased significantly since 2008; as shall be discussed later in this paper, the corruption perception index has even increased in recent years, which might be interpreted as a sign of a large proportion of unrecorded activity in the Indonesian economy. 81 96 108 120 270 355 423 439 27 30 34 39 0 100 200 300 400 500 600 700 2009 2010 2011 2012 B i l l i o n s
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activity. However, the implied relationship between a large shadow economy and loss in revenues is backed by economic theory and econometric studies and models (Cobham, 2005; Slemrod, 2007).
Even though ASEAN 2015 is not likely to trigger any major changes with regard to the shadow economy, this study seeks to emphasize the fact that it is a substantive problem that should be addressed in the light of the tax collectors interest to increase their tax revenue. What is more, ASEAN 2015 provides an excellent window of opportunity to introduce changes in tax administration and tax policies. Particularly, as shadow economies across the region are in large part attributed to both voluntary efforts of tax avoidance and evasion as well as involuntary behavior. To the extent that tax avoidance and evasion are voluntary, the efforts of individuals and companies are often supported by corrupted structures in the administration, particularly in Indonesia and the Philippines. These issues will be addressed in greater detail in Section 4. 1.3 Foreign Direct Investment
The following section will discuss regional and country-specific trends in FDI as well as expand upon the discussion of corporate income tax variation across the region in the context of tax competition and tax incentives.
FDI is a key enabler of export competitiveness. It enables the transfer of capital, production know- how, distribution logistics, and marketing. Furthermore, it generates productivity and efficiency gains through competition, and boosts employment (Bhaskaran, 2013). For ASEAN, FDI holds extreme importance as the influx of new firms serves as a primary driver of increased revenue collection. Since 2000, ASEANs share of global inflows has increased from 1.6 to 8.2 percent in 2010 reaching a total of 111.3 billion (US dollars). FDI inflows of stock have also vastly increased from roughly $257 billion in 2000 to $1.3 trillion in 2012, which as a share of global FDI stock inflows was 5.8 percent. *
1.3.1 Country Level
ASEANs dominant FDI actor remains Singapore, which attracts nearly half of its total 2012 FDI stock with approximately 52 percent of total FDI inflows, followed second by Indonesia with 16 percent, third by Thailand with 12 percent, and sixth by the Philippines with just over 2 percent. 3
Illustrated in Figure 3 are the net inflows of FDI across the three countries examined for the period 2003 to 2012, in US billions, as well as the corresponding fluctuations in CIT rates. For instance, the 5 percent decrease in the Philippines CIT rate from 2008 to 2009 occurred at the same time as an 89 percent increase in FDI. Equally, Singapores FDI underwent a sharp nose dive in 2007 to 2008, in the lead up to the US financial crisis, which coincides with a 2 percent decrease in the CIT rate from 20 to 18 percent.
Figure 3: FDI Inflows and CIT Rates by Country, 2003-2012 Source: Data compiled from the World Bank DataBank and KPMG. 4
3 UNCTADSTAT. Foreign direct investment flows and stocks, annual, 1980-2012 4 The World Bank DataBank: Development Indicators; Foreign Direct Investment, net inflows (BoP, current US$); KPMG, Hong Kong Tax Competitiveness Series; KPMG Corporate Tax Rates Table 0% 10% 20% 30% 40% 50% -$10 $0 $10 $20 $30 $40 $50 $60 2 0 0 3
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FDI Indonesia FDI Philippines FDI Singapore CIT Indonesia CIT Philippines CIT Singapore !+
However, this imbalance is not exclusively caused by CIT differentials. Also of importance are discrepancies in the regulatory framework governing FDI. The assessment by the World Economic Forums Ease of Doing Business 2012 report, which ranks Singapore as the most open economy to FDI, followed second by the Philippines, and Indonesia sixth, substantiates this assertion (Bhaskaran, 2013). 5
1.3.2 ASEAN Level
The recent development of the ASEAN Comprehensive Investment Area (ACIA) however signals new efforts at creating a common framework for FDI attraction. Specifically, the ACIA is a combination of two previous investment-related initiatives, the ASEAN Investment Area (AIA) and the Investment Guarantee Agreements (IGA). Where the ACIA differs is in its expansion of these previous agreements in its efforts to create more open investment climate in line with the ASEAN economic integration. Specifically, it places renewed focus on the adoption of international best practices in investment protection, recent trends in international investment practices to reduce investment restrictions, strengthening third-party participation and benefits in investment projects, as well as calling for higher levels of transparency in investment regulations. These initiatives represent only a handful of investment-related efforts as part of the ACIA. Although this is a step in the right direction, implementation, monitoring, enforcement of the practices outline in this framework will be key for regional FDI growth and eventual coordination. (ASEAN Comprehensive Investment Agreement Guidebook, 2013) 1.4 Tax Competition
Corporate tax competition generates market distortions as it promotes the leveraging by foreign firms of the tax differentials in various countries. 6 Current efforts at tax policy coordination remain
5 Although reports by the World Bank and the World Economic Forum show a correlation between high levels of FDI and countries who rank highly in their respective indices (Ease of Doing Business and Global Competitiveness Index), it is important to emphasize that FDI liberalization in the form of tax incentives can produce significant economic distortions. 6 Asia Development Bank. Asia Regional Integration Center. Database on Tax Incentives. !!
problematic, as many ASEAN member states are not eager to forgo their competitive tax advantage. Furthermore, tax rate setting remains up to the discretion of individual ASEAN member states. As the push toward AEC 2015 becomes more of a reality, the region will continue to see the development of negative externalities as countries with low tax rates lure capital investment from neighboring countries with high tax rates. The result of this market manipulation on behalf of multinational corporations (MNCs) is also seen on an internal structural level. MNCs are increasingly relying on transfer-pricing schemes to shift corporate profits to their foreign subsidiaries located in countries with more favorable tax systems. This gaming of the tax system by MNCs is a problem faced by many ASEAN member states whose internal regulatory frameworks prove to be inadequate in restricting the private sectors use of advanced pricing agreements. Furthermore, many countries lack the trained staff and necessary level of expertise in this field to curtail the growing transfer pricing schemes (International Tax Compact Workshop, Bangkok 2013). 1.5 Tax Incentives
Another method of FDI attraction involves the use of tax incentives whose size and scope of differ by country. However, the most widespread incentives include export-processing, creation of special economic zones (SEZ) and tax reductions or holidays for particular/protected industries (International Tax Compact, 2013). Despite facilitating higher levels of FDI and promoting general economic integration, tax incentives negatively affect revenue generation, reduce the tax base, and raise taxes for the non-exempt taxpayers. Indonesia, for instance provides a 3-8 year CIT tax holiday for foreign firms across 22 different economic sectors, while Singapore provides full tax exemptions for certain firms for the first 3 years, and the Philippines 3-6 years depending on a firms project status of pioneer or non-pioneer or new or expansion. 7 The World Bank estimates a 20 percent tax differential in the Philippines between firms benefiting from tax incentives and those who do not (International Tax Compact, 2013). Tax incentives are a viable
7 Asia Development Bank. Asia Regional Integration Center. Database on Tax Incentives. !#
means of attracting FDI to specific industry sectors. In light of the completion of the AEC 2015, which will open intra-ASEAN borders to the free movement of capital, coordination is of fundamental importance, as is the harmonization of CIT rates. This is particularly true for countries like the Philippines and Indonesia, whose respective manufacturing sectors generate the largest respective inflow of FDI, or 17 and 38 percent of total FDI. In the case of Indonesia and the Philippines, coordination of tax incentives in this sector might serve as an example of how a more coordinated approach to FDI tax incentives in a specific sector could enable the promotion of the ASEAN-brand as it relates primary industry FDI. 8
1.6 Withholding Taxes and Effective Tax Rates
Withholding taxes can come in the form of income withheld from personal labor wages, which are then paid directly to the government by the employer or taxes levied on interest, certain services, royalties and dividends. Such taxes are often levied in addition to the underlying corporate or personal income tax and thus represent a second, or double layer of taxation, in the country wherein profits were made. Furthermore, in certain countries profits made from activities abroad can also be subject to a third layer of taxation upon reentry to the home country. These multiple layers of taxation penalize financial engagement and disincentive investment and the movement of capital and services. (KPMG, 2006).
This is particularly relevant when discussing the variance in CIT rates, as illustrated in Table 2, which shows the effect of withholding taxes on dividends and the resulting increase in the effective payable tax rates corporations must pay on income. Withholding taxes on dividends arguably have the greatest effect in the Philippines causing an increase in the effective tax rate to 40.5 percent, up from the standard rate of 30 percent. Singapore, on the hand, has zero withholding taxes on dividends and as a result their CIT remains the most competitive of the region at 17 percent
8 Asia Development Bank Institute, 2012 (Indonesia); Bank of Philippines, 2014 !$
(KPMG, CFO Forum, 2012). Brunei Darussalam and Malaysia equally have no withholding taxes on dividends. (KPMG, 2006).
Although expansion of the withholding tax structure as a means of broadening the tax base is outlined as a primary goal of the AEC 2015, more can be done to address this issue. Elimination of corporate withholding tax rates among businesses in member states is one proffered solution as is the development of a multilateral tax treaty led by Singapore, the corporate taxation leader of the region (KPMG, 2014 Tax Alert). However, these will be addressed in greater detail in Section 5. It is important to note that elimination of withholding tax rates across the region has the potential to significantly destabilize capabilities of revenue generation in countries such as the Philippines wherein corporate withholding taxes accounted for as much as 20 percent of total tax revenue, see Figure 1
Table 2: Cross-country Comparison: Withholding Tax on Dividends and Effective Rates
Singapore Indonesia Philippines Corporate Income 17% 25% 30% Withholding on Dividends 0% 14% 15% Effective Rate 17% 36.3% 40.5% Source: KPMG, Corporate Tax Tables
2. REDISTRIBUTION
One of the most essential features of taxation is redistribution. Any tax reform must therefore be concerned with the redistributive consequences of changes to the tax breakdown. This section will !%
discuss issues related to personal income taxation, the effect of greater reliance on indirect taxation, such as the VAT as well as point to energy subsidies in Indonesia.
2.1 Personal Income Tax
One of the characteristics of the AEC will be the free movement of skilled labor. In Indonesia and the Philippines, this may result in a brain-drain of the most skilled part of the population to Singapore. From an economic standpoint, this will curtail potential labor productivity as well as result in the disappearance of the upper strata of the tax pyramid. 9 This brain drain will largely offset the redistributive effects inherent in progressive personal income taxes wherein high-income earners shoulder the burden of the poor.
At this point, it is worth mentioning that there is another dimension in which labor mobility has implications on taxation: countries have to guarantee that incomes are not taxed twice if a citizen from one country resides and works in another country. By the same token, governments must also ensure that there are no loopholes for these individuals, which might lead to them not paying PIT at all. In order to overcome this, an efficient system of double taxation agreements is needed. There is already a system in place, however, enforcement remains weak 10 and some treaties are incomplete. 11
2.2 Reliance on VAT
To counter the trend of decreasing revenues, there is an incentive for governments to rely on indirect taxation, and especially on VAT, which has some obvious advantages compared to direct taxation: it is relatively easy to collect, enables a pass the buck situation from businesses to consumers and is generally more growth-friendly (De Wet, 2013 and PwC, 2013).
9 Interesting: which decile contributes how much to overall revenues? 10 Courts have not consistently applied double taxation agreements as exemplified in Thailands court decisions. (Wichit, 2012) 11 Indonesia has yet to finalize two of its double taxation agreements, meanwhile Cambodia has not signed a single one. !&
These advantages are promoted by institutions like the IMF, the OECD and the European Commission, all of which recommend stronger usage of indirect taxation vis--vis direct taxation. These recommendations correlate with the general shift towards more indirect taxation observed all around the world in recent years (PwC, 2013).
Although, as outlined by the IMF (2014), the VAT is a regressive tax 12 it also argues that if there is a differentiation in VAT between certain types of products, the regressive characteristics are not as strong (IMF, 2011). 13 Keen (2013) discusses this in more detail, examining the conditions under which a system with different VAT rates can serve as social policy tool. However, his conclusion is that even a differentiated VAT system cannot eliminate the regressive character of VAT: although 'the poor' tend to consume more of the goods with reduced VAT rates (e.g. food) in relation to other goods, high income earners still consume more of these goods (food) in absolute terms, which means that these parts of society are most favored by such a policy. Besides, the example of Indonesia reveals that VAT exemptions are not only applicable for products of importance to the poor, but instead also exist for meals in restaurants or hotels and the sale of gold ingots (KPMG 2012).
In this context, it is essential to raise awareness of the following tradeoff: the price for easy revenue generation via VAT may result in growing income disparities and inequality. This is not only problematic from a normative standpoint, but there is also empirical evidence that this might be harmful to economic development (IMF, 2014). 2.3 Energy Subsidies
A closer look at energy subsidies in Indonesia serves as a prime example of the ill-directed redistributive effects of government subsidies. In February 2014, a liter of Premium bensin (low-
12 This view is supported by ODonoghue et al. (2004) and Snowdon (2013). 13 Indonesia and the Philippines have such a system in place, (KPMG, 2012; KPMG, 2014) !'
octane gasoline) at Pertamina sold for Rp 6,500 (55 US cents) and automotive diesel oil for Rp 5,500. Unsubsidized fuels are based on market prices that are in excess of Rp 10,000. 14
To understand the overall cost of this subsidy, these numbers from the OECD provide more clarity:
Figure 4: Energy subsidies in Indonesia as a percentage of GDP
In the context of the Indonesian central government budget, energy subsidies account for nearly a quarter of total funds. Despite the fact that the subsidy enables all parts of society to benefit from cheaper fuel and energy prices, the World Bank finds that the subsidy is highly regressive in character: As a share of total gasoline subsides, 40 percent go to the richest 10 percent of households, while only 1 percent of the subsidy goes to the bottom 10 percent (World Bank, 2013,OECD, 2012).
The OECD suggests that money spent in this area could be used in a much more efficient way, instead of distorting consumer behavior and encouraging carbon emissions. However, Indonesian
14 The Jakarta Post, February 3, 2014, http://www.thejakartapost.com/news/2014/02/03/indonesia-s-fuel-subsidy- monster-the-root-problems.html-0 !(
government officials and political leaders have acknowledged that there is a need to reform with regard to energy subsidies (World Bank, 2013, Jakarta Post, 2014).
3. REPRICING
One of the main elements and functions of taxation is the repricing of goods. From a tax perspective there are two primary reasons for repricing: to generate revenue and to change consumer behavior to achieve public policy goals, such as public health and safety. However, there still exist huge differences among the ASEAN member countries in terms of excise taxation. This part of the paper will focus on excise taxation and use the example of tobacco to illustrate the main weaknesses in the current excise tax arrangements across Singapore, the Philippines, and Indonesia. 3.1 Tobacco
There are only five products in the ASEAN economic community, which are all subject to excise taxation: beer, wine, liquor, motor vehicles and tobacco (Hallerberg, 2013). This means that virtually all other products can be subject to excise taxation in country A, but not in country B, which may distort consumer incentives and possibly those of producers. However, even for products for which there are excise taxes in place across all ASEAN countries, such as tobacco, distortions are equally possible.
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Table 3: Excise Taxation of Tobacco in Three Countries Tax Rate as % of Retail Price Excise Tax Rate Tax Base for Domestic Products Tax Base for Foreign Products Singapore 69% SGD 0,32 per stick No domestic production Weight and type of tobacco product Philippines 53% PHP 12 or 25 per package (2 tier) Net retail price (before tax) CIF Indonesia 46% (avg.) IDR 80-380 per stick Production cost price Transaction value of tobacco product
Source: Southeast Asia Initiative on Tobacco Tax, 2012
3.2 Tax Base
As illustrated in Table 3, all countries differentiate their excise taxation between domestic and foreign products (except for Singapore, which does not produce tobacco). In the Philippines and Indonesia, the tax base for domestic products is lower than the tax base for foreign products. 15 This obviously generates an artificial advantage for domestic products. 16 What is more, the tax base also differs insofar as the excise tax rate is levied on different units (stick v. package). 3.3 Tax Rate
The actual tax rates also significantly differ across countries. The total tax rate is shown as a percentage of the retail price; see Table 3, which includes the excise tax, tariffs, VAT and other taxes. Some of these taxes are specific (excise tax) and others are ad-valorem taxes (tariffs, VAT), which complicate the process of excise tax administration in these countries. Excise taxes are a
15 Indonesia: production cost v. transaction value; Philippines: net retail price v. Cost, Insurance and Freight price, which is the net retail price plus these positions. 16 In Indonesia, cigarettes from other countries constitute merely one percent of all consumed cigarettes. Even though it is impossible to predict how large the share would be in a counterfactual situation, the described difference in excise taxation gives at least hints that this fact is related to the excise tax regime for cigarettes. !*
specific tax in all three observed countries, even though large differences exist. Singapore has by far the simplest model of levying SGD 0.32 on each cigarette stick, while the Philippines have a two tier system and charge either PHP 12 or PHP 25 per package. This specific tax is derived from the retail price for cigarettes in 1996 and has remained constant. Indonesia, however, implements a complicated multi-tier system with a specific tax amounting from IDR 80 up to IDR 380.
As the example of tobacco has shown, excise taxation across ASEAN member states varies substantially. Hence, distortions in consumer and producer behavior are likely to occur, particularly because of the removal of tariffs envisaged by the ASEAN 2015 integration process. Some observers project that this may lead to large flows of cheap cigarettes from producer countries such as Indonesia to other AEC member states. 17 This increases the necessity to standardize the tax base across countries, as it has been the case in the EU, for instance, and achieve a certain degree of harmonization in the tax rates.
4. REPRESENTATION
No taxation without representation is a famous slogan emanating from the United States that calls for the representation of the people on whom taxes are levied in the goal of generating government revenue and the delivery of public services. The ability to collect taxes is affected by several factors including political feasibility and the capacities of both the taxpayer and the tax administration agencies. For instance, political pressures from the executive power may put strains on tax collection especially if it favors certain sectors in exchange for political support or other vested interests. Also, the capacities of the personnel in the tax agencies are an important factor, which directly relates to the concentration of the tax officers, efficiency of the tax system, and to the
17 Southeast Asia Tobacco Control Alliance #+
level of cultural integrity and professionalism of the administration and its employees. This section seeks to address these issues in greater detail with a particular focus on tax administration capacities, tax procedure complexities, and the implementation of Semi Autonomous Revenue Authorities in Singapore and the Philippines as one approach to tax administration. It will also address the ongoing challenges associated with corruption and tax generation. 4.1 Tax Administration Capacities
As we can see in Table 4, the three countries present different capacities in their tax administration systems and have different ICT-integration levels. Many of the cross-country differences can be explained by different factors such as the average taxpayers ease of registration, which includes obtaining a tax identification number. For, instance in the Philippines, citizens are required to obtain a tax identification number prior to getting a drivers license. Other factors such as geographical considerations also play a role, especially in the case of the Philippines, which has more than 800 inhabited islands and Indonesia, which has more than 6,000 inhabited islands. On an economic level, tax registration in some countries can also require the payment of a fee which has the potential to be detrimental to the tax registration of the self-employed and actors in the informal sector should the fees be too prohibitive.
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Table 4: Tax Personnel Capacity and ICT Integration Personnel Capacity and ICT- Integration Singapore Philippines Indonesia Number of Tax Personnel 1,899 10,387 32, 741 Number of Tax Payers 3,800,000 18,900,000 19,112,590 Registered Taxpayers as % of Population 72% 18% 8% Can Register Online? Yes Yes Yes Can Pay Tax Online? Yes Yes Yes Can Pay Tax With Mobile Phone? Yes No No
Source: Own elaboration based on DGT Annual Report 2010 (Indonesia), BIR Annual Report 2012 (Philippines) IRAS Annual Report 2012/13 (Singapore).
As Table 4 illustrates, there are huge discrepancies in the number of government tax personnel across the three countries. However, analyzing the number of total tax personnel as a percentage of the total respective populations, each one-government tax employee deals with nearly 10,000 individuals in the Philippines, around 7,500 in Indonesia, and only 3,000 in Singapore. As these figures suggest, some tax administrations may lack the staff necessary to fulfill the job, irrespective of efficiency and or internal organizational structure. Taken a step further, a look at the number of registered taxpayers as a percent of the total population indicates that 72 percent of Singapores population is registered in the tax system. This is exceptionally high when compared to only 18 percent in the Philippines and 8 percent in Indonesia. Relatively speaking, the Philippines and Indonesia have significant potential to expand their tax base.
It is interesting to note that all three countries provide ICT technology for online registration and tax payment despite high levels of corruption in the cases of Indonesia and the Philippines, which will ##
be addressed in Section 4.1.3. In countries where corruption in tax administration is rampant, it can be argued that the use of computer technology, which generates a paper trail (Gordon Li, 2005), might encounter opposition. 4.2 Factors Affecting Taxpayer and Regulators
During the last decade, tax experts have started to realize that behavioral economics is a necessary component in order to better understand the conduct of taxpayers. The central contribution of this approach is to more clearly pinpoint the reasons for which some individuals pay their taxes and others do not. As a consequence, the possibility of increasing revenues by modifying to the managerial behavior can be a real option for Indonesia and the Philippines 18 .
The standard and most widely applied model of tax compliance considers that people will act as rational actors. Rational actors in the context of tax payment are those who seek to assess the costs and benefits of evading taxes in their decision-making process. This rational actor model however, has not proven to be effective in all the cases (Sanchez, 2011; Serra, 2005; Walsh, 2012). The deterrence model seeks to influence the behavior of rational actors and states that, if the expected benefits (less income lost to tax payment) outweigh the costs (the chances of noncompliant tax behavior being caught and the sanctions incurred) then the taxpayer will evade tax (Walsh, 2012). Therefore, approaches based only in increasing the possible sanctions of evading taxes or the difficulty of dodging them is not necessary sufficient. Walsh (2012) discusses five factors that impact compliance with tax payments: norms, fairness and trust in tax administration, complexity of the tax system, broader economic and social factors, and interaction between factors each of which will be addressed in greater detail below.
Norms have in an important impact on individual behavior. Wenzel states that ethical concerns appear to be based on the internalized social norms of the reference group, and tax ethics motivate
18 Singapore has introduced several reforms in this direction. #$
taxpaying behavior. Conversely, ethical concerns as well as perceptions of social norms are influenced by an individuals engagement in tax evasion (Walsh, 2012; Sanchez, 2011) 4.2.1 Tax Procedure Complexities
For many people, tax is a complex subject and this complexity has been shown to contribute to non-compliance (GAO, 2011) (Walsh, 2012). Walsh (2012) and Sanchez (2011) propose that lazy non-compliant taxpayers would pay if the process were easy. Therefore, if tax agencies de- complicate the tax paying procedures, then taxpayer behavior will change towards greater compliance. Nevertheless, it is not only about simplifying laws and regulations, but also bring about direct assistance to the taxpayer in order to address instances of unintentional non-compliance due to lack of knowledge or understanding of the tax system.
If we analyze the case of the three countries in terms of complexity, the view appears to be very different between them. In Indonesia, on average, it requires 259 hours for a standard firm to prepare and file their taxes within on calendar or fiscal year. In contrast, in Singapore, the same process only takes 82 hours. The number of times that a firm has to file and pay taxes differs between the countries, in Singapore the mean is 5 times a year, while in the other two countries it is more than 35 times (PwC, 2014). As a result, compliance is expected to be higher in Singapore than in both the Philippines and Indonesia.
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Table 5: Tax Performance 2014
Source: Own elaboration based on PwC, 2014
4.2.2 Economic and Social Factors
In tax administration literature, there is a call for considering the context and specific situations of firms and individuals (Walsh 2012, Torgler 2004-05). At a macroeconomic level, elements that promote growth also encourage tax compliance. In addition, higher tax rates are correlated with evasion if they promote taxpayers to move to the shadow economy (Walsh, 2012). 4.2.3 Corruption Perception and Trust-based Approach
In Singapore, Philippines, and Indonesia corruption plays a role in the ability of each country to generate tax revenue. Singapore ranks 5 among all the countries in the Corruption Perception Index, the Philippines ranks 94 and Indonesia ranks 114 (see Table 6), which can affect the willingness of the taxpayers to comply with tax rules. As a matter of fact, Torgler (2004-05) states that tax morale is inversely correlated with the perceived size of corruption.
Philippines Singapore Indonesia Overall ranking (1- 183, 1=highest) 131 5 137 Frequency of filing and paying Tax 36 5 52 Number of hours it takes to prepare taxes 193 82 259 #&
Table 6: Comparative Corruption
Global Corruption Barometer 2013 Singapore Philippines Indonesia Corruption Perception Index (0-100, 100=cleanest) 86 36 32 Corruption Perception Index Rank (1-177, 1=highest) 5 94 114 Source: Own elaboration based on Transparency International, 2013.
On the other hand, the Global Corruption Barometer in 2013 found that in Indonesia, 71 percent of the population perceived that the level of corruption increased from the previous year. Though in the Philippines only 31 percent felt the same way (Transparency International).
Another factor that impacts the probability of paying taxes is the perception of fairness. Norms and the drive to pay taxes are influenced by this variable (Walsh, 2012). If taxpayers do not trust tax administration to collect taxes fairly, this will increase non-compliance (Torgler, 2004-05; Carasciuc, 2005). Walsh (2012) discusses three types of fairness in taxation: distributive fairness or the perception that government acts as a wise spender of tax revenues; procedural fairness or the belief that tax organization adheres to processes that are fair in dealing with tax payers; and retributive fairness or how fair the official agency is when punishing rule-breaking behavior. The two last points are more related with tax agencies.
Another important consideration is the engagement of individuals in alternative political technologies, such as bribery, when the institutions are weak, which erodes the citizens trust in their government. In the context of tax administration authorities, 7 percent of the population in the Philippines has paid a bribe to a tax officer. In Indonesia only 6 percent have. Moreover, in the #'
Philippines 10 percent have paid a bribe to a judicial officer and 14 percent to registry services; 19
meanwhile, in Indonesia 66 percent of people declared to have bribed a judicial officer and 37 percent registry and permit services officers. (Transparency International, 2013). There is no information about Singapore on these factors. 4.3 Paradigms for Tax Compliance The above-mentioned factors converge at different stages in tax administration and implementation and it is their interaction that contributes to the willingness of taxpayers to comply at the individual and collective level.
An example of how these dimensions can be combined is illustrated by the tax compliance strategies in Chile and Argentina in the 1990s. As depicted in Figure 5, Indonesia 20 has largely adopted a similar approach to Chiles, which relies on a trust-based approach. While in the Philippines, the adopted model is very similar to Argentinas approach of name-and-shame campaigns, see Figure 6.
19 These percentages are self-reported. Therefore, it has to be expected that reality could present higher rates of bribes. 20 Dissemination and education activities carried out in 2010 are as follows in Indonesia: interactive radio talk show, information through national TV, publishing of childrens storybook, development of online site for DGT library book catalogue. #(
Figure 5: Tax Compliance Campaigns, Indonesia and Chile
Carrot Style Approach
The Chilean Tax bureaus (Servicio de Impuestos Internos) strategy was first to improve its methods through gathering, managing, and analyzing data on tax collection which were also used to improve the quality of its services. They did this primarily by constantly professionalizing the quality of their human resources. In the 1990s, a full merit-based system of recruitment and promotion was installed. Other measures were bringing salaries in line with market levels, implementing constant training courses, and installing a zero tolerance policy on corruption (politicization was considered also a breach). From the perspective of the provided service, this agency implemented periodical surveys to indicate where service improvements were necessary. For instance, results were gathered on the time required to complete tax obligations and the level of attention and service provided by officers. Another measure against evasion was to improve transparency in the allocation of public expenditure. These measures aimed to increase the publics trust in the Tax Administration Bureau and to promote the collaboration of taxpayers. All these reforms, among others, impacted VAT evasion levels increasing revenues from around 30 percent in 1990 to 18.3 percent by 1993. It also enabled the total estimated share of tax evasion to remain #)
fairly stable at 23 percent of theoretical tax collection through 1995 (Walsh, 2012; Servicio de Impuestos Internos, 2014).
Figure 6: Tax Compliance Campaign in the Philippines
Stick-Based Approach
On the other hand, Argentina adopted the typical stick based approach to address their tax evaders. Their strategy was based on the improvement of the agencys legal, political, and technical tools. However, they omitted the necessary reparation of citizens trust and the construction of administrative capacity. For instance, they adopted, at the beginning of the 1990s, an aggressive public campaign to intimidate tax evaders by letting them know that the Federal Tax Bureau had more tools than before to penalize and pursue them. The phrase of the Argentinian Undersecretary of Public Revenues, Carlos Tacchi, illustrates the spirit of that period I promised God to crush tax evaders (El tiempo, 1995). As a matter of fact, they created a group of officers, Los Intocables, which investigated large taxpayers. This method produced successful results between 1991 and 1993 decreasing total estimated tax evasion by 30 percent. However after 1998 tax evasion levels returned to pre-reform standards (Walsh, 2012).
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Walsh (2012) and Sanchez (2011) postulate that a service and client formulation by tax administrations is more probable to encourage trust than a cops and robbers approach based on sanctions. 4.3 Semi-Autonomous Revenue Authorities
Semi-autonomous revenue authorities (SARAs) perform tax collection for the central government but have features that distinguish them from other tax collection agencies. SARAs enjoy autonomy from centralized executive power, which shields them from direct political influence. However, they are not as autonomous as a central bank. Moreover, SARAs have independent financing and personnel rules that usually govern the public sector, which means that they may not be part of the budget appropriation cycle in that they fight for annual allocations. They are also not subject to the hiring and firing rules of the central civil service authority. Lastly, SARAs are single-purpose agencies where all the tax functions are integrated and all tax collection is centralized as opposed to being located inside the ministries of finance where they are separated into departments and function as separate entities. The SARAs across the world vary in each feature and may also operate differently as their supposed level of independence may only exist on paper.
In general, SARAs assume tax collection under their jurisdiction and move away from the central powers of the ministry of finance. SARAs are established with two objectives: increase tax revenues and increase the authority of the central state. The public justification for the presence of SARAs are: 1) signaling political autonomy, indicates to the taxpayer that the power to tax will not be abused; 2) creating managerial autonomy serves as a means of establishing a team with excellence capabilities; and 3) facilitating reform makes the implementation of reforms in tax administration easier. Nevertheless, it has not yet been proven that SARAs improve tax recollection or the systems efficiency (Fjeldstad & Moore, 2009).
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Singapore and Philippines have adopted SARAs into their tax administration system yet still receive supervision from their respective governments (Asian Development Bank, 2012). This suggests that although these entities exist they in fact do not operate in an autonomous fashion. Meanwhile, tax collection in Indonesia directly depends on its Ministry of Finance and thus no such independent agency exists.
5. ORGANIZATIONAL FRAMEWORK
Before proceeding to Section 6, Recommendations, it is necessary to establish a framework of the political feasibilities and organizational changes. Andrews (2013), on which the following section is based, provides a detailed look at several fundamental concepts and approaches that provide insight as to how best to enact administrative reform and ensure on-the-ground implementation. 5.1 Isomorphism
One important consideration as to why many reforms fail is that countries commonly adopt reforms to signal intent rather than commit to change (Andrews, 2013). For example, the adoption of the double taxation agreements, the signing of the UN Convention Against Corruption, and the passage of certain laws to comply with international agreement requirements have to be put under strict scrutiny within this framework. First, the adoption of reforms may fail to take into consideration the degree to which context matters. Second, reforms may promote interventions that are too content specific and demanding for some countries. Lastly, these reforms may be entered into by specific agents and or single individuals, rather than a collective bottom-up groups, and therefore they cannot ensure implementation (Andrews, 2013). The danger of these types of reforms is that this only leads to change at the margins, which is visible to the outside world, but is actually irrelevant to changing the core operations that aims to make government function better. In the context of ASEAN reforms such as double taxation agreements, whether bilateral or multilateral, must be $!
implemented with country-specific feasibility in mind. As an example, Global Integrity shows many developing countries with legal systems can compete with the developed countries in anti- corruption law, which includes the Philippines and Indonesia. However, when their implementation is evaluated, there are ranked comparatively low, signaling a meaningful disconnect (Andrews, 2013). 5.2 Champions vs. Distributed Agents
Institutional reforms are often carried-out by champions, or individuals from the top political strata. Such individuals are usually within the executive power. However, reforms that are brought by champions are usually regarded by the other agents as programs of the central government only, which are too far removed from reality. This is because champions who are mostly politicians lack the professional affinity required to understand the value of new information. Therefore, it is important to rely on distributive agents as they work at the frontline of tax collection, which often remains opaque to the outside world and where changes are more difficult to implement (Andrews, 2013). This requires problem-driven analysis to understand the informal institutions, the norms, customs, values, and cognition of the officers who are tasked with implementing the reforms and why at the grassroots level, the changes are not often made. 5.3 Problem-driven Learning
Problems are the windows to the opaque parts of an issue and give light to the realities on a level that may be too far away from the central government or external actors. Thereby problem-driven learning, provides a certain degree of flexibility with regards to the solutions adopted through a combination of formal and informal reforms. By understanding the problems on the individual level, this study strives to consider the behaviors, psyche, and cultural-cognitive structures that permeate the tax administrative systems in Singapore, Indonesia, and the Philippines.
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In order to address these issues, the following questions serve a constructive starting-point: why are the tax collectors not enforcing compliance among the informal sector? Why dont running micro-, small- and medium-enterprises declare earned income? Why do people bribe tax officers less and bribe judicial officers more? The seemingly obvious things are not as what they appear to be and the rigid application of copied laws on a highly specific context would only produce meager results. 5.4 Broader Agent Engagements
Andrews (2013) purports three lessons for purveyors of externally influenced institutional reforms in the development context: First, instead of focusing on the lone champions, reformers should establish broad-based engagements. Second, instead of emphasizing agents who provide authority and ideas, reforms should cultivate mobilizers, motivators, conveners, and connectors. Third, external agents themselves should be aware of the limited roles they can play in facilitating institutional change and play these roles as effectively as possible.
It is important to consider that leaders of reforms are needed at different stages of the reform process. For example, leaders who provide formal authority are important at the start of the reform, but are less so during the implementation phase. Leaders who convene and connect actors relevant to the reform are of particular importance during the implementation stage (Andrews, 2013). In fact, these conveners and connectors accounted for more than 25% of the identified leaders at both the start of the reform and in its implementation (Andrews, 2013). Mobilizing is an essential leadership function in any and all institutional reforms. There are three approaches identified by Silvia Dorado, which are integral to change. These approaches are leveraging, accumulating, and convening. Identifying who these actors are in the respective countries and the stage at which they are needed in the reform process are critical for success.
The importance of this discussion is that external agents do not provide the primary leadership in defining problems or ideas. This must originate from local agenda-setting (Andrews, 2013). $$
External agents are not a source of authority and do not bring implementation know-how according to recent studies. By contrast, their primary role is to provide initial financing (Andrews, 2013). This nevertheless, does not necessarily equate to wielding broad influence. However, externals agents can develop on-the-ground capacity by stationing representatives in the concerned countries (Andrews, 2013).
Ultimately, it is through domestic problem identification and national ownership of reforms that governments and its citizens can truly embrace and ensure the changes they deem important.
6. POLICY RECOMMENDATIONS
The 2015 AEC deadline is quickly approaching. Integration steps are undoubtedly moving in the right direction, yet many obstacles remain spanning internal politics, economic development, and historical and cultural heritage. The following section outlines recommendations specific to the four R model of the study: Revenue, Redistribution, Repricing, and Representation. 6.1 Revenue 6.1.1 Tax Composition
CIT: As a primary starting point, this study recommends the harmonization of the upper and lower bounds of CIT rates across the region. Such a coordinated tax strategy will stimulate the growth of total ASEAN-wide FDI and strip foreign firms of the ability to shop for the most advantageous CIT rate and engage in transfer pricing schemes to the same extent as today. This strategy will, combined with our recommendations for administrative reforms, also broaden the tax base and improve compliance. $%
VAT: This study also recommends the harmonization of the upper and lower bounds of VAT as the use of this indirect tax is growing in importance as countries seek to offset declined revenue from corporate income. 6.1.2 Shadow Economy
As outlined in the Revenue part of this paper, the main assumption with respect to untaxed economic activity is that many individuals are not paying taxes because of administrative failure and the complicated system without assistance. What is more, it is important to recall that Indonesia and the Philippines are states formed by over 6000 and 880 inhabited islands, respectively. If we combine this fact with the notion that filing of tax records is a daunting task in these countries and oversight as well as assistance is rather weak, the problem of the shadow economy could be substantially reduced by simply making paying taxes less cumbersome to the average person. Approaches on how to go about administrative reforms will be outlined in more detail below.
However, when considering the voluntary part of the shadow economy, making compliance easier will not solve the problem. Yet, again, the prosecution of tax evasion or the enforcement mechanisms in general can be assumed to be either very costly or very inefficient, due to the disbursed geographical features of the countries. A possible, but controversial method to reach all islands simultaneously would be inflation. The shadow economy is cash-based, which means it is highly sensitive to inflationary pressure. The opportunity costs of not being in the real economy thereby increase, as the formal economy hedges against inflation through the interest rate channel (Gordon, Li 2005). If banks are forced to reveal details of their clients transactions to the state or at least report suspicious patterns of monetary flows (Gordon, Li 2005), the shadow economy could be substantially reduced by the combination of these two measures but at the cost of higher inflation, which may cause long-term economic growth to suffer. With regard to this proposal, the political feasibility must also be considered. As the Central Banks mandate in both countries is price $&
stability, central bank officials may not support a voluntary increase in inflation to combat the shadow economy. However, depending on how close the political ties between government and central bank are, this approach should still be considered a policy option. 6.1.3 Foreign Direct Investment: Coordination and Transparency
Although FDI rivalries will likely remain, it will be imperative that ASEAN members design strategic and comprehensive approaches to FDI attraction. Initiatives designed to increase FDI policy transparency, streamline business processing times, reduce business startup costs are important initiatives. The development of an internet information portal for FDI activities across the region would not only significantly increase transparency but also allow for the inclusion of stakeholder communication with key business players. Such an approach would also enable the promotion of an ASEAN brand for potential external FDI stakeholders. A recent survey conducted by the ISEAS-ADB has concluded that there continues to be a general lack of awareness regarding the AEC, which places the economic integration of the region at a significant disadvantage (Bhaskaran, 2013).
Furthermore, coordination of withholding taxes should be addressed so as to reduce the wide discrepancies between effective corporate tax rates in the ASEAN region. This is particularly relevant in incentivizing investment and the movement of labor, capital, and services. 6.2 Redistribution
Labor mobility and the general trend to rely more heavily on indirect taxation can have redistributive consequences. As a result, this study recommends raising awareness of this fact among the respective tax authorities, legislators and other parties involved in the process of redesigning tax policies in light of AEC 2015.
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As research has shown, the regressive character of VAT cannot be abolished by tax exemptions or cascading taxes (Keen, 2013). However, a closer look at the goods and services exempt from VAT in Indonesia shows that many products not relevant to the poor are exempt from VAT, such as meals in restaurants and hotels or the sale of gold ingots (KPMG 2012). A sensible solution towards a more equitable VAT structure in this country would thus be the elimination of the tax exemptions for products, which clearly benefit certain industries or wealthier parts of population.
However, some experts also stress that it would be even more beneficial to remove VAT exemptions altogether and provide direct transfers to poorer parts of the population. Yet, due to the administrative difficulties and political infeasibilities of this approach, this study proposes of the removal of VAT tax exemptions for goods primarily consumed by upper parts of society.
6.3 Repricing
As outlined in Section 3 of this paper, excise taxation is a major issue in the AEC integration process. This study suggests a two-step process to achieve an excise taxation framework, which will prevent economically harmful distortions in consumer and producer behavior: First, standardization of the tax base is essential. Even though the EU is not a model in many respects when discussing reforms in ASEAN tax issues, the establishment of common standards in terms of taxation is generally considered a good solution (Hallerberg, 2013). This first step can be assumed to be rather politically uncontroversial, and a multinational framework or international agreement on common standards could be achieved without major political resistance. The second step would then be the harmonization of excise tax rates across country. This study recognizes the difficulties associated with this recommendation, as the setting of the tax rates remains one of the most important national competencies that member countries are unlikely to surrender. However, in the light these challenges, should standardization of the tax base be achieved, a certain degree of excise tax $(
harmonization might still be possible. One solution could be to install an upper and lower bound for excise taxation for certain products in order to limit the distortions caused by large differentials.
6.4 Representation
6.4.1 Tax Compliance Program
Different types of taxpayers exist as a result of their knowledge of the rules and their willingness to comply with tax regulation, all of which are affected by the different factors discussed in Section 4. It is recommended that these factors are considered in the creation of an effective tax compliance program, which integrates an awareness campaign based on trust as exemplified in the Chilean and Indonesian example.
Simplification of tax procedures, which reduces transaction costs should be adopted coupled with ICT integration, which could also address the lack of tax administration capacities in the Philippines and in Indonesia. However, it is important to consider that the political feasibility of adopting a measure that includes ICT may face challenges as well because of the entrenched norms and practices among tax collectors who would not be amenable to altering practices either because of lack of training in using the available technology or because of resistance to having a digital or paper trail, which could also be linked to the issues of corruption as discussed.
Another example to facilitate tax compliance is to provide free assistance to taxpayers in filling out the correct tax return and providing information on different issues related to taxes. The Taxpayers Advocacy Panel (TAP) in the US can be taken as an example. It was established in 2002 after only very few individuals approached the Taxpayers Advocacy Services (TAS) composed of lawyers and accountants offering free of charge services. It was decided that volunteers from the ordinary public who are knowledgeable in filling out tax returns and filing may be more effective in facilitating $)
assistance to the average taxpayer. Since 2002, there are about 70-100 volunteers who provide between 300-500 hours for a term of 3 years to taxpayers. They are not paid, except for per diem when they travel to different states (2011 TAP Annual Report). TAP receives around 500 applications for volunteers and the applicants go through rigorous interviews. Although each volunteers term expires every 3 years, former volunteers continue their services outside TAP where they can charge a small amount for their help to their previous clients. Some volunteers maintain blogs, Facebook pages, and websites where citizens contact them. 21 This provides the IRS a solid group of experts outside of the formal framework IRS and helps citizens in filling out their tax returns. It can be argued that the small number of volunteers in this program significantly undermines the extent to which it can serve as a broad-based tool nation-wide. However, should attracting volunteers be the root cause of the programs low level of civic engagement, this study recommends appealing to the publics sense of community through the establishment of regional tax information hubs. This may generate greater volunteer participation as it is more accessible and joins together members of the same social community.
Lastly, this study recommends updating the ASEAN tax treaties, but suggest that there should be an agreement as to the model of the framework to be adopted in the updated treaties. Institutionalizing a coordinating body for the different agreements in the AEC, like the ASEAN Integration Monitoring Office, is desirable. But it is important to consider the reasons why the existing treaties have not been updated in the last 15 years. This can be influenced by intra-ASEAN trading, which, as measured as a percentage of total trade, is comparatively low (GIZ, 2013).
21 List of names of volunteers are published at the TAP website http://www.improveirs.org/tap-members/. $*
6.4.2 Transparency and Accountability
Corruption is one of the major challenges in the Philippines and Indonesia as it relates to informal economic activity, tax compliance, capacity building, and the lack of resources spent on tax administration. Corruption might also be entrenched in the political system, leading to certain sectors being not taxed or enjoying tax incentives. However, we can draw answers from Indonesias experience in fighting corruption through their Corruption Eradication Commission (KPK), which was created in 2003. This was modeled after Hong Kongs Independent Commission Against Corruption (ICAC), but the KPK is unique in a sense that its creation was specifically tailored to the experiences in Indonesia. It developed a problem-driven framework, which considers not only the context of Indonesia but also options, which are politically feasible (Andrews, 2013). However, with Indonesias 2013 ranking in the Global Perception Index and the percentage of the population that believe corruption to have increased, KPK still has much work to be done. Nevertheless, such an initiative could also be pursued in the Philippines, which also suffers from comparatively high levels of corruption in its tax administration.
Improvement of the tax administration office is also important not only in professionalizing the personnel, but also establishing performance management mechanisms where targets are set not only for tax collection efforts, but also for human resource management. Chile provides a good example of strategies to simultaneously improve tax capacities while building trust with the taxpayers and serves a good model for the case of Philippines.
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