By Holly Reeves
The explosive revelation of the Panama Papers through headlines across the world has made tax avoidance – and who’s guilty of it – a red-hot topic. But what does tax avoidance mean for ASEAN and its people, in real terms?
According to estimates by the United Nations, closing tax gaps for companies and individuals in 16 Asia-Pacific developing economies – including Thailand, Indonesia, Malaysia, Philippines and others – will increase the amount paid into the wider region’s coffers by more than $300 billion.
This alone would boost tax revenues by up to 40% in some ASEAN countries. That’s cash for roads, hospitals, schools, and other vital public services or economic stimulus to support the growth-led Southeast Asia region.
ASEAN governments recognise this, but what can they do?
Meeting in Laos this week the bloc’s finance ministers reiterated the need for regional cooperation on lost income via the specially-formed ASEAN Forum on Taxation. The problem is that at the national level, ASEAN is beset by a combination of self-assessment systems, based on largely voluntary taxpayer registration, and limited inspection with incomplete auditing procedures.
This allows cash that should be paid in taxes to fall readily through the gaps. Add this to the desperate need to improve information-sharing between national tax authorities, so that money trails across borders can emerge, and you start to see the problem.
Indonesia and “paper companies”
In countries such as Indonesia, for example, the government says it lost 200 trillion rupiah ($15.6 billion) in corporate tax in 2015 thanks to transfer pricing, mainly in the commodities sector. This is where companies that are part of the same multinational group trade components with each other across national borders, via subsidiaries, to take advantage of whichever country has the lowest tax rate.
And that’s just one taxing issue for the Indonesian government. Looking back to the leak of the Panama Papers and all the details of tax havens that they contain, there are certainly some high-profile Indonesian names listed.
“I have told the tax office to study the data in the Panama Papers,” explained the country’s Finance Minister Bambang Brodjonegoro. “We will confirm the data that we have now with the documents or use them complementarily.”
The government also claims to already have lists of “paper companies” which allow Indonesian nationals to channel money through tax haven countries. These lists are currently being reviewed, Brodjonegoro says.
Although a good example, Indonesia is not alone in these multiple tax challenges.
With the exception of Malaysia and Singapore, respected global auditing firm KPMG says ASEAN countries have historically lacked anti-avoidance legislation. Their annual Asia-Pacific Tax Report explains that “certain states are beginning to introduce transfer pricing regimes, controlled foreign corporation rules, and thin capitalization rules, but, on the whole, there remains scarce protection in specific anti-avoidance measures.”
Tax justice, ASEAN-wide
The meeting of finance ministers in Vientiane this week is calling for action, because there are wider issues for the ASEAN Community and how it works, beyond the loss of national revenues.
The first is competition, where without common arrangements, governments may compete to give reductions on corporate tax rates to attract foreign investors. This allows multinational companies to effectively shop around to get “the best deal” – shortchanging the rightful public purse in the process. This is one downside to the economic integration process.
With an easier movement of profits and capital comes an increased ability for taxpayers to structure investments to best take advantage of favourable tax rates and regulations. Without specific anti-avoidance measures there are concerns ASEAN governments may increasingly find themselves victims of tax abuse.
“Ultimately, this is about more than just tax dodging. It is about what type of regional and global community we hope to be, said the chairperson of ASEAN Parliamentarians for Human Rights, Charles Santiago, a lawmaker from Malaysia.
“As the ASEAN integration process continues, safeguards must be put in place to ensure that the benefits are broadly felt and that elites are not able to abuse the system for their own personal gain. We must have a broader conversation about tax justice region-wide. We need to focus on creating an ASEAN Community that works to combat, rather than enable, the kind of unscrupulous behavior revealed by these leaks,” Santiago insists.
The second reason to expect more dynamism in ASEAN tax policy in the future is that regional integration leads to increased inter-regional trade. This in turn provides lower incomes for national authorities who feel the pinch of lower customs rates as economies move closer together.
This process will likely exert pressure on national budgets and increase the need for cooperation on the tax side in the future. Development and integration projects are expensive, and opportunities to fund them precious. As the ambitious ASEAN Economic Community (AEC) blueprint takes root, mobilising this “lost” tax revenue will become increasingly appealing.
Lost tax dollars, lost new opportunities
But why the delay? Many smaller states simply lack the resources or knowledge to introduce complex tax laws. However, with a growing focus on attracting investment across the ASEAN bloc and the current intense spotlight on tax morality, we should expect anti-avoidance measures to be a hot topic across the region as the political agendas develop.
In fairness, there is no easy answer for the problem of tax avoidance, either among ASEAN countries, or worldwide. The foundations of legislation are already in place to combat corporate tax-dodging in many Southeast Asian countries but the challenges for the region are instead in the lack of prosecution, or even investigation, of criminal tax offences. And even more important than this is creating awareness of the vital role of taxation for shaping a State and its development.
The hundreds of billions of dollars lost in tax in Asia-Pacific every year could go a long way to building new opportunities, new cooperation and new futures for the people of the region. Is that an opportunity ASEAN can afford to waste?