How developing Asia can better fight tax evasion

Published on Friday, 15 April 2016

Published by Yuji Miyaki on Friday, 15 April 2016

ADB is helping improve the Philippines' tax collection capacity.
ADB is helping improve the Philippines' tax collection capacity.

The release of the so-called Panama Papers has highlighted the vast and many deficiencies in the tax and regulatory systems in many rich countries.

Developing countries, including those in Asia, are also struggling to strengthen their tax systems—and counter tax evasion—but here the stakes are even higher because without higher revenues, governments can’t pay for fundamental needs like basic infrastructure to keep their economies ticking, build schools and hospitals, or fund social security systems needed as populations age. It is also about designing a tax system that matches society’s views on reducing inequality and promotes inclusiveness, good governance, investments, job creation, and social justice.

According to a December 2015 report by Global Financial Integrity, Asia accounted for 38.8% of the estimated $7.8 trillion that developing countries lost due to illicit financial outflows in 2004-2013, and as a whole region Asia’s ratio of national tax revenue to GDP is among the lowest in the world – about half that in Europe and lower than Africa and Latin America.

In practice, the revenue productivity of a tax can be reduced by policy design choices that may deliberately cut tax revenue potential (for example, raising threshholds at which tax must be paid or VAT exemptions) and the incidence of taxpayers’ non-compliance that is not detected by the revenue body.

The alleged transactions from developing Asia included in the Panama Papers have also put the spotlight on how tax evaders in the region often take advantage of weak taxation capacity to hide their wealth from governments. Cumbersome taxpayer registration systems, inefficient tax collection systems, low taxpayer morale and compliance, corruption, a small tax base, and the absence of a reciprocal link between tax and public and social expenditures all further undermine revenue collection in developing Asia.

Authorities in developing Asia have responded; Bangladesh, India and Indonesia are already investigating their own citizens named in the documents, and other Asian countries are expected to follow suit. But even before the latest revelations, tax authorities in developing Asia were already working on better ways to counter international tax evasion schemes and boost domestic tax revenues. They have been increasingly aiming to strengthen their international networks and capacity to obtain relevant information from taxpayers, including from financial institutions, and to exchange information with foreign tax authorities.

ADB has been supporting these efforts in the region. Two years ago, we launched a technical assistance program financed by the Japan Fund for Poverty Reduction to strengthen the tax collection capacities of ADB’s developing member countries by encouraging more cooperation between national tax authorities and across countries, and training inspectors and auditors.

All the participating countries are members of the Study Group on Tax Administration and Research or of the Pacific Islands Tax Administrators Association, regional cooperation forums for tax authorities. Given they face common challenges of underdeveloped national taxation systems against the backdrop of a rising risk of tax evasion as economies expand, information sharing is helping spread best practices and build understanding of cross-border tax evasion schemes.

One key lesson learned from working with the tax authorities under the technical assistance program is that transparency is crucial.

We recognized the importance of building regional networks to cooperate and share information and intelligence on the nature of the tax crime threats—in particular in banking, construction, extractive, fishing and logging industries—and to investigate specific cases. This is already being promoted in legal and regulatory frameworks by the OECD and the Global Forum on Transparency and Exchange of Information for Tax Purposes, both of which admit the problem of capacity development but lack the resources to train Asian tax officials on why they should adopt transparency standards and how they can implement them.

Asian tax authorities must also start sharing knowledge and insights  with all countries around the world, for instance through the Financial Action Task Force, an intergovernmental anti-money laundering and anti-terror financing body which in 2012 introduced serious tax crime as an offense which may lead to  money laundering or terrorist financing.

Finally, it is particularly important that developing Asia’s views are adequately reflected in the process of reviewing international taxation rules. Creating and updating international standards on taxation must become a more bottom-up instead of top-down process. Multinational enterprises are operating actively in developing Asia, and addressing cross-border tax avoidance and evasion is critical for the region’s tax authorities. However, tax administration capacity on international taxation is still weak in developing Asia, and the revision of international taxation rules should take into account this implementation capacity gap.

Tax evasion is a global problem, and Asia’s developing countries are certainly not immune from it. The scandal of the Panama Papers has underscored the need to strengthen the capacity of local and regional tax systems not only to combat tax evasion, but also more generally so governments can truly build strong and resilient economies that provide opportunities for all their citizens.