Mapping Taxation in Selected Asian Developing Countries

Summary Report

Imprint The International Tax Compact (ITC) is an international development policy initiative to fight against tax evasion and inappropriate tax practices in developing countries. The German Federal Ministry forEconomic Cooperation and Development (BMZ) has launched the initiative and commissioned GIZ and KfW to support the implementation.

Commissioned and supervised byDeutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH on behalf of the Federal Ministry for Economic Cooperation andDevelopment (BMZ)

Published byDeutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Roland von FrankenhorstHead of Sector Project International Tax Compact (ITC)Dag Hammarskjöld Weg 1-565760 EschbornT +49 6196 79-0F +49 6196 79-801639I www.giz.de

AuthorsWolfgang BüttnerDr Barbara DutzlerDr Ute EckardtMark HallerbergDr Michael KobetskyDr Hyun- Ju KohProf. Dr Victor van KommerNina KorteBart KostersUdo LautenbacherDr Anke ScholzJana SeehofAstrid TemplinBruno Webers

compilation: Dr Ute Eckardt

Design and layout Gudrun Barenbrock, Cologne

PhotosPage 5/1-3, 51, 64: Bruno WebersPage 5/4, 34, 42, 56: Ute EckardtPage 8: Udo LautenbacherPage 16, 20: Nina KortePage 64: Gudrun BarenbrockPage 65/1-5, 66/1-5, 67/1-2, 4-5: privatePage 67/3: Fotostudio Knipper, Jena

Bonn, December 2013

Mapping Taxation

in Selected

Asian Developing Countries

Identification of experiences and lessons to learn in six Asian countries

Summary Report

final version:December 2013

Table of Contents

Executive summary 8

1. Introduction 16

2. Overview of the tax systems 20

2.1 Regulatory conditions 21

(a) Legal framework 21

(b) Major taxes 22

(c) Case Study: Legal framework for 23

combating tax evasion and avoidance

(d) Tax incentive schemes 24

2.2 Distributive effects of the tax system 27

2.3 The political economics of taxation 28

(a) Governance framework conditions 28

(b) Financial control of tax issues 31

(c) Drivers of change 33

3. Tax administration 34

3.1 Organisation of the institutions 35

3.2 Status of main business processes 37

3.3 Human Resource Capacities 41

4. Regional cooperation and coordination on tax issues 42

4.1 Tax Matters in the ASEAN regional integration process 43

4.2 Tax treaty network 45

4.3 ASEAN Forum on Taxation 47

4.4 Other fora of interchange

(a) Study Group on Asia Tax Administration and Research 49

(SGATAR)

(b) Other regular events 49

5. Donor support and coordination 51

6. Conclusion and recommendations 56

Annexes 62

table of contents | 3

Boxes, Figures and Tables

Box 1: The huge flood – tax measures 26

Box 2: The difficult political economy of tax reform, 32

an example from the Philippines

Box 3: Tax potential in Indonesia 36

Figure 1: Tax to GDP ratios for 2010 22

Figure 2: Shadow economy estimates (as % of GDP) 30

Figure 3: Intra-ASEAN trade in 2009 (as % of total trade) 44

Figure 4: DTA Network of ASEAN Members (Oct. 2011) 46

Figure 5: Age profile of intra-ASEAN DTAs 46

Figure 6: ODA and Investment flows 2010 52

Figure 7: ODA and tax ratio 2010 53

Table 1: Legal frame to combat tax evasion and avoidance 23

Table 2: Regional comparison of WBGI in 2010 29

Table 3: Corruption Perception Index 2011 29

Table 4: Population, tax administration staff and registered taxpayers 35

Table 5: Ratings of tax indicators in PEFA-reporting 38

Table 6: Tax treaties among ASEAN countries 45

4 | table of contents

page | 5

6 | acronyms and abbreviations

Acronyms and Abbreviations

ADB Asian Development Bank

AFT ASEAN Forum on Taxation

AFTA ASEAN Free Trade Agreement

APTF Asia-Pacific Tax Forum

ASEAN Association of Southeast Asian Nations

AIPA ASEAN Inter-Parliamentary Assembly

ATAF African Tax Administration Forum

BIR Bureau of Internal Revenue

BMZ Bundesministerium für Wirtschaftliche Zusammenarbeit

und Entwicklung

CIAT Inter-American Center of Tax Administration

CMLV Cambodia, Myanmar, Lao PDR, Vietnam

DoF Department of Finance

DTA Double Taxation Agreement

EC European Commission

EU European Union

FDI Foreign Direct Investment

GDC German Development Cooperation

GDP Gross Domestic Product

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

IAI Initiative for ASEAN Integration

IMF International Monetary Fund

IOTA Intra-European Organisation of Tax Administrations

ITC International Tax Compact

KfW German Development Bank

MoF Ministry of Finance

NORAD Norwegian Agency for Development Cooperation

ODA Official Development Assistance/Overseas Development Assistance

OECD Organisation for Economic Co-operation and Development

PD Paris Declaration

PEFA Public Expenditure and Financial Accountability

PFM Public Financial Management

acronyms and abbreviations | 7

PHP Philippine pesos

PI Performance Indicator

SAI Supreme Audit Institution

SGATAR Study Group on Asia Tax Administration and Research

TA Technical Assistance

THB Thai Baht

TIN Taxpayer’s Identification Number

UK United Kingdom

US United States

USD United States Dollar

VAT Value Added Tax

WGI World Wide Governance Indicators

Executive Summary

executive summary | 9

The ITC is an initiative to strengthen international cooperation with developing and

transition countries, with the objective of enhancing domestic resource mobilisa-

tion. Since 2009 the ITC has worked as an informal and action-oriented platform

for dialogue and the exchange of experiences in order to promote effective, fair and

efficient tax systems and combat tax evasion and inappropriate tax practices on a

global scale.

The present report summarises the findings from six country studies: Cambodia,

Indonesia, Lao PDR, the Philippines, Thailand, and Vietnam. The six ASEAN

countries in our sample are extremely different in terms of their political systems

and economic situations, as well as their historical and cultural backgrounds.

Consequently, they mirror the enormous task that the ASEAN has set itself with the

goal of merging into the ASEAN Economic Community (AEC) by 2015. The AEC

will require harmonisation and reciprocity not only in the area of customs, where

this is already widely the case, but also in tax matters.

The ITC Core Group Meeting in February 2012 emphasised in its concluding com-

muniqué the willingness of ITC partners to further strengthen their support for

regional tax and development organisations in Latin America, Africa and Asia.

Based on this concern, the present study has been initiated in order to gain deeper

insight into and understanding of the major factors contributing to progress and

challenges for taxation in ASEAN countries. This should lead to the identification

of areas for ITC pilot activities in the region and possibly enable the countries con-

cerned to identify areas in which regional and international dialogue could help to

develop effective solutions and provide information so that international assistance

can be effectively organised.

The present summary report is based on the findings of six expert missions held

between September and December 2012 as well as ample country data. It sum-

marises the findings in four areas: (a) tax policy related matters, (b) tax administra-

tion assessments, (c) regional cooperation issues, (d) and aid-related issues. The

last chapter then draws conclusions and develops recommendations.

(a) Tax systems

The general legal framework for taxation in most countries of our sample is in

general terms consistent with the requirements of an efficient tax system – the

main challenges for reform do not derive from fundamental legal issues: all coun-

tries have introduced modern tax practices – even if these are not always consistent

with international best practices. All provide the legal grounds for taxing the

incomes of individuals, enterprises and corporations, and all countries impose VAT

and excise duties on specific items. Even considering in greater detail the legal

10 | executive summary

provisions to control tax evasion and avoidance, most countries provide at least

some of the necessary regulations including the adoption of transfer pricing guide-

lines following OECD standards.

The legal obligations are not presented clearly to the taxpayer everywhere and in

some countries the tax appeals systems are legally deficient. Meanwhile, in others,

there is no independent judiciary system in general and no tax appeals system in

particular. In some countries with existing appeals systems the practice is rather

difficult for the taxpayer, given the high complexity of tax law and regulations and

the relative lack of transparency in terms of obligations.

The major taxes are in principle suitable to cover the required resources to finance

the budgets. The predictability of tax revenues is excellent in all countries but

Vietnam, where actual tax revenues regularly and significantly exceed the forecast.

However, tax to GDP ratios are mostly – and in some cases, extremely – low and

certainly not adequate to finance fair and extended education and health systems

or higher infrastructure development needs. The potential for improvement is high,

not only in small countries in the course of developing their tax systems such as

Lao PDR, also for the high performers in administrative terms such as Thailand,

which faces the highest shadow economy in the sample, or economically potent

Indonesia, which has the second lowest tax to GDP ratio after Cambodia.

One common reason for the tax gaps are the widespread tax incentive schemes that

all countries maintain with the main objective of attracting foreign direct invest-

ments. In our country sample tax incentive policies are mostly not under the control

of the Ministries of Finance and are usually not monitored for impact. Using highly

individualised tax exemption rules for high potential taxpayers is only to a limited

extent compatible with the objectives of efficient tax systems such as raising

revenues, broadening the tax base and generally lowering taxes. There is significant

room for closing gaps and working towards a balanced form of investment policy

that serves both budgetary and private sector development objectives. This issue

would certainly benefit from dialogue under the ASEAN umbrella.

Regarding the distributive effects of the tax systems, most countries also provide the

legal grounds for a fair tax system, but its effects are counteracted by large shadow

economies and injustices resulting from the highly arbitrary powers of tax officials

as well as widespread tax evasion and avoidance, in spite of existing regulations.

Probably the main common reason for tax gaps is this lack of balance between

general legislation and its transfer into reality – of course to a differing extent

among the various countries. In most countries there is – in addition to the many

exemptions to the law through tax incentive schemes – far too much scope for arbi-

trary behaviour on the part of tax officers and, as we shall see, no less scope for the

undetected non-compliance of taxpayers. Development of control systems for

administrative performance and internal control mechanisms is one of the main

common challenges for reform.

executive summary | 11

Furthermore, the improvement of external financial control in tax issues is

necessary in all countries. Independent external control is limited in all cases. The

ASEAN offers sound opportunities for dialogue on improvement on these issues

through the ASEAN Organisation of Supreme Audit Institutions (ASEANSAI) and

the ASEAN Inter-Parliamentary Assembly (AIPA), which also maintains a group of

Public Accounts Committee Members.

Reforms in the area of taxation will need strong political leadership, which could be

supported by the ASEAN through the requirement of common practice standards,

much work on procedures and reducing challenges on the administrative side is

needed.

(b) Tax Administration

Considering the enormous differences between the tax administrations in our

country sample, their general organisation seems relatively homogenous: all

administrations (except Lao PDR) maintain a mostly function-based organisation

and all but Indonesia are a Department under the Ministry of Finance. All have

established units or offices to address the issues of large taxpayers, although of

course the spectrum of performance is extensive. Although all tax administrations

use the support provided by Information and Communication Technology (ICT),

the results and impacts are quite different. Some tax administrations are able to

manage high performance ICT systems, while others dispose of limited ICT support.

With their given resources the administrations achieve very different results. For

example, those countries with the highest number of tax officers per population

reach by far the largest tax to GDP ratio, although the number of staff per registered

taxpayer is relatively low. Some administrations boast an extremely well-equipped

organisation with a large number of provincial and district offices but nevertheless

do not achieve much in terms of tax/GDP-ratio. Of course also the infrastructure

requirements are very different between the countries, but the countries with the

highest tax to GDP/ratio are also those with fully working taxpayer registration

systems.

Measuring and comparing cost-benefit performance among the administrations

could be a productive field for exchange within the ASEAN, because our studies

show that there is no easy correlation between the economic and administrative

development of a country when assessing the potential for reducing tax gaps. For

example Lao PDR certainly has the least developed tax legislation and administra-

tion but ranks third in our sample regarding tax to GDP and the estimated shadow

economy share.

In most countries there is still some way to go to a modern, effective, and efficient

tax administration. Only Thailand operates an overall strategic framework that

12 | executive summary

addresses the taxpaying citizens as customers and provides the service needed for

good taxpayer relations (but even Thailand does not capture much of its large

shadow economy). All other countries need to improve relations with the taxpayers.

Indonesia has worked with taxpayer education programmes but long years of cor-

ruption and collusion with tax officers have affected public and business attitudes.

Regarding the main business processes we have of course also noted many

differences in performance levels. Taxpayer registration needs improvement in all

countries. Even in Thailand, Vietnam and Indonesia, all of which run fully functional

taxpayer registration systems, improving the scope of datasets is a challenges. The

main issue regarding coverage of systems is the missing relation between various

government data sets, especially the missing link between business and taxpayer

registration.

All countries work largely with self-assessment systems, but inspection of self-

assessed tax returns is fragmented in most countries – if it occurs at all. For tax -

payers the risk of tax evasion being discovered is low, and mirroring that, the risk of

being discovered when making arbitrary decisions is equally low for the tax officers.

Moreover, in-depth auditing is not implemented systematically. In some countries

audit departments are fully occupied with VAT return control. Due to combined

assessment and corresponding payment procedures, the majority of payments are

received by the administration on time. Additional payment obligations and arrears

are created especially by audit measures. Risk management systems that would

allow for the efficient planning of auditing processes are mostly not in use.

In summary, it can be said that the combination of self-assessment systems based

on largely voluntary taxpayer registration with limited inspection and incomplete

auditing procedures probably leaves large scope for increasing tax revenues with-

out adapting the legal framework. And again in a quite broad sense, there is no

country in the sample that would not profit from improvements in those areas.

There is scope for improvement even in basic procedures such as taxpayer

registration, inspection and audit issues, although most of the administrations can

look back on a long history of developing the tax administration including the

development of procedures and information systems.

Human resource development is reported to be a challenge in many of our sample

country administrations. This limits rapid returns on investment in improved tech-

nical solutions – capacity development needs to address systematic problems with

education and training in tax matters as well as help tax officers keep up with

progress. The reported aid absorption capacity constraints are observed in many

countries to be based on constraints within the work force.

executive summary | 13

(c) Regional cooperation

One of the most surprising findings in almost all country studies has been the lack

of importance given in the tax administrations to intra-ASEAN coordination and

cooperation in tax issues. Similarly, explicit references to tax issues on the ASEAN

agenda are limited. The ASEAN Charter as of 2008 does not mention taxation at

all. The ASEAN Economic Community Blueprint with its roadmap to an ASEAN

community 2009–2015 refers to taxation regarding the bilateral double taxation

agreements network to be created, the elimination of differences in withholding

taxes and technical assistance on tax structure enhancement to CLMV for eventual

harmonisation with other ASEAN member countries’ tax systems. The awareness of

the upcoming need to observe and to harmonise VAT systems, excise duties, capital

taxation etc. as well as awareness of the need to create the adequate communica-

tion channels must be further developed.

The tax treaty network within ASEAN does exist, but it is largely outdated. Some

countries are highly cross-linked in tax matters internationally, others not at all.

And the internationally interlinked countries tend to foster the relations with non-

ASEAN countries rather than with the other member countries, thus mirroring trade

relations, which are also more significant with external partners. Three quarters of

the thirty intra-ASEAN Double Taxation Agreements (DTA) were approved at least

11 years ago, half even 15 years ago.

With the ASEAN Forum on Taxation (AFT) in 2011, tax officials have started to

concretely work together for the first time. The main issues – represented in two

subgroups – are double taxation and withholding taxes and exchange of views and

dialogue. The dialogue subgroup aims to: (i) share experiences on best practices in

taxation systems; (ii) debate strategies in areas of cooperation in taxation; and

(iii) build capacity support and training for tax administrations and other areas of

mutual interest among tax authorities. The treaty subgroup started with the agree-

ment on a model treaty and with the classification of member countries into four

groups related to the development of capital markets and their related tax regimes.

With AFT, the basis for intra-ASEAN exchanges on tax matters has been created.

Other exchange forums exist, such as the Study Group on Asia Tax Administration

and Research (SGATAR), the Asia-Pacific tax Forum (APFT) and other more or less

regular events. But ASEAN needs a forum for continuous dialogue, not only on the

political level but also in respect of the concrete administrative issues, in order to

merge into a powerful economic community for the benefit of all member countries.

14 | executive summary

(d) Aid-related issues

Aid and its coordination are most relevant for Cambodia and Lao PDR. In all other

countries it is not as urgent a topic as in other regions of the world: Thailand is

itself a donor country, while the Philippines, Indonesia and Vietnam work with sig-

nificant donor contributions, but have much more important other capital inflows

or their own significant resources.

Most of the countries follow an explicit reform agenda in PFM including taxation

that is supported by multilateral and bilateral donors. The most important donors

in the region are Japan and ADB, support in the area of taxation in all countries is

led by the World Bank and IMF, while Japan is also the most important bilateral

donor in taxation.

In the area of taxation support is often found to be fragmented and may lack

coordination even in terms of technical basics (such as the compatibility of systems

introduced). This has been assessed in all sample countries, although in the

majority of the countries donor coordination is organised along a formal framework

of regular working groups and reviews, and despite the fact that donor coordination

is reported as showing some progress by the Paris Declaration monitoring frame-

work.

In some areas further support is needed, but the countries closer to the aid systems

already face significant absorption capacity constraints. There is therefore little

scope for broadening or speeding up reform processes in taxation through more aid.

Increased or more intensive aid can only lead to the expected impact if the coordi-

nation of donor contributions improves further, and the countries improve strategic

planning of reforms and thus support the potential impact of coordinated aid efforts.

(e) Conclusions and Recommendations

Finally, we conclude from our study that the following issues require further

monitoring:

• The legal adaptations recommended are mostly related to the modernisation

or simplification of existing tax laws. Legal adaptation is also required in

most countries for regional (AEC) and global issues, for example in order to

harmonise withholding taxes on capital markets. But all in all, there are

more critical needs for improvement than fundamental legal issues.

• The main challenge is much greater than introducing new legislation: it is

necessary to transform existing tax policy into efficient tax systems in prac-

tice through a modern, efficiently and loyally performing tax administration

that earns the trust and compliance of the taxpayers.

executive summary | 15

• Here, strong political will is needed, but support on technical issues is also

possible – even crucial in some areas: Closing the gaps between voluntary

tax registration, self-assessments with fragmented inspection and audit

applications is important, and human resource development is a challenge

for many of the administrations.

• Cooperation on tax matters within ASEAN needs to develop further. ASEAN

as a joint organisation should provide a forum for dialogue, exchange and

peer learning as well as opportunities for education and training in tax matters.

• While following the ASEAN path to the AEC, collaboration in tax matters

among the ASEAN member states will need to be intensified, the existing

treaty network needs in particular to be amplified and modernised.

• Donor contributions need to strictly avoid fragmented approaches and over-

burden tax administrations already facing severe capacity constraints.

Based on these recommendations, it follows that potential ITC support should

concentrate especially on supporting further regional exchange, mainly through

organising the transfer of experience. Ideally this would support the ASEAN coordi-

nation process, possibly through the ASEAN Forum on Taxation, in growing into an

effective forum for inter-change for the member countries’ tax administrations.

In the framework of the ASEAN roadmap, scope for support is also given for

technical assistance on tax structure enhancement – mainly addressing CMLV, but

for specific matters also including other countries. The recommendations in our

country studies for issues to be supported at country level, possibly through ITC-

pilot activities, cover the following topics:

• improving management and steering of reform processes,

• improving taxpayer relations

• strengthening audit functions

• strengthening of human resources and capacities

• further development of IT-support

If assistance is integrated into already existing aid and dialogue schemes at country

level, and capacity constraints are recognised and adequately responded to, then

there is further potential for successful support for tax reforms.

1 Introduction

introduction | 17

Background to the studies

The International Tax Compact (ITC) is an initiative introduced by the German

Federal Ministry for Economic Cooperation and Development (BMZ) in 2009 at the

Doha Conference on International Financing for Development to strengthen interna-

tional cooperation with developing and transition countries, with the objective of

enhancing domestic resource mobilisation. The ITC aims to promote effective, fair

and efficient tax systems and combat tax evasion and inappropriate tax practices

on a global and regional scale.

In its concluding communiqué, the ITC Core Group Meeting in February 2012

emphasised the willingness of ITC partners to further strengthen their support for

regional tax and development organisations in Latin America, Africa and Asia.

Among the many ITC activities, two large mapping studies in the area of taxation

have been developed. The first issue elaborated – on a very broad worldwide basis

– the development policy support for the area of taxation, while the second sought

ways to provide information on a regular basis about the support for tax policy and

administration reforms through existing information channels. One of the important

lessons learned from both studies is that mapping development support for taxation

can be made more meaningful and concrete by addressing the right intervention

level – exchanging regionally and coordinating at national level. This experience is

the background to the development of the present regional mapping process.

Since 2009, the International Tax Compact has built up close relations with African

and Latin American tax administrations and their umbrella organisations CIAT and

ATAF. Asian countries have been very actively participating in ITC international

workshops from the outset, but there is still room for development regarding

concrete cooperation and the development of pilot measures on the ground.

Against this background it was decided that existing challenges and practices

should be analysed, and that solutions and perspectives to support effectiveness

and efficiency of taxation in the ASEAN region should be discussed. This also

reflects the BMZ priorities for the region,1 which, among other things, focus on

enhancing good governance and especially strengthening transparency, the rule of

law and the respective administrative capacities.

The present study was initiated in order to gain deeper insight into and understand-

ing of the major factors contributing to progress and challenges for taxation in

Asian countries. This should also lead to the identification of areas for ITC pilot

activities to enhance the exchange and sharing of South–South experiences in

strengthening tax systems. Moreover, the outcome should enable the countries

concerned to identify areas in which regional and international exchanges could

help to develop effective solutions and provide information so that international

assistance may be effectively organised in order to support them.

1 BMZ (2011)

18 | introduction

Participating countries

Many of the Asian countries working with German Development Cooperation are

ASEAN members. Against the background of the ASEAN integration process, it was

also planned to provide a contribution to the tax issues planned for in the Roadmap

for an ASEAN community 2009–2015, especially referring to the needs of technical

assistance by CMLV. The selection of the countries for the present study was mostly

based on pragmatic reasons such as the potential support for the undertaking by

GDC decentralised structures at country level. Consequently, six countries were

selected: Cambodia, Indonesia, Lao PDR, the Philippines, Thailand and Vietnam.

Work process

The work process began by compiling ample country information in the ‘Country

Briefs’ and the elaboration of an analytical framework for all studies. Between

September and November 2012, six study mission teams were sent to the coun-

tries. Most were formed of three members (some four) with complementary profiles:

one senior international expert on international tax issues, one expert with leading

position in German tax administration and a development expert with a public

financial management background (see Annex 2).

Two joint workshops with all team members outlined the country work: an introduc-

tory workshop in September 2012 in order to create a joint view of the task and the

way of working, and a summary workshop in December 2012 to present the

findings and exchange results. By end January 2013 the country reports were drafted

and a reconciliation process with the partner countries had been started.

Methodology of the summary report

The summary report is mainly based on two sources: (a) the findings of the country

studies and (b) the compilation of information from the Country Briefs – including

statistical data and the summary of PEFA-information on taxation – for all countries.

The findings of the teams reflect the interviews that it was possible to arrange, and

also the experiences and special fields of working of the team members.

The present report merges the findings in six countries into assessments in four

areas: tax policy-related matters (chapter 2), tax administration assessments

(chapter 3), regional cooperation issues (chapter 4), and aid-related issues (chap-

ter 5). The last chapter then summarises the conclusions and recommendations.

The summary of findings is to a large extent driven by the topics the teams were

able to investigate. This report concentrates on those issues that were analysed

introduction | 19

by most teams, so that a set of comparable information might lead to broader

conclusions. The specific country reports provide much more specific information.

For in-depth country-related reading it is therefore recommended to consult the

country reports at www.taxcompact.net.

In addition Lothar Bublitz has contributed a compilation of legal provisions to

combat tax evasion and tax avoidance in all countries that are taken here as case

studies related to tax policy. Special thanks go to Nina Korte, who generously

shared her experience from her dissertation on ‘The Political Economy of Public

Administration Reforms in Southeast Asia: A Comparative Analysis of the Tax

Administration in Indonesia and the Philippines’ (forthcoming).

The way ahead

Together with other interested international development partners, ITC conducted

a regional networking workshop in order to present and discuss the country studies,

verify the conclusions, and support the creation of a regional perspective on the

issue. The summary report was shared with all participants for comments and

discussion. The open format of the event was designed to enable delegates to share

lessons learned from reform approaches. Based on the results of the discussion,

ITC intended to identify pilot activities to enhance the exchange and sharing of

South–South experiences in strengthening tax systems. Particular emphasis was

placed on exploring options for continued regional exchange through a professional

network and a community of practice.

The seminar was conducted with approximately 30 participants, including high-

ranking officials from the Ministries of Finance and Tax Administrations of the six

study countries as well as international experts who delivered inputs on subjects

related to the studies, international development partners, and German inter -

national development staff.

2 Overview of the Tax Systems

regulatory conditions | 21

The six ASEAN countries in our sample vary widely in terms of their political

systems and economic situations, as well as their historical and cultural

backgrounds. Consequently, they mirror the enormous task that ASEAN has set

itself with the goal of merging into the AESEAN Economic Community by 2015.

Tax systems are one aspect of overall governance systems, and of course their

performance depends largely on its character, from practical questions on the

organisation of the public service up to rather political issues such as the account-

ability system, which sets the incentives for the State to act more or less for the

benefit of its citizens. The broad variety of governance systems in ASEAN is a

special challenge also for working together in tax issues.

2.1 Regulatory conditions

(a) Legal framework

The legal framework for taxation in general is comprehensively established in most

countries. The legal formats of personal and corporate income taxation or Value

Added Tax (VAT) are seen mostly as a good base for administration. Thailand has a

comprehensive and well-publicised tax system; the legal quality of the Cambodian

system is also reported as being comprehensive and not too complicated. For

Vietnam, the expert team assessed the tax system to be extensive, although the

quality of legislation was not always adequate because of partial conflicts between

internal legislation and international obligations.2 Lao PDR’s tax legislation still

needs to be adapted to international standards in many aspects; there are too many

exemptions and too many arbitrary powers in terms of policy and administration.

However, VAT has been introduced recently (2010) on modern terms and further

reform is planned.

Essential for the relations between the State and the taxpayer is the clarity of the

taxpayer obligations and the possibility to appeal against administrative decisions.

In our sample countries a rather mixed picture emerges. Apart from Lao PDR all

countries provide at least some scope to appeal against tax bills. Most do not have

a specific financial court system; only the Philippines and in Indonesia have a

Court of Tax Appeals under the Supreme Court. In Vietnam, appeals can be

addressed to the Administrative Court system.

Nevertheless, in most countries, the objection does not pre-empt the tax payment,

and in some countries – such as Indonesia – the penalties on disapproved appeals

are extremely high – up to 100% at the second level of appeal. The number of

appeals is therefore usually quite low, as fighting tax issues through the court

system is costly and time consuming and usually successful only for large, and

possibly international, firms.

2 For example regarding the

foreign contractor tax

22 | overview of the tax systems

PEFA reports are available for almost all countries.3 The ratings reflect a more

positive picture than our country studies, although caution is necessary when

comparing PEFA-results among countries: Only Lao PDR and Vietnam received a

‘D’ and ‘C’; all others were rated ‘A’ or ‘B’ under the performance indicator (PI)

PI–13(iii) ‘existence and functioning of a tax appeals mechanism’. The clarity and

comprehensiveness of tax liabilities (PI–13[i]) seems to be rather difficult; here

Thailand and Vietnam rate ‘B’, all others ‘C’ and ‘D’.

(b) Major taxes

All countries levy an individual income tax and income tax for corporations and

enterprises. Since Lao PDR introduced VAT in 2010, all countries also now levy

VAT, some with a very high threshold, which effectively makes VAT a tax for large

enterprises and international corporations. All countries4 also raise a significant

portion of their tax revenues from excises, including import and export duties.

Some countries still receive large revenues from natural resources, but this is of

shrinking importance, as in Indonesia and Lao PDR. In terms of direct and indirect

taxation, Cambodia and Lao PDR receive only a small share of their revenues from

direct taxation; Indonesia, the Philippines and Thailand have a slightly higher share

of direct taxation.

Most countries devolve the possibility to collect their own taxes to lower levels of

government. In most cases, these form only a small portion of overall governmental

revenues: 5% in Cambodia, 6% in the Philippines and 10% in Indonesia. Thailand

also gives the provinces the additional right to raise certain taxes such as property

and land taxes, local development rates and a signboard tax, as well as the possi-

bility to collect a surcharge tax of 10% on all central government taxes.

Figure 1: Tax to GDP ratios for 2010

Source: IMF data, see country briefs

3 All countries except Cambodia,

where only the ratings are given

(see Table 4, p. 35)

4 No data available for Vietnam

regulatory conditions | 23

Interestingly, all countries in the sample, except Vietnam, are rated ‘A’ under the

indicator 3 in the PEFA-reporting system,5 which measures the aggregate revenue

outturn compared to the original approved budget (see Table 5, page 38). This

means, on the revenue side there is a high credibility of the budget data. Vietnam

– with a ‘D’-rating – systematically underestimates the tax collection for budget

forecast. However, Vietnam also collects more taxes as a share of GDP than any

other country in the region.

(c) Case Study: Legal framework for combating tax evasion and avoidance6

All countries in the sample have developed basic legal frameworks to manage tax

offences and more or less elaborate schemes to counter tax avoidance. Most diver-

gences can be observed in the field of anti-tax-avoidance rules: some countries

have established a consistent sophisticated system of regulations in order to curb

tax dodging; others have refrained from regulating this matter at all. However, most

countries have adopted the OECD transfer pricing guidelines either by law or by

decree. The mechanism and effects of ‘thin capitalisation’ have been referred to in

some of the country studies.

Table 1: Legal frame to combat tax evasion and avoidance

5 Public Expenditure and

Financial Accountability, see

www.pefa.org and

the explication in chapter 3.2

6 See Lothar Bublitz (2013),

Legal framework directed at

combating tax evasion and

avoidance, side study to the

mapping of taxation in selected

Asian countries, January

Source: Bublitz, L., Legal Basics of Combating Tax Avoidance and Tax Evasion in South-East Asia in the framework of tax mapping studies

24 | overview of the tax systems

In general terms, the regulation of administrative penalties varies among the coun-

tries only in certain details. Generally the same structure is used, although this is

not always clear and sometimes the correlation to tax crimes is not precisely deter-

mined. Surcharges for late payment or underpayment are aligned with the amount

of unpaid tax and assess the penalty as a certain percentage of the unpaid tax. This

system is easy to handle but tends to overlook the particular circumstances of each

case (except in Vietnam). Some penalties appear to be rather harsh. Double sanctions

occur when surcharge and interest are levied simultaneously. If an honest business-

man is willing to pay his tax debt but is not able to do so due to economic straits,

he has little chance to improve his situation if high surcharges increase his debt.

By contrast, the definition of tax evasion in the law reveals considerable differ-

ences. In some cases descriptions of the intentional and objective elements of the

crime are unclear. All systems are inclined to be ‘too perfect’ with the result of

excessive regulation. Nevertheless, in general the penal provisions dealing with tax

crime prosecution provide a sufficient basis to carry out prosecution procedures

including a conviction at the penal courts. However, it seems to be difficult in all

countries to convert statutory regulations into reality; sometimes the will to do so

appears to be lacking, as the low number of convictions shows. A few spectacular

tax evasion cases are unlikely to lead to a general change in taxpayers’ behaviour.

All in all, tax criminal law as such suffices to combat tax evasion in most countries.

Challenges arise rather from the lack of a necessary prosecution of criminal tax

offences7 – there is too much scope for arbitrary interventions. A sound and consis-

tent legal system is only one condition for combating widespread tax evasion. More

important is awareness on the essential role of taxation for shaping a State and its

development, and the importance of the relation between tax officials and taxpayers,

as well as of horizontal and vertical tax equity. Achieving this can result only from

deep changes in vision and attitude and is much more problematic than legal

adaptations.

(d) Tax incentive schemes

All countries in our sample use widespread tax incentive schemes for investment

promotion.8 Such promotion, especially to attract foreign direct investment, is one

of the major issues in economic development strategies and tax incentives are the

most important instruments in achieving this goal. Thailand boasts the longest

history in this respect: since 1954 it has offered a variety of tax holidays as

instruments for investment promotion.

Most common are export processing and special economic zones as well as tax

reductions to specific industries such as in the Philippines for oil, ecological solid

waste management, agriculture and fisheries since 2006. In respect of the

Philippines incentive schemes, the World Bank has estimated that the tax differ-

ence between firms on incentive scheme and those without is around 20%, which

7 Exception: Cambodia

8 No data available for Vietnam

regulatory conditions | 25

is among the highest in the world. The Philippines also recognise tax reductions for

specific citizen groups, as senior citizens, armed forces, national athletes, coaches,

and trainers.

Lao PDR has a general tax incentive scheme related to investment promotion law,

organising incentives mainly along regional priorities – in order to drive investment

to poorer regions – and the size of the investment or firm. Besides this, there is a

highly individualised system for large investors to arrange packages with possible

necessary licenses, construction permissions, and mining rights in combination

with tax holidays and/or specific tax rates. These packages are decided by the

National Assembly – or its responsible commission – as law. There are reported to

be hundreds of such package laws.

In all countries, the responsibility for designing and possibly negotiating tax

incentive schemes lies not with the Ministry of Finance but with the Ministry in

charge of investment promotion, usually Economic Planning or Industry. How far

the Ministries of Finance are involved in development of the rules and possibly

individual negotiations is not spelled out in the majority of the country reports, but

we can suppose that the administration and implementation of tax incentives is

usually the responsibility of the tax administration. The Indonesian tax administra-

tion and independent scientists provide calculations on the economic impact of tax

incentive schemes, but they do not usually enter into the political priorities.

However, widespread tax incentives – very individualised rules for high potential

taxpayers – are only to a limited extent compatible with the objectives of an effi-

cient tax system such as rais-ing revenues, broadening the tax base and generally

lowering tax rates. These objectives are important to all countries and form part of

their strategies, because of the anticipated necessity to bridge the revenue gap

when customs are reduced with the ASEAN economic community, even if intra-

ASEAN-trade is currently not so significant. Tax incentives should therefore follow

a clear and monitored investment promotion strategy that thoroughly balances cost

and benefits. Tax incentive competition to attract FDI is a topic of regional dialogue

on tax matters within the ASEAN, while the AEC blueprint requires the member

countries to remove non-tariff trade barriers.

Tax incentives are therefore a risk to the public purse as well as to the sense of

fairness in society. In very special situations, they also might serve as instrument

for stabilisation in economically difficult situations and even contribute to social

cohesion, as the example below of the incentives schemes after the huge flood in

Thailand shows.

26 | overview of the tax systems

In 2011, vast parts of Thailand and especially Bangkok were hit by severe flooding. Around

18% of the population – 12.8 million people – were affected. Total damage was estimated at

USD 45 billion, and in total 7,548 factories were damaged. GDP shrunk by 3–4.5%. Still, the

unemployment rate rose only insignificantly and factories dismissed only a few people. The

government of Thailand introduced various measures to relieve this burden on individuals and

companies in order to kick-start the economy again and to promote investments.

For individuals, income tax was exempt for subsidies or donations received from government and

from other sources. Furthermore, costs for housing renovation not exceeding THB 100,000

(USD 3,200) and also car repairs not exceeding THB 30,000 (USD 940) were deductible from

income tax.

Companies were granted a tax exemption for subsidies or donations which they received from

government and other sources. In addition, claims received under insurance in excess of the cost

of assets after deducting depreciation were tax exempt. As a very unique measure, the govern-

ment granted a 125% depreciation of all replaced machinery, therefore not only relieving the

burden of the flood, but also granting a further subvention in order to stimulate replacements and

also the economy. To prevent severe damage by floods in the future, companies received an

income tax exemption for 8 years with a limit of 200% of the capital invested for all industrial

zones which construct flood prevention infrastructures.

On the other hand, all donations in cash were tax deductible at 150% (so if USD 100 was donated,

USD 150 was deductible) during a four-month period in order to generate sufficient funds for ad

hoc repairs. Furthermore donated assets were VAT exempt.

Concerning property tax, land owners received full tax exemption until full renovation was

completed. Local maintenance tax for agriculture land was reduced depending on the degree of

damage. As a further measure, import duties for machines and equipment imported to replace or

repair the damaged machinery were exempt.

These far-reaching tax measures can be viewed from various angles. One reason given by the

government of Thailand was that it was trying to relieve the financial burden on the economy and

to prevent future floods, but another reason was mentioned in several interviews conducted under

this mission: since companies tried to keep the society in balance by keeping staff instead of

dismissing the employees, the government of Thailand felt the need to reward this behaviour with

tax relief.

Of course, as a consequence external debt rose from USD 75.3 billion to USD 100.6 billion from

2009 to 2010.

Source: Country Report Thailand

Box 1: The huge flood – tax measures

distributive effects of the tax system | 27

2.2 Distributive effects of the tax system

The Thai example underlines the social function that can be attributed to a tax

system. The country teams in our study were also asked to assess at least broadly

the distributional effects of the respective tax systems. As these studies do not rely

on data sets, this is mostly an exercise of analysing directions of effects. The

following key points were taken into consideration:

• the relation between indirect and direct taxation, supposing that indirect

taxation tends to give rather regressive results and direct taxation rather

progressive, which of course depends on the specific form of tax rates and

bases;

• the progressive form of income taxation and whether it falls rather on

business or individual taxation;

• the extent of withholding taxation in income taxation – discriminating

middle incomes in formal sector;

• the volume and target of tax holidays – in most cases these are addressed at

large rather than small firms;

• the VAT threshold and rate;

• the spread of tax evasion.

The results are rather mixed, for example the Philippine constitution requires the

tax system to be progressive, uniform, and equitable. And the tax code indeed

seems largely progressive, but in reality the system is anything but, as big firms

enjoy many advantages over small ones, and low and middle incomes pay a greater

share of the income than high incomes.

Thailand is assessed by the country team to be a rather fair system, with a relatively

high share of direct taxation, a very high threshold for VAT and a low VAT rate, but

the shadow economy is the largest in the region (see Interestingly, neither the WGI-

indicator ‘control of corruption’ as shown in Table 2 nor the CPI as in Table 3 show

any relation with the dimension of the shadow economy. Thailand displays the

highest values for the shadow economy and Vietnam the lowest, Lao PDR ranks in

the middle. Figure 2, page 30).

The shadow economy is an indicator – and a measure – for tax evasion; but

considering that a large part of the shadow economy is formed by micro and small

enterprises in the informal economy, it also means from a distributive perspective

that the poorest mostly do not pay taxes. Nevertheless, it is clearly preferable to

achieve this by tax exemptions for low income than through informality. In

Indonesia the picture is also mixed: income tax falls more on businesses than

individuals, but personal income tax falls mostly on those paying withholding tax

from salaries – a general problem. International firms incur more taxes than other

firms, but ultimately the wide-spread tax evasion benefits rather the rich.

28 | overview of the tax systems

In Cambodia, large tax holidays for investors and a high share of indirect taxation

also create a large tax burden for middle incomes. Additionally there is another

interesting distributive aspect: most small and medium taxpayers fall under a so-

called ‘estimated tax regime’, meaning the administration estimates the taxes to be

paid. 53,000 of a total of 72,000 tax-payers fall under this regime, which is rather

open to arbitrary taxation. Only 19,000 use the self-assessment that is, given the

lack of a regular auditing procedure, probably more advantageous for taxpayers

than the estimated regime. Furthermore the Lao PDR country study reveals extreme

arbitrariness in the system, and given the lack of an appeals system, this favours

those with good networks and strong resources.

In summary it can be said that in most countries, the legal grounds are in place for

a fair tax system, but its effects are counteracted by large shadow economies, and

injustice through high arbitrary powers of tax officials (also see Chapter 3) as well

as widespread tax evasion and avoidance.

2.3 The political economics of taxation

Three aspects were examined in the context of our studies: the financial control

system, anti-corruption issues and the question of how and by whom tax policy is

influenced. These are summarised below, following an overview of key governance

indicators.

(a) Governance framework conditions

The case study on the legal framework designed to counter tax evasion and tax

avoidance showed that tax laws do not necessarily reflect tax reality. Tax policy and

tax administration are embedded in the governance system including the respective

checks and balances. Taxpayer willingness to fulfil their duties is dependent on the

trust of taxpayers in the governmental system – including a responsible tax admin-

istration – and the effective delivery of public goods and services by governmental

institutions.

The Worldwide Governance Indicators9 (WGI) provide a comparable picture of the

governance situation in many countries. In our sample, Thailand scores the best

assessments on all indicators regarding the administrative performance and its

framework, but political stability is a problem and possibly as a result the ratings

for voice and accountability are not very high either. Political stability is highest in

the two socialist countries, but voice and accountability are correspondingly low.

Lao PDR still has some way to go in terms of ‘regulatory quality’ – thus confirming

our findings for the regulatory framework in tax matters. Lao PDR and Cambodia

9 The WGI report six aggregate

governance indicators for over

200 countries and territories

over the period 1996–2011,

covering

i) Voice and Accountability,

ii) Political Stability and

Absence of Violence,

iii) Government Effectiveness,

iv) Regulatory Quality,

v) Rule of Law, and

vi) Control of Corruption.

The Worldwide Governance

Indicators (WGI) are a research

dataset summarising the views

on the quality of governance

provided by a large number of

enterprise, citizen and expert

survey respondents in industrial

and developing countries.

These data are gathered from

a number of survey institutes,

think tanks, non-governmental

organisations, international

organisations, and private

sector firms.

The scoring shows the country's

percentile rank on each of the

six governance indicators.

Percentile ranks indicate the

percentage of countries world-

wide that rank lower than the

indicated country, so that

higher values indicate better

governance scores.

the political economics of taxation | 29

10164/183 ready: rank 164

of 183 countries ranked.

also lag behind on government effectiveness and the control of corruption, and to

conclude that control of corruption would make an important contribution to

government effectiveness is probably no exaggeration. Fighting corruption is one of

the core issues in increasing tax revenues.

The ratings of the Corruption Perception Index mostly match the WGI ranking on

control of corruption. Here, it can be seen that the differences in corruption

perception are huge between our sample countries – from rank 80/183 (Thailand)

to 164/183 (Cambodia) – but apart from Indonesia they have one point in common:

corruption perception increased in the five years between 2006 and 2011.

Table 2: Regional Comparison of WGI in 2010

Source: http://info.worldbank.org/governance/wgi/mc_countries.asp / see country briefs

Table 3: Corruption Perception Index 2011

Source: Country Briefs, http://www.transparency.org/research/cpi/overview

30 | overview of the tax systems

11The Business Anti-Corruption

Portal provides information

targeted to SMEs in order to

help them avoid and fight

corruption. The portal is a tool

referred to by several major

international organisations,

including the OECD,

the UN, the World Bank,

the International Finance

Corporation (IFC) and

Transparency International.

It is financed by the

Austrian Development Agency,

the British Department for

Business Innovation and Skills,

the Danish, German,

Norwegian and Swedish

Ministries for Development

and the European Commission.

12Without stating a clear value.

The reports of the Business Anti-corruption Portal11 amongst other things specifi-

cally address corruption in tax administration. The latest reports match the picture

under WGI and CPI – corruption in tax administration is a major issue in Cambodia,

the Philippines, and Vietnam. There is no report on Lao PDR; and for Indonesia and

Thailand corruption in tax administration is considered in the reports to be less

high than in other Southeast Asian countries.12

However, all countries will benefit from addressing the issue. Interestingly, neither

the WGI-indicator ‘control of corruption’ as shown in Table 2 nor the CPI as in

Table 3 demonstrate any corre lation with the dimension of the shadow economy.

Thailand sees the highest values for the shadow economy and Vietnam the lowest,

Lao PDR ranks in the middle.

Figure 2: Shadow economy estimates (as % of GDP)

Source: Country Briefs, based on Schneider, Buehn, Montenegro, (2010)

The size of the shadow economy is one major indicator measuring tax gaps.

Schneider and Buehn (2012) have shown, in respect of high income European

countries between 1999 and 2010, that indirect taxes had by far the largest

relative impact (29.4%) on the size of the shadow economy, the influence of

personal income taxes was 13.1% and tax morale 9.5%. For our sample, we note

to a limited extent a parallel between tax ratio and the shadow economy: Vietnam

scored lowest in terms of shadow economy and had the highest tax to GDP-ratio of

the political economics of taxation | 31

all countries. Thailand, which has an astonishing low tax to GDP ratio considering

its level of development,13 has an extremely high shadow economy. For the other

countries this is not so obvious. All in all, the conclusion is that although for differ-

ent reasons and to a varying extent, all the countries visited face issues in terms of

governance framework conditions that need to be addressed further in order to

strengthen effectiveness in tax administration.

(b) Financial control of tax issues

External and internal financial control mechanisms are important factors in

securing the regularity and transparency of budget planning and execution. External

financial control through Supreme Audit Institutions in ASEAN received a major

impetus through the foundation of the Organisation of Supreme Audit Institutions

(ASEANSAI) in November 2011.14 In controlling and auditing tax administrations

SAI have in ASEAN – as in many countries – rather limited possibilities because in

most countries they are not allowed to access individual tax files. This limits

external audits to broader and macroeconomic analysis and the control of

procedures and institutional settings plus the scope for uncovering corruption

remain narrow. This is also the case even in Thailand and Indonesia, where institu-

tionally strong SAI in principle would be prepared to audit tax administrations.

Indonesia’s SAI for example is a clear leader in the ASEANSAI process and the

Indonesian Anti-corruption Board is recognised worldwide for its work. The SAI

exercises control over the tax administration; but cannot look into taxpayers’ filings

on a regular basis,15 so that revelations of arbitration are rather limited. But the

Indonesian control institutions are aware of the problem and financial controls as

well as anti-corruption are topics discussed between SAI and Ministry of Finance.

Since the decree of 2011, the control of the economic situation of tax officers has

increased – they must deliver now wealth reports and account for unusual income.

Also in the Philippines, the Supreme Audit Institution cannot look into tax files –

it is empowered only to evaluate the revenue administration’s expenditures and

process management. There is a unit in charge of this task on a permanent basis

within the SAI, but it appears too understaffed to cope with the task. The revenue

administration is subject to further control: it must report to the Congressional

Oversight Committee every six months, and there is the institution of an independ-

ent Ombudsman promoting integrity among government officers which also can be

addressed.

The Vietnamese SAI is preparing to become institutionally independent so as to

meet INTOSAI standards,16 but here too the scope for the control of tax administra-

tion is still technically limited. Similarly, in Lao PDR, the formal institutions to exe-

cute control functions are in place – the National Assembly, the Supreme Audit

Institutions and the Anti-Corruption Organisation – but their effectiveness still

requires significant strengthening, as also shown by the WBGI.

13The average OECD tax ratio

has been 33.8% in 2010,

see:

http://www.oecd.org/ctp/tax-

policy/revenuestatisticstaxratio

schangesto20102012

edition.htm

14see:

http://www.aseansai.org/home/

15It is possible for special cases

and with special procedures.

16The International Organisation

of Supreme Audit Institutions

(INTOSAI) is the worldwide

umbrella organisation on SAI

and their regional groups.

The Mexico Declaration sets

the standards for SAI

independence:

http://www.intosai.org/en/

documents/intosai/general/

declarations-of-lima-and-

mexico/mexico-declaration-

on-sai-independence.html

32 | overview of the tax systems

Box 2: The difficult political economy of tax reform, an example from the Philippines

In the autumn of 2012 the Philippine government proposed the introduction of ‘sin taxes’ – an

increase in taxes on alcohol and tobacco that the government estimated would yield approximately

PHP 60 billion a year. The House Ways and Means Committee passed a version of the tax that cut

the total to 31 billion a year and reduced the tax burden on alcohol in particular. The press

claimed that both the brewer San Miguel, which is chaired by businessman and representative

Eduardo ‘Danding’ Cojuangco Jr and Lucio Tan, owner of the Asia Brewery Inc. pushed through

the tax increase reduction in the bill.

Similarly, the Senate Ways and Means Committee Chairman at the beginning of October proposed

a bill that cut the burden on tobacco. Here, a key player is Philip Morris Fortune Tobacco Inc., also

related to Lucio Tan, which controls about 90% of the Philippine market. A reconciliation commit-

tee did produce a common bill, which President Aquino signed on 20 December, 2012, and which

as we have seen took effect on 1 January, 2013. The final target was PHP 33-34 billion, only

slightly higher than that proposed by the House Ways and Means Committee.

The experience of the sin tax also says something about the timing of reforms. Legislative

elections are held in May every three years, and the passing of reforms is quite difficult in the

months leading up to an election and impossible in the final three months before an election when

Congress is adjourned. There are therefore three-year cycles for the reforms of a sitting President.

Presidents cannot run for office over consecutive terms. Interviewees noted that the scope for

possible reforms is known through 2016, but after that there will be a new President. What they

will want is anyone’s guess.

More generally, one would expect with a particularistic electoral system and a particularistic party

system that tax legislation that originates in Congress to be targeted at specific groups or even

individual firms. An analysis of tax-related Republic Acts for the period 1998–2009 showed that

of the 57 RAs passed, 46 were revenue-eroding measures.

Source: Country Report The Philippines

the political economics of taxation | 33

(c) Drivers of change

Finding drivers of change for tax reform is no easy task and depends heavily on a

country’s political constitution. The major role in initiating and driving reform

projects lies with the executive and for tax administration with the administration

itself. For this reason, international exchange at the high ranking executive level is

expected to impact on local reform.

Parliaments as well as national assemblies in Communist systems also have a role

in driving change through discussing and deciding on legal projects and possibly

administrative reforms. Perhaps even greater is the influence on the taxation frame-

work conditions through the many committees concerned – from driving and

controlling budget planning and execution up to committees deciding on tax

exemptions for private sector development or family policy. The fulfilment of this

role is often constrained by the personal interest of parliamentarians. For Indonesia,

for example, it is reported that many parliamentarians place special interest above

the public good. Worse still, the existing high ranking officials driving reforms, such

as the Vice President and Finance Minister have come under high political pressure,

to the point of being forced to resign, because reforming tax administration and

financial control affect individual rent-seeking behaviour.

Tax administration reforms require high policy backing inside and outside the

administration. If this is missing and, worse, undermined by the personal interest

of high ranking officials, this not only directly hampers reform projects – it also

undermines the policy trust of the population and with that the tax morale.17

The Philippines, like all other states, are aware of the powerful influence of private

over public interest in taxation (see Box 2). In the Philippines, tax laws can be

changed by presidential decree, while the revenue administration enjoys a great

deal of discretion in the interpretation of tax law. The many changes to tax laws over

the year offer tax inspectors the option of arbitrary decisions.

Even in Thailand, generally a high performer in the overall ranking of the WBGI, the

schism between political parties renders the driving of reform programmes through

parliament difficult.

On the subject of drivers of change, there are also external actors with influence,

such as – in countries with high aid inflows – the donors involved in policy dialogue

on public financial management (PFM) reforms. The International Monetary Fund

(IMF), as lead organisation in these issues, is reported in some of our country

studies to be one of the supporters of change. Especially where drivers of change

exist and reform projects are on the table, IMF pressure has helped governments in

some cases to push through reforms against domestic resistance to change.

17Tax morale is actually the third

important tax related driver into

shadow economy in the study

of Schneider/Baehn 2012.

3 Tax Administration

organisation of the institutions | 35

Many challenges remain facing the tax administrations of our country sample. In

the following section we look at the findings on the organisation, the main business

processes and the human resource situation of these institutions.

3.1 Organisation of the institutions

Most of the tax administrations in our country sample have been described as

function-based organisations. Only Lao PDR’s administration is organised on the

basis of numbers of taxpayers’ at regional levels: with the largest enterprises

managed at central level, medium-sized enterprises at provincial level, and small

enterprises at district offices. Vietnam has introduced a broad function-based

organisation irrespective of personal income tax. Indonesia has a function-based

three-tier organisation, where the offices are organised by taxpayer type. All admin-

istrations also maintain a large taxpayer unit, apart from Lao PDR, which is in any

case organised in terms of taxpayer segmentation. All tax administrations have the

legal form of a directorate within the Ministry of Finance. Indonesia has a slightly

more independent tax administration with a Director General appointed by the

President on the recommendation and under the supervision of the MOF. Thus, in

very general terms, the organisation of the administration shows significant similarity.

It is difficult to measure the effectiveness of tax administration organisation, and

this was beyond the scope of the present study. However, the available data makes

it possible to compare some indicators:

Table 4: Population, tax administration staff and registered taxpayers

Source: (1) Country Briefs: IWF data est. for 2012, (2) Country Reports

36 | tax administration

The staff per population of course varies greatly between the countries. Where

Vietnam has a tax to GDP ratio of 24.10% with just 5 tax officers per 10,000

population and 3.3 tax officers per 1,000 registered taxpayers – Lao PDR has a tax

to GDP ratio of 14.50% with 3.2 tax officers per 10,000 population but almost 30

tax officers per 1,000 registered taxpayers.

Interestingly, those countries with the highest number of tax officers per

population – Thailand and Vietnam – reach by far the largest tax to GDP ratio,

although the number of staff per registered taxpayer is relatively low. This might

mirror the infrastructure situation and – relative to Indonesia and the Philippines –

a comprehensive country shape, but at least for Thailand certainly reflects the

efficient IT system. Thailand and Vietnam also capture the highest share of their

population as registered taxpayers, and both have fully working, unified TIN

registration systems.18

The most costly administrations in terms of staff per taxpayer in relation to the tax

ratio are Cambodia and Lao PDR. Lao PDR also maintains the broadest administra-

tive structure with 800 provincial and 1100 district offices. Vietnam, with a much

higher population and almost 1,000 times more registered taxpayers, needs 63

provincial offices and 694 district offices. A reorganisation would seem beneficial.

18Source for Vietnam:

PEFA-Report

By 2011, of Indonesia’s 240 million inhabitants, 110 million were in actively employment, of

which 60 million earned an income higher than the tax exemption threshold, yet only 19.9 million

were registered taxpayers and only 8.8 million filed their tax returns. Of Indonesia’s 22.6 million

formally registered medium-sized, or large, corporations, 12.9 million were active and 5 million

were estimated to have capital large enough to pay taxes, yet only 1.9 million were registered

taxpayers and 520 thousand finally filed a tax return. The Indonesian authorities are aware of the

large tax gap and the tax potential they have to achieve in the future.

Source: Country Report Indonesia

Box 3: Tax potential in Indonesia

status of main business processes | 37

3.2 Status of main business processes

Taxpayer registration

Taxpayer registration is a key issue in all the countries – except for Thailand, which

is assessed to have a well implemented system with personal identification

numbers for individual persons (PIN) and taxpayer identification number (TIN) for

enterprises. However, even Thai-land only ranks ‘B’ in all registration related

indicators (PI-14) in the PEFA assessment, whereas almost all other issues are

rated ‘A’ (see Table 5 below).

The main challenge found in the country studies is that taxpayer registration

systems are usually not connected to other government data or at least do not use

such data, even if such connections are available, for example when registering as

a business. In Cambodia the business registration process is so complicated that

this in itself is a disincentive to leave the informal sector, before even considering

taxes. There is not even a unified registration system for the whole tax administra-

tion, meaning that taxpayers can disappear when crossing the district border. In the

other countries ‘tax registration requires the pro-active participation of the tax -

payers’19, meaning that those taxpayers who do not actively approach the he the

administration to apply for a TIN or do not receive one automatically because of

withholding taxation do not appear in the system.

Not everywhere are databases are unified and technically integrated. In Lao PDR

there are a least two sets of data bases developed with the support of different

donors, neither of which are either complete or compatible. Indonesia has seen

large progress in taxpayer registration – since 2002 the base has been enlarged

almost tenfold. However, unfortunately, this has not been reflected in a similar

increase in tax revenues.

PEFA measures the effectiveness of measures for taxpayer registration through two

indicators: one is the controls in the taxpayer registration system (PI-14 [I]), where

good practice requires that all taxpayers have a unique tax identification number

(TIN), and that the relevant TIN-database is linked to all other related databases.

The other criterion is the effectiveness of penalties for non-compliance with

registration and tax declaration (PI-14[II]), where good practice requires the

deployment of a system of sanctions to give taxpayers an incentive to register with

tax authorities and thus make full declarations and timely payments of their tax

liabilities.

The PEFA results match the findings of our country studies: Vietnam and Thailand

have relatively advanced registration systems, but are not fully compliant with the

benchmark, whereas the other countries have registration systems but with limits

in coverage and linkage with other systems. Furthermore, the penalty systems do

not in most cases reach the benchmark. The PEFA-assessment of the Lao PDR

19Formulation from

Country Reports Indonesia

and the Philippines

38 | tax administration

Table 5: Ratings of tax indicators in PEFA-reporting20

20In development policy, PEFA (Public Expenditure and Financial Accountability) is a well recognised instrument to benchmark the public financial management performance of governments (see http://www.pefa.org/). The system consists of 28 performance indicators (PI) plus 3 PI on donor practices. 4 of the indicators relate to public revenues. The scoring spreads from A to D, where A is best and D worst.

* The Cambodian PEFA report has been elaborated in 2009, it is not publicly available. The data has been taken from Annex 14 in World Bank (2011).

status of main business processes | 39

penalty system should be seen against the background that there is no tax appeals

system at all in Lao PDR, so that penalties are high but no appeals are possible.

Moreover, in other countries, the appeals and penalty systems do not contribute to

the improvement of taxpayer relations, as described above (see chapter 2.1.[a]).

In summary we may conclude that taxpayer registration and its control, the most

basic function in tax administration, is in need of improvement in all countries in

the sample.

Assessment, payment and audit

Most of our sample countries rely on self-assessment systems – Vietnam,

Indonesia, the Philippines, and Thailand. Here, payments can also be made

through the bank system. In Lao PDR self-assessment is in its infancy, but further

development is planned, and in Cambodia there is a threefold ‘real, estimated, and

simplified’ system that gives many arbitrary powers to tax officers.

Inspection of the self-assessed tax returns is no easy task. In Vietnam, for example,

inspection is a relatively recent phenomenon. Only 3% of the administration’s staff

is currently assigned to that task and only since 2011 have there been inspections

on common risk factors.21 Recently in November 2012 the Law on Tax Admin -

istration was amended by a clear reference to risk management. In the Philippines

97.6% of taxes are collected from voluntary payments, against only 2.1% from

assessments.

All in all, in most countries the inspection and audit of self-assessment tax returns

requires improvement. This is matched by the results of the PEFA assessments on

the planning and monitoring of audit programmes. All countries’ tax administra-

tions include audit departments in their organisational structure, but the effective-

ness of the audit work is mostly rather limited, primarily because of limited

personnel. Another important constraint is the preoccupation with VAT refunding.

In the country studies of Indonesia and in Lao PDR the auditing capacity is reported

to be mainly preoccupied with VAT refund controls – those are compulsory by law

in Indonesia. In Lao PDR the private sector institutions and tax consultants inter-

viewed reported that VAT refunds have not occurred once since the introduction of

VAT in 2010.

Only Thailand manages tax audits and fraud investigations based on ‘a documented

audit plan, with clear risk assessment criteria for audits in at least one major tax

area that applies self-assessment’ – the benchmark for the PEFA rating B under the

indicator PI-14 (iii) on the ‘planning and monitoring of tax audit programmes’.

However, even Thailand does not audit all self-assessed taxes regularly and com-

prehensively. All the other countries run continuous programmes of tax audits and

21PEFA report Vietnam 2013,

p. v

40 | tax administration

fraud investigations, but these are not based on clear risk assessment criteria,

although Vietnam is starting to develop these. Only Lao PDR manages audits on an

exclusively ad hoc basis.

Interestingly, against the background of limited auditing capacities, almost all our

sample countries have adopted the OECD Transfer Pricing guidelines, which

requires advanced auditing capacities for implementation. Although Thailand and

Vietnam have introduced Transfer Pricing Units, none of the others have and the

issue will raise several implementation challenges for all administrations.

IT-systems

Although all tax administrations use the support of Information and Communi -

cation Technology (ICT), the results and impacts are quite different. Most countries

can look back at a long history of developing IT-systems – since the 80’s and 90’s.

In many cases this shift was linked to a broad range of donor support:

While computerisation began in the 1980s in Indonesia, even now the admin -

istration is far from having a fully computerised tax system, and the technical

possibilities to use third party data are reported in the country study as being at

their infancy.

Since the 1990s Lao PDR has been developing with the support of different donors

two different and differently structured systems that are not linked, so that there

are two different sets of TINs in use.

The Philippines first tried to build an integrated information system in 1993, but

expectations have not been fulfilled mainly because not all the modules and

functions have been implemented – the audit module for example has remained

unused. Further system developments have led since 2000 to an advanced system

also including third party information, but taxpayer registration is still not connected

to other government data, the audit module needs to be activated and only large

taxpayers can submit data electronically. Thailand has built a strong IT system; its

connectivity and integrity is fully given and used and it even won an award in the

country as the best IT system in all public institutions.

All in all, the picture is heterogeneous: some tax administrations are able to

manage a high performance ICT system, while others dispose of limited ICT support

and capacity to develop it. Consequently, most country teams have recommended

addressing the information systems as a key issue.

human resource capacities | 41

3.3 Human resource capacities

The various administrations face very different staffing situations – where Vietnam

employs almost 5 officers per 10,000 inhabitants, and Lao PDR and Thailand more

than 3, Indonesia, Cambodia and the Philippines employ little more – or even less –

than one person. This seems to go hand in hand with the tax to GDP ratios:

Vietnam, Thailand and Lao PDR also have the three highest tax to GDP ratios.

However, staffing alone, of course, does not solve the situation: Cambodia has the

second most tax administration staff per registered taxpayer, but the lowest tax to

GDP ratio.

However, human resources are reported to be scarce in most country studies. In

view of its particular historical background, the most urgent situation is that of

Cambodia, where the entire middle-aged generation of the sort required to resume

management tasks based on long years of experience is missing. However, the

shortage of personnel is also a challenge for the tax administration in the

Philippines.

In all countries recruitment is based on regular recruitment procedures, mostly

integrated in the Ministry of Finance’s general recruitment procedures.

Education and further training for tax officers seems to be an issue for most

countries. Some run specific tax schools or colleges: Vietnam provides a tax

academy or tax college for the basic and further education of tax officers. In

Indonesia education for tax officers is provided by the National Finance Education

and Training Agency, which trains all finance-related profiles. Since 2007 civil

servants under MoF – including the tax administration – have been better paid than

other departments.

The other countries use a variety of training opportunities as training on the job, in-

house and external training. Thailand and the Philippines mostly recruit graduates

from Universities for higher technical positions, for example from law schools,

public administration or accountants and information technologies, which are

trained on the job after an introductory training of several weeks.

Human Capacity Development has been assessed by the country studies to be one

of the major issues for bringing reform forward in Indonesia, Cambodia, Lao PDR

and Vietnam, and in the Philippines. In some countries the progress of reform is

reported to be strongly limited by absorption capacity constraints of staff responsible

for implementation of reforms, capacity shortfalls also hampers reform processes

by limitations to adapt to change. In this field support to education and training

seems to be an adequate assistance, and have consequently been recommended by

most teams.

4 Regional Cooperation and Coordination on Tax Issues

tax matters in the ASEAN regional integration process | 43

4.1 Tax Matters in the ASEAN regional integration process

The progress of the ASEAN Economic Community will require the compatibility and

suitability, in some cases even the harmonisation of the individual national tax

systems. This will be most needed for indirect taxation, especially VAT22, and the

taxation of capital. The establishment of adequate communication tools and

channels to exchange information is also needed.

However, explicit references to tax issues on the ASEAN agenda have been limited

to date: the ASEAN Charter (2008) does not mention taxation at all. The ASEAN

Economic Community Blueprint with its roadmap to an ASEAN community

2009–2015 refers to taxation in three respects:

(a) create a comprehensive bilateral double taxation agreements network

among the ASEAN member states;

(b) eliminate differences in withholding taxes;

(c) technical assistance on tax structure enhancement to CLMV for the eventual

harmonisation with other ASEAN member countries’ tax systems.

The latter is spelled out by the Initiative for ASEAN Integration (IAI), geared to the

needs of the CMLV countries (Cambodia, Myanmar, Lao PDR, and Vietnam).

However, the CMLV Priority Action List of October 2012 contains only two tax

related proposals by Vietnam: to define a procedure for applying the Agreement for

Avoidance of Double Taxation and to develop a mechanism for exchanging infor -

mation. This suggests that tax is a high-priority topic for CMLV.

Two aspects should be considered in relation to regional cooperation in tax matters:

First, sizeable negative impacts on regional integration can be expected to result

from non-cooperation, stemming from:

• tax competition, i.e. reduction in statutory and effective corporate tax

rates to attract foreign investors;

• loss of revenue for tax authorities due to tax avoidance; and

• higher transaction costs for businesses and investors in the region.23

A second reason to expect more dynamism in ASEAN tax policy is that regional

integration, leading to increased inter-regional trade, coupled with lower incomes

for national authorities due to lower customs rates, should exert pressure on

national budgets and increase the need for cooperation on the tax side.

22Harmonisation of VAT

legislation means, inter alia,

the harmonised definition of

the taxability, of the right

of taxation (defined by

corresponding principles:

country of origin, country

of destiny), considering

adequately the peculiarities

of B2B, B2C, the harmonised

definition of goods and services

(ICT products, electricity etc.)

the specific treatment of

specific goods (such as

vehicles, alcohol, tobacco) etc.

23ASEAN Tax Regimes (2006)

44 | regional cooperation and coordination on tax issues

The ASEAN Free Trade Area (AFTA) foresees zero tariff rates on all products by

2015 for the region. This will lead to significant reductions in revenues from

customs operations. The present country studies do not suggest that this issue is

driving Ministries of Finance to enhance coordination and alignment in tax matters

in order to increase tax revenues through combating tax evasion and avoidance.

One reason might be that intraregional trade has in the past been rather low (see

Figure 3) and possibly has not yet significantly increased – on average, around

25%; in other words, three quarters of trade takes place with non-ASEAN member

countries. By contrast, there is twice as much intra versus extra EU trade, i.e. twice

as much trade between EU members than between EU and third countries

(Koopmann/Vogel 2011).

The ASEAN integration process is speeding up, and this will be probably reflected

in rising internal trade data. It is most probable that the need for coordination and

cooperation in tax matters among ASEAN member countries will soon increase.

Figure 3: Intra-ASEAN trade in 2009 (as % of total trade)

Source: Puah (2011)

4.2 Tax treaty network

In the area of taxation the ASEAN Economic Blueprint foresees that the network of

bilateral agreements on avoidance of double taxation among all Member Countries

is completed by 2010, to the extent possible (emphasis added).24

Progress in this respect has been rather limited. Countries such as Vietnam and

Indonesia are highly cross-linked in tax matters, while not at all in others.

Cambodia does not have one tax treaty with another ASEAN member country,

whereas Lao PDR, and the Philippines have a few. Most ASEAN Members have pre-

ferred to conclude treaties with non-ASEAN members (see Figure 4) – an accurate

reflection of the trade situation (see Figure 3, p. 44).

tax matters in the ASEAN regional integration process | 45

24ASEAN Economic Community

Blueprint (2008), Jakarta,

under A3, free flow of

investment, Action 29,

and B5 Taxation, Action 58

25This table compiles evidence

for existing DTAs in the country

studies with information in the

presentation of Puah 2011

based on IBFD data.

Table 6: Tax treaties among ASEAN countries

(x- in negotiation) Source: Puah 2011 and Country Reports 25

Although several treaties exist, many of them require modernisation. Of the existing

30 DTA between ASEAN member states almost half date back more than 15 years.

Figure 5 also shows that the dynamics of entering into agreements have not

increased with the advances in the ASEAN integration process.

46 | regional cooperation and coordination on tax issues

Figure 4: DTA Network of ASEAN Members (Oct. 2011)

Figure 5: Age profile of intra-ASEAN DTAs

Source: Puah (2011)

Source: based on Table 6

If regional integration is to be positively affected by DTAs they should treat some

important issues, including the introduction of:

• information sharing and/or dispute settlement mechanisms between

ASEAN member Country tax administrations;

• a non-discrimination rule between a country’s own tax subjects and

ASEAN member Country tax subjects;

• a most favoured nation principle, i.e. to offer ASEAN member countries

at least the same tax arrangements as third countries; and

• the introduction of a maximum withholding tax rate between ASEAN

member countries.

Obstacles to such potential future areas of tax cooperation in ASEAN lie in

particular in the different bargaining position of ASEAN countries in tax matters.

One first step towards better integration in tax matters could be the joint decision

on a treaty model to be used, which was in fact decided at the last ASEAN Forum

on Taxation meeting in 2011 in the Philippines.

4.3 ASEAN Forum on Taxation

With the ASEAN Forum on Taxation (AFT), for the first time, tax officials have started

to work concretely on the treaty agenda. The cooperation, however, can be expected

to remain limited to specific issues related to DTAs and capital markets for the near

future. The AFT was founded in 2011 under the Indonesian Presidency of ASEAN.

It aims at a

‘full exchange of information on tax regimes and instruments among member

states, as well as work on the particular issues raised by the avoidance of double

taxation and withholding taxes, so as to further support the building of a competi-

tive ASEAN Economic Community.’26

In order to achieve this objective, in accordance with its Terms of Reference, the

AFT is composed of two sub-forums:

• Sub-forum 1 on Double Taxation and Withholding Tax, with the aim of delivering

a comprehensive treaty network and a favourable regime as well as timetable for

reduction of withholding tax rates among ASEAN member countries; and

• Sub-forum 2 on Enhancing Exchange of Views and Dialogue, resulting in a set

of recommendations, measures and actions regarding (i) sharing experiences on

best practices in taxation systems; (ii) debating strategies on areas of

cooperation in taxation; and (iii) building capacity support and training for tax

administrations and other areas of mutual interest among tax authorities.27

ASEAN member countries were asked to assign officers from their relevant depart-

ments to the work of the AFT.

ASEAN forum on taxation | 47

26Joint Media Statement

of the 15th ASEAN Finance

Minister’s Meeting, Indonesia,

8 April 2012, para. 17

27AFT ToR, Annex 18,

7 April 2012,

ASEAN Document

The first meeting was held in September 2011. Chaired by the Philippines, current

tax regimes were presented and background work was commissioned regarding

existing DTAs (administrative impediments, need for renegotiation). Those ASEAN

member countries without tax treaties with other ASEAN member countries were

asked to start or complete negotiations and a standard template for bilateral tax

treaties, on the initiative of the Philippines, was agreed.28

An initial work plan was drafted, designed to examine options to address withhold-

ing tax and double taxation issues in the region. Countries were classified into four

groupings:

• advanced tax systems in relation to capital markets without the taxation

of dividends and capital gains (Singapore, Malaysia);

• well-established tax systems, taxation of income generated on capital

markets (Indonesia, Philippines, Thailand, Vietnam);

• taxation of only interest from foreign loans (Brunei);

• starting to build the tax system, with no taxation of capital markets

(Cambodia, Lao PDR, Myanmar).

The report proposes to develop group 2 to bring it into line with group 1, which

together with group 3 will not need to be touched. Group 4 would follow later.

Group 2 is therefore being called upon to develop such a system of taxation on

capital market transactions so that taxes on dividends and capital gains are neutra -

lised. The harmonised rate is intended to be achieved by 2014.29 Information on

progress will be subject of the next AFT meeting, still to be convened by the chair.

The AFT foresees – as do most ASEAN institutions – decision-making based on

consensus and strict inter-governmentalism, giving the ASEAN Secretariat a

coordinating role. With this concept, the role of the chair is key in setting the

dynamics for the future development of the AFT and – also as in other ASEAN

bodies – can differ widely depending on the chair’s terms without the possibility of

being seconded by a secretariat, bridging capacity gaps between administrations in

the various chair positions. If continuous and faster progress in tax matters is

planned, the introduction of a secretariat for the mid-term would be helpful.

48 | regional cooperation and coordination on tax issues

28Progress Report of AFT,

September 2011,

ASEAN Document

29Progress Report of AFT,

September 2011, p.2

4.4 Other exchange fora

(a) Study Group on Asia Tax Administration and Research (SGATAR)

The Study Group on Asia Tax Administration and Research (SGATAR) was estab-

lished in 1970. The annual SGATAR meetings are intended to share information

about new tax policy and tax administration trends and to exchange experience

among tax officials working in various fields of tax administration (i.e. direct taxes,

indirect taxes, tax audits, transfer pricing, human resources, etc.).

The 16 current member states are: Australia, China, Hong Kong SAR, Indonesia,

Japan, Korea (Rep.), Macao SAR, Malaysia, Mongolia, New Zealand, Papua New

Guinea, Philippines, Singapore, Chinese Taipei, Thailand and Vietnam. Lao PDR is

no longer a member of SGATAR.30

Unlike professional tax administrator bodies such as CIAT, ATAF or IOTA, there is

no permanent secretary in one of the SGATAR member states and SGATAR does not

have its own staff. In additional to the yearly general meeting, there has since 2002

been a further biannual ‘Meeting of Heads of SGATAR Training Institutions’ (MHTI)

specifically addressing training issues.

In spite of the long history of SGATAR networking, none of the present country

studies mentions SGATAR as an important platform for the exchange of experience.

This might reflect the fact that SGATAR does not provide services such as

handbooks, training or peer consultancy, unlike other more institutionalised tax

administration organisations and thus feeds knowledge into all levels of the tax

administrations. Neither was any mention made of the need for further regional

exchange, although almost all country studies recommend intensifying regional

cooperation among the tax administrations.

(b) Other regular events

• Asia-Pacific Tax Forum (APTF)

Since 2005 the Asia Pacific Tax Forum has held annual meetings hosted by

rotation and an ongoing research programme has been developed.31 The

International Tax and Investment Centre (ITIC)32 and the Philippines Public

Finance Institute, both based in Manila, jointly serve as the Secretariat to the

Asia Pacific Tax Forum. The harmonisation of tax policies as preparation for the

ASEAN Integration 2015 is one of the topics dealt with in the APTF. Special

events were organised during 2012 dealing with ‘Global and Regional Tax

Trends’ and ‘Transfer Pricing’ and during the ninth annual meeting a ‘Special

Session to Discuss ASEAN Excise Tax Reform’ was suggested.

other exchange fora | 49

30The Lao PDR country study

does not report on the reasons.

31The ninth annual meeting

was held in Manila (from

3–5 October 2012), shortly

before our Tax Mapping

Mission. The Philippine

Department of Finance (DoF)

and the Bureau of Internal

Revenue (BIR) jointly opened

proceedings.

For the documentation of

the 9th APTF meeting in the

Philippines see

http://www.iticnet.org/Public/

PublicDocLanding.aspx?id=

59&type=Atf

32See

http://www.iticnet.org/

Home.aspx

• Japan/ ADB

Since 1991, ADB has provided an annual tax conference programme in cooper-

ation with the Ministry of Finance in Japan. In August 2012, the Nineteenth Tax

Conference33 was the fourth and last of the sub-regional tax treaty series, which

targeted the Central, West, and East Asian regions.

• OECD

OECD regularly holds training courses on various issues, i.e. tax treaties and

transfer pricing and also events on dispute resolution, where exchange among

participants is also fostered. These events are attended by officers from all

countries involved in the current mapping process.

• Japan/ IMF

In 2009, 2011 and 2012 IMF and the Japanese Ministry of Finance invited to

a High Level Tax Conference for Asian and Pacific Countries covering broadly

tax policy and administration reform topics in the region.34 The 2012 con fe -

rence featured presentations amongst others from Cambodia, Indonesia, the

Philippines and Thailand.

• Asian Tax Authorities Symposium (ATAS)

The Asian Tax Authorities Symposium has been held twice – 2010 and 2012 –

in Kuala Lumpur, Malaysia, hosted by the Malaysian Inland Revenue Board,

supported by the International Bureau of Fiscal Documentation (IBFD), the

Financing for Development Office (FfDO) of the United Nations, the Organi -

sation for Economic Co-operation and Development (OECD) and sponsored by

the Royal Norwegian Ministry of Foreign Affairs (MFA) and the ITC. ATAS should

contribute to enhance and promote developing country participation in develop-

ing international tax norms and in dealing effectively with such issues.

50 | regional cooperation and coordination on tax issues

33http://www.adb.org/projects/

documents/nineteenth-tax-

conference-completion-report

34The 2012 conference can be

found here:

http://www.imf.org/external/

np/seminars/eng/2012/

asiatax/index.htm

5 Donor Support and Coordination

52 | donor support and coordination

Aid and its coordination is most relevant in Lao PDR and Cambodia, as ODA

finances the major part of the capital balance and ODA contributes significantly to

the financing of public responsibilities. For all other countries in the present study

sample, as in the ASEAN in general, aid and consequently donor coordination are

hardly significant topics.

Thailand has itself evolved into a donor country, for the Philippines and Indonesia,

where many donors actively support the relationship between ODA and private

inflows (see Figure 6) and even more so the relationship between the ODA and tax

ratio (see Figure 7) shows, that the countries do receive aid, but that other sources

for investment and budget financing are much more important.

In Vietnam, ODA is an important source in the capital balance, but – as Vietnam

has the highest tax ratio in the sample – it represents only a minor contribution for

budget financing.

Figure 6: ODA and investment flows 2010

Source: Country Briefs, OECD DAC Aid Statistics

donor support and coordination | 53

35There is no data for Thailand.

The political background to aid and especially to the area of public financial

management (PFM) is clear in most countries. All governments, including Thailand,

are working with a PRSP (Poverty Reduction Strategy) or a National Development

Plan that can serve donors as a reference for the relevance of their contributions.

All development plans except the Vietnamese specify reforms in the area of taxation

as a major reform objective, some very specifically, others rather generally. All

countries35 also work with a PFM reform plan and all the PFM reform plans include

tax related reforms, mostly substantial. Only in Lao PDR is the agenda yet to be

developed and the PFM plan only includes first measures in enhancing taxpayer’s

registration for the tax area. Thus, it can be stated that, in all countries, taxation is

a relevant topic on the official political reform agenda and in most countries there

are ongoing reform programmes in taxation, as has been the case for many years in

some countries.

Nevertheless, the country studies also show that strategic planning of the concrete

reforms could be improved. In spite of the macro-level political backup, in some

countries reforms seemed to the teams to be supply-driven by donors rather than

reflecting the needs expressed at the operational level of the administration.

Figure 7: ODA and tax ratio 2010

Source: Country Briefs, OECD DAC Aid Statistics, *IMF data, Indonesia: Data from country report

In all countries donor support to taxation is led by World Bank and IMF. The next

most important donors in taxation are Japan (in Cambodia, Philippines, Vietnam

and until 2010 also in Thailand) and South Korea (in Vietnam and just entering in

Lao PDR), and there are contributions in individual countries from the US, Australia,

Canada, France, UK, Germany and the ADB. In financial terms the biggest con -

tributor to ODA in all countries is Japan, followed by the ADB. This shows that aid

is strongly supported by interregional relations, but the tax area is kept clearly in

the hands of World Bank and IMF.

Donor coordination is organised based on a formal coordination framework in most

countries, although not in Thailand. Indonesia had a consultative group on tax

issues until recently.36 So, in four countries (Cambodia, Philippines, Lao PDR,

Vietnam) the dialogue structure implemented includes working groups and regular

joint reviews. In Cambodia and Vietnam taxation is included in the working group

on PFM, in Lao PDR it is part of the macroeconomic group and in the Philippines

there is no formal coordination at all for taxation, but it is reported that informal

coordination by the resident IMF advisor – a former Indonesian tax administrator –

works well.

Even the presence of a formal framework in most countries does not mean that

donor coordination is evaluated to be working effectively. Some of the criticisms are

common to several countries: coordination measures do not match the needs of

both sides (donors and government), require many resources, and result in much

talking and little effect.

However, the progress shown in the OECD Monitoring reports for the Paris

Declaration (PD) applies to all countries but Thailand and is rated as satisfactory

for most countries. Difficulties remain almost everywhere in the application of joint

missions and joint analytical frameworks (PD indicators 10a and b) which probably

reflects the felt reality of donor coordination under the existing frameworks.

For the other indicators the challenges are rather mixed across the individual

countries. The critical factors appear to be the low rating and slow progress for

indicator 7 – the predictability of aid – in all countries, most importantly in the two

heavily aid-dependent countries Lao PDR and Cambodia.

For Indonesia and the Philippines the country studies report that the support avail-

able for the area of taxation is sufficient to cover the needs. In Cambodia and most

for Lao PDR, there is room for further support but absorption capacity has already

reached a critical level. In the case of Vietnam absorption capacity constraints of

staff are also reported in project management and implementation units.

54 | donor support and coordination

36It is commented why it stopped

working.

In summary, it appears that:

• aid and its coordination is not as urgent a topic in the ASEAN and also in the

country study sample as in other regions of the world;

• taxation is an important topic on the government’s reform agenda and many

countries follow on an explicit reform agenda in PFM including taxation;

• in the main, donor coordination is organised along a formal framework of

regular working groups and reviews;

• the most important donors in the region are Japan and ADB, support in the

area of taxation in all countries is led by the World Bank and IMF, while

Japan is also the most important bilateral donor in respect of taxation;

• donor coordination shows progress in some countries, others less, and

coordination is not reported to be very effective;

• although further support is needed in some areas, the countries close to aid

already face significant absorption capacity constraints.

For potential ITC support this means that pilot activities should be organised along

the reform priorities of the partner countries and in close coordination with existing

support initiatives.

The organisation of the transfer of experiences should be possible and helpful as

long as capacity constraints are respected. Furthermore an assessment should be

made of whether capacity constraints stemming from individual constraints could

not be eased by enhancing the capacities in project management and implementa-

tion of key persons and potential future key persons out of the reform agenda

process in partner administrations.

Potential ITC support could be useful to assist covering the awareness gap related

to the ASEAN Economic Community and indirect taxation – possibly in cooperation

with an existing regional platform. In addition, technical assistance is required to

support development of the CMLV tax administrations.

donor support and coordination | 55

6 Conclusion and Recommendations

Finally, we can conclude from our study process that the following issues require

further action:

• Legal adaptations are recommended mostly in relation to the modernisation or

simplification of existing tax laws. Legal adaptations are also required in most

countries for regional (AEC) and global issues, for example in order to

harmonise withholding taxes on capital markets. However, generally speaking,

the need for improvement is more critical than fundamental legal issues.

• The main challenge is much more difficult than introducing new legislation:

it is necessary to transform existing tax policy into efficient tax systems in

practice through a modern, efficiently and loyally performing tax administration

that earns the trust and compliance of the taxpayers.

• Here, strong political will and support is needed: ‘the single most important

ingredient required for an effective tax administration is a clear recognition at

high political levels of the importance of the task and willingness to support

good administrative practices – even if political friends are hurt.’37

• But support on rather technical issues is also possible, even crucial in some

areas: closing the gaps between voluntary tax registration, self-assessments and

fragmented inspection and audit applications is important, and human resource

development is a challenge for many of the administrations.

• Cooperation on tax matters within ASEAN needs to develop much more broadly

in terms of in topics and more in-depth. ASEAN as a joint organisation should

provide a forum for dialogue, exchange and peer learning as well as

opportunities for education and training in tax matters.

• Collaboration among ASEAN member states should be intensified while

merging into the ASEAN Economic Community – not only the customs duties

systems (broadly in place), but also the systems of VAT and excise duties need

to be harmonised. The existing DTA treaty network needs to be modernised and

expanded where necessary, the required communication channels and networks

need to be established.

• Donor contributions strictly need to avoid fragmented approaches and ove r -

burden tax administrations already facing severe capacity constraints.

Most country reports have developed detailed recommendations for further

development of tax administration and to some extent tax policies. In terms of

common topics that can be treated jointly and benefit from exchange among the

administrations, the following areas can be summarised:

conclusion and recommendations | 57

37Vietnam Country Report,

Chapter 6

Tax policy recommendations

Legal issues are not the main reflection in most reports, as we have seen. For some

countries the simplification of tax legislation is recommended – the Philippines –

while others are also being urged to develop further, as in the case of Cambodia and

Lao PDR.

Some of the more detailed recommendations also will imply legislative adaptations,

especially the reduction of possibilities for discretion and the strengthening of the

tax appeals systems.

Furthermore, some reports recommend improvement in tax administration and tax

policy through the broad but indispensable development of other governance agen-

das: to enhance external financial control through the Supreme Audit Institutions –

especially their competencies in tax matters – and public service reform.

Improve management and steering of reform processes

In some of the country studies a range of recommendations hint at improving the

management of reform processes, including:

• basing reform on adequate strategic and operational planning,

and attributing responsibilities;

• creating an adequate vision of reform sequencing – including

the full implementation and termination of started programmes;

• enhancing management capabilities through training and

performance-oriented appointment of management positions.

These issues may also lead to improved steering of donor support and help to over-

come absorption capacity constraints.

Strengthen human resource capacities

In some of the reports, human resource mobilisation is central to the recommenda-

tions, including significantly amplifying the budget of the tax administration and

the staff. No less important is increasing skill levels in general and particularly

certain kinds of expertise such as sector know-how for auditing and international

taxation issues.

For some countries the establishment of a tax academy is recommended.

58 | conclusion and recommendations

Improving relations with the taxpayer

In many of the sample countries relations between administration and taxpayers are

characterised by distrust. Recommended measures to improve this situation are

• implement effective anti-corruption measures

• strengthen tax appeals systems

• reduce compliance costs

• improve access to information tax liabilities

• provide taxpayers services (especially for small and medium enterprises)

• invest in taxpayer education

• improve and broaden tax consultancy.

Strengthen audit functions

Several recommendations in all country reports concern the strengthening of audit

functions, reflecting the fact that auditing is not sufficiently developed in most

countries.

• First of all, it is recommended to develop risk management systems suited to

the operational capabilities of the audit unit. Risk management systems do not

have to be highly complex, but even with a limited amount of indicators they

need to be sector-specific, therefore the tax administration should be able to

use sector know-how for the development. If possible and certainly for the more

sophisticated tax administrations audit-software should support risk manage-

ment.

• As far as possible, audit of low-risk cases should be automated, for example

low-risk VAT-refunds, as in a couple of our sample countries administration VAT-

refunding uses most of the capacity of the respective audit units.

• Audit units should intensify the use of third party data, first of all internally

through customs departments and through information exchange with the

Supreme Audit Institution – for example regarding state owned enterprises),

and also with other agencies and possibly internationally.

• Further, it is recommended to broaden the tax base through amplifying the audit

of small and medium enterprises (SME), if possible through the creation of

SME-units.

• Tax evasion should be addressed towards the high end – multinational enterprises

and low end – the informal sector.

conclusion and recommendations | 59

• For some countries it is first recommended to develop auditing experience in

general before entering in depth into transfer pricing issues.

• The implementation of anti-money laundering measures is also recommended.

Further develop IT-support

• Increasing information system-based automation at all levels is recommended

as one of the most important measures in order to manage effectively the

increasing data streams and to combat corruption in tax administration.

• In some countries development of comprehensive registration systems is still

necessary. Here, it is recommended to study systems in the regions and from

the outset to provide opportunities to use other governmental data, especially

through business registration.

• For most country administrations it is recommended to broaden the sources of

information of all types in order to support taxpayer registration and auditing.

This refers not only to the exchange of information with other government

agencies or with other countries – cooperation between tax and customs

administration is far from established in some countries.

Regional cooperation

The recommendations related to regional cooperation concentrate on:

• Amplification and actualisation of double taxation agreements among

the ASEAN member countries;

• Harmonisation of VAT and excise duties systems;

• Dialogue related to the taxation of capital;

• Dialogue on incentive policies and exchange of information, including

the establishment of the necessary communication channels and

networks; and

• Exchange on administrative and technical reforms.

60 | conclusion and recommendations

Joint approaches within ASEAN to education and training issues probably are lim-

ited by language constraints. Training for specific purposes, especially if concerned

with international issues, can be developed in English for all administrations.

For potential ITC support it should be considered that in all countries – except

Thailand – ample donor support is already provided, and the administrations are

facing absorption capacity constraints partly caused by fragmented aid provision

and capacity constraints in the administrations.

However, the issues derived from the country report recommendations above can

guide priorities and instruments for exchange. Ideally ITC would support the

ASEAN coordination process, possibly through the ASEAN Forum on Taxation,

in growing into an effective forum for exchange for the member countries’ tax

administrations.

conclusion and recommendations | 61

Annexes

62 | annexes

Annex 1: References

ADB (2012), Institutional arrangements for Tax administration in Asia and the

Pacific, in: The Governance Brief, Issue 19

ASEAN Economic Community Blueprint (2008), Jakarta

BMZ (2011), Deutsche Entwicklungspolitik in Asien – Ein strategischer Rahmen,

Bonn, August

Joint Media Statement of the 15th ASEAN Finance Minister’s Meeting, Indonesia,

8 April 2012

Koopmann, Georg; Vogel, Lars (2011), Globalisierung, Regionalisierung und die

Handelspolitik der Europäischen Union, HWWA Policy Paper

Mapping Taxation in Selected Asian Countries – Country Briefs (all June 2012):

Lao PDR, Cambodia, Thailand, Indonesia, Vietnam, The Philippines

Mapping Taxation in Selected Asian Countries – Draft Country Reports as of:

• Cambodia (December 2012)

• Indonesia (January 2013)

• Lao PDR (December 2012)

• Thailand (January 2013)

• The Philippines (January 2013)

• Vietnam (January 2013)

Phua, Stephen (2011), ASEAN Integration: Double Taxation and FDI, presentation

held at the 8th APFT, 16–18th Nov. 2011, Bali, Indonesia

Progress Report of AFT, September 2011

Schneider, Friedrich; Buehn, Andrea; Montenegro, Claudio E, (2010), New

Estimates for the Shadow Economies all over the World, International Economic

Journal, Vol. 24, No. 4, 443–461, December

Schneider, Friedrich; Buehn, Andrea; Keppler, Johannes (2012), Shadow

Economies in Highly Developed OECD Countries: What Are the Driving Forces?

Institute for the Study of Labour, Discussion Paper No. 6891, Bonn

Tohari, A., Retnawati, A. (2010), Is there Tax Competition in ASEAN? Bulletin for

International Taxation, Vol. 64, No. 1, 2010, p.51–60

World Bank (2011), Cambodia – More Efficient Government Spending for Strong

and Inclusive Growth, Integrated Fiduciary Assessment and Public Expenditure

Review (IFAPER) Report No. 61694–KH, November

annex 1 | 63

annex 2 | 65

Annex 2: The country teams

Dr Lothar Bublitz

Country Team Indonesia and the Philippines

Director of the Tax Office in Hamburg-Altona; Consultant on Taxation Issues for GIZ and other International Organisations

Wolfgang Büttner

Country Team Thailand

German Federal Ministry of Finance, Berlin, former Senior Advisor OECD on Transfer Pricing

Dr Barbara Dutzler

Country Team Indonesia

GIZ Senior Advisor, Head of the ITC Secretariat

Dr Ute Eckardt

Country Team Lao PDR

Consultant on public finance issues in development economics

Dr Mark Hallerberg

Country Team Indonesia and the Philippines

Professor of Public Management and Political Economy at the Hertie School of Governance and Director of Hertie's Fiscal Governance Centre, Berlin

66 | annexes

Dr Michael Kobetsky

Country Team Lao PDR

Associate Professor at the University of Melbourne, Melbourne Law School and Visiting Fellow at the Australian National University,ANU College of Law

Dr Hyun-Ju Koh

Country Team Vietnam and Cambodia

GIZ Planning Expert for Tax Reform, managing GIZ’s bi- and regional projects in the area of tax reform worldwide

Victor van Kommer

Country Team Cambodia

Member of the Executive Board and Director Tax Services of the International Bureau of Fiscal Documentation in Amsterdam, Professor of Tax Policy at theUtrecht University School of Economics (USE), Chairman of the Supervisory Boardof the Knowledge Institute for Independent Professionals, visiting professor at theuniversities in Lodz, Poland, Riga, Latvia and the Tax Academy in Kuala Lumpur

Nina Korte

Country Team Indonesia and Philippines

Research Fellow, GIGA German Institute of Global and Area Studies, Hamburg,focusing on State and Public Administration in Southeast Asia

Bart Kosters

Country Team Vietnam

Senior Principal Research Associate, Tax Services Department, International Bureau of Fiscal Documentation, Amsterdam

annex 3 | 67

Udo Lautenbacher

Country Team Lao PDR and Thailand

Director of the Tax Office in Bayreuth;

consultant in the areas “Good Financial Governance“ and “Decentralization“ for GIZ and other organizations since 1986

Dr Anke Scholz

Country Team Philippines

GIZ Deputy Programme Manager “Good Financial Governance (GFG)“

Jana Seehof

Country Team Vietnam and Cambodia

GIZ–Advisor of the Serbian Tax Administration on implementation of a management information system and reform of the administrative structures, procedures, and processes

Astrid Templin

Country Team Thailand

Former German Tax Inspector, GIZ advisor on tax issues, consultant

Bruno Webers

Country Team Vietnam and Cambodia

Berlin Tax Administration Lawyer, Tax Consultant, Certified Fraud Examiner Lecturer on Tax Audit and Tax Investigation

68 | annexes

Annex 3: Main findings on the level of corruption in tax administration in the Business Anti-Corruption country reports

Source: Country reports under http://www.business-anti-corruption.com/country-profiles/east-asia-the-pacific/

Country Classification Main findingsin report

Cambodia widespread • Estimation: Tax Department collects only 25% of potential tax revenue

• Household level: more than half of the households report paying bribes

• Business level: usually connected with tax inspections, which are frequent

Indonesia not as high • Estimation: Tax Department loses half of as in other its revenue collections due to rampant corruption

ASEAN • Household level:countries bribes are not a major individual problem

• Business level: large variation among regions, discrimination through political connections widespread, over 10% of enterprises estimated to be involved in tax fraud

Lao PDR no report

The alarmingly • Estimation: Between 2000 and 2009 estimated Philippines widespread USD 142 billion in illicit financial outflows

• Household level: one out of ten report on bribing• Business level: gifts for tax inspectors widespread,

Tax Department is ranked as second most corrupt institution in the country

Thailand not as high • Estimation: one 5th of the tax revenues is estimated as in other to be lost by corruption

ASEAN • Household level: still existent but decreasingcountries • Business level: complex compliance with many

tax payments gives opportunities, e-filing has helped

Vietnam widespread • Estimation: major cause for tax collection losses, especially in small towns and remote areas

• Household level: estimated 20% having paid bribes• Business level: high degree of discretion,

SME especially vulnerable, highly complex regulations, missing internal supervision in tax admin.

international tax compact

initiative to strengthen international cooperation with developing countries to fight tax evasion and tax avoidance