IMF deputy managing director comments on tax and economic growth in Asia

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On 12 July 2017 the IMF Deputy Managing Director Mitsuhiro Furusawa, speaking in Indonesia, commented on the importance of international tax developments for economic growth in Asia. He stressed the importance of revenue mobilization and international tax reform for achieving stronger, more inclusive growth, noting that the Asian region confronts various issues in its pursuit of continued growth including the issue of domestic revenue mobilization.

He noted that the World Economic Outlook published in April increased the forecast for global growth to 3.5% in 2017 and 3.6% in 2018, an increase from the 3.1% growth in 2016. The outlook for growth in Asia is the strongest in the world and Asia has been the most important contributor to global growth for several years. Investment in infrastructure and public services is supporting growth across Southeast Asia, and growth in the Asian region as a whole is expected to reach 5.5% in 2017.

Challenges facing Asia include uncertainty about the economic policy direction in some of the world’s advanced economies and the risk of inward-looking policies that could affect regions that have benefited from global economic integration. Market volatility could result from changing monetary conditions and from any unexpected developments in China’s economic rebalancing.

Longer-term challenges include the trillions of dollars in infrastructure investment that will be required if Asian countries are to achieve the status of advanced economies. There are also challenges resulting from demographic change and the increased healthcare and pension spending required by rapidly aging populations. The requirement to sustain inclusive growth when faced by lower commodity prices will require further economic diversification.

Domestic revenue mobilization is therefore very important. Increased revenue and public spending are important for economic growth. Tax revenues are relatively low in Asia and this could be a problem for continued growth. IMF analysis suggests that there is a minimum tax-to-GDP ratio of around 15% required to produce a real increase in growth and development. On average, most countries in the Asian region consistently fall below a ratio of 15 percent.

Strengthening revenue mobilization to collect an adequate amount of tax will require a wide range of policy and administrative measures. This could include making the value-added tax more effective and developing property taxation.

Current international tax issues facing Asia include corporate tax competition, cross-border tax issues, legal tax avoidance and illegal tax evasion. Competition for foreign direct investment could lead to a race to the bottom with countries competing for investors. There has been insufficient coordination among Asian governments on the issue.

The expansion of economic integration among the ASEAN countries with the development of the ASEAN economic area led to aggressive tax planning by multinational and regional companies. There has also been aggressive competition among countries of the region through the grant of tax exemptions and incentives.

Internationally increasing attention has been paid to corporate tax avoidance through complex tax planning. Measures taken by the international community include the adoption of automatic exchange of tax information as the international standard and the G20/OECD project on base erosion and profit shifting (BEPS). However BEPS does not address some of the international tax issues that are relevant for developing countries, for example the indirect transfer of assets (e.g. by sale of shares in companies holding assets). BEPS also does not resolve the problems arising from tax competition between countries.

The IMF is working with developing countries to develop ways to combat artificial profit shifting of profits and the transfer of assets to low-tax locations. It is also working to restrict damaging tax competition. The IMF is working on the issue of indirect transfers of assets and is cooperating with the OECD, World Bank, and United Nations through the Platform for Collaboration on Tax.

There is a very fine balance between establishing a tax system attractive to investment and protecting against damaging tax competition. Governments need to cooperate on a regional basis to resolve the issue of damaging tax competition. This work can reinforce domestic measures to protect tax the tax base and reduce spillovers from tax competition.

 

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