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Adopting the New International Tax Rules and Standards How Developing Countries in Asia and the Pacifi C Stand to Benefi T—If They Engage!

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Adopting the New International Tax Rules and Standards How Developing Countries in Asia and the Pacifi C Stand to Benefi T—If They Engage! The Governance Brief ɆŹƀɆƷɆŹŷŸž Adopting the New International Tax Rules and Standards How Developing Countries in Asia and the Pacifi c Stand to Benefi t—If They Engage! By Richard Highfi eld1 Introduction This brief presents a major challenge for all developing countries, particularly their Mobilizing the domestic resources of developing respective ministries of fi nance and national tax countries and making better use of international administrations that together play a critical role assistance has been the subject of considerable in setting revenue mobilization objectives, and discussion over the past 2 years, and is a key determining strategies and approaches for their direction and commitment refl ected in the Addis realization. Tax Initiative Declaration of 2015,2 and the UN’s In a session at the International Monetary Sustainable Development Goal 17 (Target 1): Fund (IMF)-World Bank Spring Meetings held in April 2016 titled “Collect More and Spend Better,” “Strengthen domestic resource mobilization, it was observed that billions of dollars of potential including through international support to tax revenue remain uncollected each year in many developing countries, to improve domestic developing countries, either due to poor tax system For inquires, comments, 3 capacity for tax and other revenue collection.” design or weaknesses in tax administration. A fair and suggestions, please contact the editor of the Governance Brief, Claudia Buentjen at +632 683 1852 or [email protected], 1 Richard Highfi eld works as consultant with ADB on tax administration and is also an Adjunct Professor with the University SDCC Thematic of New South Wales’ School of Business in Australia. He worked as division head and senior advisor with the Organisation Advisory Service Cluster, for Economic Co-operation and Development (OECD)’s Centre for Tax Policy and Administration (2003-2015), and with Governance Thematic the IMF’s Fiscal Af airs Department (1997-2003). He also served as Second Commissioner (1993-1997) with the Australian Taxation Of ce where he worked for over 25 years. Group. Previous issues of 2 The Addis Tax Initiative (ATI) is a multistakeholder partnership to catalyze signifi cant increases in ef orts to improve domestic The Governance Brief revenue mobilization so that partner countries can more ef ectively raise their own funds to invest in public services and can be accessed at other development needs. The initiative aims to address the billions of dollars lost every year due to narrow tax bases, weak http://www.adb.org/ administrative capacity, and poor tax compliance. For more information see https://www.taxcompact.net/documents/Addis- Tax-Initiative_Briefi ng-Note.pdf publications/series/ 3 Seminar titled “Collect More and Spend Better: The Role of Capacity Development” held with the IMF’s 2016 Spring Meeting. governance-briefs See https://www.imf.org/external/POS_Meetings/SeminarDetails.aspx?SeminarId=119 2 The Governance Brief “Over the last 7 years, amount of this foregone tax revenue arise from 1. Promoting transparency and exchange practices that are facilitated by either:4 of information for tax purposes the OECD, together (i) Lack of transparency of some countries’ with many advanced banking and regulatory environments Taxation is a critical source of revenue for all that enable tax evasion through offshore governments, in particular for developing countries and developing concealment of income and assets, as where revenue mobilization eforts produce far less countries and highlighted by the recent release of the tax revenue, relatively speaking, than in developed so-called “Panama Papers;” 5 and countries. The problem of tax evasion in developing regional tax bodies, countries is particularly acute, as tax evasion even have been working... (ii) Weaknesses in the international tax system by a wealthy few can have a relatively significant that enable profit shifting between countries impact. In the absence of alternate revenue sources, to develop new and other tax irregularities, currently the subject the inevitable losers from tax evasion are those rules and processes of the OECD project on “base erosion and citizens who miss out on essential services they profit shifting” (known as BEPS) discussed need to survive with minimum dignity and respect. to strengthen the in this brief. The revenue needs of developing countries, in international tax combination with the broader goals of nation Over the last 7 years, the OECD, together building, highlight the urgency of increasing global system.” with many advanced and developing countries transparency concerning the location of untaxed and regional tax bodies, have been working, with wealth that has been facilitated by bank secrecy and strong support from the G20, to develop new rules the inability of tax authorities to detect evasion. and processes to strengthen the international tax system.6 Exchange of Information on Request This governance brief outlines these The impetus for major changes to address the developments, along with their rationale and problems presented by the impervious practices of expected benefits. In doing so, the brief seeks to some jurisdictions, including bank secrecy, came in encourage developing countries in Asia and the 2009 when, following the global economic crisis, Pacific region to engage with the global processes G20 leaders declared that bank secrecy would no now in place to oversee further development and longer be tolerated and committed to take action implementation, where they have not already against non-cooperative jurisdictions, including done so. tax havens. In line with this commitment, many countries agreed to fight cross-border tax evasion together by committing to the international Global Developments to Reform the standard for exchange of tax information on request International Tax System (EOIR) developed by the OECD, and by joining a restructured Global Forum on Transparency and International eforts to address weaknesses in the Exchange of Information for Tax Purposes (Box 1). international tax system rely largely on two building The work of the Global Forum, with 137 members blocks: (i) promoting transparency and exchange of as of end-December 2016, has enabled rapid information among jurisdictions for tax purposes; implementation of the standard through extensive and (ii) tackling tax avoidance via the OECD/G20’s engagement with participating jurisdictions and a BEPS project. With considerable progress made comprehensive peer review process. to develop comprehensive proposals for reform in both areas, the focus of these international eforts Automatic Exchange of Information has now shifted to their implementation on a Further steps were taken to strengthen tax global basis. transparency in 2013 when G20 leaders committed 4 ADB estimates that developing countries lost $5.6 trillion in illicit tax flows over the period 2001–2010, which includes amounts lost through tax evasion; and Asia accounted for 61% of the total. ADB. 2012. Anticorruption Policy: Enhancing the Role of the Asian Development Bank in Relation to Tax Integrity. Manila. 5 The “Panama Papers” refer to a collection of over 10 million documents created by Panamanian law firm (Mossack Fonseca) that detail financial and attorney–client information for over 200,000 ofshore entities. The documents, which were leaked to a German newspaper, illustrate how wealthy individuals and public ofcials are able to keep personal financial information private. While ofshore entities are often not illegal, reporters allegedly found that some of the law firms’ shell corporations were used for illegal purposes, including fraud, tax evasion, and evading international sanctions. 6 The G20 (or G-20 or Group of Twenty) is an international forum for the governments and central bank governors from 20 major economies. It was founded in 1999 with the aim of studying, reviewing, and promoting high-level discussion of policy issues pertaining to the promotion of international financial stability. ɆŹƀɆƷɆŹŷŸž 3 “The Global Forum Box 1: The Global Forum on Transparency and Exchange of Information for Tax Purposes on Transparency The Global Forum on Transparency and Exchange of Information for Tax Purposes is the and Exchange of multilateral framework within which work on transparency and exchange of information for tax purposes has been carried out by both Organisation for Economic Co-operation Information for and Development (OECD) and non-OECD economies since 2000. Since its restructuring Tax Purposes is the in 2009, the Global Forum has become the key international body working on the implementation of the international standards on tax transparency. The Global Forum multilateral framework ensures that these high standards of transparency and exchange of information for tax within which work purposes are in place around the world through monitoring and peer review activities. In order to ensure worldwide participation in the benefits of increased tax transparency and on transparency international cooperation and to ensure that developing countries benefit from the new and exchange of tax transparent environment, the Global Forum has a technical assistance program for its members. information for There are two internationally agreed standards on exchange of information for tax tax purposes has purposes: (i) Exchange of Information on Request (EOIR); and (ii) Automatic Exchange of Information (AEOI). been carried out... The Global Forum currently has 137 members participating on an equal footing, since
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