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Home , Taxation in Japan, Tax competition, Tax evasion, Tax shelter, Tax treaty, Tobin tax

ASIAN DEVELOPMENT BANK A XECUTIVE D E INSTITUTE Kasumigaseki Bldg. 8F 3-2-5 Kasumigaseki B SUMMARY Chiyoda-ku, Tokyo 100-6008 I Tel: 81 3 3593 5500, Fax: 81 3 3593 5571 SERIES No. S52/01 Email: [email protected] http://www.adbi.org

2001 Conference 5-11 September 2001, Tokyo Executive Summary of Proceedings

CONTENTS 2 The governance of tax systems requires governments to Page continue their effort to stamp out and insure Key Messages 1 that the tax systems help the majority and not hurt them in Introduction 3 such endeavors. This is another example of the need for Opening Remarks 3 international cooperation. Taxation in an Interdependent World 4 Japan and International Tax Cooperation 5 3 Tax havens are a genuine concern to all as they erode the Tax Not Necessarily Harmful 5 revenue base. It is however important to understand how E-Commerce and Tax 6 harmful it is and to whom? Who really benefits from tax The Source of Income, Tax and havens? Perhaps this is an area, which deserves detailed Double Tax Agreements 7 research. Transfer PricingÐAdvance Pricing Agreements 8 Rationale and Scope for Fiscal Restructuring in At the specific country level, fiscal restructuring and Asia 9 4 Environmental Tax 10 financial sector restructuring are areas where attention Tax Administration and Compliance 11 of national governments as well as donors should go for Electronic Filing of Tax Returns 13 a -term solution to the ensuing problem from truly Country Experiences with Value Added Tax tax havens. (VAT) 14 Country Experiences with Tax Incentives 14 5 issues are very important but complex. Key Issues in VAT Implementation 15 They deserve special attention. Advance Pricing Tax Administration in Japan 16 Arrangements in addressing transfer pricing could be Issues and Options in Improving Tax beneficial (as experienced in Korea). Administration 17 Closing Session 19 6 While e-commerce is still relatively insignificant, it is likely to grow in the near future, resulting in the need for increased attention by tax authorities. It also appears that Key Messages e-commerce issues should be looked at from both direct as well as indirect taxation, and from domestic as well as 1 is no longer a new phenomenon but the international (cross-border) perspectives. challenges to tax policymakers and administrators it presents have yet to be resolved. It is incessantly 7 E-commerce should not be seen as a major threat to presenting us with new challenges in the application of revenue either. A key issue for many countries will be existing tax norms. Appropriate responses to this require training audit staff in order to build confidence in dealing multilateral co-operation and shared expertise by way with what, at first, may appear to be unreliable systems. of exchanges of views, experiences and information. Electronic record-keeping and electronic invoicing will

ADBI Executive Summary Series No. S52/01 1 be difficult concepts for many but over time they will 14 Tax incentives are losing their popularity due to their emerge as the norm. This is probably a far greater ineffectiveness in bringing foreign direct investment (FDI), challenge to revenue administrations than its possible administrative difficulties and high cost to the treasury (in effects on taxation policy of e-commerce. terms of foregone revenue). Tax incentives could be simplified. Where tax incentives are a must, one could 8 As Asia becomes more integrated into the world consider a lower rate rather than providing numerous economy, the tradeoffs between the benefits of integration exemptions. and the costs of surrendering fiscal autonomy become important considerations for tax administration and tax 15 Value-added tax (VAT) is a scientific taxation system but it policy. This may call for fiscal restructuring, which refers is demanding in terms of documentation. It is considered to the need to re-examine both revenue raising capacity better from the revenue as well as the economic incentive and governments’ spending needs. point of view. Public education is crucial for its success. Adaptation of international accounting and auditing 9 Fiscal restructuring in developing countries in the region standards will be useful. So will be the service of VAT book- is desirable to respond to the increased pressure on keepers, accountants and lawyers. Small businesses are revenue (less income, increased need for spending). always a problem, whilst large businesses bring the bulk of New sources of revenues need to be found; more revenues. efficient and rational tax policies to be put in place, and cost recovery, cost sharing and partnerships with 16 A particular problem in and administration in private sector, where feasible, seem necessary to be many developing countries is the shift from to broad- relied upon. based without a corresponding build-up of institutional infrastructures needed to administer the new taxes. New 10 Environment tax already exists in various forms. taxes have also tended to create new tax offices, further However, rationalization and/or consolidation may be fragmenting tax administration. There appears to be a necessary. Issues related to cross-border environmental compelling case for integration of tax administrative pollution and associated taxation are also important to functions and running a business-oriented independent tax be considered in this context. Tax policy reform may authority in many countries in the region. result in reduction in revenue, particularly when moving from trade taxes to VAT during the -run. The 17 The revenue authority model is often recommended for adjustment period can be longer than usually expected. improving tax administration as it means an integrated, Such policy reform will require a careful sequencing and autonomous and service oriented revenue administration planning of alternative sources of financing public system. Effectively “revenue authority” under such a spending. model is simply an “agent” for revenue collection under the overall supervision of ministry of finance, which is 11 Possible reform options for improving tax policy and the “principal”. It can be costly in terms of setting-up time administration are: (i) reduce opportunities for evasion and cost, although such costs may soon be offset by and abuse; (ii) reform tax structure; (iii) improve the ensuing benefits. However, there can be variants of such organization and management of tax administration; and models depending on country specific requirements and (iv) strengthen internal and external checks. political acceptability.

12 The reform of tax policy and administration will work 18 Use of computers and Internet in tax administration will better when accompanied or preceded by similar reforms certainly help to enhance efficiency and cut administration in other economic policy areas and institutions. Spending costs. It could also provide better transparency in tax on tax policy and administration reform programs are governance (e-government), and be useful in public good investments, but they will require careful planning, education (e-education for tax payers). political willingness and commitment, and public education. 19 The experience of e-filing of tax returns and their processing in the region is encouraging. Internet-based e- 13 Special focus on large should be encouraged, filing is superior to telephone-based e-filing. Public as it will pay well in terms of revenue collection. More education is very important in its promotion. Cyber laws information sharing within tax authority would help in seem to be a pre-condition. Security needs to be fully terms of cutting down administration costs. guaranteed.

2 ADBI Executive Summary Series No. S52/01 Introduction tries to take part in the revised format with a far wider reach than would have been possible previously. This year’s confer- 1. Tax officials from across Asia and the Pacific met at ence included several representatives from Central Asian and the Asian Development Bank Institute in Tokyo for the 2001 Pacific island countries who were able to send delegates for Tax Conference to participate in the capacity-building pro- the first time. The culmination of this year’s program was an gram on tax policy and administration. Jointly sponsored Attachment Program under which a study visit to Singapore and organized by the ADB Institute, the ADB, the Tax Bu- was organized. During the program a series of seminars was reau of the Ministry of Finance, Japan, and the Organiza- organized for them by the Inland Revenue Authority, the Land tion for Economic Cooperation and Development (OECD), Transport Authority and the Ministry of Finance, Singapore. the conference was held from 5-11 September 2001. The Officer-in-Charge of the conference was Dr. R. B. Adhikari, 4. Mr. Yukitoshi Kimura, Director General of the Tax Senior Capacity Building Specialist at the ADB Institute, Bureau, Ministry of Finance, Japan, noted in his welcome supported by Mr. Teruo Ujiie, Trade Specialist/Economist address that globalization is no longer a new phenomenon of the ADB. but the tax challenges it presents have yet to be resolved. In Kimura’s words, “it is incessantly presenting us with the new 2. While a number of sub-themes were addressed in the challenges in the application of existing tax norms.” Appro- course of proceedings, the one theme that dominated the priate responses required multilateral co-operation and shared 2001 tax conference is on “globalization”. Underlying al- expertise by way of exchanges of views and experiences, most every topic covered at the conference was a common which is one of the key objectives of the conference. idea that modern commercial transactions cross borders. The time when tax systems could be inward looking, focusing 5. Mr. Myoung-Ho Shin, Vice President (West), ADB, in on intra-nation transactions, have truly ended. The growth his opening remarks, briefly discussed the new format of the of multi-national enterprises, the easing of restrictions on 2001 Conference, in particular the inclusion of more partici- inward foreign investment by foreigners and outward for- pants from more jurisdictions. He noted, importantly, that this eign investment by resident enterprises, reductions of year’s conference would be followed by a short “on-the-job and non-tariff barriers to trade, and the ease of cross-border training” session conducted under the Attachment Program in sales and purchases brought about by simplified communi- Singapore. cations including the impact of the Internet, mean that inter- national commerce is now the norm, not the exception. The 6. Shin reviewed briefly several apparent conundrums faced tax conference examined all the policy and practical impli- by tax policy-makers, in particular achieving revenue-raising cations of this phenomenon. and redistributive objectives of taxation without distorting re- source allocation. Of particular importance to tax adminis- Opening Remarks trators is the move in recent years towards reducing the size of government and limiting resources for government agen- 3. The 2001 conference was the first organized in a sub- cies. He noted that many countries have moved from direct stantially new format. In the past, the organizers utilized a taxes to indirect taxes in the belief that such taxes are easier back-to-back format, with a shorter policy conference for to collect and administer. This assumption provoked many senior policy officials followed by a lengthier technical semi- questions and further discussions by participants later on in nar for tax administrators. In 2001, the two events were the conference. merged into a six-day conference that featured many work- shop sessions. In his introductory remarks, Mr. S. B. Chua, 7. While there are several international bodies concerned with Director, Capacity Building, ADB Institute, explained the tax policy cooperation and harmonization, no regional body rationale for the change in format. Under the previous for- for this purpose exists for countries in the Asia and Pacific re- mat, policy officials had little opportunity to explore the prac- gion. There have been proposals for multilateral approaches to tical administrative implications of different policy options including a current Ini- while administrators may have looked at administrative ques- tiative on Financing for Development. Shin urged delegates to tions without a full discussion of the policy implications of consider the practical, political and diplomatic difficulties in alternative approaches. More importantly, the longer for- the path of multilateral approaches. mat of the dual events under a single budget limited the num- ber of persons and jurisdictions who could participate in the 8. Finally, Shin noted that since 1999, the ADB has adopted proceedings. Amalgamation of the conference and seminar poverty-reduction as its overarching goal. A key element of made it possible for participants from 28 ADB member coun- any effective poverty-reduction program is considering the

ADBI Executive Summary Series No. S52/01 3 implications of tax policies for the poor. Delegates were urged 14. Guttentag noted the ease by which cross border financial to keep this goal in mind when considering policy and ad- transactions can be made to appear as if they had taken place in ministration options. other jurisdictions. The ability to hide such transactions from tax inspectors caused the OECD to begin its focus on harmful 9. In his opening remarks, Dr. Masaru Yoshitomi, Dean, with such transactions. Such predatory prac- ADB Institute highlighted the key issues facing Asian tax tices degrade the tax base and distort trade and investment de- administrators, which include the direct and indirect economic cisions. These offensive schemes are not limited to costs of tax competition and the revenue impact of current tax revenues of OECD countries and the OECD is working economic slowdown. with many non-member economies, which have suffered from such practices. Non-member economies often do not have the 10. A particular problem noted by Yoshitomi is the shift in economic clout of the OECD countries and are less able to many developing countries from trade to broad-based taxes pressure offending jurisdictions. Accordingly, Guttentag said without a corresponding build-up of institutional infrastruc- that it is not only helpful but also necessary that all countries tures needed to administer the new taxes. A related problem should work together. Eliminating harmful tax practices in noted is the use of separate administrations for different OECD and non-member economies and insuring that all juris- taxes. This system may not only lead to much higher com- dictions are able to, and do, cooperate fully in exchanging use- pliance costs for taxpayers, but also is likely to mean sig- ful and necessary tax information is high on his list of priorities nificant administrative inefficiencies. There may be, to maintain the needed tax revenues. Alternatives include loss Yoshitomi suggested, a compelling case for integration of of revenues, which generally hurt those in greatest need, and tax administrative functions in many countries and jurisdic- greater reliance on taxes most easily collectible in today’s world, tions. which often increases the regressivity of the tax systems.

11. Yoshitomi also touched on the UN Initiative on Financ- 15. Cross-border transactions and the number and type of ing for Development and its likely implications for tax policy players internationally have increased geometrically. Double and administration in developing and transition countries. tax agreements (DTAs) designed to avoid and Some of the matters that will be on the agenda for the Initia- prevent fiscal evasion are of greater importance. The DTAs tive include a on international financial transac- must deal more effectively with such issues as the peripatetic tions to curb speculative behaviour in markets and a executive and investor, to use DTAs to avoid any to both raise revenue and protect the international tax, the need to keep them current, and the need to expedite the resolution of issues. Most importantly, he stressed the environment. A third matter on the agenda will be the cre- need for tax officials to maintain control of tax issues and ation of an international tax organization. Finally, he stressed keep them out of other hands and non-tax fora. that public expenditure management and raising revenue for public purposes are cornerstones for a sustainable program 16. Electronic commerce tax issues should be based on exist- of pro-poor growth. The ADB Institute’s support for the 2001 ing tax principles found in the DTAs with such additional ex- tax conference is a manifestation of its work to support the planatory materials as are needed. The new technologies while ADB’s goal of . creating many problems can also be used successfully to im- prove the administration of tax systems. Guttentag foresaw the Taxation in an Interdependent World possible need for agreements to deal with value added taxes on cross border transactions paralleling the present DTAs. 12. The keynote address was delivered by Mr. Joseph Guttentag, former Deputy Assistant Secretary, Interna- 17. Governance of the tax systems requires governments to tional Tax Affairs, Treasury and formerly continue their efforts to stamp-out corruption and insure that Chairman, Committee on Fiscal Affairs, OECD. He spoke the tax systems help and not hurt in such endeavours. This is on the tax policy and tax administration issues created by the another example of the need for international cooperation. world’s tremendously increased interdependency. Countries must continue to work with the OECD and other organizations that challenge bank secrecy, which encourages 13. Guttentag noted that for many reasons with which del- and evasion. A recent UN paper notes the need egates were familiar, globalization has created the borderless for such cooperation but in Guttentag’s opinion suggests mov- world. He opined that the resulting interdependency requires ing too far and too fast. Furthermore, he suggests that the UN that those charged with tax policy and its administration take burdened with so many diverse controversial and divisive is- the steps necessary to cooperate with their colleagues inter- sues is not the right venue to carry this work forward and gov- nationally. Failure to do so will adversely affect one’s abil- ernments should all, members and non-members alike, consider ity to maintain the tax systems, which are the most desirable, building further on the fine work the OECD has done to date. based on one’s individual economies, cultures and histories. The OECD is admittedly not an ideal institution, but, in

4 ADBI Executive Summary Series No. S52/01 Guttentag’s opinion, is the finest organization in the world to- treaties covering 55 jurisdictions and accounting for more day to deal with the important issues he has described. The than 80 per cent of Japanese direct foreign investment abroad. OECD has made great strides in recognizing that 30 countries Consideration should be given to whether the treaty network cannot do this work alone and has brought in many non-mem- should be expanded further. And finally, the commission ber countries to actively participate in all of the projects that noted that further international cooperation is the only solu- Guttentag mentioned. tion to many types of avoidance and evasion. The current reporting system for overseas transfers has proved of lim- Japan and International Tax ited effectiveness because it only applies to bank transfers and then only to transfers above a very significant thresh- Cooperation old. The only realistic means for tax authorities to keep track of transfers abroad is through cooperation with other 18. Mr. Jun Sugie, Director of the Tax Bureau, Ministry jurisdictions. of Finance, Japan, followed the scene-setting survey with a more specific look at Japan’s system and the posi- Tax Competition Not Necessarily tion of Japan with respect to international tax cooperation. Sugie Harmful suggested that international tax developments in the 20th cen- tury could be divided into three phases. The first was a post- 22. An issue that has emerged recently as a focus for inter- second World War period when countries first entered into DTAs and developed unilateral mechanisms (particularly foreign tax national tax debate is the OECD’s project seeking to counter systems) to recognize the possibility of double taxation what the organization labels as harmful tax practices. Among on cross-border transactions. The drafting of the first OECD the nations that the OECD’s project targets are a number of double tax agreement falls into this period. The second was the ADB member countries. The OECD’s was outlined period that saw the introduction of rules to attack the problem by Mr. Donal Godfrey, Principal Administrator of the of transfer pricing and tax-motivated . These Harmful Tax Practices Unit and Mr. Makato Nakagawa, include controlled foreign (CFC), thin capitaliza- Senior Outreach Adviser, in the OECD’s Centre for Tax tion and transfer pricing rules. The third, and current, period Policy and Administration. Godfrey explained that tax com- has seen a significant strengthening of those rules and the petition is not necessarily harmful if there is (i) sufficient trans- OECD’s work on harmful tax competition. parency for tax audits; (ii) effective exchange of information; and (iii) substantial activities or no ring-fencing. It is harmful 19. Japan has adopted the conventional tools to address inter- when one or more of these features are absent and there is a national tax avoidance including CFC, transfer pricing and thin regime of a zero or low tax rates. capitalization rules. However, it is facing increasing challenges to prevent erosion of its tax base and to ensure the fairness and 23. Harmful tax competition is a global problem as tax ha- neutrality of its tax system. To this end, it actively participates vens have grown manifold, which has tended to erode tax in international discussion and rule-making. bases of the source countries. It requires a global solution. In this context, the OECD response to harmful tax competition 20. One serious administrative constraint faced by Japanese was conceived. It comprised: (i) the 1998 Report on Harmful authorities is the absence of tax file numbers in Japan. Politi- Tax Competition; An Emerging Global Issue; (ii) the 2000 cal constraints mean this is unlikely to change in the foresee- Report: Towards Global Co-operation—progress in identify- able future. The most recent tax commission report on the ing and eliminating harmful tax practices; and (iii) the prepa- Japanese tax system raised five issues for consideration by ration of successive progress reports. (Please see Executive the Japanese government. The first is the test that should be Summary of 2000 Tax Conference, No. S33/01 for a discus- used to characterize foreign entities. Currently, the Japanese sion on the OECD Report 1998 and 2000 on www.adbi.org. tax system relies on a formalities test and the commission has For these OECD reports and other related literature, please asked whether other tests might be more appropriate or effec- tive. A second issue to be resolved is whether the law should visit www..org). state that branches should be recognized as a separate entity for domestic tax purposes. Thirdly, the commission recom- 24. Godfrey and Nakagawa highlighted that the main reac- mended that consideration be given to updating Japan’s CFC, tions to the 1998 report were: (i) misunderstandings about thin capitalization and transfer pricing rules to counter the objectives; (ii) misunderstanding about the criteria for “harm- growing sophistication of techniques used by tax planners to ful tax practices”; (iii) too much time pressure; (iv) too little avoid the current rules. initial consultation; and (v) problematic communications. Since then the OECD has made good progress by overcom- 21. The fourth subject of recommendation was Japan’s ing some of these shortcomings. It has a target of removing treaty network. Currently, Japan is signatory to double tax harmful features in tax regimes by end-2003.

ADBI Executive Summary Series No. S52/01 5 25. Many questions were raised and addressed in the open 29. An important issue that arises from this approach is a discussion, which followed the presentation. The gist of en- perceived need to define e-commerce. The importance of ini- suing key observations included: (i) the prospects of reason- tial characterization was illustrated with the example of an able rates of return on investment are the main reason why order for music CD placed over the Internet. The fact that the investors or depositors move their capital to most profitable order was placed over the Internet might lead some to con- and safe places; (ii) tax incentives are one of the few policy clude this was an e-commerce transaction even though the options which countries may exercise in order to make their delivery is through the conventional route of the postal ser- places attractive to investors; (iii) the response to harmful tax vice. Holmes pointed out that this transaction is in essence incentives should not loose sight of possible detrimental ef- the same as a person who telephones a CD retailer, ordering fects on host economies and their poor people at large; (iv) the same CD, giving the retailer the person’s credit card de- industrialized countries and multilateral regional development tails and then awaiting delivery through the post. That trans- agencies should provide assistance in fiscal restructuring and action would not automatically be classed as e-commerce in the reform of financial sector in countries where funda- simply because a telephone was used to place the order but mental shifts in their economic systems are necessary; and some might have called the first transaction an e-commerce (v) the OECD needs to be more pragmatic in dealing with transaction. Holmes pointed out that the tax treatment of both non-OECD countries, and further strengthen its coordination means of conducting this transaction are the same. Assuming in this context with other multilateral development agencies that the transaction takes place within the same taxing juris- and bilateral donors. diction, the retailer will account for whatever is applicable and will include the transaction in the E-Commerce and Tax retailer’s annual accounts upon which any liability to tax on business profits will be assessed. 26. No single topic encapsulates better the impact of glo- balization and technology on modern tax design and admin- 30. It is thus important, Holmes cautioned, to be careful when istration than that of electronic commerce and tax. one hears calls for special treatment for e-commerce. There E-commerce has raised a myriad of direct and have been suggestions from some that “e-commerce should issues with respect to the taxation of cross-border transac- not be taxed” but such calls carry dangers if one does not tions and the OECD has emerged as a key player in the in- understand exactly what it is that will not be taxed. There- ternational sphere for its role in assisting the development fore, it is only necessary to define e-commerce if there is an of an international consensus on the best resolution of these intention to accord it some form of special treatment. And issues. that, of course, could well lead to a departure from the prin- ciples set out above. 27. The work of the OECD and the current state of play was explained to the 2001 conference by Mr. David Holmes, 31. The focus of the OECD’s work has been on three themes: Head of the Consumption Taxes, Tax Administration and direct tax; consumption taxes; and tax administration. The Electronic Commerce Division of the OECD’s Centre on 1998 Ottawa Conference recognized that to take the Tax Policy. Holmes explained that the OECD role in assist- organization’s work on e-commerce forward, input would be ing the world community to develop appropriate responses to required from outside the OECD. E-commerce is a global e-commerce issues has been based on two key principles: taxa- phenomenon and no one country, or grouping, can go it alone tion should not be a barrier to the development of e-com- in dealing with the tax issues. A number of Technical Advi- merce; and revenue streams should be maintained. An OECD sory Groups (TAGs) consisting of representatives from mem- 1998 Ministerial Conference in Ottawa put forward a set of ber and non-member governments and from businesses were Framework Conditions for taxation that the OECD believes established and these proved of great benefit to the OECD should apply to e-commerce. These include: neutrality (there work. should be no discriminatory tax treatment); certainty; sim- plicity; fairness; and flexibility. 32. A series of reports by the TAGs was published on the OECD’s web site (www.oecd.org) in February 2001 and are 28. In particular, the OECD believes that the same rules that also available in book form: “Taxation and Electronic Com- apply to conventional commerce should, as far as possible, merce Ð Implementing the Ottawa Taxation Framework Con- apply to e-commerce. The OECD ministers recognized, how- ditions”, also available through the OECD’s web site. Whilst ever, that there might be a need for some adaptation of the the direct tax issues, especially the meaning of permanent rules in order to ensure appropriate treatment to those ele- establishment in an e-commerce environment and the char- ments of e-commerce for which the existing rules resulted in acterization of income associated with e-commerce, are im- departure from the principles. portant Ð and may well turn out to be fundamental issues Ð

6 ADBI Executive Summary Series No. S52/01 the issues in need of more immediate answers are those con- ment, risk and simplifying tax systems. The key issues for the cerning e-commerce and consumption taxes. The main driver future will be the ways in which tax administrations use tech- for this is the fact that taxes such as Value Added Tax (VAT) nology to improve their efficiency and services to taxpayers. and Goods and Services Tax (GST) require the business to Developments in some countries suggest that a radical ap- act as tax collector by charging tax to customers and remit- proach to electronic filing may reduce compliance burdens ting at a later date to the tax authorities. Business requires on both administrations and taxpayers quite significantly. At certainty in order that the correct amount of tax is charged the same time, employees of tax administrations will need and, in the case of international transactions, the tax accrues training to come to terms with these new ways of doing busi- to the right country. ness.

33. E-commerce, by enabling the development of interna- 37. Holmes concluded by noting that e-commerce should not tional markets, has led to a number of consumption tax is- be seen as a major threat to revenue. A key issue for many sues. Consumers can now source products from overseas with countries will be training audit staff in order to build confi- minimal difficulty. At the same time, business can now ac- dence in dealing with what, at first, may appear to be unreli- cess markets around the world, no longer constrained by ac- able systems. Electronic record-keeping and electronic cess difficulties or, in some cases, regulatory requirements. invoicing will be difficult concepts for many but over time they will emerge as the norm. This is probably a far greater 34. The Ottawa principles that applied specifically to con- challenge to revenue administrations than its possible effects sumption taxes included: tax should accrue in the country of on taxation policy of e-commerce. consumption; for business-to-business (B2) transactions, the reverse charge mechanism would be appropriate for services; The Source of Income, Tax Arbitrage and for consumption tax purposes, digitalized products are not to be considered goods. There are few implications of and Double Tax Agreements these principles for the trade in goods. It is in the area of services, and especially digitized products such as downloaded 38. In recognition of the growing impact of globalization on software, text, music and images, that problems emerge. For national tax systems and the interest of conference partici- B2B transactions the problems can be resolved by applica- pants in exploring the myriad of international tax issues raised tion of the reverse charge mechanism. However, this solu- by globalization, a full day of the 2001 Conference was de- tion is not appropriate for business-to-consumer (B2C) sales voted to the question of international tax arbitrage and the and other means of tax collection have to be found for B2C impact of globalization on double tax treaties. The session transactions. was led by Mr. Lee Burns, Senior Lecturer, Faculty of Law, University of Sydney, Australia. 35. Work since the Ottawa conference has led to the issue of OECD guidelines, which suggest that for B2C transactions 39. In this session Lee examined the interaction between a the consumer’s normal jurisdiction of residence should act as country’s domestic income and its tax treaties in the a proxy for determining the country of consumption. A num- taxation of foreign investment. Consideration was given to ber of options for collecting taxes in these circumstances have the two key jurisdictional concepts under the income tax: resi- also been considered. The most likely outcome in the short to dence of the ; and source of the income. medium term is a system under which suppliers will be re- issues were considered by reference to the terms of the OECD quired to register and account for tax in countries in which and United Nations Model Treaties. Particular emphasis was they have private customers. This solution is unlikely to be given to current issues in international taxation, such as taxa- sustainable in the longer term and other systems for collect- tion of Internet transactions, cross-border supplies of software, ing the tax, perhaps relying on yet-to-be developed technol- allocation of income and expenses between head office and ogy, will probably be required. Developments in the US branch, and thin capitalization. dealing with wider problems of domestic sales taxes may pro- vide a way forward. 40. It was emphasized in the session that, where a tax treaty applies, the tax analysis of any cross-border business or in- 36. The OECD recognizes that e-commerce is dynamic and vestment transaction involves two steps. The first step is to will continue to build on the work already done. The recent determine how the domestic income tax law of the country collapse of the dot.coms should not lull tax authorities into a applies to the income or gains arising from such transaction false sense of security and as the economy revolves up it is and the second step is to determine whether a tax treaty modi- likely that Internet trading will increase rapidly. There remain fies or excludes the domestic liability. In the ordinary case, if several areas of work to be done, including work on enforce- it is concluded that there is no domestic tax law liability, then

ADBI Executive Summary Series No. S52/01 7 a tax treaty will not alter that conclusion. This is because tax 45. Transfer pricing adjustments are made using rules con- treaties apply essentially to limit source country taxing rights. sistent with OECD guidelines (Korea became a member of While it is possible that a tax treaty may expand domestic the OECD in 1996). Transfer pricing adjustments may be made taxing rights, this will require a special provision in the treaty where a resident taxpayer deals with a foreign related party, or domestic law to that effect. defined as a party that directly or indirectly owns 50 per cent or more of the resident taxpayer. The actual ownership rule is 41. In considering the domestic tax law treatment of income supplemented by a de facto control test known as a “substance arising from a cross-border transaction, there was particular over form” approach. This test looks at factors such as con- trol through personnel or a majority of transactions by the discussion of the rules for determining the source of income. resident taxpayer are with one particular foreign party. Ordinarily, a country can tax a non-resident only on income that is sourced within the territory of the country. In many 46. Taxpayers facing a reassessment following a transfer developing and transition countries, the rules for determin- pricing audit may request Korean tax authorities to invoke ing the source of income are not particularly well developed. the mutual agreement procedure to achieve a corresponding In the session, the design of source rules was considered. In change in the transfer price used in the related party’s juris- general, source rules are specified by reference to the charac- diction. The Korean rules allow the suspension of collec- ter of the income and, consequently, the importance of being tion during the mutual agreement proceedings, as well as comprehensive in the design of source rules was emphasized. internal administrative appeals, and appeals to the courts Also, the close relationship between characterization and while the mutual agreement procedure takes place. Experi- source of income as a focal point for international tax plan- ence has shown that mutual agreements to resolve transfer ning was discussed. pricing disputes can take up to nine years to achieve.

42. A case study was used in the session to show how the 47. In recent years, the Korean National Tax Service has pro- tax position changed as the foreign investor’s economic con- moted an alternative procedure to the traditional after-the-fact nection with the country increased. The facts covered in the audit and amendment process. The traditional system has case study included: trading “with” the country (rather than proved costly to taxpayers and administrators, has often re- trading “in” the country); dealing through an agent; the set- quired extraordinary time to resolve disputes, and fails to pro- ting up of a representative office; establishing a full branch vide taxpayers with the certainty required for investment operation; and incorporating a subsidiary. Participants dis- decision-making. Since 1997, taxpayers have been able to re- cussed the application of their country’s domestic tax law to the facts and in the case study, and there was general discus- quest an advance pricing agreement (APA) with the National sion of the impact of tax treaties. Tax Service.

Transfer Pricing—Advance Pricing 48. There is no charge for an APA. The agreement can last for three years with a possible renewal for a further three years. Agreements Both unilateral agreements between a taxpayer and the National Tax Service and bilateral agreements between a Korea-based 43. An important feature of the 2001 tax conference was in- taxpayer and the National Tax Service on one hand and, via a creased reliance on member countries to guide each other by treaty-based mutual agreement procedure, the foreign customer reference to their own experiences. Mr. Ghul-Gun Hong, or supplier and that person’s tax authority on the other hand, Director of the International Operations Division, National are possible. Of the 19 APAs completed to date, 16 have been Tax Service, the Republic of Korea made the first country bilateral agreements and only 3 have been unilateral agreements. presentation of the conference, explaining how Korea sought to address the problem of transfer pricing. 49. With five years of experience, Korean authorities have been able to reach a number of conclusions about the effec- 44. The measures adopted by Korea to counter tax minimi- tiveness of the APA system. Among other things, experi- zation by means of transfer pricing involve three levels of tax ence has shown that in most cases in which a taxpayer administration. The lowest level is the district tax office, which requests retrospective application of an APA, authorities will collects and verifies all the documentation required to be col- discover no problems with a retrospective application of the lected under the transfer pricing operations manual. These agreed price. Also, while bilateral APAs are to be preferred, are forwarded to a regional tax office for analysis and the in the case of small or medium-sized taxpayers, unilateral results are then reported to the head office. At the head office, APAs are recommended because the time and cost of com- taxpayers are classified into three categories Ð those whose pleting a bilateral APA is likely to be beyond the resources files are closed, those whose files are to be watched continu- of such firms. The National Tax Services is currently up- ously, and those who are to be subject to an audit. grading its research data bases with information on

8 ADBI Executive Summary Series No. S52/01 comparables and other factors used to determine appropri- 54. Chia considered how changes in the global develop- ate transfer prices to expedite future APA processes. It ex- ment, the cyclical economic environment and economic ide- pects to resolve increasing numbers of transfer pricing cases ology have impacted domestic . As an initial through the APA process. (For further reference on APA, example, she focused on a major change begun in early please see Guidelines for Conducting Advance Pricing Ar- 1990s when there was a paradigm shift from centralized rangements under the Mutual Agreement Procedure avail- planned to market economies in several countries with mas- able on www.oecd.org/taxation). sive revamping and/or restructuring of state owned enter- prises. These changes have major impacts on government Rationale and Scope for Fiscal revenue. As governments were weaned from excessive de- Restructuring in Asia pendence on tax (or profit) from state-owned enterprises (SOEs), new tax handles or new tax instruments were intro- 50. The first of two papers presented at the conference by duced as part of the transition to market economies. Exist- Dr. Ngee Choon Chia, Associate Professor, Department of ing enterprise profits tax were replaced with comprehensive Economics, National University of Singapore was entitled income taxes computed according to market principles, “Key Issues and Challenges in Fiscal Restructuring in Asia.” along with the introduction of value added tax to replace The presentation provided a comprehensive overview to serve older turnover taxes. as a framework for consideration of the conference papers on more specific topics. 55. Chia reported data showing falling revenues from profit taxes on SOEs in People’s Republic of (PRC) and 51. Chia introduced the topic by explaining that as Asia be- Viet Nam. Many Asian developing countries have adopted comes more integrated into the world economy, the tradeoffs the VAT. The implementation of VAT poses major challenges between the benefits of integration and the costs of surren- to tax administrators in developing countries because of low dering fiscal autonomy become important considerations for level of public awareness and high level of public resistance. tax administration and tax policy. Fiscal restructuring refers Widespread and falsifying of invoices, together to the need to re-examine both revenue raising capacity and with corruption and , have complicated tax adminis- the government’s spending needs. Domestic tax structure must tration of VAT. Low levels of literacy rates lead to adminis- adapt, adjust, and react to tax reform in the developed na- trative problems such as inadequate filing systems and fragile tions. The changing demographic landscape, the recovery of accounting systems. Tax legislation is sometimes too com- the recent financial crisis and the current global economic plicated for taxpayers to understand, let alone to comply with. slowdown will put pressures on government spending in some social sectors in Asia. 56. Besides having an impact on domestic tax structure, the evolution towards market-based economy has implica- 52. Chia suggested that a prime consideration in the design of tions on the financing of merit goods, such as health care any fiscal restructuring changes should be to maintain efficiency and pensions. For example, in the PRC and Viet Nam, em- or neutrality, to minimize economic distortion. She cautioned ployees in SOEs who had enjoyed such privileges will likely that fiscal restructuring is likely to have differential impacts on suffer social hardship with downsizing and restructuring of different segments, sectors and individuals. In particular, she SOEs. Another major change is the commitment to emphasized that in an integrated world, with tax competition, blocs such as the ASEAN Free Trade Area (AFTA) by re- it is more difficult to achieve vertical equity under a progres- ducing trade related taxes. In general, economists are in sive income structure. The tax system may have to resort to agreement that free trade and global integration is welfare preserving horizontal equity to ensure fairness. improving. In practice, however, integration into the inter- national community comes at prices measured both in terms 53. A third point made by Chia in her overview of fiscal re- of direct and opportunity costs. Integration is not just low- design issues was the importance of resources to ering barriers or separation fences; it also requires develop- enhance tax administration, to set-up appropriate legal frame- ing countries to abide by some international rules of work and audit systems to enforce tax rules and curb corrup- propriety. In implementing these obligations, developing tion and to strengthen institutional inputs such as information Asian countries incur opportunity costs of forgoing spend- technology, the banking sector and the accounting profession. ing on basic education and health. Similarly, in the after- On the expenditure side, she argued that there is a need to look math of the Asian financial crisis, there was an ambitious for alternative means of financing the public sector. All these effort to establish international codes and standards targeted considerations pose major challenges for tax policy formula- at the fragile legal and financial systems, but these have not tion, particularly for Asian developing countries. been costed.

ADBI Executive Summary Series No. S52/01 9 57. Chia then focused her discussion on tax competition for and environment. Chia emphasized that environmental tax re- foreign direct investment. The effective rates of corporate in- form is part of fiscal restructuring and is not ad hoc addition come tax in Asia are much lower than their nominal rate (and of new taxes to the existing taxes. Green taxes need to be lower than effective rates in many other regions) because of examined together with other fiscal priorities such as deficit the accelerated use of fiscal incentives. Empirical studies show reduction and financing implications of health care and pen- that tax is not the key determinant of where multinationals will sion reform. (See also ADB Institute Executive Seminar Se- invest; foreign investment laws, lack of restrictions on foreign ries No S33/01, Millennium Tax Conference). exchange conversion and dividend repatriation, political and economic stability, and the availability of a skilled workforce 61. Eco-taxes have gained significant popularity recently be- are often ranked higher than tax incentives in terms of invest- cause of the belief that “bads” such as the energy sector are ment attractions. Asian countries should seek to harmonize their under-taxed, while “goods” such as labor supply and savings fiscal incentive structures and resort to tax cooperation instead are over-taxed. Environmental tax reform is a reorientation of allowing tax revenues to be foregone to the treasuries of of tax structure from “goods” to “bads” by removing or modi- home countries of foreign investors. fying existing distortionary subsidies and tax provisions. For example, in the area of road transport, in many OECD coun- 58. The last aspect of fiscal restructuring explored in some tries, free company car, free parking, employer-paid commut- detail by Chia is the impact of domestic structural social ing expenses have now been made part of taxable incomes. changes on the design of fiscal restructuring. In the wake of In the energy sector, coal subsidies are being removed in favour the Asian financial crisis, there is increased pressure on gov- of greener energy. In many OECD countries, these changes ernment expenditures to deal with domestic demands such as are also accompanied by reductions in taxes on personal in- poverty, social insurance, ageing and healthcare. There is also come and profits. The OECD countries, particularly the Scan- pressure from international organizations to improve social dinavian countries, have introduced extensive environmental infrastructure in terms of democracy, transparency, account- tax measures in terms of taxes on motor fuels, energy prod- ability and corporate governance. Even if Asia is to recover ucts, environmentally products, air transport and waste dis- fully from the cyclical slowdown, the fiscal systems need to posal and management. be restructured to cope with domestic structural issues relat- ing to an ageing population. 62. Chia shared with conference participants the evolving experience in applying motor vehicle ownership and use taxes 59. For many developing Asian countries, the recent economic in Singapore. Being small in geographical size, land scarcity crisis has highlighted the relative neglect of the social security poses a potential constraint for in Singapore. provisions and the immediate need for a social safety net for a Restraining car ownership and car use through motor vehicle growing number of poor and unemployed persons. Chia raised taxes is part of land transport policy to ensure smoother traf- several immediate concerns regarding the current tax arrange- fic flow. However, the use of such taxes has direct environ- ments applicable to a provident fund type social security sys- mental consequences. Chia illustrated the use of price tem such as that used in Singapore. First, the current system instruments via taxes, fees and charges to bring about an in- allows tax deductions for contributions to saving through such ternalization of marginal damage caused by the car use. The funds. Given the nominal rate progressivity of the income tax certificate of entitlement (COE) is an illustration of the use of system, the deductibility of income placed in sav- market permit to achieve environmental objectives by first ings plans results in an upside down subsidy which signifi- picking the target pollution level (in this instance Ð maintain- cantly undermines equity. Second, there is a need to re-examine ing car population growth at 3 per cent per annum), then is- the generous in terms of its impact on income tax sues enough permit to meet the target and allows the demand base. Alternative financing methods such as cost recovery for to determine the price of the COE. Both the advantages and services and the use of public private partnerships in the social the pitfalls of using such market permit system were discussed. sector will become more important. 63. Motor vehicle related taxes have offered Singapore a Environmental Tax double dividend. The first dividend is revenue: motor vehicle taxes account for almost 20 per cent of the total revenue. The 60. In her second presentation, Chia reviewed the many is- second is an improved environment. Car use tax in the form of sues concerning tax and the environment. She explained that the electronic road pricing system and various car ownership there is a growing need to search for more efficient and cost taxes have distributed traffic away from the congested places effective means of implementing domestic environmental and lowered the peak hour pollutant concentration. Falling lev- policies. One such market mechanism is the environment tax els of pollution from carbon monoxide, sulphur dioxide, nitro- (eco-tax), which includes all taxes related to natural resources gen oxide and lead have been observed in Singapore.

10 ADBI Executive Summary Series No. S52/01 64. At first glance, the positive experiences of OECD and the international competitiveness of a small price taking Singapore might seem to imply that green tax implementa- economy was also raised. Finally, environment is a global in- tion is only possible for more developed countries. However, ternational public good and needs a global solution, especially Chia stressed that the advantages of greening the tax system in the area of cross border effects such as pollution. As in the can be enjoyed by developing countries as well. She reported case of local public good, there is the issue of free rider to which that a case study of the PRC suggests that there are six envi- an international tax organization (ITO) may well offer a solu- ronmentally related taxes in place Ð a natural resource tax, tion. However, this would also raise a number of other issues, consumption tax, an urban construction and maintenance tax, such as, what is the mandate for the ITO, where this is to be, vehicle use taxes, a fixed asset investment direction adjust- how and what taxes to levy and more importantly how tax rev- ment tax and a land use tax. The growing importance of ve- enue is going to be shared and recycled. hicle use in the PRC revenue system cannot be ignored. Tax Administration and Compliance 65. The establishment of environmental taxes has to be con- sistent with the principles on which a good tax is based, 68. Professor Neil Brooks, Osgoode Hall Law School, namely, efficiency, equity, transparency, revenue productiv- York University, Toronto, spoke on tax administra- ity and administrative efficiency. There are, however con- tion, focusing on “The Challenge of Income Tax Compliance”. cerns, which are unique to the implementation and design Brooks began by noting that the central task facing income of environmental-related taxes. A first concern is the stabil- tax administrators is to ensure that all individuals are assessed ity of the tax base and the robustness of green taxes. As and pay the tax they owe. Although this has always been a are taxes on bads, an effective green tax will re- difficult task, the challenges facing tax administrators in the duce the size of the tax base and hence the . Chia increasingly globalized economies characterized by difficult explained the procyclical nature of ecotaxes by reference to to tax sectors, sophisticated communication technologies, and the experience of COE revenue in Singapore. From an en- destructive tax competition have become even more formi- vironmental perspective, there is a growing need to search dable. Brooks divided his remarks on this subject into two for more efficient and cost effective means of implement- parts. First, he spoke about the serious consequences of tax ing domestic environmental policies. Chia emphasized that evasion and what is known generally about the causes of tax environmental tax reform is part of fiscal restructuring and evasion and the size of the underground economy. Second, he is not ad hoc addition of new taxes to the existing taxes. reviewed the various policy instruments that tax administra- Green taxes need to be examined together with other fiscal tors have at their disposal for increasing tax compliance and priorities such as deficit reduction, financing implications highlighted a number of ways in which these instruments of health care and pension. might be used more effectively.

66. A second concern is the adverse distributional effects of 69. As a preliminary point, Brooks emphasized that there green taxes. For example, ecotaxes that apply to energy will is no quick fix for increasing tax compliance. A reform strat- likely to have regressive effects. An increase in the tax on egy to increase compliance requires a concerted, long-term, coal will fall hardest on lower income group. This group coordinated and comprehensive plan. It is vital that tax ad- spends a proportionately higher percentage of their dispos- ministrators ensure that every compliance policy instrument able income on coal, which is their primary source of energy. at their disposal is being used as effectively as possible. The Chia also warned of the equity issues as seen in the pitfalls uses of these instruments compliment one another. He noted from the introduction of VAT on fuel in UK. The VAT on that although the organization, personal and operation of a fuel, though a revenue raiser, had most impact on lower in- tax department are obviously all important in increasing ef- come household, which led to widespread protest, especially fective administration and compliance, the legal structure by the elderly who could not afford to heat their homes. Some for tax administration is an often neglected but crucial foun- compensating redistributive instruments must be incorporated dation for implementing a comprehensive reform strategy. into green tax reform to address the equity issue. 70. Tax compliance has become such a serious problem that 67. A third concern is the international and trade competitive- it is no exaggeration to say that tax evasion threatens not ness of introducing green taxes. Green taxes such as carbon only the integrity of income tax systems themselves, but more taxes are likely to increase the cost of production. The question generally, the ability of citizens of individual nation to demo- that was raised is who bears the tax burden Ð the consumer, the cratically determine what goods and services they wish to producer, the domestic exporter or the foreign importer. This provide one another collectively through governments. This issue cannot be ignored by petroleum exporting country like fact highlights the absolutely vital and central role that tax Indonesia. The issue of whether imposing green tax undermine administrators play in democratic countries. Tax adminis-

ADBI Executive Summary Series No. S52/01 11 Box 1: Basics of Tax Policy Instruments

Changes in substantive tax laws: Tax laws should be to the taxpayer against the income reported by the taxpayer. drafted so that they can be enforced by reference to readily Tax departments should make extensive use of information verifiable facts and circumstances. Tax expenditures returns, cross-return matching and non-tax document should be designed so that they tax department can monitor matching and ensure that this information is collected in a their use. way that enables it to be readily matched against the taxpayers return. Improving the climate for taxpaying: To improve its Withholding Taxes: In addition to filing an information reputation, the tax department might publish a taxpayer’s return, where the administrative costs are not too great, charter of rights and obligations. The process of drafting third parties should also be required to withhold taxes from such a charter should provide the department with an income payments to taxpayers. Although tax departments excellent opportunity for consulting with, and gaining the invariably require employers to withhold tax on payments support of, interested community, professional and to employees, in fact this compliance instruments should industry groups. be extended to a broad range of payments.

Moral suasion: In a number of areas of the law, such as Increasing the visibility of transactions: Every drunk driving, dramatic changes have been made in the opportunity should be made in the tax and in the private behaviour of individuals by changing public attitudes law to increase the visibility of business and investment towards the . Tax departments should to transactions. educate the public about the nature and uses of taxes and the fact that tax evasion should be regarded as a serous Auditing: Unfortunately, audit coverage has been declining breach of personal, social and political morality. Everyone in many countries due to cut-backs in the civil service and loses when individuals evade their taxes. an increased emphasis on taxpayer services. Yet auditing remains an essential tax compliance instrument. It is important that when audits are undertaken they are Taxpayer services: Taxpaying should be easy; tax conducted thoroughly and effectively. A number of empirical should be difficult. Brooks reviewed the numerous types of studies have found that after a poorly conducted audit, services that tax departments can provide to inform taxpayers are more likely to cheat than before the audit. An taxpayers of the tax laws and their obligations, to reduce ineffective audit apparently leaves taxpayers with the the costs of complying with tax laws, and to make taxpaying impression that there is nothing to fear from an audit. relatively easy, if not painless. He emphasized the particular importance of assisting new businesses. Information-gathering powers: Particularly with increasing cross-border transactions, it is essential that tax Regulation of tax advisors and prepares: Tax departments continue to expand their information-gathering practitioners and tax preparers play an important role in powers. the tax administration system. They should be closely regulated to ensure that taxpayers are receiving good Civil penalties: Civil penalties should be simple and easy services from them and that their actions lead to increased to apply, integrated, fair, consistent in application, and sufficiently severe that they deter the intended conduct. compliance. Their role is to ensure that taxpayers pay the least amount of taxes “within the law”. Criminal prosecutions: Establishing and organizing a special investigations branch to pursue tax evaders involves Identity numbers: Identity numbers, in particular, general a wide range of considerations. However, there is little doubt identification numbers that must be used for multiple that the criminal sanction must be available to tax purposes, such as licenses, registering assets, and paying departments as an integral part of a compliance strategy. taxes, are a vital component in increasing tax compliance. Compliance research: All tax departments should engage Matching information: One of the most effective in research on compliance and, when possible, construct instruments for increasing compliance is by matching experiments and pilot projects to test the effectiveness of information provided by third parties about income paid their use of tax compliance instruments.

12 ADBI Executive Summary Series No. S52/01 trators may never be able to completely solve the problem mand approach, the examination of discrepancies between of tax evasion, but at least they should ensure that they are national expenditures and income statistics, and the physical moving in the right direction Ð increasing tax compliance - input method. Although these methods do not allow for an no matter how slowly. accurate measure of the size of the underground economy, they do suggest that in many countries it is very large (in some 71. Although the social and economic costs of tax evasion cases more than 50 per cent of the recorded gross domestic are well known, Brooks reviewed these costs since he con- product of a country) and is growing. tended that it was the responsibility of tax administrators to continually bring these costs to the attention of policymakers 75. Any policy strategy to reduce tax evasion should be based and politicians so that they are more willing to politically upon the reasons why people cheat on their taxes and, ac- support improved tax administration and to the attention of cordingly, Brooks reviewed some of the theoretical and em- citizens so that they realize the personal stake they have in pirical literature on tax evasion. He suggested that many the success of the tax departments mission. Tax evasion limits policymakers place too much weight on the explanation of the capacity of governments to discharge their important tax evasion given by economists, namely that in deciding to functions. The revenue lost through the underground cheat individuals rationally weigh the costs and benefits of economy must be made up by either increasing taxes on cheating, and thus concentrate their efforts on simply reduc- honest taxpayers or by reducing government services, such ing tax rates and increasing penalties. This theory of tax eva- as health, education and social programs that the most vul- sion has much less empirical support than is commonly nerable members of a society, in particular, depend upon. supposed. In designing compliance strategies, tax adminis- Moreover, tax evasion almost always benefits primarily the trators should not ignore the more compelling psychological high-income groups in a society, either directly or indirectly, and sociological theories that suggest that individuals evade thus making it more difficult for a government to achieve a taxes, in part, for reasons such as habit, the lack of social morally acceptable distribution of income and wealth in a stigma attached to tax evasion, peer pressure, attitudes towards country. the fairness of the tax system, perceptions about the uses of the taxes they pay, and the way that they frame decisions to 72. Tax evasion shifts the cost of taxation from dishonest to evade. honest taxpayers. Arguably, there is no greater unfairness in a tax system. Also, it often results in honest businesspersons be- 76. In the second part of this presentation, Brooks reviewed ing unable to compete with competitors who evade their taxes. each of the policy instruments for increasing compliance and This faces them with a terrible dilemma: comply with the law suggested ways in which those instruments might be used more and be driven out of business or cheat in order to keep up with effectively (see Box 1 for the summary of the illustrations). the competition. Electronic Filing of Tax Returns 73. Tax evasion reduces the efficiency and prosperity of an economy in a number of ways: it diverts resources to activi- ties that might be unproductive but that are susceptible to eva- 77. The use of electronic-filing of tax returns is increasing sion; in some cases it drives more productive, but honest, in the Asia and Pacific countries and brief country presenta- businesspeople out of business; it forces businesses to alter tions from three different jurisdictions provided conference production and sales methods simply in order to reduce the participants with overviews on alternative regimes. risk of being caught by the revenue authorities; it reduces the value and efficiency of businesses that operate in the under- 78. Mr. Raymond Nai-man Luk, the Deputy Commis- ground economy by making it difficult for them to keep ac- sioner, Hong Kong Inland Revenue Department curate books and records; and, by fostering a never-ending (HKIRD), Hong Kong, China (HKG), first described effort to avoid detection, it consumes resources that could Internet-based public services developments. The provision otherwise be put to productive use. Tax evasion also distorts of electronic services by the HKIRD is part of a broader macroeconomic policy and, in the long run, threatens the le- electronic service initiative by the HKG authorities. They gitimacy of the tax system and erodes moral standards more recognize the potential benefits of online tax filing: the com- generally. puter can automatically check to ensure data accuracy and completeness, provide an instant acknowledgement to the 74. Somewhat surprisingly, in spite of its seriousness, no one taxpayer and can capture data directly for processing. knows for sure the size of the underground economy. A num- ber of studies have used indirect methods of measuring the 79. The use of the Internet for tax purposes met with limited size of the underground economy, such as the de- initial success, in part because of the complicated system used

ADBI Executive Summary Series No. S52/01 13 to ensure the integrity of online transactions. Initially, per- puter with the main office. The increase in efficiency avail- sons wishing to file online had to obtain a special digital cer- able from computer processing of data has been significant tificate from a post office and this procedure proved to be and greater use of computers is a priority for Indonesian cumbersome. The system was revamped as part of a larger authorities. However, direct electronic filing by taxpayers electronic services delivery program by HKG authorities. At is some way off. present, individuals can file returns online. Businesses can register online and conduct some transactions with different Country Experiences with Value Added government departments but cannot currently file returns Tax (VAT) online. Further use of the Internet is planned, but yet to be implemented. 84. The Asian countries have had mixed experiences with VAT. Four member countries: , Nepal, Sri Lanka 80. The status of e-filingp in Singapore was explained by and Malaysia described their experiences. Mr. Zeauddin Ms. Ching Ching Kuan-Lee, the Assistant Manager, Tax- Ahmad, Member, and Waiver of the Na- payer Services Division, Inland Revenue Authority of tional Board of Revenue, Bangladesh; Mr. Bhoj Raj Singapore (IRAS). Singapore first adopted a type of elec- Ghimire, Joint Secretary of the Ministry of Finance and tronic filing by the use of telephone filing in 1994. E-filing Chairman of the Revenue Consultative Committee, Nepal; via the Internet was implemented in 1998. Internet filing and Ms. Indrachapa K. Balasooriya, Deputy Commis- has proved to be superior to telephone filing in many re- sioner of the Department of Inland Revenue, Sri Lanka spects. A tax form is a visual document and it is difficult to presented their respective countries experiences. Discussants provide useful guidance via telephone prompts. Also, there included representatives from the Maldives, India, Mongolia, are restrictions in the number of keys available to enter data Nauru, Tonga and Viet Nam. through push-button telephones and taxpayers cannot ob- tain printed evidence of their filing details through a tele- 85. The countries in question have had mixed success with phone. their VAT systems. In some cases, the introduction of VAT led to an increase of indirect tax revenue over former turn- 81. At present, there are still restrictions on which taxpayers over taxes while in other cases the VAT did not appear to be can file via the Internet. Only employees and self-employed as successful. Most significantly, there were wide divergences individuals who have been issued with an electronic filing in the scope of the VAT. It emerged from the presentations PIN are able to file their returns electronically. Employers and following discussions that many notional VAT systems in can submit information about employees’ income via the the region are closer in operation to consumption taxes oper- Internet, but cannot file their own returns as yet. It is pos- ating at a single stage or a limited number of stages in the sible, however, for businesses to file GST returns via the production chain and that they are often limited to a small Internet and to file forms for stamp online. Companies number of economic sectors or goods or services. can use the Internet to file some types of information and to file various requests, but not to file their actual returns. This 86. A number of reasons were cited for the very limited scope has resulted in two major benefits: (i) much faster processing of the so-called VAT systems in many countries including limi- possible; and (ii) significant reduction in operational costs. tations in administrative capacity, political concerns over op- The IRAS has estimated that it enjoys savings of 2.70 dollars position to broader-based consumption taxes, and trader per taxpayer who e-files. resistance to new taxes. However, time and again one factor was cited as the key reason for the limited VAT base and for the 82. Mr. Erwin Silitonga, Director, Tax Information, Di- use of surrogate measurements or taxes where the VAT did not rectorate General of Taxes, Indonesia explained how Indo- apply. This was the absence of proper accounting records in nesia was using computers and the Internet in its tax most small businesses. Extending the VAT base would require administration. Indonesia’s tax administration reflects the large tax authorities to take on a new trader educational role as part size and population of that nation. Many aspects of tax ad- of their tax administration responsibilities. Many participants ministration are decentralised, with the main office control- thought that taking on such a role could pay dividends in the ling 15 regional offices, which in turn are responsible for 140 longer term for tax administrators. district offices and 211 guide offices as well as 55 audit and investigation offices and 106 land and building offices. Country Experiences with Tax 83. Only a minority of these offices are currently online Incentives with the main office. Many more can communicate with the main office by means of modem but there remains a large 87. The principal presentation on country experiences with number of offices with no facility to communicate via com- tax incentives was presented by Ms. Fadzilla Ab. Kadir, Prin-

14 ADBI Executive Summary Series No. S52/01 cipal Assistant Secretary, Tax Analysis Division, Ministry Asian governments were doubting the wisdom of tax in- of Finance, Malaysia. Kadir provided a detailed survey of centives to attract foreign direct investment and domestic Malaysian tax incentives, which appear to be among the most investment in terms of both overall effectiveness of the in- comprehensive in the region. Tax concessions are available centive programs and the long-term quality and benefits of for investments in designated products, activities, regions or the types of investment that such concessions may attract designated economic sectors. The last include manufactur- versus the costs of offering investment programs. The prob- ing, agriculture, tourism, research and development, and train- lem highlighted by Gesaruang is the ongoing competition ing so almost all economic activities may be eligible for some between neighbouring countries in the region to attract for- sort of tax concession. eign direct investment and the difficulty of unilaterally re- moving concessions when other countries retain their tax 88. Concessions include full or partial income tax relief, spe- subsidies. The only solution to this problem would appear cial deductions (up to twice the expense actually incurred) to be a multilateral approach to the question of tax conces- and concessional tax timing and accounting rules. The most sions. important programs are the pioneer status program, invest- ment tax allowance regime, a reinvestment allowance, accel- erated capital allowance, a range of incentives for Key Issues in VAT Implementation including double deductions for certain expenses, various ex- emptions from duty, and full and partial income tax 92. Professor Rick Krever, Deakin University, exemptions or reduced tax rates. Although there was no em- Melbourne, Australia used a case study approach to ex- pirical evidence available that might be used to test the effec- plore a number of practical VAT issues with conference par- tiveness or otherwise of the various concessions, it appeared ticipants. Krever noted that the VAT is almost half a century that the Malaysian government is strongly committed to con- old and the original designers of the tax could not have pos- tinuing its multitude of concessions. In fact, one point the sibly envisaged the sweeping changes to commerce that most stressed was the flexibility of the concession program would arise five decades later such as the growth of trade in to accommodate taxpayers who prima facie appeared to be intangible cross-border services and the development of elec- unable to qualify for concessions. tronic commerce. Devising rules to apply a 50-year-old tax to modern commercial arrangements has proved a challenge 89. The Malaysian approach was contrasted with that of the in all jurisdictions. Philippines by Ms. Ma. Lourdes B. Recente, Department of Finance, Philippines. The Philippines treats tax conces- 93. Krever began his presentation by looking at the transi- sions as tax expenditures in a manner similar to that adopted tional rules that will be needed if countries are to adopt a VAT by many OECD countries and calculates the cost of revenue for the first time or broaden their existing VAT bases to in- forgone as the equivalent of taxes collected and then spent clude new goods or services, or changed the rate of VAT. again as direct expenditures. The annual cost of tax conces- Normally the actual time of supply is irrelevant for VAT pur- sions in the Philippines, not including concessions in “spe- cial economic zones” now amount to 3.73 per cent of the poses since liability arises when payment is made or an in- nation’s GDP, about the same as the country’s deficit. voice issued. However, the normal rule would lead to abuse if consumers knew a currently exempt item was about to be 90. Recente’s address included a survey of a wide array of taxed or a rate was to change. So transitional rules are needed concessions available under a large range of laws in addition to fix the time of supply for transactions that stretch over the to the and Tariff and Code. implementation or base-broadening date. Krever illustrated One interesting technique used to increase the transparency how the rules might work with a number of transactions that of at least one type of tax concession was illustrated using the stretched over the implementation date: a one-month bus pass; tax subsidy for government-owned entities that incur tax and a pack of 10 bus tickets; and a single trip over the period. duty liabilities with respect to importations. Rather than ex- Normally, transitional rules apply a ratio formula to the first empt the transactions from tax, the entities are provided with example, an estimated usage to the second (based on histori- tax subsidies to cover their tax and duty liabilities. This pro- cal data), and presume the last one was supplied before the cess converts the subsidies into wholly transparent explicit tax changed. In the case of goods, the transitional rule usually tax expenditures. looks at when the good is in the possession and control of the customer. 91. Mr. Pichart Gesaruang, Director, Bureau of Policy and Tax Planning, the Revenue Planning Department, 94. Krever next discussed how the VAT should apply to Ministry of Finance, Thailand briefly discussed the phe- non-monetary transactions where, for example, a consumer nomenon of tax concessions from the Thai and regional per- purchases a gift voucher and later redeems that for goods or spectives. He echoed the views of many conference services. A survey of participant jurisdictions revealed a participants when he suggested that a growing number of number of different rules were applied to this transaction.

ADBI Executive Summary Series No. S52/01 15 Krever suggested that tax policy theorists argued no VAT protect their privacy and business competitiveness, other docu- should apply to the purchase of a gift voucher because it ments such as materials for internal conferences or statistical would not be known at the time whether it was to be re- data have been disclosed. deemed for a zero-rated or taxable supply or, if for a taxable supply, what rate would apply to the final supply (if the tax 98. Among the important features of tax administration in system has different rates). However, it is often difficult to Japan discussed by Ohno was the recently established re- distinguish between different types of vouchers Ð traditional view team called PROTECT (Professional Team for Elec- gift vouchers, discount coupons (two-for-one or a fixed tronic Commerce Taxation). PROTECT completed 306 amount or percentage off the sale price), and other entitle- examinations on taxpayers who conduct business on the ments to future goods or services such as options or pre- Internet and found 5,853 yen million of concealed income paid telephone cards. in fiscal year 2000.

95. In the final part of his presentation, Krever used a num- 99. The NTA will introduce an electronic filing system in ber of case study examples to explore the concept of a tax- 2003 in order to enhance taxpayer convenience in the Internet able supply. Samples included government subsidies to private era. Ohno said the NTA keeps revising its regulations in the and public sector entities and payments for negative covenants area of international taxation in order to give detailed guid- as well as positive supplies of goods and services. Again, a ance to its tax examiners and taxpayers. Recently revised regu- survey around the room revealed a wide range of opinions lations are the Commissioner’s Directive on the Interpretation about the boundaries of taxable supplies. Krever showed how of Article 66-4 (Transfer Pricing Taxation) of the Special Taxa- reliance on basic principles and reconstructing transactions tion Measures Law issued in September 1999, the to ascertain their true economic basis could be used to de- Commissioner’s Directive on the Operation of Transfer Pric- velop appropriate taxing rules in these cases. ing (Administrative Guidelines) issued on June 1, 2001, and the Commissioner’s Directive on the Mutual Agreement Pro- Tax Administration in Japan cedures (Administrative Guidelines) issued on June 25, 2001. Ohno also presented some figures about NTA’s activities in 96. Mr. Masato Ohno, Director, Office of Mutual Agree- the area of international taxation. In fiscal year 1999, the ment Procedures, National Tax Agency (NTA), Ministry NTA completed 38 transfers pricing examinations and made of Finance, Japan, gave a presentation on Tax Administra- pricing adjustments of 45.5 billion yen. As of the end of June tion in Japan. Ohno explained the January 2001 restructur- 2001, the NTA has 139 unresolved mutual consultation cases ing of Japan’s national government, in which 22 ministries in inventory, more than half of which are advance pricing ar- were consolidated into the present 12 ministries. Under the rangement cases. National Government Restructuring Law, every ministry and agency of the government are required to set policy goals and 100. Ohno also commented that the birth rate has been de- evaluate its own activities. The NTA’s policy goals are to clining in Japan, and the percentage of people who are 65 arrange an appropriate tax environment for taxpayers and to years old or over will constitute more than 25 per cent by implement appropriate and impartial tax administration. To 202X. The Japanese government raised the consumption tax evaluate its activities to achieve these policy goals, the NTA rate from 3 per cent to 5 per cent (including the 1 per cent has picked 61 indexes and will publicize them. One of those local consumption ) in 1997 and reduced the individual indexes is the number of counselling sessions given by tax income tax rate from 50 per cent to 37 per cent in 1999 in counsellors. Ohno said the 600 tax counsellors of the NTA order to divide the social cost of the aging society among the had answered 3.025 million questions from taxpayers in fis- generations. The corporation tax rate was reduced from 34.5 cal year 1999. Moreover, the NTA’s question-and-answer web per cent to 30.0 per cent in 1999, as well. The percentage of site was visited 5.671 million times over the same period. direct tax revenues to the total tax revenues declined to 57 per cent in 1999, but 40 per cent of revenues for the national 97. The Freedom of Information Law, which was enacted in budget comes from government bonds because of Japan’s stag- May 1999 and put into effect in April 2001, is another law nant economy. important to tax administration in Japan. Under the law, gov- ernmental organizations have to disclose their administrative 101. In addition, Mr. Akira Koga, Professor, National Tax documents if requested unless the documents fall into one of five categories prescribed by the law. By the end of June, the College, National Tax Agency (NTA), Japan, introduced NTA had received nearly 5,000 requests for document dis- the conference participants to the international technical as- closure. Although information relating to individual taxpay- sistance program offered by the NTA. He shared his own ers and must be kept confidential in order to and NTA’s experience in technical cooperation in the re-

16 ADBI Executive Summary Series No. S52/01 gion. Koga also introduced a variety of training opportuni- taxation authorities to raise more revenue when the tax base is ties offered by the NTA at home and abroad for tax officials weaker than before. Dr. R. B. Adhikari, Senior Capacity (see Box 2 for details). He reported that technical assis- Building Specialist, ADB Institute, Tokyo made a presenta- tance through the dispatch of long-term experts is very con- tion on issues and options for improving tax administra- ducive to the transfer of useful practical knowledge but it tion in the region. He started by highlighting the background precludes the exchange of many ideas or viewpoints. On issues for improving tax administration. He stressed that addi- the other hand, the short-term experts program must involve tional and more stable revenue flows are warranted to sustain a healthy sharing of ideas but it provides less opportunity growth and poverty reduction in the region. to impart practical skills and knowledge because of the short- age of time. 103. Adhikari made a number of observations drawing on the discussions in the earlier sessions of the conference and the Box 2: Training Opportunities in available literature that he surveyed. As evident from the coun- try papers and experiences presented at the conference, many developing Asian and Pacific countries seem to have an almost primitive system of revenue administration. It also appears that The National Tax Agency (NTA), Tokyo offers three types changes in tax policy in developing countries are not commen- of assistance programs that are provided in Japan and surate with changes in tax administration. In general, reforms another three types of assistance provided outside of Japan. thus far for strengthening revenue administration seem to be ad hoc or neglected. Procedures and processing are largely Japan Program. The first program offered in Japan comprises two international seminars on taxation—a manual. Thus far, there is a limited use of information and com- general tax course for tax official from about 20 countries munication technologies (ICT). There is inadequate informa- and a senior tax course for officials delegates from about tion sharing within revenue administration. Tax departments in 10 countries. The second program is a country-specific many DMCs are not in a position to information even at training course, lasting for two to three weeks, for 5 to 15 a domestic level that could impact directly on their ability to tax officials from a country. The third program is a practical generate revenues to anywhere near their tax capacities. In some training program offered in conjunction with Japanese cases, ironically, several tax departments are housed under the universities, leading to a master’s degree after one or two same roof and under the same ministry but within themselves years study. they have very little horizontal integration and/or information sharing. They consistently do not have autonomy or any flex- Overseas Program. The first type of overseas program ibility, leading to low efficiency and effectiveness in providing offered is the long-term (for several years) dispatch of an services to taxpayers and collecting revenues for the govern- expert to a host country. The second overseas program is ments. The performance of their tax administration is modest, similar to the first but involves the long-term expert visiting and the tax compliance is low, leading to high cost to taxpayers neighbouring countries of the host country on a short-term as well as to the governments. basis. The third overseas program is based on sending a short-term expert to a host country for one or two weeks to 104. In the policy areas, shifts from trade taxes on to broad- provide advice on particular issues. based taxes (e.g., VAT) have taken place in many developing countries in the region. Policy reforms have also favored lower Conference participants were advised to contact their closest tax rates. In addition, there is an increased competition in tax Japanese Embassy for tax assistance application forms. policy whereby tax incentives are offered to attract foreign Alternatively, they can contact the Office of International investments, regardless of their effectiveness or costs. Operations at the National Tax Authority directly on fax: 81-3-3591-1321. 105. Adhikari also pointed out the fact that tax administra- tion is always susceptible to criticisms related to unlawful Issues and Options in Improving Tax personal gains, inefficiencies, pressures from interest groups and non-transparent. Good governance (efficiency, transpar- Administration ency and accountability) is critical in tax administration as it is in other sectors of public administration. The difficult ques- 102. Lately, there is a growing pressure on revenue adminis- tion is how to overcome all these problems and maximize tration in general owing to the decreasing ODA flows and the revenue collection. global economic slowdown, which has reduced the tax base both implying re0duced level of financial resources for gov- 106. Touching on the issue of the integration in tax adminis- ernments. There are therefore additional challenges to national tration, Adhikari explained that integration is necessary for

ADBI Executive Summary Series No. S52/01 17 ensuring: (i) higher effectiveness in revenue collection; (ii) fragmented information system, and poor communications higher efficiency in minimizing opportunities for tax eva- and coordination. This surely indicates that there is a great sion; and (iii) saving of administrative costs through the use need for putting modern systems and procedures in place in of common support services and minimizing compliance cost these countries. to taxpayers. He highlighted that the possible reform op- tions for improving tax policy and administration are to: (i) 110. Adhikari concluded his presentation by noting that tax reduce opportunities for evasions and abuses; (ii) reform tax policy and administration reform will work better when ac- structures; (iii) improve the organization and management companied or preceded by similar reforms in other economic of tax administration; and (iv) strengthen internal and ex- policy areas and institutions. Spending on tax policy and ad- ternal checks. ministration reform programs are good investments. But, it will require careful planning, political willingness and com- 107. While discussing several possible options in reforming mitment, and public education for its total success. tax administration, Adhikari alluded to the usefulness of the “revenue authority” model. He explained that the revenue 111. While the 2001 tax conference focused on income and authority model implies an integrated, autonomous and ser- profits taxes and indirect consumption taxes, it was recog- vice-oriented revenue administration system. Effectively nized that customs duties continue to play a significant role “revenue authority” under such a model is simply an “agent” in revenue raising in many regional countries. The final pre- for revenue collection under the overall supervision of the sentation for the conference, by Mr. Teruo Ujiie reviewed ministry of finance, which is the “principal”. The main current developments in customs law design and administra- strengths of revenue authority model are: (i) organizational tion. He introduced the World Customs Organization (WCO), and operational autonomy to provide customer-oriented ser- which was established in 1952 and has more than 150 mem- vices; (ii) better compensation and reward systems; and (iii) bers. It plays a key role in the simplification and harmoniza- taxpayers’ representation in policy making. It can be costly tion of customs procedures. in terms of setting up time and cost, although such costs may soon be offset by ensuing benefits. However, there can 112. He said that coping with the ever-changing external en- be variants of such model. A key consideration in this re- gard is that the reform model must take into account coun- vironment (e.g. globalization of economic activities), customs try specific requirements and political acceptability. authorities must continue making the right balance between control and facilitation by reforming and modernizing their 108. Adhikari then moved on to highlight the usefulness of management methods and operational procedures, (such as the use of computers and Internet in tax administration. He in US). An introduction of computerized customs clearance said that it could make a huge difference in tax administra- system is essential to shorten processing time for free circu- tion and governance. Potential uses of ICT in tax administra- lation to domestic market, to assist in correct collection of tion are: (i) mail handling; (ii) information system/data base; customs duties by avoiding human involvement and errors, (iii) information processing; (iv) educating taxpayers; (v) elec- to facilitate transparency (good governance or integrity). It tronic filing (through Internet); (vi) more efficient sharing of helps to achieve a paperless customs clearance processing and, information on taxpayers and also revenues through e.g. ideally, towards “seamless” information required for customs Intranet, which is useful for both tax policy making and ad- clearance among customs administrations (i.e. flow of infor- ministration; and (vii) public information and external rela- mation is from a customs in an exporting country to another tions to enhance transparency and to reduce information cost customs in an importing country, which can be ideal to pre- to taxpayers. vent incorrect declaration e.g. declared value).

109. The regional experience in tax administration varies in 113. Ujiie reported that almost all ADB members are, at dif- relation to the level of economic development. Singapore ferent stages, utilizing computerized systems for customs has perhaps the best model of revenue administration [see purposes. Some have developed their own system and others Box 3 for details on the Inland Revenue Authority of rely on a system developed by the UNCTAD Ð such as the Singapore]. Hong Kong, China and Singapore have perhaps Automated System for Customs Data (ASYCUDA). The the most efficient tax administration in the region. Simi- ASCYCUDA is a computerized customs management sys- larly, authorities in other countries such as the Indonesia, tem covering cargo manifests, customs declarations, account- Korea and the Philippines are progressing reasonably well ing procedures, transit and suspense procedures, which is being in reforming their tax administration. However, many coun- deployed by more than 80 countries. The UNCTAD has an tries in the region still have greater reliance on manual in- ASYCUDA project, which assist its members to install the formation collection and processing, inadequate and system (e.g. ASYCUDA++).

18 ADBI Executive Summary Series No. S52/01 Box 3: How Singapore Reformed Its Tax Administration?

The vision of the Inland Revenue Authority of Singapore Revenue Integrated System (IRIS). The IRIS was (IRAS) is “to be the leading tax administration in the world, implemented in 1995. With the IRIS, the IRAS adopts a delivering excellent services with well-trained and dedicated pipeline structure approach to process all income tax returns staff”. To realize this vision, the IRAS embarked on the for individuals based on pre-determined checks and criteria. reform journey way back in 1992 and succeeded in As a result, 80% of the returns can be processed transforming a departmental revenue administration into an automatically while the remaining 20%, being the more independent authority, and replacing a labor-intensive hard- complex cases, are identified by the system to be manually copy filing system with a paperless imaging system reviewed by tax officers. This has drastically improved the supported by electronic filing. turnaround time of issuing a , from 12-18 months previously to the current 3-5 months. Recognising the benefit of being an independent revenue authority, which would allow them greater flexibility in tax With the document imaging and workflow system, the IRAS administration and hiring highly skilled staff, the IRAS was eliminated a lot of problems associated with paper handling. formed in 1992 as a statutory board under the Ministry of Currently, tax returns and correspondences from taxpayers Finance. At the same time, the IRAS took a bold step to are scanned and stored in optical disks. The IRIS undergo a major re-structuring—from a non-integrated tax- automatically creates work items and fetches the relevant based organization to a functional-based organizational images for officers’ review of taxpayers’ enquiry. The system structure, providing a one-stop taxpayer service. This new also adopts pre-defined supply rules such that work items structure allows each functional division to enjoy economies are supplied to different tax officers according to their of scale and reduces duplication of functions previously experience and skill levels. inherent in the old tax-based structure. Computer services account for only 14%, whilst staff cost Concurrently, the IRAS revamped the whole computer amounts to more than half of the annual operating system to an integrated database with document imaging expenditure (55%) of the IRAS. and workflow system. The name of the new system is Inland

Closing Session 116. Mr. S. B. Chua, Director, Capacity Building, ADB In- stitute and Dr. Jungsoo Lee, Director, Japanese Represen- tative Office, ADB gave their closing remarks. Lee stressed 114. The closing session started with the presentation of key three points in his closing remarks, all under the theme of equip- messages that emerged from the conference, which was pre- ping participant countries to meet emerging challenges in tax pared and presented by Adhikari. In his presentation, administration. First, he stressed the importance of maintain- Adhikari highlighted the emerging key issues and messages ing and further developing networks that had established in the from the conference in tax policy and administration for course of the conference. There was universal agreement by the Asia and Pacific region, covering tax competition, e- participants with Lee’s suggestion that the opportunity to es- commerce, fiscal restructuring, environment tax, tax policy tablish and develop networks with fellow tax administrators reform, tax administration, tax incentives and value added and tax policy officers was one of the most important aspects tax. of the conference. Second, Lee urged participants to fully ex- ploit the benefits gained from the conference by ensuring the 115. In the second part of the closing session participants were knowledge that they gained was fully disseminated to work asked to present their views and a quick assessment of the colleagues in the home jurisdictions. This process, Lee ex- conference. They provided useful tips and areas to consider plained, was an important part of capacity building. Finally, in the design of the next conference. For example, the major- Lee reminded participants of the need to consciously apply the ity of them suggested to have more case-study oriented mate- new knowledge gathered at the conference to actual policy rials, small group sessions, more inputs from real life making. Chua, while endorsing Lee’s suggestions, stressed again practitioners, more coverage of the issues and options in im- the benefits of maintaining and further developing networks proving integrity and performance of tax administration. And, established at the conference and the importance of dissemi- focus could be put on transfer pricing, including APA, in the nating knowledge gathered at the conference by the partici- area of international taxation issues. pants for the benefit of tax administration employees in general.

ADBI Executive Summary Series No. S52/01 19 Executive Summary Series All these titles and much more available online and fully searchable at http://www.adbi.org/publications/ ● Millennium Tax Conference 20-29 September 2000, Tokyo, ESS No. S33/01 ● Public-Private Partnerships in Health 30 October - 3 November 2000, Ayutthaya, Thailand, ESS No. S34/01 ● Skill Development for Industry 27 November - 5 December 2000, Tokyo, ESS No. S35/01 ● High-Level Dialogue on Banking Regulation and Development: New Issues in the Post-Crisis Recovery Phase 8-9 June 2000, Tokyo, ESS No. S36/01 ● Banking Sector Reform 14-23 August 2000, Kuala Lumpur, ESS No. S37/01 ● Pacific Public Management Executive Program (PPMEP) Module 3: Managing Programs, Projects and People 5-13 March 2001 Brisbane, Australia, ESS No. S38/01 ● Information and Communication Technology (ICT) Strategies for Developing Countries 21-27 February 2001, Singapore, ESS No. S39/01 ● Public Expenditure Management: Local Program Conducted by Pakistan Administrative Staff College as assisted by ADB Institute 29 January - 3 February 2001, Lahore, Pakistan, ESS No. S40/01 ● Information and Communication Technology and Education: Potential for Partnerships 23-27 April 2001, Hong Kong, China, ESS No. S41/01 ● Social Safety Nets Seminar 19-28 March 2001, Tokyo, ESS No. S42/01 ● Reforming Pension Systems in South Asia Part 1ÐPolicy Conference 23-25 November 2000, New Delhi, India, ESS No. S43/01 ● Reforming Pension Systems in South Asia Part 2ÐTraining Workshop 27 November - 2 December 2000, New Delhi, India, ESS No. S44/01 ● Public Expenditure Management: Training-of-Trainers Program 27 May - 8 June 2001, Tokyo, ESS No. S45/01 ● Trade Policy Emerging Issues 16-24 April 2001, Singapore, ESS No. S46/01 ● Urban Poverty Reduction Issues 4-13 June 2001, Dhaka, Bangladesh, ESS No. S47/01 ● 2001 Tokyo Round Table on Reform in Asia 10-11 April 2001, Tokyo, ESS No. S48/01 ● Tokyo Seminar on Securities Market Regulation 12-13 April 2001, Tokyo, ESS No. S49/01 ● Pacific Public Management Executive Program (PPMEP) Module 4: Leadership and the Management of Change 30 July - 7 August Cairns, Australia, ESS No. S50/01 ● Partnership Issues in the Social Sector 22-28 August 2001, Tokyo, ESS No. S51/01 ● 2001 Tax Conference 5-11 September 2001, Tokyo, ESS No. S52/01

The views expressed by presenters and speakers, and the findings, interpretations, and conclusions of authors are their own and are not necessarily endorsed by the Asian Development Bank Institute. They should not be attributed to the Asian Development Bank, its Boards, or any of its member countries. The Institute does not guarantee the accuracy or reasonableness of the contents herein and accepts no responsibility whatsoever for any consequences of its use.

© 2001 Asian Development Bank Institute. Further proceedings online at http://www.adbi.org/forum/forum.htm ADBI Publishing 12/01

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