TAX AND DEVELOPMENT Challenges in Asia and the Pacific Edited by Satoru Araki and Shinichi Nakabayashi ASIAN DEVELOPMENT BANK INSTITUTE Tax and Development Challenges in Asia and the Pacific Edited by Satoru Araki and Shinichi Nakabayashi ASIAN DEVELOPMENT BANK INSTITUTE © 2018 Asian Development Bank Institute All rights reserved. First printed in 2018. ISBN 9784899741039 (Print) ISBN 9784899741046 (PDF) The views in this publication do not necessarily reflect the views and policies of the Asian Development Bank Institute (ADBI), its Advisory Council, ADB’s Board or Governors, or the governments of ADB members. ADBI does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. ADBI uses proper ADB member names and abbreviations throughout and any variation or inaccuracy, including in citations and references, should be read as referring to the correct name. By making any designation of or reference to a particular territory or geographic area, or by using the term “recognize,” “country,” or other geographical names in this publication, ADBI does not intend to make any judgments as to the legal or other status of any territory or area. Users are restricted from reselling, redistributing, or creating derivative works without the express, written consent of ADBI. ADB recognizes “China” as the People’s Republic of China. Note: In this publication, “$” refers to US dollars. Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5, Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan www.adbi.org Contents Figures, Tables, and Boxes v Contributors vii Abbreviations xii Preface xiv Introduction 1 Satoru Araki and Shinichi Nakabayashi PART I: Regional Views on Tax and Development 1. Tax Challenges in Asia and the Pacific 9 Shinichi Nakabayashi 2. A Global Framework on International Taxation Standards and the Role of International Development Organizations 20 Satoru Araki 3. How Can We Achieve an Integrated Approach to Accelerating the Financing of the SDGs? ADB Support on Domestic Resource Mobilization 33 Yuji Miyaki 4. Learning from ADB’s Regional Tax Projects 46 Brian McAuley PART II: Country Policy Analyses 5. Macroeconomic Effects of the PRC’s Fiscal Policy 55 J ungsuk Kim, Mengxi Wang, Cynthia Castillejos-Petalcorin, and Donghyun Park 6. Ongoing Fiscal and Tax Reforms in the People’s Republic of China 78 Jurgen Conrad and Jian Zhuang 7. Taxation of Small and Medium-Sized Enterprises: The Indonesian Perspective 88 Wawan Juswanto and Milson Febriyadi iii iv Contents PART III: Sharing Practical Experiences 8. Improving the Training Function in the Tax Authority of the Philippines 101 David Tansey 9. Experiences While Working for the Tax System of Maldives 116 Natalie Bertsch 10. Thailand’s Tax Policy Agenda and Collaboration with International Organizations 120 Patricia Mongkhonvanit Index 129 Figures, Tables, and Boxes Figures 1.1 Tax-to-GDP Ratios and Per Capita Income of Selected Economies 10 2.1 Shift in the Process of Formulating International Taxation Standards 24 2.2 A Global Framework Model of International Taxation Standards 26 3.1 Tax Revenues, Share of GDP 34 3.2 Funding Gaps Required to Achieve the SDGs 35 4.1 Transactions Involving Domestic Traveler and www.A.com 48 5.1 State-owned Enterprises’ Tax Revenue 56 5.2 Non-performing Loans as % of Total Gross Loans 59 5.3 R&D Expenditure by Type of Government 61 5.4 Government Bond Circulation and Budget Deficit 61 7.1 Potential SME Income Tax Calculation 95 8.1 Training Pathway for New Recruits (One Size Fits All) Before Project 103 8.2 Training Pathway for New Recruits (Competency-based) After Project 104 8.3 Japan’s National Tax College Training Programs 108 10.1 Tax Collected by Three Revenue Agencies in FY2017 121 10.2 Tax Collection by the Revenue Department of Thailand 121 10.3 Number of Staff, Revenue Department of Thailand 126 Tables 5.1 Phases of Fiscal Stances 57 5.2 Removed NPL and Cash Recovery Rate from PRC Asset Management Companies 60 5.3 Multiplier Output Response to Central Government Expenditure Shock 69 5.4 Multiplier Output Response to Local Government Expenditure Shock 69 5.5 Multiplier Output Response to Net Tax Shock 70 5.6 Multiplier Output Response to Infrastructure Investment Shock 73 5.7 Multiplier Output Response to Manufacturing Investment Shock 73 v vi Figures, Tables, and Boxes 5.8 Multiplier Output Response to R&D Investment Shock 74 * 5.9 The Effect of (dt–i – d ) in the External Debt Model 75 7.1 Tax Revenue Structure (Selected Countries) 89 7.2 Small and Medium-Sized Enterprise Categorization 91 7.3 Example of Calculation of Income Tax for Medium-Sized Enterprises 93 7.4 SME Selected Economic Indicators, 2012 94 Boxes 3.1 ADB Technical Assistance Projects 43 3.2 Domestic Resource Mobilization Trust Fund for Sustainable Development 44 Contributors Satoru Araki is a former public management specialist (taxation) at the Asian Development Bank (ADB) in Manila. He started his professional career at the National Tax Agency in Tokyo and has extensive experience in tax policy and administration, international development finance, and securities market regulation. During 2005–2008, he served as a principal administrator at the Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development in Paris. He holds a Doctor of Business Law from Hitotsubashi University, a Magister Juris from the University of Oxford, and a Master of Arts in Political Science from the University of Birmingham. He co-authored A Comparative Analysis of Tax Administration in Asia and the Pacific (ADB 2014). Natalie Bertsch studied international affairs and development management in Switzerland and the United Kingdom (UK) and joined ADB as a young professional in 2010. After managing a diverse multitude of public financial management and financial sector projects in South Asia, she joined the Swiss State Secretariat of Economic Affairs as a program manager responsible for Indonesia and global financial sector initiatives in 2016 as part of her sabbatical leave from ADB. Cynthia Castillejos-Petalcorin is a senior economics officer at the Economic Research and Regional Cooperation Department of ADB. She is part of the team that produces ADB’s Asian Development Outlook and handles economic monitoring and forecasting of the Republic of Korea and selected developing Asian economies. She assists in the management of AsianBondsOnline. She was previously a senior economic development specialist at the National Economic and Development Authority in the Philippines. Her research interests are international trade, development economics, and macroeconomics. She has an MSc in development economics from the University of Manchester, UK. Jurgen Conrad is a financial industry professional with 26 years’ experience in private and public sector financial institutions. He started his career at Germany’s top economic research think tank, the ifo Institute for Economic Research, before joining Deutsche Bank as head of Eastern European Economic Research to cover transition economies in Central and Eastern Europe, Asia, and the Middle East. After joining vii viii Contributors ADB in 2002, he worked as mission leader for policy-based lending programs and technical assistance projects supporting financial and private sector development, and public–private partnerships in Central, West, and South Asia, while sustaining his research activities with a focus on financial and private sector development. During 2009–2011, he took leave from ADB to work as an advisor for the Japan Bank for International Cooperation in Tokyo, from where he covered emerging markets worldwide. Since early 2013, he has headed ADB’s economics team in Beijing, which focuses on economic surveillance and policy dialogue on key structural reforms. Jungsuk Kim is a professor in the Department of Economics and Trade at Sejong University in the Republic of Korea. She worked in the airline industry for more than 20 years before earning her PhD in international trade from Sogang University. Her main fields of research are international trade, econometrics, microeconomics, and fiscal policy. She has published extensively in journals and books with empirical analysis relevant for international trade, population aging, and fiscal policy. Milson Febriyadi is a fiscal analyst in the Fiscal Policy Agency, Ministry of Finance in Indonesia, where he is responsible for constructing macro- fiscal evaluation for income tax systems. He has worked with government entities (Directorate General of Taxes, Directorate General of Budget, and the Ministry of Energy and Mineral Resources) for administering the fiscal regime for the extractive industry in Indonesia. His extractive industry taxation experience ranges from fiscal advice to the revision of fiscal terms both for the oil and gas production sharing contract and mineral and coal mining contracts. He is involved in the preparation of the fiscal regulatory framework for the mining industry. He had previously worked at the Institute for Economic and Social Research as a junior research associate, providing macroeconomic model and basic analysis for an investment rating agency. He graduated with a bachelor’s degree in economics from Universitas Indonesia. Wawan Juswanto is special advisor to the dean of the Asian Development Bank Institute (ADBI) and a senior economist at the Capacity Building and Training (CBT) Department in ADBI, based in Tokyo, Japan. His main responsibility in CBT is to identify issues, and design, organize, and implement effective CBT programs and evidence- based knowledge products and activities on developing issues, including programs on finance, government expenditure, and taxation that affect ADB’s member countries. Prior to joining ADBI, he acquired extensive experience in economic and development policy decision making at viii Contributors ix Indonesia’s Ministry of Finance. There, he held various senior positions, mostly in the Fiscal Policy Agency regarding macroeconomic policy, taxation, and international cooperation. He earned his MA and PhD in International Development from Nagoya University in Japan.