Regional cooperation can boost domestic tax revenues for sustainable development

While mainly a domestic policy issue, tax revenue collection within a country can be affected by policies in other countries. A well-known example is the growing tax competition among countries to attract foreign direct investment. This is leading to a “race to the bottom” as reduced tax rates, concessions and incentives for foreign investors distort competition, placing local businesses at a disadvantage.

Survey 2014 expresses concern in view of the findings that tax concessions do not necessarily attract higher flows of foreign direct investment. On the other hand, such policy is eroding tax revenues in the region, which lags in tax collection. Central government revenues averaged only 14.8 per cent of GDP in developing Asia-Pacific countries in 2011, compared to an average of 17.1 per cent of GDP in Latin America and the Caribbean, and 16.3 per cent in sub-Saharan Africa.

Accordingly, Survey 2014 highlights the need for Asia-Pacific countries to work together to harmonize taxation. This can involve subregional groupings such as the South Asian Association for Regional Cooperation (SAARC) and the Association of Southeast Asian Nations (ASEAN).

Harmonizing corporate tax rates is one of Survey 2014 proposals for regional cooperation on tax issues to strengthen domestic resource mobilization by Asia-Pacific developing countries. It outlines five other areas for regional cooperation on tax issues.

Combating transfer pricing: Regional cooperation is key to tackling transfer pricing by multinational companies which involves the pricing of transactions between their subsidiaries in different countries to divert more profit to a country with lower taxes. Some 20 Asian countries have already incorporated transfer-pricing rules in tax laws. Thus, the Income Tax Department of India ensures that most multinational corporations are audited for transfer pricing.

Combating tax havens and illicit transfers: Another cross-border dimension of tax collection is manifested in illicit financial flows. Developing countries worldwide lose an estimated $5.9 trillion in clandestine international financial transfers. The Asia-Pacific region is the major source of such outflows, accounting for more than 60 per cent of illicit financial transfers from the developing world. This can be addressed by bilateral treaties to provide for regular and automatic exchanges of information related to civil and criminal issues. It would not require suspicion of a crime other than tax evasion, and would override bank secrecy laws in tax havens.

Agreements on double taxation: Another important area of regional cooperation is broadening double tax avoidance agreements (DTAAs) to give corporations greater confidence and to encourage investment. For example, India has comprehensive DTAAs with 88 countries and Pakistan with 63 countries. ESCAP can prepare a generic DTAA and encourage member countries to sign bilateral agreements.

Harmonizing import duties for transit trade: Landlocked developing countries can lose sizeable revenue to smuggling if their import duties on transit trade are not harmonized with those in the country providing the transit.

Survey 2014 advocates the creation of an Asia-Pacific tax forum to monitor national tax laws, promote sharing of best practices and provide training and capacity development. Such a forum, which could be hosted by ESCAP, would enable countries to strengthen revenue collection and provide urgently required resources for investment in sustainable development.