Preventing a race to the bottom in corporate taxes

How do you assess the fiscal impact of the global health crisis on ASEAN countries, and how has it affected public spending on essential services like healthcare?

Oxfam Vietnam's country director Babeth Ngoc Han Lefur

The region is facing an unprecedented crisis of inequality and some countries still have some of the highest poverty levels in the world. Most countries in the region are falling to invest sufficiently in essential public services such as health, education, and social security systems.

For some countries such as Cambodia, Laos, Vietnam, Malaysia, and Myanmar, the situation is so critical that the Asian Development Bank (ADB) has already warned that if they do not mobilise significantly greater revenues in the coming years, the 2030 Sustainable Development Goals will not be met.

The most worrying aspect is that this lack of spending is being seen at a time when countries in the region are already seeing their fiscal space stretched. Six ASEAN member states already had significant budget deficits in 2018, and some have high levels of public debt. On average, the ASEAN region saw a budget deficit of 1.5 per cent of GDP in 2018.

Budget deficits and consequently public debt, are likely to see further significant increase due to the extra budgetary efforts that will be required to overcome the current economic challenges and the health crisis created by the COVID-19 pandemic. It is expected that nine ASEAN countries face budget deficits in 2020 with the average one of 4.2 per cent.

In the ASEAN region, levels of revenue collection, measured as a proportion of GDP, remain very low. These low ratios mean that they have little budget capacity and are running public deficits, and this gap has dramatic consequences for the quality of public services, infrastructure, and levels of good governance.

How has the pandemic also impacted the budget revenues of ASEAN countries?

Initial estimates from the Organisation for Economic Co-operation and Development predict that the pandemic will have significant negative impacts on tax revenues, while at the same time budget burdens will increase due to governments’ efforts to introduce supportive packages to help cope with the disease. In ASEAN countries, the expected budget spending on responses to the coronavirus is enormous: 13 per cent of GDP in Singapore, 9 per cent in Thailand, and 3 per cent in the Philippines, Indonesia, and Vietnam.

Despite this, the region that for decades has seen sustained economic growth and which attracts substantial amounts of foreign direct investment (FDI) still collects such low amounts of tax revenue. ASEAN countries are still highly dependent on revenues from corporate income tax (CIT). However, they are giving up huge amounts of revenue by offering large tax incentives to both domestic and foreign investors.

International institutions have repeatedly warned countries in the region to stop offering redundant tax incentives. Tax losses due to corporate tax incentives were estimated to be 6 per cent of GDP in Cambodia and 1 per cent of GDP in Vietnam and the Philippines.

How do you view the tax incentives provided by ASEAN countries and their fiscal capacity?

Just like in many other regions of the world, countries in ASEAN are competing with one another in a disastrous race to the bottom by reducing their CIT rates and offering aggressive tax incentives to foreign multinationals. Across the region, the average CIT rate has fallen over the last 10 years, from 25.1 per cent in 2010 to 21.7 per cent in 2020.

Taking into account the tax holidays of up to 20 years and other profit-based incentives offered to multinationals by some countries, the effective corporate tax rate is on average 9.4 percentage points lower. This makes ASEAN a region with effectively some of the lowest CIT rates in the world for large companies.

Aggressive tax competition is also a fertile ground for profit shifting. Countries such as Thailand, Indonesia, and Malaysia are estimated to lose at least 6-9 percentage points of potential corporate tax revenues due to profit shifting. The race to the bottom is a lose-lose game. ASEAN countries need to react at the political level to stop the race. Countries in the region need to improve their domestic revenue mobilisation if they are serious about overcoming climate change, inequality, poverty, and the COVID-19 crisis.

There are no legitimate reasons for political inaction. There is no evidence that tax incentives increase FDI – indeed, quite the contrary. Additionally, incentives create an unfair investment environment for small and medium-sized local companies.

ASEAN member countries should begin a process of phasing out the most redundant tax incentives and should establish a clear rulebook for tax incentives in the region. The current race to the bottom is increasing economic and social divergence in the region. ASEAN needs to make sure that its members’ tax policies serve the collective good and help create a stable fiscal environment.