Presentation and closing remarks by Masatsugu Asakawa, President, Asian Development Bank, at the launch of the Asia Pacific Tax Hub at the 54th Annual Meeting, 3 May 2021
Introduction
Governor Aso, thank you for introducing this important topic and framing the course of our discussions. Let me also extend my appreciation to our panelists, and to Ms. Chia-Tern for facilitating today’s session.
I. Why domestic resource mobilization matters for Asia and the Pacific
Let me begin by posing a question: why does domestic resource mobilization (DRM) matter, especially when the entire world is still grappling with the recurrent wave of the pandemic, and desperately trying to secure safe and effective coronavirus disease (COVID-19) vaccines?
While I am sure we will see a clear answer to the question through the dialogue in this seminar, I want to present two main reasons to show why DRM has emerged as a major strategic priority for our developing member countries, or DMCs at this moment. The first is the need to address debt sustainability; and the other is to achieve the Sustainable Development Goals, or SDGs.
Let me start with debt sustainability. As we all know, the COVID-19 crisis has exacerbated existing structural challenges in public finance.
Unanticipated increases in public debt as a result of large-scale fiscal measures to mitigate the impact of COVID-19, and shrinking tax revenues during the pandemic have obviously worsened the fiscal balance and substantially increased public debt in many of our DMCs.
We have to note that, even before the pandemic, most of our DMCs recorded weak revenue performance. Tax yields across developing Asia are still on average substantially lower than in OECD countries.
Tax yields have also been unstable and unpredictable. The tax-to-GDP ratio in some DMCs, such as Indonesia, remains below the 15% benchmark, widely regarded as the minimum level for sustainable growth.
Tax revenues in countries that depend heavily on natural resources, such as Papua New Guinea and Mongolia, show a large degree of variability across time, reflecting volatility in international commodities markets. In other countries, like Viet Nam, tax revenues decreased sharply between 2012 and 2015, due to corporate income and tariff reductions, tax exemptions and incentives, and declining oil revenues.
These examples demonstrate the importance of careful revenue management and attention to underlying vulnerabilities. These issues require strong attention now because governments need to secure sufficient financial resources to contain the spread of COVID-19, procure safe and effective vaccines, and get the economy back to a sustainable recovery track, without losing market confidence.
In this regard, we have to be mindful that with gradual hikes in interest rates expected in the U.S., DMCs with a large share of US-dollar denominated bonds face additional vulnerability. Lower income countries also need to improve their public financial management to ensure debt sustainability to maintain access to their principal sources of external financing: concessional loans and grants from development financial institutions, including ADB.
Achieving the SDGs is the second key reason why DMCs must prioritize DRM. The region is falling short on all 17 SDGs. Here, I would like to stress that DRM is a target of itself under SDG 17.
In addition to providing a source of direct financing more generally, tax policy offers governments the tools to achieve specific goals under the SDGs. For example, you can better address income inequality through progressive taxes and promote a green recovery through carbon tax or other environmental taxes. Investing in innovative digital technologies such as information and communications technology can modernize tax policy and administration and enhance revenue collection.
With this in mind, I would like to touch on two key areas that will enable the region to strengthen DRM.
II. Key priority areas for developing member countries
First, fiscal normalization should be carefully calibrated, and implemented in a phased manner. While many of our DMCs may be considering reducing fiscal stimulus this year, countries should bear in mind the lessons from premature fiscal consolidation right after the global financial crisis.
At the same time, our DMCs can already begin their preparatory work to address their underlying public finance vulnerabilities through strategic dialogue, careful analysis, and knowledge sharing.
On the tax policy side, this includes addressing the disproportionate reliance on narrow sources of revenue; a lack of progressivity; limited efforts to tap environment and subnational taxation; and excessive and sometimes unaccountable tax expenditure measures.
On the tax administration side, addressing the large size of the informal economy is a common challenge for many DMCs. We can also start joint analysis and knowledge sharing on how to enhance capacity to monitor taxpayers, and make tax administrations more efficient with effective digital tools.
Second, at a time when governments must explore ways to increase tax revenues, they also need to build and maintain public trust by demonstrating that tax burdens are distributed fairly and equally.
International tax cooperation, or ITC, can play a role here. DMCs in the Asia and Pacific region can work together to close the tax loopholes routinely exploited by aggressive tax planning, and to combat tax evasion facilitated by an increasingly interconnected global financial network. A multilateral, consensus-based solution will also be needed to tackle the tax challenges created by a digitalized economy.
ITC is particularly relevant for our DMCs. As the pandemic recedes, we can expect increased investments from multinational corporations given the large population and vibrant markets in the region. Our DMCs should not let those companies shift profits to jurisdictions where they can minimize the tax burden.
Regrettably, my friends, international cooperation on tax issues in this region is still lagging. More than half of our DMCs are still not participating in the Inclusive Framework on Base Erosion and Profit Shifting. The rate of participation in the Global Forum on Transparency and Exchange of Information for Tax Purposes also shows room for improvement.
This lack of engagement in ITC may lead to more unilateral tax measures, increasing the occurrence of double taxation and undermining cross-border trade and investments.
III. Foundational building blocks of the Asia Pacific Tax Hub
To strengthen international tax cooperation, we need to be aware that the lack of a pan-regional tax community has been a unique and significant shortcoming for Asia and the Pacific. To address this, I would like to announce today the official launch of the Asia Pacific Tax Hub.
This new Tax Hub will serve as an open and inclusive platform for strategic policy dialogue, knowledge sharing, and development coordination among our members, development partners, and ADB.
ADB recently approved a technical assistance program to establish a secretariat and to develop a web portal. These activities will serve as entry points and a facilitator for engagement between DMCs and development partners as we work toward the first high-level conference under the Tax Hub later this year. In parallel, ADB will ramp up its operational support for DRM and ITC.
Closing
Distinguished guests, colleagues, ladies, and gentlemen.
I believe our dialogue today will provide solid building blocks for the Tax Hub. I look forward to the panel discussions hereafter, focusing on three important issues:
(i) A medium-term revenue strategy;
(ii) A roadmap for the automation of tax administrations; and
(iii) Proactive participation in international tax initiatives.
Let me thank you once again for your attention as we work together to ensure sustainable public finances for our DMCs and steady progress toward achieving the SDGs.
CLOSING REMARKS
Introduction
Many thanks to our distinguished panelists and moderator for joining us today, and to the Republic of Korea and Japan for funding the establishment of the Asia Pacific Tax Hub through the e-Asia and Knowledge Partnership Fund and the Domestic Resource Mobilization Trust Fund.
I. Summary of the discussions
Let me highlight the takeaways from our panel discussions, before discussing our next steps for the Tax Hub.
First, Ms. Baer from IMF highlighted that tailored and holistic reforms in line with a medium-term revenue strategy (MTRS) can help governments restore debt sustainability and promote inclusive and sustainable growth.
Second, Mr. Mun from National Tax Service of the Republic of Korea and Mr. Katf from Australian Taxation Office indicated that automation is a long journey that requires a comprehensive strategy including enhancement of taxpayer service and high-level commitment.
Third, and as Pascal from OECD highlighted, cooperation is needed—bilaterally, multilaterally, regionally.
Increased international tax cooperation (ITC) within the Asia Pacific region is critical to promoting coordinated and effective responses to international tax challenges, and enabling our developing member countries (DMCs) to rebuild fair and effective tax systems for a strong and lasting recovery from the pandemic.
Fourth, Ms. Sangasubana from Revenue Department of Thailand, Mr. Kose from World Bank, and Ms. Tionko from Department of Finance of Philippines highlighted the importance of development support including lending projects, technical assistance, capacity building, and knowledge sharing.
II. Asia Pacific Tax Hub
The Asia Pacific Tax Hub will play a key role in these agendas by stimulating regional dialogue and knowledge sharing on needed reforms.
In particular, the Tax Hub Secretariat will engage stakeholders in the following ways.
First, ADB will cooperate with the IMF as our DMCs formulate country-specific MTRS, with activities such as regional workshops organized this May in collaboration with the Platform for Collaboration on Tax, and diagnostic tools such as the Tax Administration Diagnostic Assessment Tool (TADAT).
Second, ADB will conduct needs assessments to support the automation of tax administrations in our DMCs. We organized a workshop on digital transformation with the World Bank this March, and we will explore areas for future collaboration with development partners.
Third, ADB will continue leading policy dialogues with the OECD to raise awareness, facilitate membership, and stimulate proactive participation of our DMCs in the Inclusive Framework on BEPS and the Global Forum. Next month, we are co-hosting regional consultations on proposed actions under Pillars 1 and 2 of the Inclusive Framework.
Fourth, under the Tax Hub, ADB will proactively use our financial instruments—such as policy-based and project lending—to promote DRM, adoption of international tax standards, and strengthened technology investment by revenue agencies.
The web portal launched today will allow for participation and communication of progress in these areas; as will recently approved technical assistance that helps promote knowledge and good practice on raising tax yields in a fair and equitable manner.
Last, let me note that I have requested my staff to reach out to the various countries that may wish to learn more about the Tax Hub.
We propose establishing a Steering Committee to bring together key development partners and DMCs willing to actively engage in the Tax Hub. It will work closely together with the Secretariat to lead the operation of the Tax Hub.
And we are currently engaged in discussions with countries that would benefit from tax reforms, including Indonesia, Pakistan, and the Philippines, among others.
III. High-level conference
I would like to conclude this tax webinar by inviting you to join the first High-Level Conference organized under the Asia Pacific Tax Hub, which will be held by the fourth quarter of 2021.
The conference will report on progress and discuss next steps on the three building blocks of the Tax Hub, including details of the operations of the Secretariat and Steering Committee. We look forward to participation from high-level officials of tax policy and administrations.
We will reach out to our members and development partners to consult on potential topics of interest and explore how the Tax Hub could partner with your authorities to provide solutions to many of the DRM and ITC reforms that you are and will be pursuing.
Closing
Thank you for allowing me the opportunity to present the Asia Pacific Tax Hub to you today.
