Asia's status as a global tax haven

There must be many reasons why expats choose to relocate to Asia for a few years. To achieve a better quality of life — probably; to meet a desire for adventure and variety — possibly; to escape poor job prospects elsewhere in the world — quite likely. But, to accumulate some capital by saving up income — almost certainly.

A publication released on Tuesday by the Asian Development Bank (ADB), called Taxation in Asia, confirms that they are right to be so sanguine. As the bank reports, a significant feature of life in Asia is that “tax burdens are among the lowest in the world”.

The policy note transcribes the main content of a presentation that Jorge Martinez-Vazquez, a professor at Georgia State University, delivered in Manila to the ADB in October 2010. It presents an overview of how countries in Asia-Pacific compare with the rest of the world in revenue collection and tax culture.

The author points out that the average tax-to-GDP ratio in Asia is half that of the EU and below the ratios for Africa, the Middle East and the Americas. He also suggests that it needs to rise.

“There is a clear need for higher tax levels through more direct taxation, especially personal income tax (excluding Japan and Korea). There could also be a wider role for VAT in Asian taxation systems, while there is a scope to decrease customs duties,” according to the report.

Asian governments tend to favour low tax-to-GDP ratios to create a more business-friendly environment and attract foreign direct investment. The downside includes fewer resources to build infrastructure such as schools, hospitals and roads, and might also mean lower welfare services and greater inequality.

Of course, Asian tax regimes are by no means homogenous — and Martinez-Vazquez is keen to point out that there is no “Asia tax model”. They vary in terms of overall levels and by the mix between direct and indirect taxation. Collection and administration also show wide disparities, as do the extent of underground economies in each country in the region.

China and India have similarly low ratios between direct and indirect taxes; but both lack social security contributions. Japan and South Korea share similar figures for direct taxes, while Japan has higher social security contributions. In Malaysia, the ratio between direct and indirect taxes tends to be higher because of profits taxes on petroleum companies. Social contributions do not exist in Malaysia, and in Thailand they are very small.

Asian governments started to adopt value-added taxes in the early 1990s, and they are now well established in China, Japan and Korea, but Hong Kong, Malaysia, Pakistan and Singapore have yet to introduce one. In terms of overall indirect taxes, VAT still represents a smaller share of total revenues in Asia than in other regions of the world. Instead, customs duties still represent a much higher share of total revenues in Asia than in most other regions of the world.

But, one feature is clear. Throughout the world, direct taxes (such as personal and corporate income tax) are larger than indirect taxes (such as VAT and excise duties) on average by 50% and in developed countries by more than 100%.

However, in Asia, indirect taxes dominate direct taxes by 10%. In particular, personal income tax is still in its primary stages everywhere in Asia other than in Japan and Korea, and to a lesser extent in Indonesia and Hong Kong. Only in Japan and Korea is labour income more heavily taxed than capital and consumption. So, although income tax is the dominant form of direct taxation in developed countries, this is not so in Asia.

In addition, according to the report, the average country in Asia still ranks below best international practice in developed countries for tax administration practice and the transaction costs faced by firms to work with tax administration agencies. The underground economy is on average higher in Asia than in developed countries, though lower than in Africa and Central and South America.

Tax administration in Asian countries can be improved by “making the tax departments more consumer-friendly and following the service paradigm”. This can be done through promoting broad taxpayer education, assisting taxpayers in filing returns and paying taxes, improving phone services and websites, and simplifying the payment of taxes and forms.

For promoting more effective tax enforcement and voluntary compliance, Asian countries need to improve audit capabilities, increase penalties for tax cheating and shame tax dodgers through the press.

In the end, better taxation systems and higher tax revenues mean more resources for Asian countries to improve social services, build infrastructure and reduce pervasive poverty, the report concludes.