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HERTIE SCHOOL OF GOVERNANCE

ASEAN ECONOMIC COMMUNITY 2015


A Framework for Taxation

























Francisco Bchler
Paulyn Duman
Priscilla Gray Hermann
Georg Wagner

5/16/2014



!


ASEAN ECONOMIC COMMUNITY BLUEPRINT
2
1. REVENUE 3
1.1 TAX BREAKDOWN 4
1.2 SHADOW ECONOMY 6
1.3 FOREIGN DIRECT INVESTMENT 8
1.3.1 COUNTRY LEVEL 9
1.3.2 ASEAN LEVEL 10
1.4 TAX COMPETITION 10
1.5 TAX INCENTIVES 11
1.6 WITHHOLDING TAXES AND EFFECTIVE TAX RATES 12

2. REDISTRIBUTION 13
2.1 PERSONAL INCOME TAX 14
2.2 RELIANCE ON VAT 14
2.3 ENERGY SUBSIDIES 15
3. REPRICING 17
3.1 TOBACCO 17
3.2 TAX BASE 18
3.3 TAX RATE 18

4. REPRESENTATION 19
4.1 TAX ADMINISTRATION CAPACITIES 20
4.2 FACTORS AFFECTING TAXPAYER AND REGULATORS 22
4.2.1 TAX PROCEDURE COMPLEXITIES 23
4.2.2 ECONOMIC AND SOCIAL FACTORS 24
4.2.3 CORRUPTION PERCEPTION AND TRUST-BASED APPROACH 24
4.3 SEMI-AUTONOMOUS REVENUE AUTHORITIES 29

5 ORGANIZATIONAL FRAMEWORK 30
5.1 ISOMORPHISM 30
5.2 CHAMPIONS VS. DISTRIBUTED AGENTS 31
5.3 PROBLEM-DRIVEN LEARNING 31
5.4 BROADER AGENTS ENGAGEMENTS 32

6. POLICY RECOMMENDATIONS 33
6.1 REVENUE 33
6.1.1 TAX COMPOSITION 33
6.1.2 SHADOW ECONOMY 34
6.1.3 FOREIGN DIRECT INVESTMENT: COORDINATION AND TRANSPARENCY 35
6.2 REDISTRIBUTION 35
6.3 REPRICING 36
6.4 REPRESENTATION 37
6.4.1 TAX COMPLIANCE PROGRAM 37
6.4.2 TRANSPARENCY AND ACCOUNTABILITY 39

7. BIBLIOGRAPHY 40

#

ASEAN 2015 is fast approaching. The implications for taxation are diverse, touching not only
upon tax composition, but also revenue, redistribution and repricing, and the representation of
and relationship between tax regulators and taxpayers. Based on this framework, this study
provides the following recommendations for the Philippines, Indonesia, and Singapore, which
are derived from both qualitative and quantitative analysis.
Revenue
! Harmonize upper and lower bounds of corporate income tax, value-added tax, and excise tax
! Coordinate regional foreign direct investment tax incentives and establish public-private
dialogue with relevant business stakeholders through transparent information portal
Redistribution
! Raise awareness of redistributive effects of overreliance on indirect taxation
! Eliminate VAT exemptions on high-end goods, particularly in Indonesia
Repricing
! Standardization of tax base for excise taxation
Representation
! Establish trust-based tax compliance model
! Build internal administrative capacity through employee professionalization
! Institutionalize assistance to taxpayers

ASEAN ECONOMIC COMMUNITY BLUEPRINT


The ASEAN Vision 2020 seeks to establish the ASEAN Economic Community (AEC), The
ASEAN Security Community, and the ASEAN Socio-Cultural Community, which will be the three
integral pillars of the ASEAN Community. This was the vision of the ASEAN Leaders at the 1997
Summit in Kuala Lumpur. The establishment of the ASEAN Economic Community has been the
focus since 2003 and aims to achieve regional economic integration by 2015 with clear targets and
timelines for implementation of various measures as well as pre-agreed flexibilities to accommodate
the interests of all ASEAN member countries (Secretariat, 2008). The key characteristics envisaged
are (a) a single market and production base, (b) a highly competitive economic region, (c) a region
of equitable economic development, and (d) a region fully integrated into the global economy.
To: Professor Mark Hallerberg and GIZ
From: Francisco Baechler, Paulyn Duman, Priscilla Hermann, Georg Wagner
Topic: Economic and Administrative Implications of ASEAN Economic Community 2015
Date: 16 May 2014

$

Ultimately, the goal is to transform ASEAN into a region with free movement of goods,
services, investment, skilled labor, and free flow of capital (Secretariat, 2008). Critical to this
discussion are the implications of this integration on tax administrations across the ASEAN region.
This paper analyses the possible implications of the AEC on the 4 Rs of taxation: Revenue,
Redistribution, Repricing, and Representation across Singapore, Indonesia, and the Philippines.
Section 1 addresses revenue, specifically providing the breakdown of the tax composition and tax
revenues as well as the tax implications associated with shadows economies and foreign direct
investment. Section 2 will discuss the redistributive effects with regard to personal income tax,
value added taxes, and energy subsidies. Section 3 deals with repricing in the context of excise
taxation using the example of tobacco across the three countries. Section 4 will discuss
representation analyzing the factors that affect the taxpayers and tax regulators. Lastly, Section 5
will provide this studys recommendations across each of the four Rs.
This paper does not aim to discuss all taxation areas that are affected by the AEC, but only
to provide a framework on some key issues, which the authors deem important in economic
integration.

1. REVENUE


In general terms, developing countries systemically collect less tax revenues than OECD countries
if measured as a proportion of GDP. This observation also holds true for the three countries that
are examined in this paper, even though Singapore should not be seen as a developing country.
According to the World Bank, Singapores tax revenues amounted to 14.5 percent of GDP in 2012,
outperforming the Philippines (12.9 percent of GDP) and Indonesia (11.4 percent of GDP, latest
data from 2009). As taxes are the main source of revenue for any state, and the described countries
are facing significant challenges with regard to social policy and infrastructure, an increase of the
tax revenue to GDP ratio is a legitimate and sensible policy goal. With respect to ASEAN 2015, the
%

importance of tax collection becomes even more urgent, as the elimination of tariffs constitutes the
loss of a reliable source of income (even if not extremely high when intra-ASEAN trade is
considered). In the following chapter, we will outline the major sources of revenue for these three
countries, discuss the implications of shadow economies, and take a closer look at foreign direct
investment as it relates to corporate income tax and withholding taxes on dividends.
1.1 Tax Breakdown

In developed countries the majority of government revenue is collected through the direct taxes on
personal income from labor, payroll taxes as well as indirect taxes on consumption such as value-
added taxes (VAT). In developing countries, however, the sources of revenue generation do not
follow this logic and analysis shows that the corporate income tax constitutes a much larger
component of the tax system. This difference in taxation strategy is often linked to regulation
enforceability and implementation challenges as well as the size and scope of informal economies
(Gordon and Li, 2005). The ASEAN member states are not isolated from such challenges.

As countries across the ASEAN region work towards completion of the AEC 2015 noticeable
trends in taxation have arisen. In particular, corporate income tax (CIT) rates have been decreasing
over the last 15 years. Today the average rate hovers at around 23 percent. These decreasing CIT
rates are largely the result of countries seeking to attract greater foreign direct investment (FDI), a
topic, which will be examined in Section 1.3. With declining regional corporate tax rates, countries
will need to rely on other forms of taxation for revenue generation. Taxes on consumption are
predicted to help shoulder this revenue burden. Nevertheless, as Table 1 below illustrates, large
variance continues to exist across the different tax rates on a country-specific level. There is a 13
percent spread in CIT rates between Singapore and Philippines, respectively as well as 12 percent
spread between personal income tax rates. Although more marginal, differences in VAT rates are
also present. In all three tax categories, Singapore has the lowest rates of all three countries.

&

Table 1: Cross-country Comparison of CIT, PIT, and VAT Rates


Singapore Indonesia Philippines
Corporate Income 17% 25% 30%
Value-Added 7% 10% 12%
Personal Income 20% 30% 32%
Source: KPMG Corporate Tax Tables

Figure 1, below, provides a closer look at the tax revenue generation by tax category in 2012. At
the macro level, the following pie charts immediately indicate the heavy reliance on both corporate
and personal income taxation in all countries. A breakdown is provided for both Singapore and the
Philippines, yet for Indonesia income revenue is generated via taxes on gas and oil and non-
gas and non-oil, therefore greater comparative analysis of this tax category is not possible.
1
In
Singapore, the CIT tax revenue accounted for a 31 percent share (there are no corporate withholding
taxes), while personal income and personal withholding taxes claimed a 21 percent combined share.
Withholding taxes will be discussed in greater detail in Section 1.6. In the Philippines, the
breakdown is significantly different with both corporate and personal withholding tax shares
exceeding revenue generated through standard PIT and CIT rates. In fact, personal income tax only
generated an approximate 2 percent of total revenue. In total, withholding taxes in the Philippines
accounted for a combined 39 percent of total 2012 tax revenue.

All three countries equally show heavy reliance on indirect forms of taxation. Notably, in Singapore
Goods and Services Tax (GST) accounted for 22 percent of total revenue. Meanwhile, in the
Philippines and Indonesia the VAT claimed respective shares of 22 and 33 percent.

1
Tax revenue generation provided by the Bank of Indonesia does not provide greater granularity into the tax
breakdown. No corporate income or personal income revenue is provided.
'

Figure 1: Tax Revenue Generation 2012, by Tax Category

Sources: Inland Revenue Authority (Singapore); Bureau of Internal Revenue (Philippines): Bank of
Indonesia (Indonesia).

The following tax categories were subsumed under Other for the purposes of this analysis:
Singapore included Property Tax (9%), Stamp Tax (10%), Betting Tax (6%), and Estate Tax (0%).
In the Philippines included was Percentage tax (5%) and Other category (10%). Lastly, for
Indonesia the Other category combined Land and Building Tax (3%), Other Domestic Taxes (5%),
and Internal Trade Taxes (5%).
1.2 Shadow Economy

Much of the economic activity in AEC countries is untaxed as it is not officially recorded or, to put
it differently, part of the shadow economy. Although exact numbers are very difficult to pin-point,
(

current estimates from Bloomberg suggest that the informal sector amounts to 48.8 percent and 14.3
percent of GDP in the Philippines and Singapore, respectively. The German-Indonesian Chamber of
Commerce estimated a percentage of around 50 percent of GDP for the size of informal economy in
2008. Keeping this estimation constant over the time period 2009 to 2012,
2
the following estimated
values are produced for Indonesias informal economy.

Figure 2: Missed Opportunities Untaxed Economic Activity

Source: Bloomberg (2014), Deutsch-Indonesische Auenhandelskammer, 2009; World Bank (2014)

A key insight from the above graph is that a huge amount of economic activity remains untaxed and
is therefore a missed opportunity for tax collectors in the respective countries, as is depicted in
Figure 2. Another primary takeaway of Figure 2 is that Singapore outperforms both the Philippines
and Indonesia with regard to the approximate size of its shadow economy.

As Figure 2 provides a very rough approximation of the respective sizes of the informal economies,
these absolute values are not provided with the intent to enable a calculation of potential additional
revenues, rather to indicate the levels of untaxed economic activity. The latter should not be
confused with forgone tax revenues, which would equate to a certain percentage of the untaxed

2
In fact, there is little evidence that the level of the shadow economy has decreased significantly since 2008; as shall be
discussed later in this paper, the corruption perception index has even increased in recent years, which might be
interpreted as a sign of a large proportion of unrecorded activity in the Indonesian economy.
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activity. However, the implied relationship between a large shadow economy and loss in revenues is
backed by economic theory and econometric studies and models (Cobham, 2005; Slemrod, 2007).

Even though ASEAN 2015 is not likely to trigger any major changes with regard to the shadow
economy, this study seeks to emphasize the fact that it is a substantive problem that should be
addressed in the light of the tax collectors interest to increase their tax revenue. What is more,
ASEAN 2015 provides an excellent window of opportunity to introduce changes in tax
administration and tax policies. Particularly, as shadow economies across the region are in large part
attributed to both voluntary efforts of tax avoidance and evasion as well as involuntary behavior. To
the extent that tax avoidance and evasion are voluntary, the efforts of individuals and companies are
often supported by corrupted structures in the administration, particularly in Indonesia and the
Philippines. These issues will be addressed in greater detail in Section 4.
1.3 Foreign Direct Investment


The following section will discuss regional and country-specific trends in FDI as well as expand
upon the discussion of corporate income tax variation across the region in the context of tax
competition and tax incentives.

FDI is a key enabler of export competitiveness. It enables the transfer of capital, production know-
how, distribution logistics, and marketing. Furthermore, it generates productivity and efficiency
gains through competition, and boosts employment (Bhaskaran, 2013). For ASEAN, FDI holds
extreme importance as the influx of new firms serves as a primary driver of increased revenue
collection. Since 2000, ASEANs share of global inflows has increased from 1.6 to 8.2 percent in
2010 reaching a total of 111.3 billion (US dollars). FDI inflows of stock have also vastly increased
from roughly $257 billion in 2000 to $1.3 trillion in 2012, which as a share of global FDI stock
inflows was 5.8 percent.
*

1.3.1 Country Level

ASEANs dominant FDI actor remains Singapore, which attracts nearly half of its total 2012 FDI
stock with approximately 52 percent of total FDI inflows, followed second by Indonesia with 16
percent, third by Thailand with 12 percent, and sixth by the Philippines with just over 2 percent.
3

Illustrated in Figure 3 are the net inflows of FDI across the three countries examined for the period
2003 to 2012, in US billions, as well as the corresponding fluctuations in CIT rates. For instance,
the 5 percent decrease in the Philippines CIT rate from 2008 to 2009 occurred at the same time as
an 89 percent increase in FDI. Equally, Singapores FDI underwent a sharp nose dive in 2007 to
2008, in the lead up to the US financial crisis, which coincides with a 2 percent decrease in the CIT
rate from 20 to 18 percent.

Figure 3: FDI Inflows and CIT Rates by Country, 2003-2012
Source: Data compiled from the World Bank DataBank and KPMG.
4



3
UNCTADSTAT. Foreign direct investment flows and stocks, annual, 1980-2012
4
The World Bank DataBank: Development Indicators; Foreign Direct Investment, net inflows (BoP, current US$);
KPMG, Hong Kong Tax Competitiveness Series; KPMG Corporate Tax Rates Table
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FDI Indonesia FDI Philippines FDI Singapore
CIT Indonesia CIT Philippines CIT Singapore
!+

However, this imbalance is not exclusively caused by CIT differentials. Also of importance are
discrepancies in the regulatory framework governing FDI. The assessment by the World Economic
Forums Ease of Doing Business 2012 report, which ranks Singapore as the most open economy to
FDI, followed second by the Philippines, and Indonesia sixth, substantiates this assertion
(Bhaskaran, 2013).
5

1.3.2 ASEAN Level

The recent development of the ASEAN Comprehensive Investment Area (ACIA) however signals
new efforts at creating a common framework for FDI attraction. Specifically, the ACIA is a
combination of two previous investment-related initiatives, the ASEAN Investment Area (AIA) and
the Investment Guarantee Agreements (IGA). Where the ACIA differs is in its expansion of these
previous agreements in its efforts to create more open investment climate in line with the ASEAN
economic integration. Specifically, it places renewed focus on the adoption of international best
practices in investment protection, recent trends in international investment practices to reduce
investment restrictions, strengthening third-party participation and benefits in investment projects,
as well as calling for higher levels of transparency in investment regulations. These initiatives
represent only a handful of investment-related efforts as part of the ACIA. Although this is a step in
the right direction, implementation, monitoring, enforcement of the practices outline in this
framework will be key for regional FDI growth and eventual coordination. (ASEAN
Comprehensive Investment Agreement Guidebook, 2013)
1.4 Tax Competition

Corporate tax competition generates market distortions as it promotes the leveraging by foreign
firms of the tax differentials in various countries.
6
Current efforts at tax policy coordination remain

5
Although reports by the World Bank and the World Economic Forum show a correlation between high levels of FDI
and countries who rank highly in their respective indices (Ease of Doing Business and Global Competitiveness Index),
it is important to emphasize that FDI liberalization in the form of tax incentives can produce significant economic
distortions.
6
Asia Development Bank. Asia Regional Integration Center. Database on Tax Incentives.
!!

problematic, as many ASEAN member states are not eager to forgo their competitive tax advantage.
Furthermore, tax rate setting remains up to the discretion of individual ASEAN member states. As
the push toward AEC 2015 becomes more of a reality, the region will continue to see the
development of negative externalities as countries with low tax rates lure capital investment from
neighboring countries with high tax rates. The result of this market manipulation on behalf of
multinational corporations (MNCs) is also seen on an internal structural level. MNCs are
increasingly relying on transfer-pricing schemes to shift corporate profits to their foreign
subsidiaries located in countries with more favorable tax systems. This gaming of the tax system by
MNCs is a problem faced by many ASEAN member states whose internal regulatory frameworks
prove to be inadequate in restricting the private sectors use of advanced pricing agreements.
Furthermore, many countries lack the trained staff and necessary level of expertise in this field to
curtail the growing transfer pricing schemes (International Tax Compact Workshop, Bangkok
2013).
1.5 Tax Incentives

Another method of FDI attraction involves the use of tax incentives whose size and scope of differ
by country. However, the most widespread incentives include export-processing, creation of special
economic zones (SEZ) and tax reductions or holidays for particular/protected industries
(International Tax Compact, 2013). Despite facilitating higher levels of FDI and promoting general
economic integration, tax incentives negatively affect revenue generation, reduce the tax base, and
raise taxes for the non-exempt taxpayers. Indonesia, for instance provides a 3-8 year CIT tax
holiday for foreign firms across 22 different economic sectors, while Singapore provides full tax
exemptions for certain firms for the first 3 years, and the Philippines 3-6 years depending on a
firms project status of pioneer or non-pioneer or new or expansion.
7
The World Bank
estimates a 20 percent tax differential in the Philippines between firms benefiting from tax
incentives and those who do not (International Tax Compact, 2013). Tax incentives are a viable

7
Asia Development Bank. Asia Regional Integration Center. Database on Tax Incentives.
!#

means of attracting FDI to specific industry sectors. In light of the completion of the AEC 2015,
which will open intra-ASEAN borders to the free movement of capital, coordination is of
fundamental importance, as is the harmonization of CIT rates. This is particularly true for countries
like the Philippines and Indonesia, whose respective manufacturing sectors generate the largest
respective inflow of FDI, or 17 and 38 percent of total FDI. In the case of Indonesia and the
Philippines, coordination of tax incentives in this sector might serve as an example of how a more
coordinated approach to FDI tax incentives in a specific sector could enable the promotion of the
ASEAN-brand as it relates primary industry FDI.
8

1.6 Withholding Taxes and Effective Tax Rates

Withholding taxes can come in the form of income withheld from personal labor wages, which are
then paid directly to the government by the employer or taxes levied on interest, certain services,
royalties and dividends. Such taxes are often levied in addition to the underlying corporate or
personal income tax and thus represent a second, or double layer of taxation, in the country wherein
profits were made. Furthermore, in certain countries profits made from activities abroad can also be
subject to a third layer of taxation upon reentry to the home country. These multiple layers of
taxation penalize financial engagement and disincentive investment and the movement of capital
and services. (KPMG, 2006).

This is particularly relevant when discussing the variance in CIT rates, as illustrated in Table 2,
which shows the effect of withholding taxes on dividends and the resulting increase in the effective
payable tax rates corporations must pay on income. Withholding taxes on dividends arguably have
the greatest effect in the Philippines causing an increase in the effective tax rate to 40.5 percent, up
from the standard rate of 30 percent. Singapore, on the hand, has zero withholding taxes on
dividends and as a result their CIT remains the most competitive of the region at 17 percent

8
Asia Development Bank Institute, 2012 (Indonesia); Bank of Philippines, 2014
!$

(KPMG, CFO Forum, 2012). Brunei Darussalam and Malaysia equally have no withholding taxes
on dividends. (KPMG, 2006).

Although expansion of the withholding tax structure as a means of broadening the tax base is
outlined as a primary goal of the AEC 2015, more can be done to address this issue. Elimination of
corporate withholding tax rates among businesses in member states is one proffered solution as is
the development of a multilateral tax treaty led by Singapore, the corporate taxation leader of the
region (KPMG, 2014 Tax Alert). However, these will be addressed in greater detail in Section 5. It
is important to note that elimination of withholding tax rates across the region has the potential to
significantly destabilize capabilities of revenue generation in countries such as the Philippines
wherein corporate withholding taxes accounted for as much as 20 percent of total tax revenue, see
Figure 1

Table 2: Cross-country Comparison: Withholding Tax on Dividends and Effective Rates

Singapore Indonesia Philippines
Corporate Income 17% 25% 30%
Withholding on Dividends 0% 14% 15%
Effective Rate 17% 36.3% 40.5%
Source: KPMG, Corporate Tax Tables

2. REDISTRIBUTION



One of the most essential features of taxation is redistribution. Any tax reform must therefore be
concerned with the redistributive consequences of changes to the tax breakdown. This section will
!%

discuss issues related to personal income taxation, the effect of greater reliance on indirect
taxation, such as the VAT as well as point to energy subsidies in Indonesia.

2.1 Personal Income Tax

One of the characteristics of the AEC will be the free movement of skilled labor. In Indonesia and
the Philippines, this may result in a brain-drain of the most skilled part of the population to
Singapore. From an economic standpoint, this will curtail potential labor productivity as well as
result in the disappearance of the upper strata of the tax pyramid.
9
This brain drain will largely
offset the redistributive effects inherent in progressive personal income taxes wherein high-income
earners shoulder the burden of the poor.

At this point, it is worth mentioning that there is another dimension in which labor mobility has
implications on taxation: countries have to guarantee that incomes are not taxed twice if a citizen
from one country resides and works in another country. By the same token, governments must also
ensure that there are no loopholes for these individuals, which might lead to them not paying PIT at
all. In order to overcome this, an efficient system of double taxation agreements is needed. There is
already a system in place, however, enforcement remains weak
10
and some treaties are
incomplete.
11

2.2 Reliance on VAT

To counter the trend of decreasing revenues, there is an incentive for governments to rely on
indirect taxation, and especially on VAT, which has some obvious advantages compared to direct
taxation: it is relatively easy to collect, enables a pass the buck situation from businesses to
consumers and is generally more growth-friendly (De Wet, 2013 and PwC, 2013).

9
Interesting: which decile contributes how much to overall revenues?
10
Courts have not consistently applied double taxation agreements as exemplified in Thailands court decisions.
(Wichit, 2012)
11
Indonesia has yet to finalize two of its double taxation agreements, meanwhile Cambodia has not signed a single one.
!&

These advantages are promoted by institutions like the IMF, the OECD and the European
Commission, all of which recommend stronger usage of indirect taxation vis--vis direct taxation.
These recommendations correlate with the general shift towards more indirect taxation observed all
around the world in recent years (PwC, 2013).

Although, as outlined by the IMF (2014), the VAT is a regressive tax
12
it also argues that if there is
a differentiation in VAT between certain types of products, the regressive characteristics are not as
strong (IMF, 2011).
13
Keen (2013) discusses this in more detail, examining the conditions under
which a system with different VAT rates can serve as social policy tool. However, his conclusion is
that even a differentiated VAT system cannot eliminate the regressive character of VAT: although
'the poor' tend to consume more of the goods with reduced VAT rates (e.g. food) in relation to other
goods, high income earners still consume more of these goods (food) in absolute terms, which
means that these parts of society are most favored by such a policy.
Besides, the example of Indonesia reveals that VAT exemptions are not only applicable for
products of importance to the poor, but instead also exist for meals in restaurants or hotels and the
sale of gold ingots (KPMG 2012).

In this context, it is essential to raise awareness of the following tradeoff: the price for easy
revenue generation via VAT may result in growing income disparities and inequality. This is not
only problematic from a normative standpoint, but there is also empirical evidence that this might
be harmful to economic development (IMF, 2014).
2.3 Energy Subsidies

A closer look at energy subsidies in Indonesia serves as a prime example of the ill-directed
redistributive effects of government subsidies. In February 2014, a liter of Premium bensin (low-

12
This view is supported by ODonoghue et al. (2004) and Snowdon (2013).
13
Indonesia and the Philippines have such a system in place, (KPMG, 2012; KPMG, 2014)
!'

octane gasoline) at Pertamina sold for Rp 6,500 (55 US cents) and automotive diesel oil for Rp
5,500. Unsubsidized fuels are based on market prices that are in excess of Rp 10,000.
14


To understand the overall cost of this subsidy, these numbers from the OECD provide more clarity:

Figure 4: Energy subsidies in Indonesia as a percentage of GDP

In the context of the Indonesian central government budget, energy subsidies account for nearly a
quarter of total funds. Despite the fact that the subsidy enables all parts of society to benefit from
cheaper fuel and energy prices, the World Bank finds that the subsidy is highly regressive in
character: As a share of total gasoline subsides, 40 percent go to the richest 10 percent of
households, while only 1 percent of the subsidy goes to the bottom 10 percent (World Bank,
2013,OECD, 2012).

The OECD suggests that money spent in this area could be used in a much more efficient way,
instead of distorting consumer behavior and encouraging carbon emissions. However, Indonesian

14
The Jakarta Post, February 3, 2014, http://www.thejakartapost.com/news/2014/02/03/indonesia-s-fuel-subsidy-
monster-the-root-problems.html-0
!(

government officials and political leaders have acknowledged that there is a need to reform with
regard to energy subsidies (World Bank, 2013, Jakarta Post, 2014).


3. REPRICING


One of the main elements and functions of taxation is the repricing of goods. From a tax
perspective there are two primary reasons for repricing: to generate revenue and to change
consumer behavior to achieve public policy goals, such as public health and safety. However, there
still exist huge differences among the ASEAN member countries in terms of excise taxation. This
part of the paper will focus on excise taxation and use the example of tobacco to illustrate the main
weaknesses in the current excise tax arrangements across Singapore, the Philippines, and
Indonesia.
3.1 Tobacco

There are only five products in the ASEAN economic community, which are all subject to excise
taxation: beer, wine, liquor, motor vehicles and tobacco (Hallerberg, 2013). This means that
virtually all other products can be subject to excise taxation in country A, but not in country B,
which may distort consumer incentives and possibly those of producers. However, even for
products for which there are excise taxes in place across all ASEAN countries, such as tobacco,
distortions are equally possible.






!)

Table 3: Excise Taxation of Tobacco in Three Countries
Tax Rate as % of
Retail Price
Excise Tax Rate Tax Base for
Domestic
Products
Tax Base for
Foreign Products
Singapore 69% SGD 0,32 per
stick
No domestic
production
Weight and type
of tobacco
product
Philippines 53% PHP 12 or 25 per
package (2 tier)
Net retail price
(before tax)
CIF
Indonesia 46% (avg.) IDR 80-380 per
stick
Production cost
price
Transaction
value of tobacco
product

Source: Southeast Asia Initiative on Tobacco Tax, 2012

3.2 Tax Base

As illustrated in Table 3, all countries differentiate their excise taxation between domestic and
foreign products (except for Singapore, which does not produce tobacco). In the Philippines and
Indonesia, the tax base for domestic products is lower than the tax base for foreign products.
15
This
obviously generates an artificial advantage for domestic products.
16
What is more, the tax base also
differs insofar as the excise tax rate is levied on different units (stick v. package).
3.3 Tax Rate

The actual tax rates also significantly differ across countries. The total tax rate is shown as a
percentage of the retail price; see Table 3, which includes the excise tax, tariffs, VAT and other
taxes. Some of these taxes are specific (excise tax) and others are ad-valorem taxes (tariffs, VAT),
which complicate the process of excise tax administration in these countries. Excise taxes are a

15
Indonesia: production cost v. transaction value; Philippines: net retail price v. Cost, Insurance and Freight price,
which is the net retail price plus these positions.
16
In Indonesia, cigarettes from other countries constitute merely one percent of all consumed cigarettes. Even though it
is impossible to predict how large the share would be in a counterfactual situation, the described difference in excise
taxation gives at least hints that this fact is related to the excise tax regime for cigarettes.
!*

specific tax in all three observed countries, even though large differences exist. Singapore has by far
the simplest model of levying SGD 0.32 on each cigarette stick, while the Philippines have a two
tier system and charge either PHP 12 or PHP 25 per package. This specific tax is derived from the
retail price for cigarettes in 1996 and has remained constant. Indonesia, however, implements a
complicated multi-tier system with a specific tax amounting from IDR 80 up to IDR 380.

As the example of tobacco has shown, excise taxation across ASEAN member states varies
substantially. Hence, distortions in consumer and producer behavior are likely to occur, particularly
because of the removal of tariffs envisaged by the ASEAN 2015 integration process. Some
observers project that this may lead to large flows of cheap cigarettes from producer countries such
as Indonesia to other AEC member states.
17
This increases the necessity to standardize the tax base
across countries, as it has been the case in the EU, for instance, and achieve a certain degree of
harmonization in the tax rates.


4. REPRESENTATION

No taxation without representation is a famous slogan emanating from the United States that
calls for the representation of the people on whom taxes are levied in the goal of generating
government revenue and the delivery of public services. The ability to collect taxes is affected by
several factors including political feasibility and the capacities of both the taxpayer and the tax
administration agencies. For instance, political pressures from the executive power may put strains
on tax collection especially if it favors certain sectors in exchange for political support or other
vested interests. Also, the capacities of the personnel in the tax agencies are an important factor,
which directly relates to the concentration of the tax officers, efficiency of the tax system, and to the

17
Southeast Asia Tobacco Control Alliance
#+

level of cultural integrity and professionalism of the administration and its employees. This section
seeks to address these issues in greater detail with a particular focus on tax administration
capacities, tax procedure complexities, and the implementation of Semi Autonomous Revenue
Authorities in Singapore and the Philippines as one approach to tax administration. It will also
address the ongoing challenges associated with corruption and tax generation.
4.1 Tax Administration Capacities

As we can see in Table 4, the three countries present different capacities in their tax administration
systems and have different ICT-integration levels. Many of the cross-country differences can be
explained by different factors such as the average taxpayers ease of registration, which includes
obtaining a tax identification number. For, instance in the Philippines, citizens are required to obtain
a tax identification number prior to getting a drivers license. Other factors such as geographical
considerations also play a role, especially in the case of the Philippines, which has more than 800
inhabited islands and Indonesia, which has more than 6,000 inhabited islands. On an economic
level, tax registration in some countries can also require the payment of a fee which has the
potential to be detrimental to the tax registration of the self-employed and actors in the informal
sector should the fees be too prohibitive.










#!

Table 4: Tax Personnel Capacity and ICT Integration
Personnel Capacity and ICT-
Integration
Singapore Philippines Indonesia
Number of Tax Personnel 1,899 10,387 32, 741
Number of Tax Payers 3,800,000 18,900,000 19,112,590
Registered Taxpayers as % of
Population
72% 18% 8%
Can Register Online? Yes Yes Yes
Can Pay Tax Online? Yes Yes Yes
Can Pay Tax With Mobile
Phone?
Yes No No

Source: Own elaboration based on DGT Annual Report 2010 (Indonesia), BIR Annual Report 2012 (Philippines) IRAS
Annual Report 2012/13 (Singapore).

As Table 4 illustrates, there are huge discrepancies in the number of government tax personnel
across the three countries. However, analyzing the number of total tax personnel as a percentage of
the total respective populations, each one-government tax employee deals with nearly 10,000
individuals in the Philippines, around 7,500 in Indonesia, and only 3,000 in Singapore. As these
figures suggest, some tax administrations may lack the staff necessary to fulfill the job, irrespective
of efficiency and or internal organizational structure. Taken a step further, a look at the number of
registered taxpayers as a percent of the total population indicates that 72 percent of Singapores
population is registered in the tax system. This is exceptionally high when compared to only 18
percent in the Philippines and 8 percent in Indonesia. Relatively speaking, the Philippines and
Indonesia have significant potential to expand their tax base.

It is interesting to note that all three countries provide ICT technology for online registration and tax
payment despite high levels of corruption in the cases of Indonesia and the Philippines, which will
##

be addressed in Section 4.1.3. In countries where corruption in tax administration is rampant, it can
be argued that the use of computer technology, which generates a paper trail (Gordon Li, 2005),
might encounter opposition.
4.2 Factors Affecting Taxpayer and Regulators

During the last decade, tax experts have started to realize that behavioral economics is a necessary
component in order to better understand the conduct of taxpayers. The central contribution of this
approach is to more clearly pinpoint the reasons for which some individuals pay their taxes and
others do not. As a consequence, the possibility of increasing revenues by modifying to the
managerial behavior can be a real option for Indonesia and the Philippines
18
.

The standard and most widely applied model of tax compliance considers that people will act as
rational actors. Rational actors in the context of tax payment are those who seek to assess the costs
and benefits of evading taxes in their decision-making process. This rational actor model however,
has not proven to be effective in all the cases (Sanchez, 2011; Serra, 2005; Walsh, 2012). The
deterrence model seeks to influence the behavior of rational actors and states that, if the
expected benefits (less income lost to tax payment) outweigh the costs (the chances of
noncompliant tax behavior being caught and the sanctions incurred) then the taxpayer will evade
tax (Walsh, 2012). Therefore, approaches based only in increasing the possible sanctions of
evading taxes or the difficulty of dodging them is not necessary sufficient. Walsh (2012) discusses
five factors that impact compliance with tax payments: norms, fairness and trust in tax
administration, complexity of the tax system, broader economic and social factors, and interaction
between factors each of which will be addressed in greater detail below.

Norms have in an important impact on individual behavior. Wenzel states that ethical concerns
appear to be based on the internalized social norms of the reference group, and tax ethics motivate

18
Singapore has introduced several reforms in this direction.
#$

taxpaying behavior. Conversely, ethical concerns as well as perceptions of social norms are
influenced by an individuals engagement in tax evasion (Walsh, 2012; Sanchez, 2011)
4.2.1 Tax Procedure Complexities

For many people, tax is a complex subject and this complexity has been shown to contribute to
non-compliance (GAO, 2011) (Walsh, 2012). Walsh (2012) and Sanchez (2011) propose that lazy
non-compliant taxpayers would pay if the process were easy. Therefore, if tax agencies de-
complicate the tax paying procedures, then taxpayer behavior will change towards greater
compliance. Nevertheless, it is not only about simplifying laws and regulations, but also bring about
direct assistance to the taxpayer in order to address instances of unintentional non-compliance due
to lack of knowledge or understanding of the tax system.

If we analyze the case of the three countries in terms of complexity, the view appears to be very
different between them. In Indonesia, on average, it requires 259 hours for a standard firm to
prepare and file their taxes within on calendar or fiscal year. In contrast, in Singapore, the same
process only takes 82 hours. The number of times that a firm has to file and pay taxes differs
between the countries, in Singapore the mean is 5 times a year, while in the other two countries it is
more than 35 times (PwC, 2014). As a result, compliance is expected to be higher in Singapore than
in both the Philippines and Indonesia.














#%

Table 5: Tax Performance 2014

Source: Own elaboration based on PwC, 2014

4.2.2 Economic and Social Factors

In tax administration literature, there is a call for considering the context and specific situations of
firms and individuals (Walsh 2012, Torgler 2004-05). At a macroeconomic level, elements that
promote growth also encourage tax compliance. In addition, higher tax rates are correlated with
evasion if they promote taxpayers to move to the shadow economy (Walsh, 2012).
4.2.3 Corruption Perception and Trust-based Approach

In Singapore, Philippines, and Indonesia corruption plays a role in the ability of each country to
generate tax revenue. Singapore ranks 5 among all the countries in the Corruption Perception Index,
the Philippines ranks 94 and Indonesia ranks 114 (see Table 6), which can affect the willingness of
the taxpayers to comply with tax rules. As a matter of fact, Torgler (2004-05) states that tax morale
is inversely correlated with the perceived size of corruption.






Philippines Singapore Indonesia
Overall ranking (1-
183, 1=highest)
131 5 137
Frequency of filing
and paying Tax
36 5 52
Number of hours it
takes to prepare taxes
193 82 259
#&

Table 6: Comparative Corruption

Global Corruption
Barometer 2013 Singapore Philippines Indonesia
Corruption Perception
Index
(0-100, 100=cleanest) 86 36 32
Corruption Perception
Index Rank
(1-177, 1=highest) 5 94 114
Source: Own elaboration based on Transparency International, 2013.

On the other hand, the Global Corruption Barometer in 2013 found that in Indonesia, 71 percent of
the population perceived that the level of corruption increased from the previous year. Though in
the Philippines only 31 percent felt the same way (Transparency International).

Another factor that impacts the probability of paying taxes is the perception of fairness. Norms and
the drive to pay taxes are influenced by this variable (Walsh, 2012). If taxpayers do not trust tax
administration to collect taxes fairly, this will increase non-compliance (Torgler, 2004-05;
Carasciuc, 2005). Walsh (2012) discusses three types of fairness in taxation: distributive fairness or
the perception that government acts as a wise spender of tax revenues; procedural fairness or the
belief that tax organization adheres to processes that are fair in dealing with tax payers; and
retributive fairness or how fair the official agency is when punishing rule-breaking behavior. The
two last points are more related with tax agencies.

Another important consideration is the engagement of individuals in alternative political
technologies, such as bribery, when the institutions are weak, which erodes the citizens trust in
their government. In the context of tax administration authorities, 7 percent of the population in the
Philippines has paid a bribe to a tax officer. In Indonesia only 6 percent have. Moreover, in the
#'

Philippines 10 percent have paid a bribe to a judicial officer and 14 percent to registry services;
19

meanwhile, in Indonesia 66 percent of people declared to have bribed a judicial officer and 37
percent registry and permit services officers. (Transparency International, 2013). There is no
information about Singapore on these factors.
4.3 Paradigms for Tax Compliance
The above-mentioned factors converge at different stages in tax administration and implementation
and it is their interaction that contributes to the willingness of taxpayers to comply at the individual
and collective level.

An example of how these dimensions can be combined is illustrated by the tax compliance
strategies in Chile and Argentina in the 1990s. As depicted in Figure 5, Indonesia
20
has largely
adopted a similar approach to Chiles, which relies on a trust-based approach. While in the
Philippines, the adopted model is very similar to Argentinas approach of name-and-shame
campaigns, see Figure 6.










19
These percentages are self-reported. Therefore, it has to be expected that reality could present higher rates of bribes.
20
Dissemination and education activities carried out in 2010 are as follows in Indonesia: interactive radio talk show,
information through national TV, publishing of childrens storybook, development of online site for DGT library book
catalogue.
#(

Figure 5: Tax Compliance Campaigns, Indonesia and Chile










Carrot Style Approach

The Chilean Tax bureaus (Servicio de Impuestos Internos) strategy was first to improve its
methods through gathering, managing, and analyzing data on tax collection which were also used to
improve the quality of its services. They did this primarily by constantly professionalizing the
quality of their human resources. In the 1990s, a full merit-based system of recruitment and
promotion was installed. Other measures were bringing salaries in line with market levels,
implementing constant training courses, and installing a zero tolerance policy on corruption
(politicization was considered also a breach). From the perspective of the provided service, this
agency implemented periodical surveys to indicate where service improvements were necessary.
For instance, results were gathered on the time required to complete tax obligations and the level of
attention and service provided by officers. Another measure against evasion was to improve
transparency in the allocation of public expenditure. These measures aimed to increase the publics
trust in the Tax Administration Bureau and to promote the collaboration of taxpayers. All these
reforms, among others, impacted VAT evasion levels increasing revenues from around 30 percent
in 1990 to 18.3 percent by 1993. It also enabled the total estimated share of tax evasion to remain
#)

fairly stable at 23 percent of theoretical tax collection through 1995 (Walsh, 2012; Servicio de
Impuestos Internos, 2014).

Figure 6: Tax Compliance Campaign in the Philippines







Stick-Based Approach

On the other hand, Argentina adopted the typical stick based approach to address their tax
evaders. Their strategy was based on the improvement of the agencys legal, political, and technical
tools. However, they omitted the necessary reparation of citizens trust and the construction of
administrative capacity. For instance, they adopted, at the beginning of the 1990s, an aggressive
public campaign to intimidate tax evaders by letting them know that the Federal Tax Bureau had
more tools than before to penalize and pursue them. The phrase of the Argentinian Undersecretary
of Public Revenues, Carlos Tacchi, illustrates the spirit of that period I promised God to crush tax
evaders (El tiempo, 1995). As a matter of fact, they created a group of officers, Los Intocables,
which investigated large taxpayers. This method produced successful results between 1991 and
1993 decreasing total estimated tax evasion by 30 percent. However after 1998 tax evasion levels
returned to pre-reform standards (Walsh, 2012).

#*

Walsh (2012) and Sanchez (2011) postulate that a service and client formulation by tax
administrations is more probable to encourage trust than a cops and robbers approach based on
sanctions.
4.3 Semi-Autonomous Revenue Authorities

Semi-autonomous revenue authorities (SARAs) perform tax collection for the central government
but have features that distinguish them from other tax collection agencies. SARAs enjoy autonomy
from centralized executive power, which shields them from direct political influence. However,
they are not as autonomous as a central bank. Moreover, SARAs have independent financing and
personnel rules that usually govern the public sector, which means that they may not be part of the
budget appropriation cycle in that they fight for annual allocations. They are also not subject to the
hiring and firing rules of the central civil service authority. Lastly, SARAs are single-purpose
agencies where all the tax functions are integrated and all tax collection is centralized as opposed to
being located inside the ministries of finance where they are separated into departments and
function as separate entities. The SARAs across the world vary in each feature and may also operate
differently as their supposed level of independence may only exist on paper.

In general, SARAs assume tax collection under their jurisdiction and move away from the central
powers of the ministry of finance. SARAs are established with two objectives: increase tax
revenues and increase the authority of the central state. The public justification for the presence of
SARAs are: 1) signaling political autonomy, indicates to the taxpayer that the power to tax will not
be abused; 2) creating managerial autonomy serves as a means of establishing a team with
excellence capabilities; and 3) facilitating reform makes the implementation of reforms in tax
administration easier. Nevertheless, it has not yet been proven that SARAs improve tax recollection
or the systems efficiency (Fjeldstad & Moore, 2009).

$+

Singapore and Philippines have adopted SARAs into their tax administration system yet still receive
supervision from their respective governments (Asian Development Bank, 2012). This suggests that
although these entities exist they in fact do not operate in an autonomous fashion. Meanwhile, tax
collection in Indonesia directly depends on its Ministry of Finance and thus no such independent
agency exists.

5. ORGANIZATIONAL FRAMEWORK


Before proceeding to Section 6, Recommendations, it is necessary to establish a framework of the
political feasibilities and organizational changes. Andrews (2013), on which the following section is
based, provides a detailed look at several fundamental concepts and approaches that provide insight
as to how best to enact administrative reform and ensure on-the-ground implementation.
5.1 Isomorphism

One important consideration as to why many reforms fail is that countries commonly adopt reforms
to signal intent rather than commit to change (Andrews, 2013). For example, the adoption of the
double taxation agreements, the signing of the UN Convention Against Corruption, and the passage
of certain laws to comply with international agreement requirements have to be put under strict
scrutiny within this framework. First, the adoption of reforms may fail to take into consideration the
degree to which context matters. Second, reforms may promote interventions that are too content
specific and demanding for some countries. Lastly, these reforms may be entered into by specific
agents and or single individuals, rather than a collective bottom-up groups, and therefore they
cannot ensure implementation (Andrews, 2013). The danger of these types of reforms is that this
only leads to change at the margins, which is visible to the outside world, but is actually irrelevant
to changing the core operations that aims to make government function better. In the context of
ASEAN reforms such as double taxation agreements, whether bilateral or multilateral, must be
$!

implemented with country-specific feasibility in mind. As an example, Global Integrity shows
many developing countries with legal systems can compete with the developed countries in anti-
corruption law, which includes the Philippines and Indonesia. However, when their implementation
is evaluated, there are ranked comparatively low, signaling a meaningful disconnect (Andrews,
2013).
5.2 Champions vs. Distributed Agents

Institutional reforms are often carried-out by champions, or individuals from the top political strata.
Such individuals are usually within the executive power. However, reforms that are brought by
champions are usually regarded by the other agents as programs of the central government only,
which are too far removed from reality. This is because champions who are mostly politicians lack
the professional affinity required to understand the value of new information. Therefore, it is
important to rely on distributive agents as they work at the frontline of tax collection, which often
remains opaque to the outside world and where changes are more difficult to implement (Andrews,
2013). This requires problem-driven analysis to understand the informal institutions, the norms,
customs, values, and cognition of the officers who are tasked with implementing the reforms and
why at the grassroots level, the changes are not often made.
5.3 Problem-driven Learning

Problems are the windows to the opaque parts of an issue and give light to the realities on a level
that may be too far away from the central government or external actors. Thereby problem-driven
learning, provides a certain degree of flexibility with regards to the solutions adopted through a
combination of formal and informal reforms. By understanding the problems on the individual
level, this study strives to consider the behaviors, psyche, and cultural-cognitive structures that
permeate the tax administrative systems in Singapore, Indonesia, and the Philippines.

$#

In order to address these issues, the following questions serve a constructive starting-point: why are
the tax collectors not enforcing compliance among the informal sector? Why dont running micro-,
small- and medium-enterprises declare earned income? Why do people bribe tax officers less and
bribe judicial officers more? The seemingly obvious things are not as what they appear to be and
the rigid application of copied laws on a highly specific context would only produce meager results.
5.4 Broader Agent Engagements

Andrews (2013) purports three lessons for purveyors of externally influenced institutional reforms
in the development context: First, instead of focusing on the lone champions, reformers should
establish broad-based engagements. Second, instead of emphasizing agents who provide authority
and ideas, reforms should cultivate mobilizers, motivators, conveners, and connectors. Third,
external agents themselves should be aware of the limited roles they can play in facilitating
institutional change and play these roles as effectively as possible.

It is important to consider that leaders of reforms are needed at different stages of the reform
process. For example, leaders who provide formal authority are important at the start of the reform,
but are less so during the implementation phase. Leaders who convene and connect actors relevant
to the reform are of particular importance during the implementation stage (Andrews, 2013). In fact,
these conveners and connectors accounted for more than 25% of the identified leaders at both the
start of the reform and in its implementation (Andrews, 2013). Mobilizing is an essential leadership
function in any and all institutional reforms. There are three approaches identified by Silvia Dorado,
which are integral to change. These approaches are leveraging, accumulating, and convening.
Identifying who these actors are in the respective countries and the stage at which they are needed
in the reform process are critical for success.

The importance of this discussion is that external agents do not provide the primary leadership in
defining problems or ideas. This must originate from local agenda-setting (Andrews, 2013).
$$

External agents are not a source of authority and do not bring implementation know-how according
to recent studies. By contrast, their primary role is to provide initial financing (Andrews, 2013).
This nevertheless, does not necessarily equate to wielding broad influence. However, externals
agents can develop on-the-ground capacity by stationing representatives in the concerned countries
(Andrews, 2013).

Ultimately, it is through domestic problem identification and national ownership of reforms that
governments and its citizens can truly embrace and ensure the changes they deem important.

6. POLICY RECOMMENDATIONS



The 2015 AEC deadline is quickly approaching. Integration steps are undoubtedly moving in the
right direction, yet many obstacles remain spanning internal politics, economic development, and
historical and cultural heritage. The following section outlines recommendations specific to the four
R model of the study: Revenue, Redistribution, Repricing, and Representation.
6.1 Revenue
6.1.1 Tax Composition


CIT: As a primary starting point, this study recommends the harmonization of the upper and lower
bounds of CIT rates across the region. Such a coordinated tax strategy will stimulate the growth of
total ASEAN-wide FDI and strip foreign firms of the ability to shop for the most advantageous CIT
rate and engage in transfer pricing schemes to the same extent as today. This strategy will,
combined with our recommendations for administrative reforms, also broaden the tax base and
improve compliance.
$%

VAT: This study also recommends the harmonization of the upper and lower bounds of VAT as the
use of this indirect tax is growing in importance as countries seek to offset declined revenue from
corporate income.
6.1.2 Shadow Economy


As outlined in the Revenue part of this paper, the main assumption with respect to untaxed
economic activity is that many individuals are not paying taxes because of administrative failure
and the complicated system without assistance. What is more, it is important to recall that Indonesia
and the Philippines are states formed by over 6000 and 880 inhabited islands, respectively. If we
combine this fact with the notion that filing of tax records is a daunting task in these countries and
oversight as well as assistance is rather weak, the problem of the shadow economy could be
substantially reduced by simply making paying taxes less cumbersome to the average person.
Approaches on how to go about administrative reforms will be outlined in more detail below.

However, when considering the voluntary part of the shadow economy, making compliance easier
will not solve the problem. Yet, again, the prosecution of tax evasion or the enforcement
mechanisms in general can be assumed to be either very costly or very inefficient, due to the
disbursed geographical features of the countries. A possible, but controversial method to reach all
islands simultaneously would be inflation. The shadow economy is cash-based, which means it is
highly sensitive to inflationary pressure. The opportunity costs of not being in the real economy
thereby increase, as the formal economy hedges against inflation through the interest rate channel
(Gordon, Li 2005). If banks are forced to reveal details of their clients transactions to the state or at
least report suspicious patterns of monetary flows (Gordon, Li 2005), the shadow economy could be
substantially reduced by the combination of these two measures but at the cost of higher inflation,
which may cause long-term economic growth to suffer. With regard to this proposal, the political
feasibility must also be considered. As the Central Banks mandate in both countries is price
$&

stability, central bank officials may not support a voluntary increase in inflation to combat the
shadow economy. However, depending on how close the political ties between government and
central bank are, this approach should still be considered a policy option.
6.1.3 Foreign Direct Investment: Coordination and Transparency


Although FDI rivalries will likely remain, it will be imperative that ASEAN members design
strategic and comprehensive approaches to FDI attraction. Initiatives designed to increase FDI
policy transparency, streamline business processing times, reduce business startup costs are
important initiatives. The development of an internet information portal for FDI activities across the
region would not only significantly increase transparency but also allow for the inclusion of
stakeholder communication with key business players. Such an approach would also enable the
promotion of an ASEAN brand for potential external FDI stakeholders. A recent survey
conducted by the ISEAS-ADB has concluded that there continues to be a general lack of
awareness regarding the AEC, which places the economic integration of the region at a significant
disadvantage (Bhaskaran, 2013).

Furthermore, coordination of withholding taxes should be addressed so as to reduce the wide
discrepancies between effective corporate tax rates in the ASEAN region. This is particularly
relevant in incentivizing investment and the movement of labor, capital, and services.
6.2 Redistribution


Labor mobility and the general trend to rely more heavily on indirect taxation can have
redistributive consequences. As a result, this study recommends raising awareness of this fact
among the respective tax authorities, legislators and other parties involved in the process of
redesigning tax policies in light of AEC 2015.

$'

As research has shown, the regressive character of VAT cannot be abolished by tax exemptions or
cascading taxes (Keen, 2013). However, a closer look at the goods and services exempt from VAT
in Indonesia shows that many products not relevant to the poor are exempt from VAT, such as
meals in restaurants and hotels or the sale of gold ingots (KPMG 2012). A sensible solution towards
a more equitable VAT structure in this country would thus be the elimination of the tax exemptions
for products, which clearly benefit certain industries or wealthier parts of population.

However, some experts also stress that it would be even more beneficial to remove VAT
exemptions altogether and provide direct transfers to poorer parts of the population. Yet, due to the
administrative difficulties and political infeasibilities of this approach, this study proposes of the
removal of VAT tax exemptions for goods primarily consumed by upper parts of society.

6.3 Repricing


As outlined in Section 3 of this paper, excise taxation is a major issue in the AEC integration
process. This study suggests a two-step process to achieve an excise taxation framework, which will
prevent economically harmful distortions in consumer and producer behavior: First, standardization
of the tax base is essential. Even though the EU is not a model in many respects when discussing
reforms in ASEAN tax issues, the establishment of common standards in terms of taxation is
generally considered a good solution (Hallerberg, 2013). This first step can be assumed to be rather
politically uncontroversial, and a multinational framework or international agreement on common
standards could be achieved without major political resistance. The second step would then be the
harmonization of excise tax rates across country. This study recognizes the difficulties associated
with this recommendation, as the setting of the tax rates remains one of the most important national
competencies that member countries are unlikely to surrender. However, in the light these
challenges, should standardization of the tax base be achieved, a certain degree of excise tax
$(

harmonization might still be possible. One solution could be to install an upper and lower bound for
excise taxation for certain products in order to limit the distortions caused by large differentials.

6.4 Representation

6.4.1 Tax Compliance Program


Different types of taxpayers exist as a result of their knowledge of the rules and their willingness to
comply with tax regulation, all of which are affected by the different factors discussed in Section 4.
It is recommended that these factors are considered in the creation of an effective tax compliance
program, which integrates an awareness campaign based on trust as exemplified in the Chilean and
Indonesian example.

Simplification of tax procedures, which reduces transaction costs should be adopted coupled with
ICT integration, which could also address the lack of tax administration capacities in the Philippines
and in Indonesia. However, it is important to consider that the political feasibility of adopting a
measure that includes ICT may face challenges as well because of the entrenched norms and
practices among tax collectors who would not be amenable to altering practices either because of
lack of training in using the available technology or because of resistance to having a digital or
paper trail, which could also be linked to the issues of corruption as discussed.

Another example to facilitate tax compliance is to provide free assistance to taxpayers in filling out
the correct tax return and providing information on different issues related to taxes. The Taxpayers
Advocacy Panel (TAP) in the US can be taken as an example. It was established in 2002 after only
very few individuals approached the Taxpayers Advocacy Services (TAS) composed of lawyers and
accountants offering free of charge services. It was decided that volunteers from the ordinary public
who are knowledgeable in filling out tax returns and filing may be more effective in facilitating
$)

assistance to the average taxpayer. Since 2002, there are about 70-100 volunteers who provide
between 300-500 hours for a term of 3 years to taxpayers. They are not paid, except for per diem
when they travel to different states (2011 TAP Annual Report). TAP receives around 500
applications for volunteers and the applicants go through rigorous interviews. Although each
volunteers term expires every 3 years, former volunteers continue their services outside TAP where
they can charge a small amount for their help to their previous clients. Some volunteers maintain
blogs, Facebook pages, and websites where citizens contact them.
21
This provides the IRS a solid
group of experts outside of the formal framework IRS and helps citizens in filling out their tax
returns.
It can be argued that the small number of volunteers in this program significantly undermines the
extent to which it can serve as a broad-based tool nation-wide. However, should attracting
volunteers be the root cause of the programs low level of civic engagement, this study recommends
appealing to the publics sense of community through the establishment of regional tax information
hubs. This may generate greater volunteer participation as it is more accessible and joins together
members of the same social community.

Lastly, this study recommends updating the ASEAN tax treaties, but suggest that there should be an
agreement as to the model of the framework to be adopted in the updated treaties. Institutionalizing
a coordinating body for the different agreements in the AEC, like the ASEAN Integration
Monitoring Office, is desirable. But it is important to consider the reasons why the existing treaties
have not been updated in the last 15 years. This can be influenced by intra-ASEAN trading, which,
as measured as a percentage of total trade, is comparatively low (GIZ, 2013).



21
List of names of volunteers are published at the TAP website http://www.improveirs.org/tap-members/.
$*

6.4.2 Transparency and Accountability

Corruption is one of the major challenges in the Philippines and Indonesia as it relates to informal
economic activity, tax compliance, capacity building, and the lack of resources spent on tax
administration. Corruption might also be entrenched in the political system, leading to certain
sectors being not taxed or enjoying tax incentives. However, we can draw answers from Indonesias
experience in fighting corruption through their Corruption Eradication Commission (KPK), which
was created in 2003. This was modeled after Hong Kongs Independent Commission Against
Corruption (ICAC), but the KPK is unique in a sense that its creation was specifically tailored to the
experiences in Indonesia. It developed a problem-driven framework, which considers not only the
context of Indonesia but also options, which are politically feasible (Andrews, 2013). However,
with Indonesias 2013 ranking in the Global Perception Index and the percentage of the population
that believe corruption to have increased, KPK still has much work to be done. Nevertheless, such
an initiative could also be pursued in the Philippines, which also suffers from comparatively high
levels of corruption in its tax administration.

Improvement of the tax administration office is also important not only in professionalizing the
personnel, but also establishing performance management mechanisms where targets are set not
only for tax collection efforts, but also for human resource management. Chile provides a good
example of strategies to simultaneously improve tax capacities while building trust with the
taxpayers and serves a good model for the case of Philippines.






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