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Findings of Cross-Country Research on Tax Policy and

Inequality: Comparative Study of Indonesia, South Africa and


Brazil

INTERNATIONAL NGO FORUM ON


INDONESIAN DEVELOPMENT (INFID)
2015

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

4/29/2015

Indonesia, South Africa, and Brazil are prominent developing countries in the
world.
Indonesia: has higher and more stable growth compared with Asia-pacific average.
Afrika Selatan: GDP per capita far outperformed Sub-Saharan Africa average.
Brazil: 7th biggest economy in the world (2013)
GDP Growth, Indonesia vs East Asia and Pacific
8
6
4
2
0

GDP Per Capita, ZA vs Sub Saharan Africa

Brazil: 2013s 7th Largest Economy (By GDP)

10000
5000

1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Indonesia

South Africa

East Asia & Pacific (all income levels)

Sub-Saharan Africa (all income levels)

Source: data.worldbank.org
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INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

However, these countries have worrying inequality problems


Measured with Gini Ratio,
Indonesia: Gini Ratio slowly increasing from around 30% to around 40%
South Africa: Gini Ratio 2000 around 50%, 2007 around 60%
Brazil: Although inequality is declining, Gini Ratio still lies above 50%

Indonesia

South Africa

Brazil

OECD

70

70

70

70

60

60

60

60

50

50

50

50

40

40

40

40

30

30

30

30

20

20

20

20

10

10

10

10

0
2002 2005 2007 2008 2009 2010 2011 2012 2013

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2000

2005

2007

0
2001 2002 2003 2004 2005 2006 2007 2008 2009

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

0
2000 2005 2007 2008 2009 2010 2011

Taxation plays vital role to fight inequality:

1. As main source of government budget, to fund various social spending


2. As main income redistribution tool.

Health and education


are important spending
to fight economic
inequality.
For 2000-2010,
education spending (%of
GDP) of Indonesia did
not make any progress.

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INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Tax revenue performance of these countries are still not satisfying


compared to developed countries (OECD Members).
Do the riches pay proper tax?
Brazil has the highest tax ratio, but also high economic inequality.
Do the tax structure/policy reflect equality?
Tax Ratio Indonesia, South Africa, Brazil, and OECD countries
Indonesia

South Africa

Brazil

OECD members

40
30
20
10
0
2001
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2002

2003

2004

2005

2006

2007

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

2008

2009

2010

2011
5

Income tax is the most


progressive kind of tax
because it considers
taxpayers ability to pay.
In contrast, the
consumption tax is
regressive because it
does not consider
taxpayers ability to pay.
Most of developed
countries rely on
revenue from income
tax.
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INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

OECD Countries revenue composition, 2010

The composition of tax revenue Indonesia,


South Africa, and Brazil in 2010

Brazil relies heavily on


consumption taxes, it
constitutes of more
than 53%.
Income tax revenue is
dominant in South
Africa and Indonesia

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INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Although the income tax revenue is more dominant than consumption tax, the
revenue of income tax mostly obtained from employees through PAYE system.

It shows us that tax paid by the middle class (employees), not by self-employed individuals.

Income tax composition of Indonesia, South Africa, and Brazil


Indonesia
Individual
24%
PAYE
23%
Self employed 1%
Corporate
33%
Others
43%
Total
100%
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South Africa
62%
60%
2%
36%
2%
100%

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Brazil
14%
8%
6%
46%
41%
100%
8

Personal income tax system in Indonesia and South Africa do not show
progressivity. It is proved by relatively low marginal rate and relatively high income
level that subject to the highest rate.
Marginal tax rate in Indonesia, South Africa, Brazil, and
United Kingdom, 2014.
50%
45%
40%

Tax Rate

35%
30%
25%
20%
15%
10%
5%
0%
0
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6
8
Annual Income divided by GDP Per capita

10

INFID-FFD
29april 2015UNESCAP-MOF
Indonesia
South
Africa Jakarta.
Indonesia
Brazil
United Kingdom

12

14
9

Gender Inequality
Indonesia treat family as single taxation unit. As a result, married woman that
have their own tax ID potentially pay more tax due to the progression of income
tax rates.
In Indonesia, a wife with income from one employer is not combined but income
from self-employed activities need to be combined with the husband's income.
VAT in South Africa even burdens men more heavily than women by a margin of
about 8%. Each ZAR 1 spent, families with male head 9:23 cent pay VAT while
families with female head paying 8:13 cents.
One of the contributing factors is the consumption behavior. Indirect taxes are
higher on alcohol and tobacco as well as taxes on fuel burdening more to male
family.
Indonesia does not provide an exception of non-taxable goods in the gender
perspective.
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High corporate income tax rates could potentially lead to capital flight to countries
with low tax
Tarif Corporate Income Tax 2006-2014 (%)

On the other side,


developing countries may
give too many tax incentives
which is not effective.
The tax expenditure needs
to be evaluated.

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Indonesia

Afrika Selatan

OECD Average

Global Average

Brazil

38
36
34
32
30
28
26
24
22
2006 2007 2008 2009 2010 2011 2012 2013 2014

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

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Indonesia, South Africa, and Brazil have large proportion of informal economy
Large informal sector reduce tax revenue potential

Informal sector in Indonesa, South Africa, and Brazil, compared to OECD


OECD High Income

13,4

Brazil

39,0

South Africa

27,3

Indonesia

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18,9
0

10 Jakarta.15
20
25 Indonesia
30
INFID-FFD
29april 2015UNESCAP-MOF

35

40

45

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Tax Revenue Loss Estimates Some Developing Countries (G20) Originating from
Bilateral Trade mispricing by the European Union and the United States
(millions GBP)

Indonesia, South Africa, and


Brazil are always included in top
list of countries suffered the
greatest losses due to tax
evasion.
Tax base deduction by shifting of
profit to other countries is well
known as Base Erosion Profit
Shifting (BEPS).

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Financial Asset Stored in Tax Haven


Rank

Country

1
2
3
4
5
6
7
8
9
10

China
Rusia
Korea
Brazil
Kuwait
Meksiko
Venezuela
Argentina
Indonesia
Arab Saudi

Financial Asset
in Tax Haven
(billion USD)
1.189
798
779
529
496
417
406
399
331
308

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Top ten of illicit financial flows 2003-2013


(billion USD)
Rank
1
2
3
4
5
6
7
8
9
10

Negara
China
Russian Federation
Mexico
India
Malaysia
Brazil
Indonesia
Thailand
Nigeria
South Africa

Total
1.252
974
514
440
395
217
188
172
157
122

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OECD BEPS Action Plan


To combat BEPS, OECD released BEPS Action Plan in July 2013 to address the perceived
flaws in the international tax rules.
The Action Plan, negotiated and Drafted with the active participation of its member
states, contains 15 separate action points.
The Plan is squarely focused on addressing issues in a coordinated, comprehensive
manner, and was endorsed by the G20.
Issues raised in BEPS Action Plan that are strongly correlated with developing countries are:
Digital economy
Digital economy makes developing
countries facing more and more
difficult way to levy tax. Besides
the difficulty of administration, in
the context of cross-border trade,
there is also the issue of how the
taxing right be defined
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Transfer Pricing
Transfer pricing is often associated with
the company's actions in the set price so
that the transfer tax payable in a country
can be transferred to other countries.
Among the countries of the G-20, Brazil,
Indonesia, and South Africa are ranked
4,5, and 6 respectively in term of the
amount of tax revenue lost due to transfer
pricing.

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Transparency of Information.
A key aspect of multilateral
cooperation is exchange of
information.
In 2014, OECD created of one common
global standard for the automatic
exchange of financial account
information, which has been made
available for all jurisdictions to use.
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Beyond BEPS Action Plan


More involvement of developing countries in
the formulation of a global initiative
Involvement of developing countries is
limited only on the implementation of the
Action Plan rather than on all phase
including the formulation.
For some measures, in the Action Plan the
OECD is unlikely to propose solutions that
would be strong enough or appropriate for
developing countries.
Regarding information transparancy, the
lack of involvement of developing
countries in policy formulation also occurs
in the preparation of the Common
Reporting System. Developing countries
were not involved or consulted in the
design stage.
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Introduction of Global Formulary Apportionment


The concept of international taxation currently
very detrimental to a developing country with a
vast market as the three countries that observed
for income generated in their countries through
trading activities but more income enjoyed by the
country in which a company operates sellers.
In the context of the division of taxation right, the
method needs to be considered is assessment of
multinational corporations on a unitary basis using
Global formulary apportionment (GFA).
GFA requires coordination for the state to support
a country-by-country reporting so that the
calculation of the proportion of profit can be
calculated correctly.

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

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The need to go beyond OECD-BEPS


How much will OECD-BEPS benefit developing countries?
Country-by-country reporting template: only applies to companies
with a turnover of EUR 750 million or higher > European standards.
Applied to Spain: only 183 companies in Spain will have to report,
representing only 0,76% of all Spanish large multinationals
Issues not addressed at all
Taxing rights between source and resident countries
Taxation of the extractive sector
Tax incentives
Sierra Leone in 2012: tax incentives for multinationals were equivalent to 59
percent of the countrys entire budget, and more than eight times the
governments spending on health.
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Upcoming opportunities: talking tax at the


FFD in Addis
We support calls for an interministerial meeting on tax, as part of
the UN FfD conference in Addis Ababa in July 2015
Objective: to establish an intergovernmental body on tax matters
under the auspices of the United Nations, with universal membership
and adequate resources, in time for the body to convene its first
meeting in 2016.
Address the issue of residence vs. Source taxation
Address the issue of tax competition and tax incentives
Ensure a strong framework under the UN auspice, for ongoing global
cooperation on tax
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INFID-FFD
Jakarta. 29april 2015UNESCAP-MOF
Indonesia
Tax dodging is a global
problem,
it requires
a truly global reaction 17

A growing momentum....
In October 2014, the Ministers of Finance of Francophone countries called for a high level
meeting on tax under UN auspices
As part of the FFD discussions in NY, the G77 group stated: While there is increasing recognition
of the central role of tax systems in development, there is still no global, inclusive norm setting
body for international tax cooperation at the intergovernmental level. There is also not enough
focus on the development dimension of these issues. This should be one of the key deliverables in
the Addis Ababa Outcome Document.
An international tax body was also called for by a number of countries at this months drafting
session, including India, Brazil, and Senegal
The African group also called for strengthening the role of the UN in promoting international
cooperation on tax matters, including setting up an intergovernmental tax body, as demanded
several times by many developing countries.

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The way forward


Developing countries have to raise their voices and support the
creation of an intergovernmental body on tax cooperation under the
UN auspices and the call for a Ministerial roundtable on international
taxation during the FFD Conference in July 2015
The way toward July 2015:
Acknowledge tax dodging by MNCs not entirely solved with BEPS
Ensure that one of the six Ministerial Roundtables at the FFD conference in Addis is
focused on tax reform and that at least Ministers of Finance will be present to
ensure real political participation
Create a global tax body to meet first in 2016 to negotiate global tax rules in an
inclusive and transparent way
Re-open the tax debate for a more visionary and fair design
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Conclusions
Indonesia and South Africa have relatively low revenue performance
Brazilian tax system are very regressive due to domination of indirect taxes.
Individual tax revenue in South Africa and Indonesia are significantly raised by tax revenue of employees,
compared to very little contribution from self-employed individual.
In terms of individual income taxation, these three countries have maximum rates that are relatively low
compared to developed countries that make them less progressive.
The taxation policy of the three countries as a whole has not been reflected in the context of gender justice.
One cause of the low level of tax revenue is massive amount of tax evasion and tax avoidance. This is done
by using artificial international taxation scheme, equipped with the use of tax havens jurisdiction.
The G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan is a good first step towards addressing
problems in the international tax system, but BEPS Action Plan doesn't seem enough for developing
countries.
There is a need for more inclusive and fair reform of global tax rules, where developing countries are
included with an equal seat at the table. The creation of an intergovernmental body for cooperation on tax
matters under the auspices of the UN is a crucial step. The 2015 Financing for Development (FFD) process
can lead to the creation of a global tax body, but timelines are very short.
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INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

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Recommendations
Indonesia, South Africa, and Brazil need to maximize their tax
revenue potential so they can increase public spending to fund
social spending needed for inequality reduction.
Brazil should be able to reduce its reliance on consumption taxes
and the income tax system. Brazil also has to reduce the
complexity of their VAT administration.

Developing countries need to take steps to cooperate on tax amongst


themselves and to engage in existing international processes of tax
reform including more involvement in discussion and formulation of
BEPS Action Plans and take steps towards improving regional
cooperation

Bringing beneficial ownership issue into political discourse to get more


attention and real cooperation between developed countries and
developing countries by standardize the automatic exchange of
information and recharacterization of tax planning structures that do
not have economic substance.

Beyond BEPS Action Plans, developing countries need to call for more
inclusive and fair reform of international tax rules and support the calls
for the creation of a new intergovernmental body on tax.
An intergovernmental body on tax would create a global Forum in which
developing countries can raise issues such as reviewing the application
of tax treaty and tax treaty abuse, proposing application of unitary
taxation regime, proposing formulary apportionment with country-bycountry reporting as an alternative of the arm's length principle, and
pressing developed countries to provide assistant in the
implementation of information exchange as well as enhancing
transparency of beneficial owners in international tax scheme so the
artificial profit shifting can be reduced.
The Financing for Development (FFD) process currently underway and
completing in June/July 2015 provides an opportunity to create an
intergovernmental body on tax

Indonesia and South Africa need to increase tax compliance of


self-employed rather than rely on PAYE system. Indonesia, South
Africa, and Brazil need to review their idividual income tax rates to
be more progressive.
Indonesia, South Africa, and Brazil need to review their corporate
tax rates because their rate are relatively high. Indonesia, South
Africa, and Brazil need to calculate tax expenditure to evaluate
how much are benefits of giving tax incentives compared to the
loss of revenue incurred.

Indonesia needs to change the family unit tax into individual tax
so women are not harmed by higher marginal tax rates. Indonesia,
South Africa, and Brazil need to consider basic needs required
differently by gender.

To decrease the informal sector, the tax approach that can be


done by applying a lower tax rate and easier administration.

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INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

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Thank You!

INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

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