The Variability of Tax Rates among ASEAN Countries and Its Impact to

Regional Economic Performance

Rachel Gay Baruc, Noelyn Joy Espina, Axel Kevin Lacerna,

Ma. Nenetha Liba, Blunch Jane Lila,
Jonnifer P. Magpale

College Of Commerce
University of San Jose – Recoletos

This paper is concerned about what affects the economic performance in countries of the
ASEAN considering it has been observed that there are variations in the tax rates of
these countries. This study thoroughly took into consideration factors such as
government spending and total government revenue. To measure these factors, the
researchers have used the Gross Domestic Product and allocation of the government
budget. The researchers also considered the Human Development Index to measure and
compare development factors excluding economic growth among the countries of
ASEAN. These factors are deemed to be significant in knowing and measuring the
regional economic performance in the ASEAN stressing that taxation is not the only
source of growth but other drivers as well.

Keywords: ASEAN, Variability of Tax Rates, Regional Economic Performance

I. Introduction

The Association of Southeast Asian Nations or “ASEAN” is an organization

intended at promoting economic growth and regional stability among its member nations
(World Economic Forum on ASEAN, 2017). "ASEAN" is referring to the countries of
Brunei, Indonesia, Cambodia, Laos, Vietnam, Philippines, Singapore, Myanmar,
Thailand, and Malaysia. Among the ten nations in the region, the only one close to
recession is Brunei. The Asian Development Bank (ADB) predicted that the regional
gross domestic product (GDP) would rise from 4.5% in 2016 to 4.8% in 2017 (The
Economist, 2016). "ASEAN-5" refers to Singapore, Indonesia, Malaysia, Thailand, and
the Philippines. "ASEAN-6" refers to Vietnam, Indonesia, Philippines, Malaysia,
Singapore, and Thailand. These terms are used to group ASEAN nations together for the
purpose of research. The reason is that ASEAN is a diverse group of nations with
different profiles, so to make the comparative research useful, like nations are grouped
(Peter Topping, 2016).
One of the progressing regions across the globe is Southeast Asia. The said region
recorded a growth of at least 5% of which Philippines overtook forecasts and detailed a
GDP growth of 7.2% in the year 2013. "The Philippines has been struggling with our
fiscal deficit for some years now, and one way to fix that is to impose hefty taxes on its
citizenry and corporates. Thus we've seen tax rates increased to their current levels,"
Bank of the Philippine Islands (BPI) officer Nicholas Antonio Mapa's statement. "The
frontier markets of Cambodia, Laos, and Myanmar also recorded growth of more than
7%. The more mature economies of Thailand, Indonesia, Malaysia and Singapore saw
their economies grow higher than global growth rates" (Taxation in Southeast Asia: An
Overview, 2017).
A significant part of the total tax revenues in Southeast Asia is there income tax
revenues because a portion of these amount comes from taxpayers earning a high income.
Tax administrators have employed organizational models which were evolving over the
years, and such trend has also been seen for revenue regulators to regulate around certain
types of taxpayers. There were several reformations made in the Asian nations, regarding
their tax rates, which were directly focusing on large taxpayers because of their high
amount of tax contributions. The Bureau of Internal Revenue (BIR) of the Philippines
paced up in monitoring high-income earners and made procedures to address such issues
of compliance in 2015 (Revenue Statistics in Asian Countries, Trends in Indonesia,
Philippines, Malaysia, Korea, Japan, and Singapore).
Implementing tax rules are based on an area's economic standing and performance
which is also affected by time and current situation levels —poverty level, growth rate,
and the like. Across nations, poverty has been a major concern. Based on statistics, in the
years 1990 and 2012, a part of the population in the region which is living with less than
1.25 US dollars per day decreased from 53% to 14%, and predicted to fall to 12% in 2015
(ASEAN Statistical Report on Millennium Development Goals, 2017) which only means
that ASEAN countries are now progressing in rising from poverty. With the said
percentages, more or less ninety percent of the total population in the Southeast Asia who
are living below the international poverty line is mostly Indonesians and Filipinos, with
regards to a report released in the year 2017.
The economic projections of the ASEAN are strong and stable. Total GDP
increased from 1.5 trillion to 2.4 trillion US dollars in the years 2005 to 2015, with 5.2
percent as the annual growth rate. Their economy is one of the largest in the world and in
Asia. Some economist forecasts that in 2050 it could be ranked as the 4th largest
economy. (Financing the Sustainable Development Goals in ASEAN, 2017).
Notwithstanding the aforementioned statistics, there are determinants for a
country's tax effort. In a paper written by McCoon (2012), tax effort and the size of the
government are important. As cited by McCoon (2012), Smith (2009) observed that
taxation which is too high is self-defeating and that excessive taxation can be detrimental
to the economy. Further citation by McCoon (2012) stated that according to Barro
(1990), increases in taxation and government spending have two effects on growth. The
increase in taxation reduces growth because of the disincentive effects of taxation while
the increase in government spending raises the marginal productivity of capital and
increases growth (Barro, 1990). A government needs enough funds to function promptly.
In order to build infrastructures and to meet ever mounting social welfare obligations,
governments of developing nations need additional revenue. (Determinants of tax effort:
A cross-country analysis, 2012).
Many research and statistics have been conducted about the tax rates and the
current situation of the ASEAN. Some useful insights and inputs have also been
highlighted in such articles. This research paper is created to bridge the gap that other
researchers focus more on the revenue that contributes to the economic performance
while this paper took into consideration primarily the gross domestic product. Other
indices such as the Human Development Index, tax to GDP, and the government
expenditure budget and allocation were also used to compare. In that way, other
researchers, economists, and other users could use this as a guide for their future
researchers.

II. Methodology

The process used in this study is exploratory data analysis or commonly known as
data mining. As cited by Kalyani, it is a process of looking into useful patterns and
indicators from a voluminous data. It is also a process wherein information is extracted
from large databases to make critical decisions in certain research (Simoudis, 1996). It
can also be defined as a process that digs out large sets of data and knowledge or
information will then be extracted out of it.
Listed below are the variables being considered in the study and were obtained
from credible sources. The ASEAN members were also drawn, namely: Myanmar,
Cambodia, Brunei, Indonesia, Thailand, Malaysia, Vietnam, Singapore, Laos, and the
Philippines.

1. Comparative Tax Rates – it shows the tax rates per ASEAN member country.
Taxes included are the personal tax, corporate income tax, and VAT which are
essential matters in the study.

2. Gross Domestic Product – it is the summation of the uses of goods and services,
excluding intermediate consumption, measured using buyers' prices, minus
importations of goods/services. The data stated present GDP at current prices and
in US billion dollars. Being the primary indicator of economic health, the higher
the GDP, the greater the well-being of a country. Data was gathered from
International Monetary Fund’s estimates.

3. GDP per Capita – is the measure of a country's total output and divided by its
total population. This is useful when comparing a country to another because it
reflects a country's performance. An increasing GDP per capita denotes growth in
the economy and also an increase in productivity.

4. Tax to GDP ratio – is the ratio of tax relative to the GDP in a country. This
measure how much a nation’s government controls its economic resources.

5. Human Development Index – this gauges the average achievement of having a

healthy and decent life. The higher the HDI, the more the country emphasizes the
 significance of its people and their capabilities, not considering economic growth
alone.

6. Percentage of Tax Revenue over Total Revenue - this reflects part of the total
revenue of the country which represents revenue collected from taxes. This is
shown to see how much it affects the total budget of the country.

7. Allocation of Government Budget- this shows the allocation or percentage upon

which the budget is to be given for. Such budget was allocated to the following:

a. Local Government Units -consists primarily of the Internal Revenue

Allotment and Special shares of LGUs to National Taxes.
b. Maintenance Expenditures -supports the delivery of government services
(e.g., large funding for conditional cash transfers, education, and health
services), regular operations of agencies (e.g., training and seminar expenses,
water, and electricity) and other maintenance and operating requirements.
c. Personnel Services -represents the salaries and other compensation of civil
servants
d. Debt Burden -represents allocations for interest payments and net lending.
e. Budgetary Support to GOCCs -represents budget by the government has given
to GOCCs like DOH in the Philippines and other government corporations.
f. Infrastructures and Other Capital Outlays -represents the basic facilities such
as transportation and communications, including the acquisition of fixed
assets and other goods and services that contribute to productivity.

The manner of acquiring data was done through browsing several reliable world
statistics sources and then compiled to show each of the ASEAN member's details.

III. Results and Discussion

 In connection with the variables being said and the main concern of this study, it
is relevant to show each of the variables to assess each of the nations' quantitative details.
Shown in Table 1 in each of the ASEAN member nations' tax rates (Corporate tax,
Income Tax, and Value added tax). Obviously, their respective taxes vary which is the
main concern of this study whether their tax rates imply a good measure of their
economic progress.

Table 1. ASEAN Member Nations’ Tax Rates

Corporate Tax Value Added

List of Countries Rates Tax Personal Income Tax
  (%) (%) Min. (%) Max. (%)
Brunei
Darussalam 20 0 0 0
Cambodia 20 10 20 20
Indonesia 25 10 5 30
Laos 24 10 0 24
Malaysia 25 5-10 0 26
Myanmar 5-40 0 1 35
Philippines 30 12 5 32
Singapore 17 7 0 20
Thailand 20 7 5 37
Vietnam 22 10 5 35

The tax rates are based on the year 2017. In the column of Corporate tax rates,
Myanmar had the highest rate (up to 40 ℅ ) while Singapore had the lowest (17 ℅ ).
Moreover, Philippines has 12 ℅ VAT being the highest rate of which Myanmar and
Brunei have no VAT. In terms of Income taxes, Cambodia had the highest minimum
income tax rate while Thailand had the highest maximum rate. In contrary, Brunei placed
as the lowest since they have no income taxes.

Based on the data presented, researchers proceeded to perform cluster analysis.

This procedure involves grouping each of the ASEAN member nations based on their
ranking on each of the variables given. First, they are ranked based on each of their tax
rates with number 1 having the highest rate and onwards. Their ranking is then averaged,
and the researchers picked the top 5 grouping the nations with the highest tax rates and
eliminate the countries having lower rates. Table 2 shows the results of the process.

Table 2. Process and Results of Ranking the Nations based on their Tax Rates
   Ranks
List of
Personal Income Tax
Countries Corporate Value Added
Average
Tax Tax Minimu
Maximum
m
Brunei
Darussalam 6 4 4 8 5.50
Cambodia 6 2 1 7 4.00
Indonesia 3 2 2 4 2.75
Laos 4 2 4 6 4.00
Malaysia 3 2 4 5 3.50
Myanmar 1 4 3 2 2.50
Philippines 2 1 2 3 2.00
Singapore 7 3 4 7 5.25
Thailand 6 3 2 1 3.00
Vietnam 5 2 2 2 2.75

As shown in table 2, two nations tied in the second place (namely Indonesia and
Vietnam) having high tax rates. The researchers decided to count them as one and picked
another which resulted to having the top six countries (Philippines, Myanmar, Vietnam,
Indonesia, Thailand, and Malaysia, in order) having high tax rates collectively
considering corporate, income, and value-added taxes.

After considering their ranking, performance indicators are then being considered.
This is shown to look into each of the countries' economic progress with regards to their
respective operations. Table 3 shows each of the top six countries' indicators (namely
Gross Domestic Product, Per Capita GDP, Tax to GDP ratio, and Human Development
Index).

Table 3. Countries with high tax rates on their Economic Indicators

List of Ranking based on tax GDP in GDP per Tax to GDP

Countries rates billions Capita Ratio HDI
Philippines 1 321.19 3,022.40 0.17 0.68
Myanmar 2 66.97 1,271.98 0.06 0.56
Vietnam 3 215.96 2,306.28 0.23 0.68
Indonesia 3 1,010.94 3,858.70 0.12 0.69
Thailand 4 437.81 6,335.89 0.16 0.74
Malaysia 5 309.86 9,658.98 0.15 0.79

The countries will be then ranked again based on the respective GDPs with
number 1 being the highest and onwards. The researchers decided to base the ranking
regarding their GDP because it is the primary indicator in terms of measuring a country's
economic health which is somehow close to seeing their economic progress rather than
HDI and the other factors which exclude the measurement of economic growth. The
researchers will then choose the top 3 countries having high Gross Domestic Product or,
in other words, the countries having high economic health. However, in the process of
ranking the countries, it has been observed that the top 3 countries based on their GDP
also have higher HDI. Each of these three countries chosen will be assessed regarding the
total revenues coming from tax and their government expenditures showing the allocation
of their spending. Table 4 shows the top 3 countries (Indonesia, Thailand, and the
Philippines) with the percentage of the tax revenue and the allocation of their government
expenditures to Local Government Units, Maintenance Expenditures, Personnel Services,
Debt Burden, Budgetary Support to GOCCs, and Infrastructures and other capital outlays.

Table 4. Top Performing Countries with Percentage of Tax Revenue over

Total Revenue and Government Budget Allocation

      Allocation of Budget
% of
  Tax
Revenu
e over Budgetar Infrastructures
Ranking Total Local Maintenance y Support and Other
List of Based on Revenu Government Expenditure Personne Debt to Capital
Countries GDP e Units s l Services Burden GOCCs Outlays

Indonesia 1 0.118 0.144 0.243 0.168 0.064 0.132 0.249

Thailand 2 0.157 0.038 0.096 0.016 0.030 0.455 0.365
Philippines 3 0.170 0.166 0.16 0.298 0.105 0.039 0.233

In Table 4, it can be seen that most of the countries allocate so much of their
budget to Infrastructure and Capital Outlays. This includes construction of public roads
and highways, offices, and schools. Such also includes various foreign investments that
said countries are into now. Budget to other allocations also varies between the three
countries, for example, their allocation to personnel services which includes Military
budget and Defense of which the Philippines allocates about almost 30℅ for that rather
than in Indonesia and Thailand which allocates 17℅ and 2℅, respectively, from their
budget. With regards to the percentage of tax revenue over total government revenue, the
three countries held to have an almost similar ratio ranging from 11% to 17 ℅.
IV. Conclusion

In the optimization of growth of the ASEAN countries, the government must look
for ways to leverage fiscal policy. ASEAN's government, particularly to the developing
countries, should give attention to the combination of both their revenues and expenditure
in order to maximize the contribution of fiscal policy to growth. In considering economic
growth, taxation plays a vital role. If the government is unable to collect sufficient tax
revenue, the role of fiscal will be limited distorting the economy.

Similarly, higher taxation causes a heavier burden to individual taxpayers and

private sectors leading to a reduction of investment activities. This implies that a certain
amount of tax revenue that is not more than the taxation capacity of the country is
beneficial for the economy. Growth doesn't depend solely on taxation. Economic drivers
and socio-political factors determine aggregate growth that whether tax rates are high or
low, and increase or decrease, it doesn’t directly affect a country’s economic performance
since other revenues, budget, expenditure allocation are also being sought out.

After having gathered significant data, it has been seen and observed that what
was thought to be poor in the economy were actually performing better in the economy.
The variation of tax rates was of little contribution to the economic performance of a
country. Although tax revenue is a significant part of the total revenue for a nation, it is
not the only focus on looking at how economically-progressing a country is. The
variation of taxes among ASEAN countries, then, does not significantly affect their
respective regional performance.

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