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IMF: ASEAN incentives risk 'race to the bottom' on tax revenue

Southeast Asian countries urged to join global efforts to curb tax evasion

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IMF Deputy Managing Director Mitsuhiro Furusawa, center, stands by as Indonesia's Finance Minister Sri Mulyani Indrawati, left, greets Malaysia's Deputy Minister of Finance Johari Abdul Ghani during the International Tax Conference in Jakarta on Wednesday.   © Reuters

JAKARTA -- Competition among Southeast Asian countries to attract foreign investment through tax exemptions and incentives has proven "damaging" to their national revenues, the International Monetary Fund says.

Sluggish global growth and this investment battle waged by members of the Association of Southeast Asian Nations have amplified corporate tax competition, cross-border tax avoidance and illegal tax evasion in the region, Mitsuhiro Furusawa, the IMF's deputy managing director, said Wednesday.

'Unwanted side effects'

The ASEAN Economic Community, established in December 2015 to encourage regional economic integration and cross-border investment, also has produced "unwanted side effects," Furusawa added, such as aggressive tax planning by multinational and regional companies.

"We are living through what often looks like a race to the bottom in which countries compete -- to the advantage only of investors," he said during the opening of a two-day IMF-Indonesia conference here on international taxation in Asia. "The result is being felt on the bottom line, with pressures on much-needed government revenue."

The deputy managing director urged regional governments to improve coordination to resist "damaging tax competition," which he dubbed as "one of the IMF's longstanding concerns."

Furusawa noted the importance of new global initiatives to tackle tax avoidance and evasion. He cited the Automatic Exchange of Information, an Organization for Economic Cooperation and Development framework allowing reciprocal exchange of tax data between nations, as well as the Base Erosion and Profit Shifting initiative to combat exploitation of differing national tax rules that the OECD is developing with the Group of 20 economies.

But those do not address all international tax issues, "especially some that are most relevant for developing countries," Furusawa said. These countries -- including a majority of the 10 ASEAN states -- typically have a low ratio of tax to gross domestic product but are pursuing robust economic growth. Five major ASEAN members have tax-to-GDP ratios below 20% -- Indonesia, Southeast Asia's largest economy, is one of the lowest with around 10% -- much lower than the 34% average among OECD countries.

Join the fight

Indonesian Finance Minister Sri Mulyani Indrawati acknowledged the unhealthy tax competition. Indonesia can have "too many tax exemptions" to lure investors, she said, making it seem like some companies are getting revenue from the government rather than paying taxes.

Yet Singapore is seen as benefiting from its low corporate tax rates, which draw regional and international companies to build their bases in the city-state -- often at the expense of its Southeast Asian neighbors.

Indrawati said countries that have not committed to adopting the AEOI and BEPS tax initiatives need to be invited to do so, in order to create a "fair and level playing field." The former World Bank managing director advocates adoption of the two global initiatives, saying they make "addressing tax compliance ... no longer a lonely journey."

ASEAN members Vietnam, Myanmar, Cambodia and Laos have not joined the OECD framework for implementing international standards on tax transparency.

"Making progress is not easy because of the free-rider problem," said Michael Keen, deputy director of the IMF's fiscal affairs department. "People who benefit most are the people who stay outside the agreement."

Members of the framework may face domestic roadblocks. Indonesia pledged to implement AEOI as of 2018. But a government regulation to enable it still requires parliamentary approval, said Awan Nurmawan Nuh, a senior Finance Ministry official.

Yet the current level of cooperation "is unthinkable compared to five or six years ago," as awareness of tax evasion has increased, said Monica Bhatia, head of the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes.

Wataru Suzuki, Nikkei staff writer in Jakarta contributed to the story.

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