TOKYO -- Countries like Indonesia and Malaysia lag behind the global average in terms of tax revenues collected as a proportion of gross domestic product, even falling behind many Latin American and Caribbean countries.
The Organization for Economic Cooperation and Development said in a recent report that Indonesia, Singapore, Malaysia and the Philippines recorded tax-to-GDP ratios of 11.8%, 13.6%, 15.3% and 17.0%, respectively, in 2015. All bar the Philippines registered a fall in the ratio compared to a year earlier.
The figures also all fell below half the OECD average of 34.3% and behind the average for Latin America and the Caribbean, which stood at 22.8%.
The trend poses a significant problem for Southeast Asian governments who need to mobilize revenue to fund public services. "Taxation provides a predictable and sustainable source of government revenue, in contrast with declining development assistance and the volatility of nontax revenues with respect to commodity prices," the report noted.
The OECD attributed the low figures to various factors, including the prevalence of agriculture in some of the countries. "Higher shares of agriculture in GDP are associated with lower tax-to-GDP ratios," it said. "This finding is mirrored in the revenue data for most of the Asian countries featured in this publication."
The OECD describes agriculture as a "challenging sector to tax" as many people in the sector are on low incomes and are not registered for tax purposes.
Agriculture accounts for more than 8% of GDP in Indonesia, Malaysia and the Philippines. "Their tax-to-GDP ratios are all below 18%. In contrast, agriculture is less than 3% of GDP in Japan and Korea and their tax ratios are above 25%," the report said.
The OECD also pointed out the problem of low compliance -- Indonesia, for example, has an estimated 44 million people who should be paying tax but only 27 million are registered, and of these, less than 40% pay in full. The base is also narrowed by numerous tax exemptions and incentives to attract foreign investment.
"As Southeast Asian countries have increasingly integrated into the global market they have reduced corporate income tax rates and import tariffs, in line with international trends," the OECD said. "The countries have also developed broad tax-incentive schemes to encourage foreign investment. Tax incentive schemes have put pressure on corporate income tax revenues, particularly following ASEAN integration," it added.
While getting rid of tax exemptions may be hard due to the risk of reducing global competitiveness, countries like Indonesia have taken steps to address the problem of low compliance.
The archipelago launched a tax amnesty program in July last year to rein in its chronic low compliance problem as the national budget shortfall had been hampering President Joko Widodo's efforts to implement major infrastructure spending.
The nine-month program ending in March this year led citizens to declare at least 4,866 trillion rupiah ($365 billion) in hidden assets -- an amount equal to nearly 40% of Indonesia's gross domestic product. Around 965,000 people took part, with the government collecting 135 trillion rupiah in penalties.