Speech

The International Tax Dimension of Economic Growth in Asia

July 12, 2017

Good afternoon. I am honored to welcome you to this high-level conference on International Taxation in Asia”. I would like to thank Minister Sri Mulyani Indrawati and Indonesia’s Ministry of Finance for hosting this event.

I am especially honored to speak alongside the Minister today. We have worked together in many settings, and it is truly a pleasure to open this gathering with you.

It is also very important that Indonesia and the IMF are working closely in addressing issues like international tax policy. This country has emerged as an influential in ASEAN, the G-20, and other forums. This is just one stop in our work with your country—work that, within the IMF, we are calling the Voyage to Indonesia.

The destination is the 2018 IMF Annual Meetings, which will be held in Bali next October. Those meetings will provide a unique opportunity to showcase to the world the impressive social and economic achievements of both Indonesia and Asia.

I would also like to welcome everyone who has traveled to Jakarta from across the region to talk about a matter of policy importance.

Ladies and gentlemen, the 18^th century statesman Edmund Burke once said of what we call domestic revenue mobilization: “To tax and to please, no more than to love and be wise, is given to no man.”

These words hold true today as they did in the 18^th century. But at the very least, perhaps the countries of ASEAN can make better use of tax revenues to please more of their people.

I know that this distinguished audience absolutely understands the importance of revenue mobilization and international tax reform for achieving stronger, more inclusive growth. So, what I would like to talk about with you today is the core tax-policy challenge the region confronts in its pursuit of continued economic success.

To set the stage for the topic of this conference, I will begin by outlining the IMF view of the region’s economic prospects. Then I will discuss some of the key issues that need to be addressed in the coming years—including domestic revenue mobilization. Finally, I will turn to the topic of international tax policy.

Economic Outlook

Let’s turn to the economic outlook. The IMF sees growth continuing to strengthen in many advanced and emerging market countries, after a decade of disappointing global growth.

The World Economic Outlook released in April upgraded our forecast for global growth to 3.5 percent this year and 3.6 percent in 2018. That is up from 3.1 percent in 2016. We will release an updated WEO forecast next week in Kuala Lumpur.

Asia’s outlook remains the strongest in the world—and has been the most important contributor to global growth for several years. Policy stimulus continues to support domestic demand in China and Japan. Meanwhile, investment in infrastructure and public services is supporting growth across Southeast Asia.

Growth in the region is expected to reach 5.5 percent in 2017, after slowing last year. Most importantly, this recovery reflects stronger expansion of world trade.

The Indonesian economy has been one of the strongest and most resilient performers among the large emerging market economies. Growth is solid, inflation is manageable, and the current account deficit has been contained.

The government has effectively steered its way through the obstacles presented by the global economy in recent years with a good mix of macroeconomic policies and structural reforms. Indonesia’s growth this year is expected to exceed 5 percent.

These are very positive developments. But Asia faces significant challenges. In the short run, there is uncertainty about the direction of economic policy in some advanced economies, especially the risk of inward-looking policies that could affect regions like Southeast Asia that have benefited from global economic integration.

Although the normalization of Fed policy so far has proceeded smoothly, it still poses a risk. This is especially the case for borrowing costs in regional economies where private debt has risen over the past decade.

There also is the potential for renewed market volatility—both because of the changing monetary conditions and unexpected turns in China’s economic rebalancing.

Then there are the longer-term challenges. These include the trillions of dollars in infrastructure investment that will be required if Asian countries are to achieve advanced economy status.

There will also be demands for increased spending on education and other public goods to make growth more inclusive. In addition, some countries will need to address the implications of demographic change, especially the rapid aging of populations that carry implications for health care and pension spending.

Finally, many Asian countries—including Indonesia—face the policy challenge of sustaining and accelerating inclusive growth at a time of lower commodity prices. This will require further economic diversification.

The Demands of Growth

These challenges all will cost money—and that points to the central importance of domestic revenue mobilization. Increased revenue and public spending are essential catalysts for growth—at a time when the demands for fiscal resources are only growing.

This audience understands this linkage better than most. Revenue mobilization already is high on your countries’ policy agendas. And it is not just a matter of development. It is essential to ensuring the macroeconomic stability that has been central to your success.

The challenge you face is very clear. Compared to other regions in the world, tax revenues are relatively low in Asia. Some see this as something of a tradition in this region.

But this comes at a cost. Analysis recently conducted by our Fiscal Affairs Department suggests that there is a minimum tax-to-GDP ratio associated with a significant acceleration of growth and development.

We estimate threshold at a ratio just below 15 percent. That is largely in line with the Fund’s standard recommendation.

Where does Asia stand? On average, most countries in this region consistently fall below a ratio of 15 percent. Simply put, that is likely to be insufficient for reaching the goals to which so many of your countries aspire.

Strengthening revenue mobilization is likely to require a wide range of measures including both policy and administration. In domestic taxation, it could involve making the value-added tax more effective, for instance, and developing property taxation.

But our focus at this event is the international dimension—relating to cross-border trade and investment.

At a time of change in the global tax environment, there is a wide-ranging reassessment of tax policy involving issues like corporate tax competition, cross-border, legal tax avoidance, and illegal tax evasion.

The sluggish global growth of recent years and intense competition for foreign direct investment has amplified these trends. We are living through what often looks like a race to the bottom in which countries compete—to the advantage only of investors.

In this region, as in others, a lack of coordination among governments has intensified this trend. The result is being felt on the bottom line, with pressures on much-needed government revenue.

International aspects of taxation have been a feature of IMF advice on mobilizing business tax revenue for many years, and the topic of considerable Fund analysis in Southeast Asia.

Unwanted Side Effects

After the ASEAN Economic Community was established, the expansion of economic integration and cross-border investment produced some unwanted side effects. This included aggressive tax planning by multinational and regional companies.

It also involved aggressive competition among nations through the grant of tax exemptions and incentives. The adverse impact of business tax incentives on countries and regions has been one of the Fund’s longstanding concerns.

In addition, the world has turned increasing attention to corporate tax avoidance through complicated tax planning, and new initiatives have been undertaken in response. Among them have been the adoption of automatic exchange of tax information as the international standard. And of course, the G20-OECD Base Erosion and Profit Shifting initiative, known as BEPS.

BEPS is important. But it does not address all international tax issues—especially some that are most relevant for developing countries. This includes the important issue of the indirect transfer of assets.

In addition, while BEPS focuses on closing anti-avoidance loopholes, it does not directly examine the systemic problems of international tax competition. I should add that some tax reform proposals in in the United States would likely raise these issues even higher up the international agenda.

With many people regarding the international tax architecture as outdated for a modern, global economy, we continue to hear calls for radical changes.

The IMF has been working with all countries to address tax evasion and avoidance by seeking practical solutions. This includes helping countries to devise ways to counter the artificial shifting of profits and assets to low-tax locations—and how to resist damaging tax competition.

A recent element of this work has been longstanding IMF advice on the indirect transfer issue. This work is being taken forward in cooperation with the OECD, World Bank, and United Nations within the framework of the newly established Platform for Collaboration on Tax.

This represents a milestone in capacity building to support developing countries.

We will address many of these matters over the next day and a half, with a concentration on how ASEAN can respond. Here, it is most important to keep in mind the delicate balance between establishing a tax system attractive to investment and protecting against damaging tax competition.

Cooperation is Key

The bottom line is straightforward: the issues of tax competition cannot be tackled in isolation. Governments need to work together on a regional basis to increase cooperation. This will facilitate and reinforce domestic actions to protect tax bases and reduce the spillovers from competition.

So, ASEAN’s response needs to be based on cooperation.

Remember that the ASEAN Economic Community Blueprint 2025 emphasizes tax cooperation as a “key element” to support regional competitiveness.

Experience shows that achieving effective coordination in tax matters is far from easy. In this event, we will spend some time looking at what has been achieved, and current initiatives elsewhere.

But a key lesson from the experiences we shall discuss is that addressing these problems does not get easier as integration proceeds. It gets harder. Now is the time for ASEAN to recognize and look for ways to address them.

However, we should not pretend that fixing the international tax system and limiting tax competition will be enough to meet the ambitious revenue needs I have described. The challenge of corporate taxation is largely to preserve revenue from cross-border activities.

Increasing overall collections also will require domestic reforms. But that is a topic for another conference.

In conclusion, this region has made extraordinary economic progress. A future built on sustainable and inclusive growth will depend on advances in many areas. Cooperation will be one foundation stone for this progress—including on tax issues.

Revenue mobilization can provide the resources needed to advance the economies of Southeast Asia and help meet important social objectives. Inclusive growth, resilience, and cooperation: these are the goals you need to keep in mind while addressing the issues attached to international tax policy.

I wish you all success in your discussions here and in your future work. Thank you!