Tax Policy and the Asian Crisis

IMF Policy Discussion Papers, February 1, 1999

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Tax Policy and the Asian Crisis

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Bibliographic details

• Authors: David C Nellor
• Published: February 1, 1999
• Series: IMF Policy Discussion Papers
• DOI: https://doi.org/10.5089/9781451974454.003

Summary

• Focus: tax policy and the crisis in Asia in the context of globalization and technological change.
• Two sets of conclusions form the tax policy agenda:
  • specific tax reform measures, and
  • general lessons from the crisis.
• Key observation: the complexity and volume of financial transactions, associated with the opening of emerging markets, have made tax administration a more challenging task.
• Analogy: just as strengthening financial systems must be a precursor to capital account liberalization, tax administrations clearly also require strengthening in such an environment.
• Constraint noted: in many emerging markets the capacity to tax capital returns is limited.
• Required capability: tax administrators need to understand and monitor complex financial transactions that grew rapidly due both to financial sector liberalization and technological innovation.
• Expanded scope of traditional challenges: transfer pricing, once often limited to natural resource sectors, took on wider importance as local companies gained sophistication and developed offshore operations.

Major findings and conclusions

• Specific tax reform measures and general lessons from the crisis together constitute the recommended tax policy agenda.
• The rapid growth in the complexity and volume of financial transactions increased challenges for revenue administration.
• Strengthening tax administration is a necessary complement to financial system strengthening prior to capital account liberalization.
• Limited capacity to tax capital returns in many emerging markets undermines revenue mobilization in liberalizing economies.
• Transfer pricing and other traditional tax administration difficulties became more widespread beyond resource sectors as corporate structures and offshore activities evolved.

Challenges for tax administration highlighted

• Monitoring and understanding complex financial transactions driven by:
  • financial sector liberalization, and
  • technological innovation.
• Addressing transfer pricing issues as they expand in scope with corporate sophistication and offshore operations.
• Constraining the limited ability to tax capital returns in many emerging markets.

Policy implications and agenda

• Prioritize strengthening tax administrations in tandem with financial system reforms ahead of capital account liberalization.
• Enhance capacity to tax capital returns in emerging markets.
• Build expertise within tax administrations to detect, monitor, and tax complex financial transactions and transfer-pricing arrangements.
• Recognize that globalization and technological change require updated administrative capabilities and oversight.

Content in this bundle

• Tax Policy and the Asian Crisis - PDP/99/2
  • Tax Policy and the Asian Crisis - PDP/99/2 (Markdown version)
  • Tax Policy and the Asian Crisis - PDP/99/2 (PDF)