Countries in Asia-Pacific are likely to continue raising indirect taxes this year as they tighten fiscal policies. At the same time, they will target tax incentives more narrowly to attract inbound investment and nurture domestic industries, according to a report released last week by Ernst & Young.
Tax cuts and spending increases introduced in response to the 2009 global recession have slowly given way to policies of fiscal consolidation, emphasising higher tax collections and modest spending initiatives.
“Most Asia-Pacific nations entered 2012 continuing the prudent tax and fiscal policies that have helped make them preferred destinations for investment capital,” said the authors of the paper, entitled Tax Policy and Controversy Outlook, Asia-Pacific 2012.
In addition, concern about the effects on regional economic growth of further crises in Europe or the US has prompted aggressive enforcement of tax laws and regulations.
“Faced with massive revenue losses [in 2009], governments told their tax administrators to do whatever was necessary to collect the right amount of tax and to seek unpaid taxes,” said the report.
Foreign companies involved in cross-border transactions and high-net-worth individuals with accounts in other countries were priority targets.
Meanwhile, Ernst & Young expects tax policies in the region to follow several key trends underpinned by a desire to guard against large budget deficits.
It recognised the “vastly different tax rates to personal income, business income, consumption and every other component of the tax base” within the region, but said a common evolution is identifiable because “tax policy leaders have sensibly taken cues from the experiences of other nations”.
A shift towards taxing consumption on previously exempt goods and services is likely to be maintained, despite political sensitivity. Rates may also rise.
China has launched a value-added tax (VAT) pilot in Shanghai, converting its business tax to a VAT for selected industries, and the scheme is likely to spread rapidly throughout the country. Malaysia is discussing a planned goods and services tax (GST), and Japan is doubling its shouhizei consumption tax to cover a shortage in the social welfare budget.
“Selective excise taxes, customs duties and other indirect taxes on consumption have risen considerably and will continue to rise,” said Ernst & Young.
The firm also said that most countries will continue to move away from broad–based tax incentives towards those that are more narrowly focused. For instance, they might introduce tax-breaks to promote call centres, high-tech businesses and the financial services industry, where Malaysia, Singapore, Australia and New Zealand have already enacted advantageous tax provisions to attract high value-added financial services to compete with Hong Kong.
But corporate tax rates in general are likely to fall in an effort to draw inbound investment. Japan and Thailand have both enacted cuts that will take effect this year, although China and Korea have made it clear that they will retain their headline rates of 25% and 24.2% respectively.
Yet, as they did during 2011, governments will maintain corporate tax revenue despite lower tax rates and larger targeted tax subsidies. In some cases, legislation will expand the tax base, or administrative reforms will improve collection — such as in Indonesia. In others, courts might judge a higher percentage of corporate income to be taxable.
Ernst & Young also argued that environmental issues will increasingly shape tax policies. Resource-rich nations such as Australia and China will continue to seek revenue from the mining sector, not least because of the appeal to environmental lobbies and in response to a need to conserve natural resources. Taxing carbon emissions would have similar benefits. In addition, subsidising green products or industries through tax codes will maintain its popularity, particularly in China.
In conclusion, most Asia-Pacific nations will guard against large budget deficits by increasing the tax burden and restraining spending growth. They will only switch to fiscal stimulus if there is a return to the depressed conditions of 2009. And whether or not that happens, is probably outside the region’s control.