Findings of Cross-Country Research on Tax Policy and Inequality: Comparative Study of Indonesia, South Africa and Brazil

INTERNATIONAL NGO FORUM ON INDONESIAN DEVELOPMENT (INFID) 2015

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2000

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01

2002

20

03

2004

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2006

20

07

2008

20

09

2010

20

11

2012

Indonesia

East Asia & Pacific (all income levels)

Brazil: 2013s 7th Largest Economy (By GDP)

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5000

10000

1961

19

65

1969

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73

1977

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81

1985

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89

1993

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97

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2009

South Africa

Sub-Saharan Africa (all income levels)

GDP Per Capita, ZA vs Sub Saharan Africa GDP Growth, Indonesia vs East Asia and Pacific

Indonesia, South Africa, and Brazil are prominent developing countries in the world. Indonesia: has higher and more stable growth compared with Asia-pacific average. Afrika Selatan: GDP per capita far outperformed Sub-Saharan Africa average. Brazil: 7th biggest economy in the world (2013)

Source: data.worldbank.org

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Indonesia

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OECD

However, these countries have worrying inequality problems Measured with Gini Ratio, Indonesia: Gini Ratio slowly increasing from around 30% to around 40% South Africa: Gini Ratio 2000 around 50%, 2007 around 60% Brazil: Although inequality is declining, Gini Ratio still lies above 50%

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Taxation plays vital role to fight inequality: 1. As main source of government budget, to fund various social spending 2. As main income redistribution tool.

Health and education are important spending to fight economic inequality. For 2000-2010, education spending (%of GDP) of Indonesia did not make any progress.

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Tax Ratio Indonesia, South Africa, Brazil, and OECD countries

Tax revenue performance of these countries are still not satisfying compared to developed countries (OECD Members). Do the riches pay proper tax? Brazil has the highest tax ratio, but also high economic inequality. Do the tax structure/policy reflect equality?

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Indonesia South Africa Brazil OECD members

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OECD Countries revenue composition, 2010

Income tax is the most progressive kind of tax because it considers taxpayers ability to pay. In contrast, the consumption tax is regressive because it does not consider taxpayers ability to pay. Most of developed countries rely on revenue from income tax.

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The composition of tax revenue Indonesia, South Africa, and Brazil in 2010

Brazil relies heavily on consumption taxes, it

constitutes of more than 53%.

Income tax revenue is dominant in South

Africa and Indonesia

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Income tax composition of Indonesia, South Africa, and Brazil

Indonesia South Africa Brazil Individual 24% 62% 14%

PAYE 23% 60% 8% Self employed 1% 2% 6%

Corporate 33% 36% 46% Others 43% 2% 41%

Total 100% 100% 100%

Although the income tax revenue is more dominant than consumption tax, the revenue of income tax mostly obtained from employees through PAYE system.

It shows us that tax paid by the middle class (employees), not by self-employed individuals.

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Marginal tax rate in Indonesia, South Africa, Brazil, and United Kingdom, 2014.

Personal income tax system in Indonesia and South Africa do not show progressivity. It is proved by relatively low marginal rate and relatively high income level that subject to the highest rate.

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Annual Income divided by GDP Per capita

South Africa Indonesia Brazil United Kingdom 4/29/2015 9 INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Gender Inequality Indonesia treat family as single taxation unit. As a result, married woman that

have their own tax ID potentially pay more tax due to the progression of income tax rates.

In Indonesia, a wife with income from one employer is not combined but income from self-employed activities need to be combined with the husband's income.

VAT in South Africa even burdens men more heavily than women by a margin of about 8%. Each ZAR 1 spent, families with male head 9:23 cent pay VAT while families with female head paying 8:13 cents.

One of the contributing factors is the consumption behavior. Indirect taxes are higher on alcohol and tobacco as well as taxes on fuel burdening more to male family.

Indonesia does not provide an exception of non-taxable goods in the gender perspective.

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Tarif Corporate Income Tax 2006-2014 (%)

22 24 26 28 30 32 34 36 38

2006 2007 2008 2009 2010 2011 2012 2013 2014

Indonesia Afrika Selatan Brazil OECD Average Global Average

High corporate income tax rates could potentially lead to capital flight to countries with low tax

On the other side, developing countries may give too many tax incentives which is not effective.

The tax expenditure needs to be evaluated.

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Informal sector in Indonesa, South Africa, and Brazil, compared to OECD

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OECD High Income

Indonesia, South Africa, and Brazil have large proportion of informal economy Large informal sector reduce tax revenue potential

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Rank Country Financial Asset

in Tax Haven (billion USD)

1 China 1.189 2 Rusia 798 3 Korea 779 4 Brazil 529 5 Kuwait 496 6 Meksiko 417 7 Venezuela 406 8 Argentina 399 9 Indonesia 331

10 Arab Saudi 308

Rank Negara Total 1 China 1.252 2 Russian Federation 974 3 Mexico 514 4 India 440 5 Malaysia 395 6 Brazil 217 7 Indonesia 188 8 Thailand 172 9 Nigeria 157 10 South Africa 122

Financial Asset Stored in Tax Haven Top ten of illicit financial flows 2003-2013 (billion USD)

Tax Revenue Loss Estimates Some Developing Countries (G20) Originating from Bilateral Trade mispricing by the European Union and the United States

(millions GBP)

Indonesia, South Africa, and Brazil are always included in top list of countries suffered the greatest losses due to tax evasion. Tax base deduction by shifting of profit to other countries is well known as Base Erosion Profit Shifting (BEPS).

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OECD BEPS Action Plan

To combat BEPS, OECD released BEPS Action Plan in July 2013 to address the perceived flaws in the international tax rules.

The Action Plan, negotiated and Drafted with the active participation of its member states, contains 15 separate action points.

The Plan is squarely focused on addressing issues in a coordinated, comprehensive manner, and was endorsed by the G20.

Digital economy Digital economy makes developing countries facing more and more difficult way to levy tax. Besides the difficulty of administration, in the context of cross-border trade, there is also the issue of how the taxing right be defined

Transfer Pricing Transfer pricing is often associated with the company's actions in the set price so that the transfer tax payable in a country can be transferred to other countries. Among the countries of the G-20, Brazil, Indonesia, and South Africa are ranked 4,5, and 6 respectively in term of the amount of tax revenue lost due to transfer pricing.

Transparency of Information. A key aspect of multilateral cooperation is exchange of information. In 2014, OECD created of one common global standard for the automatic exchange of financial account information, which has been made available for all jurisdictions to use.

Issues raised in BEPS Action Plan that are strongly correlated with developing countries are:

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Beyond BEPS Action Plan More involvement of developing countries in the formulation of a global initiative Involvement of developing countries is

limited only on the implementation of the Action Plan rather than on all phase including the formulation.

For some measures, in the Action Plan the OECD is unlikely to propose solutions that would be strong enough or appropriate for developing countries.

Regarding information transparancy, the lack of involvement of developing countries in policy formulation also occurs in the preparation of the Common Reporting System. Developing countries were not involved or consulted in the design stage.

Introduction of Global Formulary Apportionment The concept of international taxation currently very detrimental to a developing country with a vast market as the three countries that observed for income generated in their countries through trading activities but more income enjoyed by the country in which a company operates sellers. In the context of the division of taxation right, the method needs to be considered is assessment of multinational corporations on a unitary basis using Global formulary apportionment (GFA). GFA requires coordination for the state to support a country-by-country reporting so that the calculation of the proportion of profit can be calculated correctly.

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The need to go beyond OECD-BEPS

How much will OECD-BEPS benefit developing countries? Country-by-country reporting template: only applies to companies

with a turnover of EUR 750 million or higher > European standards. Applied to Spain: only 183 companies in Spain will have to report,

representing only 0,76% of all Spanish large multinationals Issues not addressed at all

Taxing rights between source and resident countries Taxation of the extractive sector Tax incentives

Sierra Leone in 2012: tax incentives for multinationals were equivalent to 59 percent of the countrys entire budget, and more than eight times the

governments spending on health. 4/29/2015 16 INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Upcoming opportunities: talking tax at the FFD in Addis We support calls for an interministerial meeting on tax, as part of

the UN FfD conference in Addis Ababa in July 2015 Objective: to establish an intergovernmental body on tax matters

under the auspices of the United Nations, with universal membership and adequate resources, in time for the body to convene its first meeting in 2016. Address the issue of residence vs. Source taxation Address the issue of tax competition and tax incentives Ensure a strong framework under the UN auspice, for ongoing global

cooperation on tax Tax dodging is a global problem, it requires a truly global reaction

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A growing momentum.... In October 2014, the Ministers of Finance of Francophone countries called for a high level

meeting on tax under UN auspices As part of the FFD discussions in NY, the G77 group stated: While there is increasing recognition

of the central role of tax systems in development, there is still no global, inclusive norm setting body for international tax cooperation at the intergovernmental level. There is also not enough focus on the development dimension of these issues. This should be one of the key deliverables in the Addis Ababa Outcome Document.

An international tax body was also called for by a number of countries at this months drafting session, including India, Brazil, and Senegal

The African group also called for strengthening the role of the UN in promoting international cooperation on tax matters, including setting up an intergovernmental tax body, as demanded several times by many developing countries.

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The way forward

Developing countries have to raise their voices and support the creation of an intergovernmental body on tax cooperation under the UN auspices and the call for a Ministerial roundtable on international taxation during the FFD Conference in July 2015

The way toward July 2015: Acknowledge tax dodging by MNCs not entirely solved with BEPS Ensure that one of the six Ministerial Roundtables at the FFD conference in Addis is

focused on tax reform and that at least Ministers of Finance will be present to ensure real political participation

Create a global tax body to meet first in 2016 to negotiate global tax rules in an inclusive and transparent way

Re-open the tax debate for a more visionary and fair design 4/29/2015 19 INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Conclusions Indonesia and South Africa have relatively low revenue performance Brazilian tax system are very regressive due to domination of indirect taxes. Individual tax revenue in South Africa and Indonesia are significantly raised by tax revenue of employees,

compared to very little contribution from self-employed individual.

In terms of individual income taxation, these three countries have maximum rates that are relatively low compared to developed countries that make them less progressive.

The taxation policy of the three countries as a whole has not been reflected in the context of gender justice. One cause of the low level of tax revenue is massive amount of tax evasion and tax avoidance. This is done

by using artificial international taxation scheme, equipped with the use of tax havens jurisdiction.

The G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan is a good first step towards addressing problems in the international tax system, but BEPS Action Plan doesn't seem enough for developing countries.

There is a need for more inclusive and fair reform of global tax rules, where developing countries are included with an equal seat at the table. The creation of an intergovernmental body for cooperation on tax matters under the auspices of the UN is a crucial step. The 2015 Financing for Development (FFD) process can lead to the creation of a global tax body, but timelines are very short.

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Recommendations Indonesia, South Africa, and Brazil need to maximize their tax

revenue potential so they can increase public spending to fund social spending needed for inequality reduction.

Brazil should be able to reduce its reliance on consumption taxes and the income tax system. Brazil also has to reduce the complexity of their VAT administration.

Indonesia and South Africa need to increase tax compliance of self-employed rather than rely on PAYE system. Indonesia, South Africa, and Brazil need to review their idividual income tax rates to be more progressive.

Indonesia, South Africa, and Brazil need to review their corporate tax rates because their rate are relatively high. Indonesia, South Africa, and Brazil need to calculate tax expenditure to evaluate how much are benefits of giving tax incentives compared to the loss of revenue incurred.

Indonesia needs to change the family unit tax into individual tax so women are not harmed by higher marginal tax rates. Indonesia, South Africa, and Brazil need to consider basic needs required differently by gender.

To decrease the informal sector, the tax approach that can be done by applying a lower tax rate and easier administration.

Developing countries need to take steps to cooperate on tax amongst themselves and to engage in existing international processes of tax reform including more involvement in discussion and formulation of BEPS Action Plans and take steps towards improving regional cooperation

Bringing beneficial ownership issue into political discourse to get more

attention and real cooperation between developed countries and developing countries by standardize the automatic exchange of information and recharacterization of tax planning structures that do not have economic substance.

Beyond BEPS Action Plans, developing countries need to call for more

inclusive and fair reform of international tax rules and support the calls for the creation of a new intergovernmental body on tax.

An intergovernmental body on tax would create a global Forum in which developing countries can raise issues such as reviewing the application of tax treaty and tax treaty abuse, proposing application of unitary taxation regime, proposing formulary apportionment with country-by-country reporting as an alternative of the arm's length principle, and pressing developed countries to provide assistant in the implementation of information exchange as well as enhancing transparency of beneficial owners in international tax scheme so the artificial profit shifting can be reduced.

The Financing for Development (FFD) process currently underway and completing in June/July 2015 provides an opportunity to create an intergovernmental body on tax 4/29/2015 21 INFID-FFD Jakarta. 29april 2015UNESCAP-MOF Indonesia

Thank You!

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Findings of Cross-Country Research on Tax Policy and Inequality: Comparative Study of Indonesia, South Africa and BrazilSlide Number 2Slide Number 3Slide Number 4Tax revenue performance of these countries are still not satisfying compared to developed countries (OECD Members).Do the riches pay proper tax?Brazil has the highest tax ratio, but also high economic inequality. Do the tax structure/policy reflect equality?Slide Number 6Slide Number 7Slide Number 8Slide Number 9Gender InequalitySlide Number 11Slide Number 12Slide Number 13OECD BEPS Action PlanBeyond BEPS Action PlanThe need to go beyond OECD-BEPSUpcoming opportunities: talking tax at the FFD in AddisA growing momentum....The way forwardConclusionsRecommendationsThank You!