2013 tax policy outlook for Asia-Pacific

July 2, 2013

Over the past few years most countries in the Asia-Pacific region have adopted policies aimed at a switch from fiscal stimulus to fiscal consolidation. This trend is expected to continue in 2013 with most countries projecting sovereign debts and annual deficit levels of a similar size to those seen in 2011 and 2012.

For the 2013 to 2017 period, most counties are projecting improvements in (or at the very least stabilization of) both sovereign debt and annual deficit levels. While this is encouraging, improvements in sovereign debt levels are not expected to be dramatic (with only China projecting a reduction in debt in excess of 10% over the 2013 to 2017 period).

Although this might seem to indicate that tax burdens will increase generally, this is certainly not borne out by the subjective outlooks from our 13 responding countries. Instead, it seems to indicate how well Asia-Pacific has weathered the global financial crisis and been largely protected from the European sovereign debt crisis — at least in terms of its impact on taxation policy in the region.

In fact, across all tax classes tracked (CIT, PIT and VAT/GST/ sales tax) in all countries, only four increases are reported. Of the four, three (New Zealand, the Philippines and Singapore) are in the area of indirect taxes and involve base-broadening as opposed to headline rate increases.

More specifically, countries in the region seem to be using the delivery of stimulus via the CIT regime as a key plank of policy. Of the 13 countries reporting, the overall CIT burden is projected to decrease in 10, a far higher ratio than in other regions.

PIT attracts projected burden reductions in 7 of the 13 (with no substantive changes in burden in the remaining 6) while the region confirms the global trend of an overall move to the taxation of consumption: none of the 13 countries are projected to decrease the indirect tax burden in 2013.

Overall, the tax policy landscape in 2013 is expected to be very similar to that of 2012, with continuance of most trends identified in the prior year, notably:

  • Reductions in corporate and personal tax rates aimed at attracting domestic and foreign investment and boosting spending
  • Introduction of incentives to promote “green activities” and taxes on carbon emissions
  • Introduction of taxes on mineral resources and/or property
  • A more targeted approach to the provision of tax incentives
  • De facto broadening of the tax base (across all taxes: CIT, PIT and VAT/GST/sales tax) through targeted compliance programs

While not a broad trend across the region, there has been a marked increase in the focus by some countries (primarily Australia and Japan) on the taxation of cross-border transactions and e-commerce activities, aligning to the overall global focus on these issues.

Although many countries’ ability to implement proposed tax policy changes was hampered in recent years due to political instability and/or natural disasters, the appetite for tax policy change appears to be developing. Nonetheless, a majority of proposed changes, while important, are not overly ambitious, which may be symptomatic of narrow political mandates in a number of countries.

Asia’s sovereign debt picture

Consistent with global trends, sovereign debt as a percentage of GDP increased significantly (in many cases on top of already high debt-to-GDP ratios) for most countries in the Asia-Pacific region in the 2007 to 2011 period. In contrast, sovereign debt as a percentage of GDP was relatively stable over 2011 and 2012.

This trend is projected to continue in 2013 with countries in the region falling into one of three broad categories:

  1. Those countries with relatively moderate levels of sovereign debt (i.e., with sovereign debt in the vicinity of 33% of GDP or less). This group comprises the more developed economies of Australia and Hong Kong but also includes China, Korea and Indonesia.
  2. Those countries with relatively high levels of sovereign debt (i.e., with sovereign debt in the vicinity of 40% to 50% of GDP). This group comprises the rapidly developing economies of Malaysia, the Philippines, Taiwan, Thailand and Vietnam but also includes New Zealand.
  3. Those countries with significant levels of sovereign debt. This group comprises Japan, which boasts the highest public debt burden in the developed world (projected to be 245% of GDP in 2013), and Singapore, with a debt/GDP ratio of 106% for 2012.

Most countries in the region forecast a reduction in sovereign debt as a percentage of GDP of between 1.6% and 9.5% over the 2013 to 2017 period with the exceptions being Japan, Malaysia and Thailand (whose debt/GDP ratios are expected to increase by 5.3%, 2.3% and 5.2%, respectively).

Interestingly, average unweighted projected sovereign debt for the 13 countries in 2013 stands at approximately 57% of GDP — or, excluding Japan, approximately 42% of GDP. This shows how much more capacity to control policy decisions is available in Asia-Pacific versus others parts of the world.

Annual deficits: modest improvements support policy flexibility

As would be expected, the stabilization of sovereign debt levels across the region is accompanied by projections of modest improvements in annual budget deficits for most countries. Overall, 8 out of the 13 countries in this report anticipate an improvement in deficient levels over the 2011 to 2017 period, while 4 countries project overall net change of less that 1%.

The exceptions to this trend are Indonesia (a net contraction of 1.2% of GDP during this period) and Singapore. Given that the latter possesses a relatively rare bond market situation and continues to run an annual surplus through this time period, it is probably wise to consider this to be exceptional.

The Australian federal Government recently moved away from a long-standing commitment to delivering a budget surplus in 2013 and is now projecting a modest deficit. The turnaround is primarily the result of lower-than-expected returns from the Government’s controversial Mining Rent Resources Tax.

The tax, which took effect from 1 July 2012, was supposed to raise AU$2 billion in its first year from the key players in the Australian mining industry, with collections earmarked for a range of funding programs and tax cuts. Recently released figures show that the tax only raised AU$126 million in its first six months, which has called into question the ability of the Government to deliver on its promises without increasing its budget deficit.

The failure of the tax to generate the anticipated level of revenues is due to a combination of falling commodities prices and features of the law that (among other things) allow miners to deduct asset values from current earnings when calculating the amount of profit generated that is subject to the tax.

The health of Thailand’s annual deficit situation, while broadly stable over the course of this six-year period, will rely heavily on the Government’s growth policy being delivered through significant CIT rate cuts — from 30% to 23% in 2012 and to 20% in 2013.

The leveling out of sovereign debt across the region has been accompanied by an increase in the number of implemented and anticipated tax policy changes in the region (compared with the 2012 year, at least), albeit on a cautious basis.

However, rather than seek to implement any major changes, most countries have adopted an approach that is effectively a continuation of previously announced proposals. These generally include a combination of at least two of the following:

  • Reductions in corporate and personal tax rates aimed at attracting domestic and foreign investment and boosting spending:
    • Malaysia
    • Thailand
    • Vietnam
  • The introduction of incentives to promote green activities and taxes on carbon emissions:
    • Australia
    • Thailand
  • The introduction of incentives to promote green activities and taxes on carbon emissions:
    • Australia
    • China
    • Hong Kong
    • Indonesia
    • New Zealand
    • The Philippines
  • Taking a more targeted approach to the provision of tax incentives:
    • Australia
    • China
    • Japan
    • Malaysia
    • New Zealand
    • The Philippines
    • Singapore
    • Vietnam
  • The de facto broadening of the tax base (across all taxes) through targeted compliance programs:
    • Australia
    • Indonesia
    • New Zealand
    • The Philippines
    • South Korea
    • Thailand

Taxation of cross-border transactions and e-commerce activities

While not a broad trend across the region, there has been a marked increase in the focus by some countries on the taxation of cross-border transactions and e-commerce activities. In terms of cross-border transactions, the Australian Taxation Office has released draft revisions to tax laws, which are designed to prevent base erosion and profit shifting.

These moves are in line with the wider efforts by the G20 and OECD. The Australian Treasury paper titled “Ways to address tax minimization of multinational enterprises” is under development at the time of writing and will set out the risks to the sustainability of Australia’s corporate tax base from multinational tax minimization strategies and identify potential responses for public discussion.

The Assistant Treasurer also instructed the Treasury to analyze whether greater reporting of taxes paid by multinationals in every country is desirable. A specialist reference group will provide input, and the Treasury will consult directly with interested stakeholders before the Treasury paper is released for public consultation in mid-2013.

Other countries, most notably Japan, have raised the prospect of similar legislative changes, demonstrating how important this issue is being taken at the national and supranational levels, as outlined in the introduction to this report.

Debate has also risen in Australia in relation to the tax treatment of online purchases, and the deliberations globally and in Australia will likely influence other local policies in the future. An expert panel has urged the federal Government to halve the AU$1,000 GST-free threshold for goods bought from overseas, which is out of step with other countries in the region and elsewhere.

Despite the arguments in favor of lowering the threshold, the federal Government has indicated that it has no plans to make such a change in the short term.

Political landscape

Although the ability of a number of countries to implement proposed tax policy changes was hampered in prior years due to political instability and/or natural disasters, the ability to effect tax policy change does appear to be improving. For example:

  • Thailand’s overall political stability improved in 2012 following the inauguration of the Puea Thai Party. With solid control of the lower house and a strong popular mandate, the Government has been able to push through a number of tax policy changes, including a reduction in the CIT rate from 30% to 23% in 2012 and to 20% in 2013 and a reduction in the top personal tax rate from 37% to 35% in 2013 (notwithstanding the fact that this creates a growing misalignment between the two types of tax).
  • The expected re-election of the Malaysian Government in the upcoming April 2013 election should pave the way for implementation of longawaited GST legislation in 2014. Nonetheless, a majority of proposed changes are not overly ambitious, which may be symptomatic of narrow political mandates in a number of countries.

Read more: The outlook for global tax policy in 2013

Questions or comments? Contact T Magazine and Ernst & Young

EY refers to one or more of the member firms of Ernst & Young Global Limited (EYG), a UK private company limited by guarantee. EYG is the principal governance entity of the global EY organization and does not provide any service to clients. Services are provided by EYG member firms. Each of EYG and its member firms is a separate legal entity and has no liability for another such entity's acts or omissions. Certain content on this site may have been prepared by one or more EYG member firms.