‘Tax incentives work against Asean economies’


THE policy advisor to members in the Association of Southeast Asian Nations plus China, Japan and Korea (Asean+3) warned that generous tax incentives would prevent countries from boosting economic growth in the post-pandemic period.

In a Policy Perspectives Paper, the fiscal specialists and economists at the Asean+3 Macroeconomic Research Office (Amro) said that while incentives may help attract Foreign Direct Investments (FDIs), this is not the only reason investors invest in countries.

Amro’s Andriansyah Andriansyah, Seung Hyung Hong and Byunghoon Nam said countries would do well to review their tax incentive systems to favor better targeting, sunset clauses and monitoring, especially in light of the discussions on global tax reforms.

“Many countries are facing two potentially conflicting policy priorities—supporting economic recovery and rebuilding policy space—in the post-pandemic period,” the Amro said.

“Strong investment is essential to boosting the recovery momentum, but generous fiscal incentives to attract FDI could hamper the government’s efforts to rebuild fiscal policy space,” it added.

The Amro recommended that tax incentives should have clear targets to maximize the benefits these can bring to the economy. When selecting sectors and activities, governments can base the decision on a country’s priorities.

These priorities could be research and development, human resource development, or efforts to develop certain industries through the creation of Special Economic Zones.

The Amro added that targeted incentives can also be provided to manufacturing and agriculture-based industries. In terms of manufacturing, incentives can be provided to “pioneer industries” that can help produce goods needed domestically.

“[Based on] existing studies and international best practices, tax incentives are more effective for efficiency-seeking FDI and Greenfield FDI. Therefore, when a country aims to attract multiple types of FDI, tax incentives should focus more on efficiency-seeking FDI than market-and resource-seeking FDIs,” the Amro said.

Apart from this, the economists also recommended that tax incentives be monitored and that a transparent assessment be done to ensure that these are in check.

Further, the Amro said strong regional cooperation is needed to ensure that tax incentives benefit countries and reduce tax competition and evasion.

Based on the paper, the Amro data showed that among the 10 Asean countries, only the Philippines and Vietnam offer all types of tax incentives such as: income tax exemption; tax rate reduction; tax allowance; tax credit; and, trade tax exemption.

The countries with the least number of tax incentives in the region were Brunei, Cambodia and Thailand which only offer three kinds of incentives—income tax exemption, tax allowance and tax trade exemption.

Other Asean countries like Indonesia, Lao PDR, Malaysia, Myanmar and Singapore offer all tax exemption except for tax credits.

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