Taxation in ASEAN and China

Local Institutions, Regionalism, Global Systems and Economic Development

Nolan Sharkey

• Publisher: Taylor & Francis
• Year: 2012
• Print ISBN: 9780415608893
• eBook ISBN: 9781136312809
• Edition: 1
• Topic: Business
• Subtopic: Taxation
• Index: Business

China and the ASEAN region have risen rapidly to a position of immense economic significance in the global economy. Academics, policy makers and businesses are all keen to understand more about taxation in China and ASEAN, and this work seeks to address this key issue by providing a comprehensive overview of the many often mentioned but little understood challenges of doing business in the region.

Traversing a wide range of regional issues and jurisdictions, topics covered include the role of DTAs in regional integration, the impact of social institutions on tax, corruption and its causes, economic development and taxation and the use of education in developing systems. Case studies are taken from countries such as China, Vietnam, Hong Kong, Singapore, the Philippines, Malaysia and Indonesia. Drawing on the results of these discussions, the book also sheds light on the question of whether different taxing institutions are needed in the region.

Gathering together a cross-disciplinary group of eminent scholars, this work will be of great interest to all students and scholars of Asian economics, Asian finance and taxation in general.

1

Greater China and South East Asia

A taxing problem?

Nolan Cormac Sharkey

China and South East Asia present a unique challenge to the development of taxation concepts globally, concepts that to date have largely been developed outside the region. China and South East Asia are important and they are different. They are different because the people who live in them are part of complex and long-standing societies that have institutions that reflect their different origins. They are also different because they are simultaneously thoroughly interconnected but incredibly diverse. This book provides a multidisciplinary review of issues and challenges in relation to taxation in contemporary China and South East Asia. These issues and challenges are of global significance for a number of reasons and deserve careful consideration by academics and policymakers despite and because of the relatively low level of attention they have received to date.

An emergent economic powerhouse with unique features

The region comprises the states of China (including Hong Kong and Macau), Taiwan, Singapore, Malaysia, Indonesia, Thailand, Brunei, the Philippines, Vietnam, Burma, Cambodia and Laos. The economic significance of the region is indisputable. China of itself has emerged over the last three decades as one of the largest and fastest growing economies in the world. Other states in the region are also notable for their twentieth-century economic success, a success that has been put forward on various occasions as being a model for developing countries to follow. States such as Singapore, for example, present a picture of economic success that far exceeds what may have been expected when it became independent on the basis of simple measures of population and natural resources.

The size and significance of the regional economy should not be underestimated on the grounds that it has no greater relevance than a simple amalgamation of the economies of disparate states that happen to be neighbours. The level of formal success (or lack of it) of official attempts at economic integration should also not be relied upon to affirm this assertion. From the outset, it must be noted that there is a significant meaning to grouping these states as a region. Regardless of the official developments with the ASEAN initiative, there are vast strong and long-standing economic and social connections between the nations of South East Asia and those of (greater) China.¹

The connections between the Chinese populations and societies in the various states are very significant, and there is a large degree of regional transnationalism with many individuals from these societies. This interconnected Chinese population in South East Asia, mainland China, Hong Kong and Taiwan is a key factor linking the states as a region. This interconnectivity is enhanced by the fact that while the Chinese community is connected across the region it is not isolated from the non-Chinese populations in these diverse states.² While there have been and continue to be barriers between particular communities in particular states, there is also a very significant interconnectivity. The outcome of this situation is that in many respects the economies of the various states do represent a single regional economy.

There is a twofold importance to the issue of economic success in the region. The first is that in terms of gross scale, the economy of the region as a whole is simply very large. This size means that it is indisputably significant to the rest of the world in the context of a global economy. Every part of the world has a self-motivated interest in the economic success of this region. If the region’s economy continues to grow rapidly, the impact will be felt globally. If the region’s economic growth falters in a significant manner, the impact will be felt globally. The second aspect of the importance of the region’s economic performance is its rapid growth and how this may provide a model for improving economic success in other parts of the world. Understanding the nature of the region’s economy, understanding the success of the region’s economy, understanding the potential dangers to the region’s economy and understanding the potential of the region’s economy are all of critical global importance.

Finally, there is the fact that a large proportion of the world’s population lives in the region. With approximately 1.97 billion people, the region’s population represents approximately 29% of the world’s population. This means that even if the rest of the world was not impacted by the region’s economic performance, there is a real humanitarian value to any work that seeks to understand and improve the social and economic conditions of the region’s population.

The importance of taxation

The importance of taxation in the region – how it works, its efficacy and how it can be improved – flows directly from all the factors outlined above regarding the economic significance of the region. There are again a number of aspects to this issue. Essentially, taxation is an important government function as it funds government expenditure; it is therefore critical to economic and social development. Some significant issues arise in relation to this. Taxation and government expenditure on infrastructure can play a significant part in economic development. If a government chooses not to tax significantly to stimulate economic activity, the question of how they deal with their funding needs arises as without the ability to cover necessary expenditure, economic development will be hampered and social instability may arise as the population becomes dissatisfied with the government. Taxation also plays a very major part in balancing wealth disparities among populations and ensuring the basic living conditions of the less wealthy. This may be very important to social stability and ultimately to economic development.

Taxes that are poorly designed at the legal level or poorly implemented at the administrative level will cause economic inefficiency and inequity or perceptions of inequity. Again, this can directly hamper economic growth in the case of inefficiency or can cause significant social instability and public anger in the case of inequity. Widespread perceptions of unfairness in taxation can lead to further tax failure and social unrest. Beyond inefficiency and inequity, poorly designed or administered taxes can simply fail in their revenue-raising role, causing problems for the functioning of government.

Knowledge about how taxation works in a particular region is critical to businesses that need as much certainty as possible in planning their operations. This applies to both domestic businesses and those from outside the region that are doing or are planning to do business in the region. Uncertainty about taxation outcomes can provide a very significant cost and disincentive to those who may chose to invest in the region. Finally, it should also be noted that knowledge about the operation of taxation in a particular region is of major interest to governments from outside the region owing to the interconnectivity of tax systems around the world through double tax agreements (DTAs) and unilateral international tax measures.

Tax policy and economic development

The combination of all the above factors makes the question of taxation in China and ASEAN one of the most important tax questions in the contemporary world. The role that taxation has played in the economic success of regional economies is of the utmost importance. Have tax incentives and low tax rates been a major reason for economic success? This question is significant in a number of regional economies, not least mainland China, Singapore and Hong Kong. The significance is that the low taxing and incentives can significantly cut government funds. Therefore whether it creates the benefit of economic growth that it promises needs to be carefully considered. The extent to which economic successes such as Singapore and Hong Kong are tied to low taxation and tax incentives is important, not only to them but to others who may seek to emulate their tax design to emulate their success.

The follow-up question when a low tax approach is adopted, is how do the low tax states succeed with limited funding? This question is again highly relevant to the Singapore and Hong Kong cases. This book sheds significant light on this issue of tax incentives and low tax regimes in the region. In Chapter 10 Phua and Halkyard provide a detailed comparative assessment of the role of taxation in the economic success of Singapore and Hong Kong. In Chapter 9 Cullen and Wong look at the context and development of the Hong Kong tax regime and outline its extraordinary success despite having a very narrow base and low tax rates. Chapter 8 by Tran-Nam considers the interrelationship between Vietnam’s transitional and developmental experience and its taxing approach. It also tackles the difficult questions involved in deciding on high taxes versus low taxes and in deciding on the desirability of tax incentive programs. Finally, Hendrischke, Krug and Zhu’s chapter on local government taxation in China, while not specifically focused on the topic, sheds light on how governments may seek to deal with significant funding needs and low formal tax intake.

Different outcomes in different institutional environments

The efficaciousness and reality of taxing in the region is the key focus of several chapters of the book. Chapter 3 by Hendrischke, Krug and Zhu and Chapter 4 by Sharkey look at some of the less-known realities of the operation of tax in China. They show how its day-to-day operation differs significantly from formal laws and varies from location to location in China despite formally unified laws. The importance of these findings is multiple. First, it raises serious questions about the efficiency and equity of taxation in China and highlights that those who wish to study this aspect of tax in China have to do significant investigative work that goes beyond reference to laws and other formal pronouncements. For example, both chapters show that there is a reality of tax competition between different localities in China. Such tax competition may have a significant negative impact on the overall revenue raised in China, but those who limit their assessment of China’s tax system to formal descriptions will not deduce the possibility for it. The reality of taxation in China and the region is, of course, of significant relevance to business persons and potential investors, and these two chapters provide significant insight into these realities. They also show that there is a significant need for further research into the reality of taxation in China.

The causes of the taxing realities highlighted in the above two chapters raises a different theme that is developed in this book. That is that among a number of historical and institutional factors, the role of society and culture in shaping the efficacy of tax systems in the region should not be underestimated. Both these chapters show the significant social institutions at play in shaping governance and taxing in China. This leads to the question of the suitability of taxing concepts developed in the context of western societies to the societies of the region. Chapter 2 of this book provides a philosophical justification for asking whether these taxing institutions are correct for a region with significantly different social institutions in the first place. It notes that it should not be presumed that what works in the west should work in the region. It also argues that a failure in these taxing institutions when they are unsuited to the institutional context should not be viewed as a lack of development but simply the application of inappropriate formal institutions. It ultimately calls for a careful assessment of ideas developed outside the region to see whether they are socially appropriate before they are imposed on the basis of their outside success.

The location of taxing problems within the context of regional culture and society is a theme also pursued in Chapter 5, on the Philippines, by Chaikin and Dyball. In the chapter the authors consider the problem of tax evasion in the Philippines in detail and assess the success and failure of measures imposed to deal with it. A key finding that is put forward in this chapter is that a strong driver of the significant tax evasion is local society and culture. It also highlights how measures to deal with the problem of evasion have failed owing to their non-suitability to the local institutional environment.

These findings again call for careful assessment of the complete institutional context of the region when judging success or failure of taxation and when proposing solutions to problems. Chapter 9 by Cullen and Wong also touches on this in that it raises the suggestion that a factor in the particular success of the Hong Kong tax approach may also be attributed to its particular suitability to the local institutional context in the region. It may be possible that Hong Kong provides a model for taxing success in regional society.

Confucian taxation?

All the above chapters raise the issue of what links the region in terms of social and cultural institutions and what sort of taxation is suited to these institutional environments. Is there an argument for Confucian taxation?³ What would Confucian taxation be? As noted above, one of the facets that link the area is Chinese society and Chinese-influenced society. Chinese society has spread throughout the region, and it is features of its institutions that most typify common regional institutions. As the taxation issues being discussed are predominantly business related, the significant over-representation of the regional Chinese population in regional business activity makes the issue of Chinese institutions more significant than population figures may indicate. It is also true that Chinese social institutions have heavily influenced other regional communities through historical interaction and the influence of China as a regional power. Core Chinese values and ideals such as Confucianism that provide the foundation for Chinese social institutions have strongly influenced non-Chinese communities in Vietnam, for example.⁴ In fact, if the region was defined as including all states in which Confucianism and other Chinese ideals had had a major influence, then it should extend to include both Korea and Japan.⁵ No doubt some of the considerations raised in this book are relevant to these two states.

It is, of course, acknowledged that significant diversity exists within the region’s societies and significant diversity exists within and between the regional Chinese communities. This creates further challenges that are discussed later in this chapter. However, there remains a need to deal with Chinese social institutions in taxation in the region. Also, the issue of the non-Chinese elements of societies within the area becomes less of a concern when you define the problem as one of taxing regional Chinese society only. This is significant enough economically to not weaken any of the issues touched upon in this book.

A diversity of needs for a diverse population

The book does not seek to dismiss the suitability of all concepts developed outside the region because of regional social and cultural factors. Chapter 6 by Loo and McKerchar and Chapter 7 by Collier et al. look at the success of ideas recently introduced into regional tax systems from outside. Loo and McKerchar consider the introduction of the self-assessment system in Malaysia and offer ideas for its improvement. Their work does not give any indication that such a system might be impacted by particular local institutional problems. Rather, they propose that improvements may be made in the expected manner with greater tax officer and taxpayer education and information. In a similar manner, the study by Collier et al. focuses on improving ethics in tax administration in Indonesia through tax officer training. It does not indicate that such efforts may be fraught by a local institutional environment at odds with such a conceptualization of ethics. The theme that reading all the chapters together therefore conveys is that improvements in taxation are certainly possible in the region but a careful account of the local institutional context is needed before measures will yield expected results.

The catering for the local institutional context by formal institutions like taxation is made significantly more complicated by the diversity of requirements in the region. The above two chapters by Loo and McKerchar and Collier et al. already show that what works in one context may not work in another. There are a number of complexities that arise in relation to institutional diversity in the region. The first is that, without weakening the argument that there is significant regional cultural and social continuity, it must also be noted that there is significant diversity within local regional culture and society. Institutional context varies significantly in mainland China, let alone the region as a whole. This diversity involves different, although interconnected, cultural and social communities. For example, while some may argue for Asian values, there are stronger arguments that the culture and values of the majority of the populations of Indonesia and Malaysia (that is, Javanese and Malays) differ significantly from the values of the Chinese populations of these states and of China. Owing to the influence of Islam, these majority populations will share many values with other Islamic populations worldwide and in fact with westerners rather than with local Chinese populations.

It must also be noted that while there are clear similarities in values between the interconnected Chinese populations of these states, there is also diversity within them. This diversity is the product of many factors including traditional diversity between south and north in China, more specific traditional diversity between localized Chinese identities (for example, Cantonese, Hakka and Min groups), diversity due to the influence of living outside mainland China (for example, Hong Kong people versus the current Cantonese population of Guangzhou), and diversity due to living in particular South East Asian states (for example, Singapore Chinese versus Malaysian Chinese or Peranekan/ ‘Straits Chinese’ versus newer Chinese residents of these states). All these differences result in material institutional differences. By way of example, there is no doubt that the way business is conducted on average by Chinese business persons in Singapore diff...

Table of contents

• Cover
• Dedication
• Title
• Copyright
• Contents
• List of figures and tables
• About the editor
• Notes on contributors
• Preface
• Acknowledgements
• 1. Greater China and South East Asia: a taxing problem?
• 2. Considering different approaches to tax law in China and ASEAN: a political, philosophical and pragmatic rationale
• 3. China’s local tax regimes: devolution, tax farming and fiscal federalism
• 4. Localization of central taxation in China
• 5. Tax compliance and administrative challenges: lessons from the Philippine experience
• 6. Self-assessment system in Malaysia: performance to date and challenges ahead
• 7. The impact of workplace learning groups on ethical behaviour in the Indonesian Tax Office
• 8. Tax reform and economic development in Vietnam
• 9. How history has shaped the Hong Kong revenue regime
• 10. The impact of tax incentives on economic development in Singapore and Hong Kong
• 11. Bilateral tax treaties and ASEAN economic integration: current position and future prospects
• 12. Tax residence and regions: addressing South East Asian transnationalism through ASEAN
• 13. The wrap: impact of a region’s tax systems on the changing world order
• Bibliography
• Index