Jakarta, The PRAKARSA - The PRAKARSA held a public discussion with the theme "Update on Fiscal Policy Landscape in ASEAN: From Macro Economics to Public Spending". This event marked the launch of their latest research entitled "Assessing the Fiscal Incentives Policies for Foreign Direct Investment in ASEAN Member States 2021-2023". Taking place in Jakarta, on Thursday (6/6/2024).
Bintang Aulia Lutfi, Researcher at The PRAKARSA conveyed that the low revenue ratio in ASEAN countries was partly due to the large number of tax concessions given to companies to facilitate foreign investment.
“Some ASEAN countries even tend to extend the tax holiday period by 2 – 5 years. "Then there was a decrease in the average minimum tax rate (Corporate Income Tax/CIT) from 0.85% to 20.85%," said Bintang.
Bintang explained that providing tax incentives for companies is not enough to accelerate economic recovery. "Even though ASEAN countries need foreign investment for economic recovery, relying on corporate tax incentives alone is not enough," said Bintang.
Bintang highlighted that ASEAN countries' excessive reliance on tax incentives could create a "race to the bottom" phenomenon, where countries compete to offer larger tax incentives to companies, ultimately only benefiting multinational companies. "A lot of tax relaxation will actually be detrimental to the country, because companies can easily move their parent businesses to countries with lower rates or more profitable incentives," added Bintang.
ASEAN countries which tend to use tax incentive instruments to attract foreign investors will actually be detrimental to their countries. In 2021, the average ASEAN tax revenue will only be 14,46% of GDP in the ASEAN region, this amount is only half of the average tax revenue in OECD countries, which reaches 34,11%.
Economist and founder of the Institute for Development of Economics and Finance (INDEF) Faisal Basri, who was also present as a response to the discussion, emphasized that it is not a problem if there is competition between ASEAN countries in attracting incoming investment, but don't let the competition that occurs be eliminating. "Let's compete but don't eliminate each other," stressed Faisal.
Apart from that, Faisal also explained that basically investors are not interested in tax incentives, but investors' considerations are in the sectors that attract their interest in investing. In this context, Faisal said that Indonesia has a good bargaining position, because of its ownership of abundant natural resources (SDA). "If there is a potential sector in Indonesia then they (investors) will come, investors come to Indonesia because there are lots of natural resources in Indonesia," explained Faisal.
According to Faisal, ASEAN is a very diverse organization. Singapore and Brunei Darussalam are countries that have high GDP with low populations, while Indonesia and Myanmar are rich in natural resources, Thailand and Myanmar are strong in agriculture and MSMEs. "It's difficult to see taxes as a demonizing factor, countries with rich natural resources, they don't need to apply incentives because we have lots of natural resources," added Faisal.
Meanwhile, Ah Maftuchan, Executive Director of The PRAKARSA urges ASEAN countries to collaborate to eliminate the policy of selling tax incentives. According to him, excessive incentives must be stopped immediately.
On the other hand, Maftuch also touched on the OECD's plan to set a minimum global corporate income tax rate of 15%. Although this is an effort to reduce the practice of Base Erosion and Profit Shifting (BEPS). However, this policy is considered to tend to benefit developed countries such as Germany (15,8%), Luxembourg (18,2%), and Canada (15%), which have had appropriate tariffs from the start.
In contrast, developing countries, especially those in ASEAN with an average CIT of 20%, still rely heavily on tax revenues and may have difficulty competing.
The application of this 15% tariff has the potential to create inequality, especially between ASEAN countries and developed countries or those with high per capita income such as Singapore and Brunei Darussalam. From these conditions, PRAKARSA recommends that ASEAN countries agree on a corporate tax rate in the ASEAN region of 25%.
Increased tax revenues can be used to equalize education. Not only in terms of school infrastructure, but also providing access to education for people who are poor or have difficulty accessing education financially.
Maftuch emphasized two things that the OECD needs to pay attention to regarding this agreement so that it is more proportional and fair.
“First, the OECD needs to review this policy to ensure that minimum tariffs are more proportional and fair. Second, it has been proven that tax incentives cannot be the only investment attraction. The government of each country needs to improve its governance to attract investors. "With legal certainty, ease of licensing, and economic and political stability, it will give investors a sense of security in entrusting their funds." closed Maftuch.