NEARLY a third of the Philippine economy remained informal—a trend shared with several Southeast Asian nations—resulting in a narrow tax base that makes building back better after the pandemic a big challenge, an economist from the Asian Development Bank (ADB) said.
This could be one of the reasons that prevents the government from building back better after the pandemic, according to Aekapol Chongvilaivan, ADB Southeast Asia Department Senior Economist for Public Finance.
Writing a Policy Brief, Chongvilaivan said 28 percent of the economy is informal while other countries have larger informal sectors, such as Thailand with 43 percent of its GDP being part of the shadow economy and 35 percent in Cambodia.
Lao People’s Democratic Republic and Indonesia have smaller informal economies compared to the Philippines at 25 percent and 23 percent, respectively.
“One root cause of the generally narrow tax base in Southeast Asian countries is attributed to a relatively large informal sector —shadow economy,” Chongvilaivan said.
“Given the magnitude of the pandemic-induced shocks, a further decline in tax revenues is most possibly substantial. In addition, the post-pandemic economic recovery is by and large uneven and uncertain due to mixed progress on vaccine rollouts and emergence of new Covid-19 variants,” he also said.
The mounting fiscal challenges in the region, Chongvilaivan said, should prompt government to improve tax compliance, particularly for micro, small, and medium-sized enterprises (MSMEs).
He said this can be done by reducing the cost of paying taxes and shortening the time for tax registration, filing, and payment, which often prevent small firms from complying with tax rules and regulations.
Digital transformation is needed, Chongvilaivan also said, to improve services to taxpayers and allow tax authorities access to data for monitoring of noncompliance risks. It can also cut transaction costs and enhance transparency.
“It is important for tax authorities to recognize that efforts to lower costs of compliance may entail lower tax revenue flows from each taxpayer; however, improved tax compliance means an expanded tax base—more and more taxpaying individuals and firms entering a tax system—thereby enhancing total tax revenues,” Chongvilaivan said.
In the long-term, the ADB economist said Southeast Asian governments should strive to develop and implement medium-term revenue strategies (MTRSs) to address the unpredictable and inconsistent tax reform efforts that often fail to deliver any benefits.
In the wake of Covid-19, Chongvilaivan said the government should rethink tax reform priorities and refine existing MTRSs to address development challenges such as income inequality, climate change and aging societies.
He said moves to introduce new levies on digital services providers in countries like Indonesia, Malaysia, the Philippines, and Thailand can be an effective way to tax multinational digital companies.
Chongvilaivan said efforts to impose carbon taxation can also shore up domestic revenues not only to finance development challenges but also climate change.
He said in Southeast Asia, energy-related carbon emissions are expected to rise by 61 percent between 2014 and 2025. This presents an opportunity to facilitate energy transition and strengthen environmental tax regimes.