Asia-Pacific Tax Revenue Set To Fall Due To Virus, OECD Says

By Matt Thompson
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Law360 (July 23, 2020, 1:56 PM EDT) -- Tax revenue in the Asia-Pacific region is expected to drop significantly due to the economic fallout from the coronavirus pandemic, the Organization for Economic Cooperation and Development said in a report released Thursday.

Despite the challenges presented by the virus, most of the countries surveyed in the report had increased their ratio of tax to gross domestic product in 2018 over 2017, which means they have been collecting more tax as a percentage of the size of their economies than in previous years. The OECD report focused on the period from 1990 to 2018,

The largest increases in the tax-to-GDP ratio from 2017 to 2018 were found in Nauru, Tokelau and Mongolia, which reported rises of 6.4, 3.8 and 2.5 percentage points, respectively. Bhutan was the only country that experienced a decrease of more than 1 percentage point, with a 1.4 percentage point fall.

The coronavirus pandemic means that the general trend of rising tax takes across the region is likely to go into reverse, the report said. The region's governments are currently "ramping up" spending, it added.

"In the immediate future, tax revenues will suffer as corporate revenues and household incomes fall due to the economic downturn," the report said. "Given the magnitude of the economic shock, the drop in tax revenues is likely to be substantial." 

There is some difficulty in accurately predicting the impact of the coronavirus that causes COVID-19 on government revenue, but some economies are more vulnerable to the shock than others, the OECD said.

South Asia, in particular, is an export-focused region and is likely to feel any slowdown in global trade more acutely.

"Countries such as Brunei, Indonesia, Kazakhstan, Malaysia, Singapore, Thailand and Vietnam, which generate significant public revenues from the production or refinery of oil, will likely experience a sharp drop in revenues as a result," the OECD said.

Even before taking into account the significant corporate welfare packages that have been disbursed in order to ameliorate the worst aspects of economic shock, corporate income tax takes are likely to fall by a higher percentage than the underlying fall in economic activity, the report said. A decrease in wages and employment is likely to mean less personal income tax and social security contributions are collected. 

Consumption tax revenue, such as value-added tax, will decline as consumption falls due to widespread state-mandated business closures. "Lower consumer confidence, as well as a potential shift towards the consumption of staple goods, which are often taxed at reduced or zero rates" will also contribute to a decline, the report said.

The structure of tax revenue in Asian and Pacific economies may render them more vulnerable due to their high reliance on certain kinds of taxes that are set to be most impacted, the OECD said.

The statistics aren't about measuring for the sake of measuring, David Bradbury, head of the tax policy and statistics division at the OECD, told a virtual conference accompanying the launch of the report. Rather, they are used by policymakers to support reform in developing countries and across the wider Asia-Pacific region.

--Editing by Vincent Sherry. 

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