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Tax revenues in Asian and Pacific economies rebound

MD Staff

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Tax-to-GDP ratios increased in the majority of Asian and Pacific economies covered by a new OECD report published today. Nine of the economies in the publication increased their tax-to-GDP ratios between 2016 and 2017, compared with only three in the preceding year, according to Revenue Statistics in Asian and Pacific Economies 2019.

This sixth edition of Revenue Statistics in Asian and Pacific Economies covers 17 countries, including Vanuatu for the first time. Tax-to-GDP ratios across these countries varied considerably, ranging from 11.5% in Indonesia to 32.0% in New Zealand. In general, tax-to-GDP ratios were higher in the Pacific economies than in the Asian economies: Pacific economies had tax-to-GDP ratios higher than 24%, with the exceptions of Tokelau (14.2%) and Vanuatu (17.1%), while the Asian economies reported tax-to-GDP ratios below 18%, with the exceptions of Korea (26.9%) and Japan (30.6%, 2016 figure).

The increased revenue collection of most countries in 2017 was largely driven by economic factors rather than changes in tax policy or administration. These factors included higher revenues from oil production in Kazakhstan, the growth of the logging sector in the Solomon Islands and Vanuatu’s recovery from Cyclone Pam in 2015. Meanwhile, a fall in revenues from corporate income tax (CIT) and value added tax (VAT) resulting from an economic slowdown explained the decline in Papua New Guinea’s tax-to-GDP ratio. Over a longer timeframe, 11 of the 17 economies in the publication increased their tax-to-GDP ratios between 2007 and 2017, with the exception of Australia, Indonesia, Kazakhstan, Papua New Guinea, New Zealand and Vanuatu.

This publication also includes data on non-tax revenues for five Pacific economies (the Cook Islands, Papua New Guinea, Samoa, Tokelau and Vanuatu). These revenues, which include mainly grants, resource income (including fishing and mining) and other fees, were equivalent to at least 6% of GDP in the Cook Islands, Tokelau and Vanuatu. Grants exceeded 30% of total non-tax revenues in all five countries and were the main source of non-tax revenues for the Cook Islands (65.7%), Papua New Guinea (59.9%), Samoa (51.1%) and Vanuatu (52.2%).

The report is a joint publication of the OECD Centre for Tax Policy and Administration and the OECD Development Centre with the co-operation of the Asian Development Bank (ADB), the Pacific Islands Tax Administrators Association (PITAA) and the Pacific Community (SPC) and the financial support of the European Union.

Revenue Statistics in Asian and Pacific Economies 2019 includes a special feature exploring the operations of tax administrations in the region produced in collaboration with the ADB.

Key findings

Tax revenues as a percentage of GDP

In 2017, tax-to-GDP ratios varied across the 17 economies, from 11.5% in Indonesia to 32.0% in New Zealand. Tax-to-GDP ratios in all Asian and Pacific economies in the publication were lower than the OECD average tax-to-GDP ratio of 34.2%.

Eight of the economies had tax-to-GDP ratios above the Latin American and the Caribbean (LAC) average of 22.8%.

Five countries (Fiji, Kazakhstan, Singapore, Solomon Islands and Vanuatu,) experienced increases larger than 1.0 percentage point between 2016 and 2017 while Malaysia and Papua New Guinea experienced the largest decreases (0.7 percentage points in both cases).

Over the last decade, tax-to-GDP ratios increased in 11 countries in this publication and declined in six. The highest increases were observed in Fiji and the Solomon Islands (4.4 and 4.5 percentage points, respectively) while the largest declines were registered in Kazakhstan and Papua New Guinea (9.7 and 7.0 percentage points, respectively).

Tax structure

In nine economies in this publication, taxes on goods and services accounted for the largest share of tax revenues in 2017. Within goods and services, VAT is an important and increasing source of revenues in most Asian and Pacific economies.

Income taxes provided the main share of tax revenues in the eight remaining countries with the exception of Japan, where social security contributions (40.4% of total tax revenue, 2016 figure) represented the largest source.

The tax structure of Asian economies tends to differ from that of Pacific economies:

VAT accounted for at least 25% of total tax revenue in the Pacific economies with the exception of Australia and Papua New Guinea, but less than 25% in the Asian economies, except Indonesia.

Revenues from CIT were higher than revenues from personal income tax (PIT) in most Asian economies, with the exception of Japan and Korea; whereas the reverse is true in the Pacific, except in Fiji.

Revenues from VAT ranged from 12.9% of total tax revenue in Australia (2016 figure) to 44.4% in the Cook Islands (the Solomon Islands and Tokelau do not impose VAT) and was higher as a share of total taxes in the Pacific compared to Asian economies.

Across all economies with the exception of Tokelau (which does not impose CIT) and Vanuatu (which does not impose income taxes), revenues from CIT ranged from 9.1% of total tax revenue in Samoa to 41.5% in Malaysia.

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Canada has the most comprehensive and elaborate migration system, but some challenges remain

MD Staff

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Canada has the largest and most comprehensive and elaborate skilled labour migration system in the OECD, according to a new OECD report.

Recruiting Immigrant Workers: Canada 2019 finds that Canada admits the largest number of skilled labour migrants in the OECD. Additionally, Canada also has the most carefully designed and longest-standing skilled migration system in the OECD. It is widely perceived as a benchmark for other countries, and its success is evidenced by good integration outcomes. Canada also boasts the largest share of highly educated immigrants in the OECD as well as high levels of public acceptance of migration. In addition, it is seen as an appealing country of destination for potential migrants.

According to the OECD, Express Entry – the two-step Expression of Interest system for federal permanent labour migration introduced in 2015 – has greatly improved efficiency and the effectiveness of permanent labour migration management. It allows for ranking migrants for selection from a pool of eligible candidates. A unique feature of the Canadian model, in contrast to other selection procedures, is the degree of refinement in the ranking of candidates eligible for immigration. It considers positive interactions of skills, such as between language proficiency and the ability to transfer prior foreign work experience to the Canadian context.

The OECD report stresses that core to Canada’s success is not only its elaborate selection system, but also the comprehensive infrastructure upon which it is built, which ensures constant testing, monitoring and adaptation of its parameters. This includes a comprehensive data infrastructure, the capacity to analyse such data, and subsequent swift policy reaction to new evidence and emerging challenges. Recent reforms addressed several initial shortcomings in the Express Entry system, such as too many points being attributed for a job offer (which led to a high intake of migrants working in the hospitality sector, for instance), and which were subsequently reduced. The current selection system focuses on human capital factors such as age, language proficiency and education and is largely supply driven – meaning that most labour immigrants are admitted without a job offer – in contrast to the majority of other OECD countries.

To further strengthen the system, Canada should address some remaining inconsistencies. For instance, entry criteria to the pool are not well aligned with final selection criteria and language requirements for several groups of onshore candidates are lower than for those coming from abroad. In addition, a specific programme designed to attract tradespeople allows migration for only a few occupations and not necessarily where there are shortages, which contrasts with its original objectives. Providing for a single entry grid based on the core criteria for ultimate selection would simplify the system and ensure common standards.

The management of permanent labour migration is shared between Canada’s federal and provincial/territorial (PT) governments. The increasingly significant role played by regional governments in selection and integration has resulted in a more balanced geographic distribution of migrants across the country. PT-selected migrants have a lower skills profile than federally selected migrants but boast better initial labour market outcomes and high retention. The OECD also recommends considering a provincial temporary foreign worker pilot programme, to allow PTs to better respond to regional cyclical or seasonal labour needs that are not otherwise met, without the need to resort to permanent migration through provincial nomination.

Most of the provincial nominees – like their federally selected counterparts – settle in metropolitan and agglomeration areas, a development that Canada is currently addressing with an innovative rural community-driven programme. This includes a whole-of-family approach to integration, designed to enhance retention. Indeed, the report notes that Canada has been at the forefront of testing new, holistic approaches to managing labour migration and linking it with settlement services, especially in areas with demographic challenges.

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Maintaining Economic Stability in Lao PDR

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Economic growth in Lao PDR is projected to rebound to 6.5 percent in 2019, up from 6.3 percent in 2018. Growth is expected to be driven by the construction sector, supported by investments in large infrastructure projects, and a resilient services sector, led by wholesale and retail trade growth. Against the backdrop of challenging domestic and external environments, the Government of Lao PDR has remained committed to fiscal consolidation by tightening public expenditure and improving revenue administration, according to the latest edition of the World Bank’s Lao Economic Monitor, released today.

Fiscal consolidation is expected to result in a decline in the budget deficit to 4.3 percent of GDP in 2019 down from 4.4 percent in 2018, driven by tighter control of the public wage bill and capital spending. This is expected to keep public expenditure stable at around 20 percent of GDP in 2019. The revenue to GDP ratio is projected to improve slightly in 2019 thanks to efforts to strengthen revenue administration and the legal framework. Looking forward, public debt is expected to decline from 57.2 percent of GDP in 2018 to 55.5 percent of GDP in 2021. The outlook until 2021 is subject to increasing downside risks.

Strengthening revenue collection is important to create fiscal space and reduce the burden of public debt,” said Nicola Pontara, World Bank Country Manager for Lao PDR. “Looking forward, it will be important to improve the business environment to support private sector development, including the growth of small and medium enterprises. These measures can contribute to maintaining a stable macroeconomic environment, promoting job creation and reducing poverty and inequality.”

The report includes a thematic section that summarizes the perceptions of small and medium enterprises (SMEs) on the business environment, based on the data of the World Bank Enterprise Survey. The key constraints reported by SMEs include access to finance, competition with informal firms – such as those that are not registered and do not comply with regulations – and electricity outages. The report maintains that strengthening the performance of SMEs can improve the quality of jobs, raise incomes, and contribute to the greater well-being of the Lao people.

The Lao Economic Monitor is published twice yearly by the World Bank Office in Lao PDR.

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Economic woes hold sway over geopolitics

MD Staff

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While geopolitical tensions in the Middle East Gulf remain high, with US sanctions recently extended to more Iranian officials and a Chinese oil importer, as well as another tanker seizure, oil prices (Brent) have eased back from the most recent high of $67/bbl. Shipping operations are at normal levels, albeit with higher insurance costs. The messages from various parties that vessels will be protected to the greatest extent possible, and the IEA’s recent statement that it is closely monitoring the oil security position in the Strait of Hormuz will have provided some reassurance.

There have been concerns about the health of the global economy expressed in recent editions of this Report and shown by reduced expectations for oil demand growth. Now, the situation is becoming even more uncertain: the US-China trade dispute remains unresolved and in September new tariffs are due to be imposed. Tension between the two has increased further this week, reflected in heavy falls for stock and commodity markets. Oil prices have been caught up in the retreat, falling to below $57/bbl earlier this week. In this Report, we took into account the International Monetary Fund’s recent downgrading of the economic outlook: they reduced by 0.1 percentage points for both 2019 and 2020 their forecast for global GDP growth to 3.2% and 3.5%, respectively.

Oil demand growth estimates have already been cut back sharply: in 1H19, we saw an increase of only 0.6 mb/d, with China the sole source of significant growth at 0.5 mb/d. Two other major markets, India and the United States, both saw demand rise by only 0.1 mb/d. For the OECD as a whole, demand has fallen for three successive quarters. In this Report, growth estimates for 2019 and 2020 have been revised down by 0.1 mb/d to 1.1 mb/d and 1.3 mb/d, respectively. There have been minor upward revisions to baseline data for 2018 and 2019 but our total number for 2019 demand is unchanged at 100.4 mb/d, incorporating a modest upgrade to our estimate for 1Q19 offset by a decrease for 3Q19. The outlook is fragile with a greater likelihood of a downward revision than an upward one.

In the meantime, the short term market balance has been tightened slightly by the reduction in supply from OPEC countries. Production fell in July by 0.2 mb/d, and it was backed up by additional cuts of 0.1 mb/d by the ten non-OPEC countries included in the OPEC+ agreement. In a clear sign of its determination to support market re-balancing, Saudi Arabia’s production was 0.7 mb/d lower than the level allowed by the output agreement. If the July level of OPEC crude oil production at 29.7 mb/d is maintained through 2019, the implied stock draw in 2H19 is 0.7 mb/d, helped also by a slower rate of non-OPEC production growth. However, this is a temporary phenomenon because our outlook for very strong non-OPEC production growth next year is unaltered at 2.2 mb/d. Under our current assumptions, in 2020, the oil market will be well supplied.

IEA

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