Globalization and Tax Systems: Implications for Developing Countries with Particular Reference to Southeast Asia

Article excerpt

The unfolding globalization process, centring on production and distribution networks and on financial institutions, products, and transactions, is having a profound impact on a wide range of policies and practices in both the private and the public sectors. This article analyses the implications of globalization and the resulting greater integration of the world economy on tax systems in developing countries in general, and Southeast Asian countries in particular. Issues discussed include international factor mobility and the resulting consequences for efficiency and burden of taxation; tax competition among various jurisdictions to attract foreign direct investment (FDI) and professional and technical manpower; the impact of globalization on indirect taxation, including international trade taxation; tax implications of the Internet and e-commerce; taxation of global portfolio flows (i.e. non-FDI flows); and the impact of globalization on fiscal sustainability in Southeast Asia.

I. Introduction

The unfolding globalization process, centring on production and distribution networks and on financial institutions, products, and transactions, is having a profound impact on a wide range of policies and practices in both the private and the public sectors.

Present tax systems evolved when each country formulated its own tax policy and focused on the requirements of its domestic economy. When tax treaties, agreements and conventions among nations were negotiated, they were within the framework of national sovereignty in tax policy. The globalization process has changed this, particularly with respect to the level of taxation, mix of taxes, design of particular taxes, and the manner of their administration and compliance. Countries are being forced to exhibit much greater awareness of and sensitivity to the tax changes being undertaken by their trading partners and competitors, reducing autonomy concerning their tax policies (Lodin 2000; Owens 1998; Tanzi 1998, 2000).

Tanzi (2000) uses the term "fiscal termites" to depict how globalization and technological changes will impact on national tax systems.1 In other words, adaptation of the tax systems to globalization is expected to be slow and subtle rather than discontinuous (Slemrod 1995). It is also possible that even as the tax administrators confront challenges in administering current taxes, new types of taxes may become feasible with the rise of new technologies and activities (Tanzi 2000).2 This article analyses the implications of globalization and the resulting greater integration of the world economy on tax systems in developing countries in general, and Southeast Asian countries in particular.3 The remainder of the article is organized as follows.

Globalization has greatly increased the international mobility of goods, services, factors (particularly capital), finance, and consumers (or more precisely consumption activities). The issue of international mobility and the resulting distribution of tax burden between mobile versus immobile factors is analysed in the next section. Globalization and international factor mobility has implications for efficient taxation of firms operating in multiple tax jurisdictions. These are discussed in Section III. This is followed by an analysis of the phenomenon of tax competition among various jurisdictions to attract foreign direct investment (FDI) in Section IV; and professional and technical manpower in Section V Section VI deals with the impact of globalization on indirect taxation, including international trade taxation. Section VII briefly discusses the tax implications of the Internet and e-commerce. Taxation of global portfolio flows (i.e. non-FDI flows) is taken up in Section VIII. The final section concludes with an extended discussion of the impact of globalization on fiscal sustainability in Southeast Asia, and on ways to deal with the implications of globalization for the tax systems. …