Spend Matters welcomes this guest post from ApexPeak.
While, culturally, there seems to be quite a gap between the dance-loving, football-celebrating nations of Latin America and the mysteries of Southeast Asia, economically, it is easier to draw parallels. Countries such as Indonesia, Thailand, Vietnam and the Philippines share the market dynamics of many Latin American countries: they are emerging markets, they share similar growth rates with their Latino cousins and have recently slapped a value-added tax (VAT) on retail purchases. They are also experiencing irregularities in both public and private procurement.
In this first part of a 3-part series, we look at the experiences of Mexico, Chile, Brazil and Argentina, the continent’s forerunners in implementing e-invoicing and tax reform and ask what Southeast Asia’s emerging nations can learn from their successes and failures.
GDP rates of Latin America and Southeast Asia
Adoption of VAT in Asia Pacific
VAT (also sometimes referred to as GST, or goods and service tax) is designed to skim off a percentage of spending in sectors of the economy where most wealth is created and is, therefore, generally regarded as being pretty efficient and is met with less resentment than are some other taxes. Nowadays, over 150 countries and over 4 billion people worldwide are subject to VAT.
In Asia Pacific, more than 20 countries have got onboard the VAT bus. However, there is still quite a difference in terms of development when these tax regimes are put under the microscope; for example, Singapore slots nicely into an internationally recognized template, with more sophisticated and consistent tax regulation, while countries such as China and Malaysia are still struggling to toe the line as regards internationally recognized tax standards.
A few nations in Asia Pacific, such as Hong Kong, are still holding out against this VAT trend, but, as their populations age, direct taxes are falling and these nations are considering the usefulness of indirect taxation.
Southeast Asia’s VAT gap
As many Southeast Asian countries have difficulty in collecting personal income-tax revenue, and corporate-tax rates have been suppressed as a carrot for foreign investors, VAT has assumed an important role in keeping these economies afloat. Although Southeast Asian tax rates remain below the OECD average of 19%, VAT as a percentage of total tax revenue in these countries can be as high as 35%.
Southeast Asian countries suffer from the same problem that Latin American countries have had in the past (and many continue to have) as regards tax: collected tax revenues are almost always lower than the revenues that would be collected if legislated tax rates were applied uniformly and collected strictly. In fact, Southeast Asia’s tax collection shows a similar gap to that of the European Union, which fell short by around $220 (1.5% of GDP) in 2012, owing to non-compliance or non-collection. Studies have shown that more efficient tax collection in countries such as Indonesia, Malaysia and the Philippines could raise national GDP by as much as 1%.
Mandatory e-invoicing could close the VAT gap
In a recent survey conducted by ApexPeak, Gosocket Corp and Invoiceware International, participants were asked what they thought Southeast Asia could learn from Latin America in terms of B2B and B2G e-invoicing. Respondents agreed unanimously that e-invoicing would help any country that has implemented VAT.
“In countries where tax agents are not as thick on the ground as they are in the US, the ability to control via computer automation versus after-the-fact audits is the only economical way of ensuring efficient tax collection,” said Scott Lewin, chief executive officer of Invoiceware International.
This sentiment may explain why South Korea, the first Asian nation to introduce VAT, in 1976, was also the first to introduce B2G and B2B e-invoicing. E-invoicing is increasingly seen as an effective means by which to measure and control tax collection, especially in light of the rise in cross-border e-commerce transactions.
Southeast Asian countries have attempted to deal with the VAT gap either by meting out slaps on the wrist to offending companies, or through attempts to ‘educate’ business about the benefits to the economy of efficient tax collection. Singapore has led the way in this respect, hosting the first GST/VAT conference in the Asia Pacific region in 2013 and also launching several initiatives to improve VAT awareness among business owners. However, if Southeast Asian governments could implement e-invoicing and provide a unique, identifiable code for each invoice, a large percentage of human errors would be removed from VAT collection.