cross country research on tax policy and inequality: comparative study of indonesia, south africa...

8/20/2019 Cross Country Research On Tax Policy And Inequality: Comparative Study Of Indonesia, South Africa And Brazil

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CO M PARA TIVE STUD Y O F IND O NESIA, SO UTH AFRICA AN D B RAZIL 1

CROSS-COUNTRY RESEARCH ONTAX POLICY AND INEQUALITY:COMPARATIVE STUDY OF INDONESIA,

SOUTH AFRICA AND BRAZIL

YUSTINUS PRASTOWO

SUGENG BAHAGIJO

SITI KHOIRUN NIKMAH

Em pow ering C ivil SocietyO rga nisation in an U neq ualM ulti-Polar W orld

SouthAfricanNetwork on Inequality


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CO M PARA TIVE STUD Y O F IND O NESIA, SO UTH AFRICA AN D B RAZIL i

CROSS-COUNTRY RESEARCH ONTAX POLICY AND INEQUALITY:COMPARATIVE STUDY OF INDONESIA,

SOUTH AFRICA AND BRAZIL

YUSTINUS PRASTOWO

SUGENG BAHAGIJO

SITI KHOIRUN NIKMAH

ISBN 978-979-8811-08-1

@ June 2015


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CRO SS-CO UN TRY RESEARCH O N TAX PO LICY AN D INEQ UALITYii

Author:

Yustinus P rastow o, D irector Executive C enter for Taxation A nalysis (C ITA )

Sug eng B ahag ijo, D irector Executive International N G O Forum on Ind onesian D evelop m ent (IN FID )

Siti K hoirun N ikm ah, Program M anager International N G O Forum on Indonesian D evelopm ent (IN FID )

This pub lication has been p rod uced w ith the assistance of the European U nion. The contents of this

the European U nion.

This rep ort has been develop ed w ith the assistance of O xfam in order to share research results and

to contribute to d eb ate on d evelop m ent and hum anitarian policy and practice. The content and view s

expressed in this report are the responsibility of the author and do not necessarily represent the

view s of O xfam .

Supp orted by:


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CO M PARA TIVE STUD Y O F IND O NESIA, SO UTH AFRICA AN D B RAZIL iii

v ABBREVIATIONS

vi EXECUTIVE SUMMARY

1 1. INTRODUCTION

7 2. ANALYSIS OF TAXATION IN INDONESIA, SOUTH AFRICA AND BRAZIL AND

IMPLICATIONS FOR INEQUALITY

8 2.1 Tax revenue performance

8 2.1.1 Overall performance

10 2.1.2 Performance by sector

11 2.2 Composition of tax revenues

14 2.3 Analysis of taxation policy

15 2.3.1 Income tax

19 2.3.2 Indirect taxation

20 2.4 Gender justice in taxation policy

22 2.5 The informal sector, tax avoidance and tax evasion

22 2.5.1 The informal sector

24 2.5.2 Tax avoidance and tax evasion

24 2.5.2.1 Losses arising from international tax evasion

26

28 2.5.2.3 Beyond the BEPS Action Plan: issues raised by developing countries

33 3. CONCLUSION AND RECOMMENDATIONS

33 3.1 Conclusion

34 3.2 Policy recommendations

TABLE OF CONTENTS

iv ACKNOWLEDGEMENTS


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CRO SS-CO UN TRY RESEARCH O N TAX PO LICY AN D INEQ UALITYiv

ACKNOWLEDGEMENTSW e are using this opportunity to express our gratitude to several individuals for their support

and guidence. W e are g rateful to Y anuar Falak A biyunus as R esearch A ssistant at C enter

for Ind onesia Taxation A nalysis (C ITA ) w ho provided inform ation and processing the data

need ed for the research. W e thank to M . Yud ha Fathoni at IN FID for huge assistance w ith

ad m inistrative process and help us to com m unicate w ith fellow researchers in Ind onesia,

South A frica, B razil, the U K , and other parties associated w ith the success of this research.

W e w ould like to show our gratitude to Thom as D unm ore R odriguez at O XFAM G B in M exico

C ity, M exico w ho continuously provided insight and expertise that greatly assisted the

research. O ur gratitud e is also given to Sibulele P osw ayo and A yab onga C aw e at SAN I in

South A frica, Johnlyn Trom p at O XFA M in S outh A frica, and Pauline C azaubon at O XFA M in

B razil for sharing their com m ents and data d uring the course of this research althoug h any

errors are our ow n and should not tarnish the rep utations of these esteem ed persons. W e

also place on record, our sense of gratitude to all w ho d irectly or indirectly contribute to the

success of this research.


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CO M PARA TIVE STUD Y O F IND O NESIA, SO UTH AFRICA AN D B RAZIL v

ABBREVIATIONSAEOI A utom atic exchang e of inform ation

BEPS

BRIICS B razil, R ussia, Ind ia, Ind onesia, China and South A frica

CIT C orporate incom e tax

COFINS C ontribuição para o Financiam ento d a Seg uridad e S ocial

CRS C om m on R eporting Standard

EE Em erging econom ies

EU European U nion

FAR Function, assets and risksFDI Foreign direct investm ent

GAAR G eneral anti-avoidance rule

GDP G ross dom estic p roduct

GFA G lob al form ulary apportionm ent

GST G oods and S ales Tax

HDI H um an D evelopm ent Index

HNWI H igh net w orth ind ividuals

ICMS Im posto sob re C irculação d e M ercadorias e Serviços

IFF

IHDI Ineq uality H um an-adjusted D evelopm ent Index

IMF International M onetary Fund

IPI Im posto sob re Prod utos ind ustrializad os

ISS Im posto Sobre Serviços

IT Inform ation Technolog y

MNC M ultinational com pany/corporation

NTR N on-tax revenue

OECD O rganisation for Econom ic C o-operation and D evelopm ent

PAYE Pay-as-you-earn

PIS Prog ram a de Integ ração S ocial

PIT Personal incom e tax

SMEs Sm all-M ed ium Enterprises

TIN

VAT Value-added tax


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CRO SS-CO UN TRY RESEARCH O N TAX PO LICY AN D INEQ UALITYvi

Ind onesia, South A frica and B razil are develop ing countries w ith strong econom ic

perform ances in com parison w ith their peers, althoug h this is accom panied by severe

inequalities. Inequality can create a num ber of prob lem s, includ ing unsustainable econom ic

grow th. Taxation is an effective policy instrum ent that can b e used by governm ents to tackle

the ever w idening gap betw een rich and poor: taxes can b e b oth a source of sustainable

fund s for public spending and a tool for incom e redistribution. A t the sam e tim e, the quantity

of tax revenue (the am ount raised) and its quality (progressiveness, op tim ization of tax

expenditures) can p rovide b enchm arks for assessing a country’s tax system in term s of

econom ic ineq ualities.

A vailab le data show that the revenue perform ance of all three countries lag s far behind that

of develop ed countries, and the w ay in w hich revenue is collected is far from eq uitab le. In

B razil, the tax revenue system is dom inated by regressive ind irect taxes. In S outh A frica

and Ind onesia, tax revenues consist m ostly of m ore prog ressive direct taxes but there is

depend ence on p ay-as-you-earn (PA YE) system s or other withholding m echanism s.

The structure of the taxation system s in all three countries leads to inequitab le outcom es.

B razil has a com plex system of ind irect taxation based on earm arking . In term s of personal

incom e tax, all three countries im pose relatively low m axim um tariffs com pared w ith

develop ed nations. In Ind onesia and South A frica, the m axim um incom e tax rate is applicable

only to im possibly high levels of incom e. Furtherm ore, tax policies in these countries do not

O ne of the reasons for low levels of tax revenue com pared w ith w hat could potentially be

raised is w idesp read tax evasion and tax avoidance, w hich take place in all three countries.

This is m ad e p ossible b y international tax schem es and tax havens, of w hich H igh N et W orth

Individuals and m ultinational corporations are able to take advantage. In stud ies looking

pricing, all three countries have consistently ranked in the top ten. M any self-em ployed and

w orkers in the inform al sector also evade taxes, as ind icated by the existence of substantial

EXECUTIVE SUMMARY


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CO M PARA TIVE STUD Y O F IND O NESIA, SO UTH AFRICA AN D B RAZIL vii

To effectively overcom e d isparities, a system of taxation that is sound, both q uantitatively

and qualitatively, m ust be in place. Tax potential should continually b e m axim ized by

strengthening law enforcem ent and increasing levels of tax com pliance. B razil need s to

increase its proportion of direct taxes, w hile Indonesia and South A frica should w ork tow ards

personal incom e tax) m ust also be able to sup port a p rog ressive tax structure by setting

m arginal tax rates as high as possible, w ith the top rates ap plied to the low est possible

levels of incom e. Tax exp enditures should also b e optim ized throug h tax allow ances and tax

exem ptions targeted tow ards vulnerab le w om en and children, low -incom e w orkers and other

m arginalized groups.

To com bat international tax evasion, m ultilateral partnerships are necessary, eng ag ing as

m any countries as possible. O ne w ay to do this is b y initiating action on the digital econom y,

Shifting (B EPS) A ction Plan. B eyond the B EPS A ction Plan, develop ing countries m ust take

initiatives them selves, including participating in discussions and the form ulation of future

action plans on B EPS; m oving tow ards greater reg ional coop eration; review ing unfavourable

clauses and im plem entation of tax treaties; proposing the adop tion of unitary taxation and

form ulary apportionm ent reg im es by m eans of country-by-country reporting , as an alternative

to the current ‘arm ’s length’approach, and a com parability test for transfer pricing; and

betw een tax jurisd ictions.


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CRO SS-CO UN TRY RESEARCH O N TAX PO LICY AN D INEQ UALITYviii TR


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1. INTRODUCTION

The rapid grow th of em erging econom ies has created a new force in the global econom y.

C ountries such as B razil, Russia, Ind ia, Ind onesia, C hina and South A frica (often called the

BR IIC S) now play a m ore im portant role in the glob al econom y.1 According to the W orld B ank,

em erging econom ies m ay join d evelop ed countries as the m ain d rivers of glob al grow th b y

2025.2 A m ong the B R IIC S countries, Ind onesia, South A frica and B razil are prom inent in their

resp ective regions. For the past decad e, Ind onesia has had one of the strongest and m ost

Africa after N igeria, w ith a per capita gross dom estic prod uct (G D P) that far exceeds the

averag e for sub-Saharan A frica. M eanw hile, w ith a G D P of U SD 2.24 trillion, B razil had the

seventh largest econom y in the w orld in 2013.

Figure 1.1: Economic performance of Indonesia, South Africa and Brazil

So urce: data.w orldba nk.org

1 C. Hackenesch and H. Janus (2011) Post 2015: How Emerging Economies Shape the Relevance of a New Agenda.

2 World Bank (2011) Multipolarity: The New Global Economy. Washington DC.

2 0 0 0

2 0 0 1

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6

4

2

0

Indonesia

1 9 6 1

1 9 6 5

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1 9 8 5

1 9 8 9

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10000

5000

0

South Africa

GDP Per Capita South Africa Vs. Sub Saharan Africa

Ranking Economymillions ofUS dollars

1 U nited States 16.768.100

2 C hina 9.240.270

3 Japan 4.919.563

4 G erm any 3.730.261

5 U nited K ingdom 2.806.428

6 B razil 2.245.673

7 Italy 2.149.485

8 R ussian Federation 2.096.777

9 India 1.876.797

10 C anada 1.826.769

11 A ustralia 1.560.372

12 Spain 1.393.040

13 K orea, R ep. 1.304.554

14 M exico 1.260.915

15 Indonesia 868.346

33 South A frica 350.630

1


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CRO SS-CO UN TRY RESEARCH O N TAX PO LICY AN D INEQ UALITY2

ap pear good are in reality accom panied by severe econom ic inequalities. Ind onesia’s G ini

3 in 2013 w as 41,3% , the highest since the country’s ind ep endence. Brazil and

w as above 50% each year from 2001 to 2009, w hile S outh A frica’s reached 63.1% in 2007.

Source: data.w orldbank.org

Econom ic ineq uality can create unequal econom ic grow th, and a num ber of studies have

show n that grow th accom panied by high levels of inequality tends to be unsustainable.4 N ot

ind icators used is the Inequality H um an-ad justed D evelop m ent Ind ex (IH D I).5 Indonesia’s

IH D I score is 0.553, below the regional averag e of 0.564, while B razil’s is 0.542, low er than

the reg ional averag e of 0.559 for Latin A m erica and the C aribbean. H ow ever, inequality is of

grow ing concern glob ally.

In dealing w ith inequality, governm ents have a vital role to play. O ne w ay in w hich they can

is effective in red ucing ineq uality; tw o of the m ost effective types of public spend ing are

investm ents in quality health services6 and public ed ucation for all.7

3 The Gini coefficient is used to measure the income distribution of a country’s population and helps to dene the gapbetween rich and poor. It is based on residents’ net income and is expressed as a value between 0 and 1, with 0 representingperfect equality and 1 representing perfect inequality.

4 For example, research by the International Monetary Fund (IMF) has shown that growth where inequality is high lasts for

a shorter duration than growth where there is little inequality. See Andrew G. Berg and Jonathan D. Ostry (2011) Inequalityand Unsustainable Growth: Two Sides of the Same Coin?, IMF.

5 The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of humandevelopment – health, education and income. A higher HDI value reects greater levels of development. The Inequality-adjusted Human Development Index (IHDI) measures not only the average achievement by countries on these three basicaspects of human development, but also their distribution amongst the population by ‘discounting’ the average value of eachaccording to levels of inequality. Higher levels of inequality lead to a reduction in a country’s HDI score, after adjusting forthe IHDI. IHDI data are unavailable for South Africa.

6 On the correlation between health and inequality, see, for example, Andrew Leigh, Christopher Jencks and Timothy M.Smeeding, ‘Health and Economic Inequality’ in The Oxford Handbook of Economic Inequality (2009); and Angus Deaton(2003) Health, Income, and Inequality. http://www.nber.org/reporter/spring03/health.html

7 One study which demonstrates that education reduces inequality is Abdul Jabbar Abdullah, Hristos Doucouliagos andElizabeth Manning (2011) Education and Income Inequality: A Meta-Regression Analysis. However, this study also makesthe point that high levels of public spending on education do not necessarily correlate with quality education.

2 0 0 2

2 0 0 5

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

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2 0 1 3

70

60

50

40

30

20

10

0

Indonesia

2000 2005 2007

70

60

50

40

30

20

10

0

South Africa

2 0 0 1

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70

60

50

40

30

20

10

0

Brazil

2 0 0 0

2 0 0 5

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

70

60

50

40

30

20

10

0

OECD


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Lim ited availability of state revenues leads to lim ited choices for governm ents w hen allocating

their bud gets. R esearch b y the C entre for B ud get and G overnance A ccountab ility (C B G A )8

show s that all em erging econom ies have increased their health bud gets, but the sam e is

not true for ed ucation; Ind onesia and Ind ia, for exam ple, have not increased their education

bud gets. In Ind onesia the ratio of the ed ucation bud get to G D P in 2010 w as 2.8% , the sam e

as it w as in 2000.

Figure 1.3: Public expenditure on education as a percentage of GDP

Source: Su brat D as (201 5)

There is m uch p otential for budgets to b e increased if the governm ent has the funds to

afford this. M ost countries around the w orld rely on tax revenue to fund spending because

this grow s in line w ith econom ic grow th and w ell-being of the society. In ad dition, it does not

carry the political burdens associated w ith aid and foreign d ebt. The increasing ly im portant

role of the state is supported by contributions from tax revenue, which ideally w ill increase

m eet its ow n needs, w ithout dep ending on foreign aid, and also the grow ing contribution of

its ow n people to develop m ent.

As w ell as funding spending , governm ents can use tax revenue to red istribute incom e.

In g eneral, taxes are paid by people w ho are better off, w hile com m on people receive

alw ays the case, as taxes used as a tool to collect revenue m ay also be regressive i.e. they

disadvantag e those least ab le to pay.

Research by Profeta and Scabrosetti (2010) show s that spending on w elfare is relatively high

in d em ocratic system s.9 A transition to d em ocracy req uires increases in b oth tax revenue

8 The CBGA is a policy research and advocacy organization based in New Delhi. See http://www.cbgaindia.org/

9 Paola Profeta and Simona Scabrosetti (2010) The Political Economy of Taxation: Lessons from Developing Countries,Edward Elgar, p.15.

6

5

4

3

2

1

0

2.8 2.8

4.1

3.1

2.1

4.04.4

4.1 4.4

5.34.7

5.7 5.56.0

Indonesia India China Russia Mexico Brazil South Africa


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show s a positive correlation b etw een tax revenue and econom ic op enness. U sing data from

the P olity IV dataset10 and Freedom H ouse,11 the authors found a positive correlation betw een

a country’s G D P per w orker and the quality of dem ocracy.12

The p resent stud y sets out to analyse in dep th how the current tax revenue perform ances

of Ind onesia, South A frica and B razil com pare w ith their potential. As w ell as analysing

overall revenues, it investigates the com position of revenues by type of tax. This is im portant

because not all taxes are prog ressive i.e. they do not dep end on the econom ic ability of the

taxpayer to pay. M oreover, certain types of tax are paid only b y certain people: for exam ple,

payroll tax is im posed only on em ployees and not on self-em ployed w orkers. A n analysis

of the w ay tax revenues are com posed can ind icate w hether a state has a prog ressive tax

system in p lace and w hether all segm ents of society are being taxed eq uitab ly.

The p ap er looks in d ep th at the prevailing tax p olicy in each country to m easure how

prog ressive their tax system s are, using exam ples of develop ed countries as a benchm ark

for com parison. It also analyses the gender dim ension of tax policy to d eterm ine w hether or

not the country’s tax system has taken gender equity into account.

Further, it exam ines levels of tax avoidance and tax evasion in the countries concerned

and exam ples of the m ost frequently em ployed tax avoidance schem es. The degree of

tax avoidance and tax evasion ind icated by this stud y im plies tw o thing s: (i) develop ing

countries lose large am ounts of revenue that could be used for social spend ing and (ii) it

is com paratively easy for H N W I and m ultinational com panies to avoid their tax ob ligations,

given the existence of a w ide rang e of international tax avoidance/evasion schem es of

w hich they are ab le to take advantag e. The p ap er further exam ines the extent of the inform al

sectors in the countries concerned: these escape the taxation system and so there is a

large potential loss of revenue, w hile at the sam e tim e w orkers in these sectors m ay not be

receiving the rights they are d ue, w hich w orsens levels of inequality. It should be noted that

inform al sectors includ e not only sm all businesses but also large com panies that are not

properly reg istered .

initiatives to com bat harm ful tax practices, such as the O rganisation for Econom ic C o-

10 The Polity IV Project measure characteristics of countries’ political regime and transitions by scoring polity annually, withcountry reports exploring trends from 1946 to the present. See: http://www.systemicpeace.org/polity/polity4x.htm

11 Freedom House is an independent watchdog organization dedicated to expanding freedom around the world. See: https://freedomhouse.org/about-us#.VWxKV9Kqqko

12 Paola Profeta and Simona Scabrosetti (2010) The Political Economy of Taxation: Lessons from Developing Countries, p.45.


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It also looks at w hether such initiatives allow develop ing countries to expand their tax bases

w hile also m aintaining a com petitive investm ent clim ate.

Finally, based on this analysis, the pap er draw s conclusions and attem pts to form ulate

recom m endations on taxation for these three em erging econom ies, in the context of both

dom estic p olicy and global participation, that w ould help them to reduce ineq uality w hile

achieving sustainable grow th and prosperity.


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2. ANALYSIS OF TAXATION IN

INDONESIA, SOUTH AFRICA ANDBRAZIL AND IMPLICATIONS FOR

INEQUALITY

In m any countries, tax is the largest source of state revenue and also the m ost sustainable

because it grow s in line w ith econom ic g row th and the pop ulation’s w ell-being –unlike aid or

foreign d eb t, w hich com e w ith a political burden. The contribution of tax revenue to G D P has

Various stud ies have show n that increased tax revenue (in term s of percentag e of G D P) is

associated w ith econom ic op enness, dem ocratization, strong er institutions and civil society,

and the red uction of corrup tion.13

At the sam e tim e, the principle of justice in taxation cannot be neglected . A dam Sm ith (often

called the father of m od ern econom ics) said in The Wealth of Nations , pub lished in 1776,

the cap ab ilities and incom es of taxpayers, w ithout discrim ination. The core part of this study

analyses w hether Ind onesia, South A frica and B razil have m axim ized their tax revenue

potential so as to b e able to fund social spend ing in order to reduce social inequality, and

w hether these three countries currently have taxation policies that offer equality for their

citizens.

13 Paola Profeta and Simona Scabrosetti (2010) The Political Economy of Taxation: Lessons from Developing Countries,pp.15-16, p.45. See also Deborah Brautigam (2008) ‘Introduction: taxation and state-building in developing countries’, inDeborah Brautigam, Odd-Helge Fjeldstad and Mick Moore, Taxation and State-Building in Developing Countries: Capacityand Consent, Cambridge University Press, pp.1-2.

2


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2.1 Tax revenue performance

2.1.1 Overall performance

In m easuring perform ance on tax revenue, a freq uently used ind icator is the total tax ratio,

w hich is the ratio of tax revenue to G D P. In general, the greater a country’s tax ratio, the

better the perform ance of the state revenue ag ency in collecting taxes. The tax ratio can

also ind icate the extent of any tax gap , or how m uch tax potential is not being realized . The

tax ratio approach show s that the revenue perform ance of taxation institutions in these three

countries is far from optim al in com parison w ith that of developed countries.14 Ind onesia

lag s the furthest behind : in 2001 the country’s tax ratio w as 18.3% and show ed a stag nating

trend, w hile in 2011 it w as even low er at 16.2% .15 South Africa’s tax ratio is som ew hat better:

in 2001 it reached 24.8% , w ith an increasing trend.16 It declined in 2008 and 2009,17 but in

2011 it stood at 26.1% . B razil has the best perform ance on taxation of the three countries. Its

tax ratio has im proved steadily since 2001, w hen it stood at 31.0% , to 34.8% in 2011. In 2010

and 2011, B razil’s tax ratio exceeded the averag e for O EC D countries (see Figure 2.1).18

Figure 2.1: Tax ratios of Indonesia, South Africa, Brazil and OECD countries

14 In this study, the OECD countries are taken to represent developed countries as a whole.

15 The tax revenue used to calculate Indonesia’s tax ratio consists of central taxation revenue plus non-tax revenue (NTR). Thesource of data is central government nancial statements.

16 Source for South Africa’s tax ratio: data.worldbank.org.

17 The decrease in the tax ratio in these years was due largely to the global recession.

18 Social contributions are actual or imputed payments to social insurance schemes to make provision for social insurancebenets. They are included in calculations of the tax ratio for Brazil and OECD countries. If social contributions areexcluded, Brazil’s tax ratio in 2010 was 25.91%. See José Roberto Rodrigues Afonso, Julia Morais Soares and KleberPacheco Castro (2013) Evaluation of the Structure and Performance of the Brazilian Tax System. Inter-AmericanDevelopment Bank.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Indonesia South Africa Brazil OECD Members


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These data show , how ever, that the revenue p erform ance of both Ind onesia and S outh

their low tax ratios –poor enforcem ent by tax authorities or lack of voluntary com pliance by

taxp ayers. N ot all taxpayers pay the taxes they should: non-com pliance can take the form of

underpaym ent of taxes due, und er-reporting of incom e or not rep orting it at all. Ind eed , data

from Ind onesia show that only 10.7 m illion of 27 m illion reg istered taxp ayers com pleted a tax

return in 2014.

Figure 2.2: Compliance on tax return reporting in Indonesia

A num ber of stud ies have attem pted to estab lish the reasons for non-com pliance by

taxp ayers around the w orld. A hm ed Riahi-Belkaoui (2008), for exam ple, em pirically

dem onstrated a link b etw een tax com pliance, corrup tion and bureaucracy.19 B elkaoui show s

that tax com pliance has a positive correlation w ith the control of corruption and, conversely,

a neg ative correlation w ith the deg ree of bureaucratization. Indonesia recorded the low est

level of control of corrup tion am ongst 30 develop ed and develop ing countries surveyed. It

w as the third m ost bureaucratic country and w as ranked 19th for its levels of tax com pliance.

O f the 174 countries surveyed by Transparency International for its C orrup tion Percep tion

Ind ex in 2014,20 Ind onesia w as ranked 117th, w hile South A frica and B razil w ere ranked 67th

and 69th respectively.21

19 Ahmed Riahi-Belkaoui (2008) ‘Bureaucracy, Corruption, and Tax Compliance’ in Robert W. Gee (ed.) Taxation and PublicFinance in Transition and Developing Countries, Springer, pp.3-10.

20 See: http://www.transparency.org/cpi2014/results

21 Corruption in Indonesia affects not only tax compliance, but also perceptions of the overall business climate. The WorldEconomic Forum’s Global Competitiveness Index 2014 ranked corruption top amongst the most problematic factors fordoing business in the country.World Economic Forum (2014) The Global Competitiveness Report 2014–2015.

30

25

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in%20011 2012 2013 2014

Registered Tax payer Reported Tax Return %


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2.1.2 Performance by sector

B y sector, the low est tax ratios in Indonesia are seen in agriculture, horticulture, forestry,

Ind onesia is not the only country strug gling to generate tax revenue from such sectors.22

M any of the m ajor com panies active in them alleg ed ly evade taxes, and som e forest and

plantations products are exp orted illegally.23

Table 2.1: Tax ratio in Indonesia by sector, 2009–201324

Sector 2009 2010 2011 2012 2013

A griculture, horticulture, forestry, hunting

1.30% 1.09% 1.22% 1.14% 1.12%

M ining and extraction 14.21% 13.78% 14.00% 10.42% 10.57%

Processing industries 10.66% 11.76% 13.37% 14.00% 12.14%

Electricity, gas and water 13.11% 17.16% 18.30% 13.49% 13.52%

C onstruction 2.25% 1.74% 2.02% 2.34% 1.66%

Trade, hotels and restaurants 6.10% 6.36% 6.80% 7.07% 5.22%

Transportation and com m unications 7.75% 7.36% 7.19% 7.75% 5.81%

18.17% 16.01% 16.42% 16.96% 13.28%

Services 1.23% 1.28% 1.20% 1.29% 0.96%

construction services com panies.25

This is done b ecause construction businesses have

This policy needs to b e review ed , how ever, as m ost construction com panies are cap ab le of

keeping good accounts.

In South Africa, the sectors w here tax p erform ance need s to b e exam ined are those related

to natural resources. N atural resources account for 30% of the total value of South A frica’s

exports, but the country earns less than 10% of its total tax revenue from this sector.26

22 Three of the most generally difficult sectors to tax are agriculture, services and small and medium-sized enterprises(SMEs). See Richard M. Bird (1983) Income Tax Reform in Developing Countries: The Administrative Dimension, in Bulletin

for International Fiscal Documentation 37:1, pp. 3-4.

23 See C. Nellemann (2012) Green Carbon, Black Trade: Illegal Logging, Tax Fraud and Laundering in the World’s TropicalForests, INTERPOL/United Nations Environment Programme.

24 Calculated tax consists of income tax and value-added tax (VAT).

25 A presumptive tax is one that is calculated using indirect methods other than the taxpayer’s own accounts, such as incomereconstruction or by applying baseline taxation across the whole tax base. It is thought to be effective in reducing taxavoidance, while equalizing the distribution of the tax burden.

26 Data taken from the IMF African Department Database and processed and cited by Alun Thomas and Juan P. Treviño(2013) Resource Dependence and Fiscal Effort in Sub-Saharan Africa, IMF Working Paper No. WP/13/188.


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2.2 Composition of tax revenues

In ad dition to overall revenue perform ance, in analysing aspects of inequality it is im portant

to look at the structure of tax revenues. D ata on revenue p erform ance show that B razil has

the highest levels of tax collection, follow ed by South A frica and Ind onesia. B razil and South

Africa m eanw hile are am ong the countries w ith the highest levels of ineq uality. Therefore

the perform ance of state revenue collection is not enough on its ow n to m easure w hether a

Ind icators that can b e used to determ ine w hether or not a tax system is just includ e the

prop ortions of direct and indirect taxes. D irect taxes have great potential to reduce ineq uality

because they are prog ressive and are based on the sub ject’s ab ility to p ay. The m ore

capab le the tax sub ject, the bigger the tax burden incurred (the incom e tax policies of

the stud y countries are exam ined in section 2.3.1). C onversely, for poorer people the tax

burden is sm aller. Ind irect taxes, by contrast, potentially cause im balances b ecause they

are regressive, i.e. they have no regard for the econom ic status of the taxpayer. Ind irect

taxes are im posed on objects, the m ost com m on form s being value-added tax (VA T) and

goods and services tax (G ST).27A stud y in S outh Africa estim ated that VA T accounts for 86%

of the tax burden b orne by a person w ith an incom e of ZA R 1,799, w hile for som eone w ith an

incom e of ZA R 10,241 the VA T burden accounts for only 18% of total tax p aid.28

In d evelop ed O EC D countries, incom e tax is the m ain focus of state revenue (see Figure

2.3). In m ost O EC D countries, the reg ressive im pact of ind irect taxes is m itigated by p ersonal

incom e tax (PIT) system s that are prog ressive and help provide g ood social security system s.

In develop ing countries, how ever, the redistributive effect of incom e tax is not optim ized; one

reason for this is that the structure of taxation is dom inated by indirect taxes.29

27 VAT is widely used because it is a simple, effective and fair source of revenue for a state with limited administrativecapacity. See Michael Keen (2013) ‘Taxation and Development – Again’, in Critical Issues in Taxation and Development,Clemens Fuest and George R. Zodrow (eds), Massachusetts Institute of Technology, pp.20-21.

28 Imraan Valodia and Terence Smith, Gender and Taxation In South Africa, University of KwaZulu-Natal, Durban, p.25.http://www.levyinstitute.org/pubs/CP/May2006_symposium_papers/paper_Valodia.pdf

29 Eric M. Zolt and Richard M. Bird (2005) Redistribution Via Taxation: The Limited Role of The Personal Income Tax InDeveloping Countries, UCLA School of Law.


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Figure 2.3: Proportion of revenues in OECD countries, 2010

Source: O EC D ,Revenue S tatistics in Latin A m erica 1990–2010: Brazil30

In a num ber of em erging econom ies, ind irect taxes, especially VA T, are a vital source

of revenue. The IM F and O EC D som etim es recom m end that states should im plem ent

adm inister.31 A lthoug h VA T is not the dom inant form of ind irect taxation in Ind onesia or South

A frica, the proportion of revenue it contributes in these countries continues to increase. VA T

revenue in S outh A frica has slow ly risen, from 25% in 2009 to 26% in 2013. In Ind onesia, the

prop ortion of VA T to total receipts increased from 31% in 2009 to 36% in 2013.

Figure 2.4: Composition of tax revenues in Indonesia,32 South Africa33and Brazil,34 2010

30 See: http://www.oecd.org/ctp/tax-global/Brazil country note_EN_nal.pdf

31 Fiscal Affairs Department, IMF (2011) Revenue Mobilization in Developing Countries, http://www.imf.org/external/np/pp/eng/2011/030811.pdf; and OECD (2010) Tax Policy Reform and Economic Growth, OECD Publishing, http://dx.doi.org/10.1787/9789264091085-en, p.22.

32 Source: Government Financial Report 2010.

33 Source: South Africa Tax Statistics 2013. Figure 2.4 shows data for the 2009/10 tax year.

34 José Roberto Rodrigues Afonso, Julia Morais Soares and Kleber Pacheco Castro (2013) Evaluation of the Structure andPerformance of the Brazilian Tax System, Inter-American Development Bank, p.21. Social contributions are excluded.

OECD21%

11%

8%

33%

26%

Speci cComsumption

Taxes

GeneralComsumption

Taxes

PayrollTaxes

SocialSecurity

Contribution

OtherTaxes

Taxes on Income

and Proits

Brazil

62%

32%

9%

South Africa

7%

33%

60%

Indonesia

10%

41% 49%

Income Tax Indi rec t Tax Other


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O f the three countries, B razil relies the m ost on ind irect taxes: in 2010, such taxes accounted

for 62% of the country’s total tax revenue. Incom e tax, which in m ost countries m akes up the

biggest slice of revenue, accounted for only 29% in B razil. The country’s huge d ep endence

on ind irect taxes is likely to be one of the reasons w hy inequality is so great, despite it having

a relatively high tax ratio.

years in b oth countries has accounted for ap proxim ately half of total tax revenues. In S outh

Africa, incom e tax revenue exceed ed 60% of the total in 2009, before declining to 55% in

2013. In Ind onesia, incom e tax accounted for 51% of revenues in 2009, thoug h this had

declined to 47% in 2013.

In develop ing countries, the prop ortion of corporate incom e tax (C IT) often outw eighs

revenue from personal incom e tax (PIT). Excep t for som e large-scale industries, in p articular

those based on natural resources such as m ining , oil and gas, corporate incom e tax is

im balance m ight also ind icate a lack of com pliance by ind ividual taxp ayers.

The collection of PIT revenue in develop ing countries has not been op tim al. O f the three

countries studied, only S outh Africa collects a m ajority of its revenues from ind ividual incom e

tax; in Ind onesia and B razil corporate incom e tax is the m ain source of revenue. In Ind onesia

in 2014 the ratio of PIT to C IT revenue w as 24:33. In B razil, the difference w as even m ore

W eak tax adm inistrations and w idespread tax evasion are tw o reasons for low levels of

revenue from PIT. The p rob lem is com pound ed by the size of the inform al sector, w hich is

‘invisible’to the tax authorities and w here peop le do not pay tax on incom e. In Latin A m erican

countries, the estim ated tax g ap (i.e. the difference b etw een w hat revenues should be and

w hat they actually are) is often m ore than 50% .35

In term s of individual taxation, if taxpayers consist only of a certain group of people, then

that country’s tax system cannot be regarded as fair –for exam ple, if taxpayers are m ostlym iddle-class em ployees w hile business people and professionals w ith high levels of incom e

do not pay their fair share of taxes. Ind icators that can be used to analyse fairness include

the individual incom e ratio obtained from a country’s pay-as-you-earn (PA YE) or w ithholding

35 J.P. Jimenez, J.C. Gómez Sabaini and A. Podestá (2010) Tax Gap and Equity in Latin America and the Caribbean, FiscalStudies, No. 16, published in Public Finance and Administrative Reform Studies, ECLAC and GTZ, Eschborn.


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tax system 36 and the ind ividual incom e tax p aid by high-earning self-em ployed w orkers.

D ata from the three countries show that ind ividual incom e tax receipts are dom inated by

revenue collected via the PA YE system . The ratio of PIT revenue paid by em ployees via a

PA YE system to that of paym ents by self-em ployed/professional w orkers is 30:1 in South

A frica, 23:1 in Ind onesia and 4:3 in B razil (w here ind irect taxes account for a m uch bigger

prop ortion of the total). Table 2.2 show s that ind ividual incom e tax paym ents are dom inated

by PA YE contributions.

Table 2.2: Breakdown of income tax revenue in Indonesia, South Africa and Brazil

Indonesiai South Africaii Braziliii

Ind ividual 24% 62% 14%

PAYE 23% 60% 8%

Self-em ployed /professional

1% 2% 6%

C orporate 33% 36% 46%

O thers 43% 2% 41%

Total 100% 100% 100%

The im balance in revenues b etw een PA YE and self-em ployed taxpayers is exacerbated by a

lack of enforcem ent. Self-em ployed w orkers w ith high incom es and low levels of com pliance,

in tax evasion.37

2.3 Analysis of taxation policy

There are m any factors that can affect a g overnm ent’s choices in form ulating tax p olicy. The

political cost. In m ost em erging econom ies, the costs of collecting incom e tax are higher

than paying ind irect taxes. In term of effectiveness, a prog ressive tax system can im prove

stressed that perceptions of fairness play an im portant role in tax evasion.38

i Data for revenues in scal year 2014. Source: Tax Revenue Report, Directorate General of Treasury, as of 5 January 2015.ii Data for revenues in scal year 2013. Source: South Africa Tax Statistics 2013.iii Data for revenues in scal year 2010. Source: Afonso et al. (2013) Evaluation of the Structure and Performance of the

Brazilian Tax System, op. cit., p.21.

36 A PAYE system obliges employers to deduct income tax directly from employees’ salaries, which means that employeescannot avoid paying income tax. By contrast, for business people or professionals who declare their own tax liabilities,there are ample opportunities not to report income properly.

37 Tax Justice Network Africa/Christian Aid (2014) Africa rising? Inequalities and the essential role of fair taxation, p.40.

38 Eric M. Zolt and Richard M. Bird (2005) Redistribution via Taxation: The Limited Role of the Personal Income Tax InDeveloping Countries.


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A large p rop ortion of direct taxes does not necessarily m ean that a country’s tax system is

fair, nor does a large proportion of indirect taxes necessarily m ake it unfair. Even if direct

taxes dom inate, a system cannot be considered eq uitab le if only certain groups of people are

paying taxes, such as em ployees through w ithholding tax or PA YE schem es w hile ind ividual

incom e tax revenues from businesses rem ain very sm all. Ind irect taxes m ay exclud e certain

basic item s (tax exem ptions) w hile levying an ad ditional am ount on goods consum ed by

H N W I, for exam ple in the form of a tax on luxury goods.

2.3.1 Income tax

Incom e tax is a p rog ressive 39 type of tax, especially individual incom e tax, w hich is calculated

annually on the basis of all taxable incom e for that year. Ind onesia, South Africa and B razil all

the rate charged . Som e excep tions apply: ind ividual incom e tax system s take account of

taxp ayers’circum stances, such as the num ber of dep endants they have or their insurance

prem ium s.

Figure 2.5: Individual tax rates based on GDP income per capita, 201440

39 ‘Progressive’ taxation means the higher the income, higher the tax burden. Conversely, ‘regressive’ means the higher theincome, the lower the tax burden.

40 Figure 2.5 assumes that a taxpayer has no dependants.

0 2 4 6 8 10 12 14

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

T a x R a t e

Annual Income divided by GDP Per capita

Indonesia South Africa Brazil United Kingdom


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In Indonesia, ind ividual incom e tax is applied at four different rates, or band s. The basic

rate is a 5% tariff payable b y those w ho have an annual taxable incom e of up to ID R 50

m illion, or 1.4 tim es G D P per capita.41 The highest tax rate is 30% , im posed on ind ividuals

w ith an incom e of m ore than ID R 500 m illion, or app roxim ately 13.8 tim es G D P per capita.

Taxab le incom e is determ ined after a num ber of ded uctions from gross incom e, includ ing a

personal allow ance of ID R 24.3 m illion and an extra ID R 2 m illion for each dep endant (up to

a m axim um of three) and ad ditional to m arital status. M arried w om en are considered not to

have dep endants, as they are includ ed in the calculation of a husband’s taxes.

B razil also has four different tax bands, w ith the low est rate of 7.5% applying to taxpayers

w ith an annual incom e of B R L 20,529, or 0.8 tim es G D P per capita. The highest rate of 27.5%

is levied on ind ividuals w hose incom es exceed B RL 51,259, ap proxim ately 2.1 tim es G D P

per cap ita. U nlike Ind onesia, Brazil does not lim it the num ber of dep endants a taxp ayer

can claim for, but instead lim its total ded uctions to B R L 14,542: besides dep endants, this

includ es m ed ical, social and ed ucation costs. A nnual incom es of below B RL 20,529 are not

taxed.

South A frica has the m ost tax bands, w ith six, and also higher rates of tax than Ind onesia

and B razil. Its low est rate is 18% , w hich is applied to incom es of up to Z A R 165,600, or about

1.1 tim es G D P per capita. The highest rate is 40% , ap plicable to taxp ayers w hose incom es

exceed ZA R 638,600, or about 10 tim es G D P per capita. South A frica allow s certain costs to

be d ed ucted from taxable incom e, includ ing m ed ical exp enses. Taxpayers also receive the

follow ing allow ances that reduce taxable income: ZA R 12,080 for those aged up to 65 years,

an ad ditional ZA R 6,750 for those aged 65–75 and a further ZA R 2,250 for those aged over

75. Ind ividuals young er than 65 w ith an incom e of less than ZA R 67,111 are not sub ject to

tax.

O ptim al prog ressiveness and a fair tax system can b e achieved by increasing m arginal tax

rates for the highest levels of incom e.42 H ow ever, an exam ination of the highest tax b rackets

in the three countries show s that their ind ividual incom e tax system s have a long w ay to g o

in term s of progressiveness. The highest tax rates in all three countries are low er than in

develop ed countries, althoug h the levels of incom e to w hich the top rates ap ply are relatively

high. B y com parison, the average top tax rate for O EC D countries in 2013 w as 42% ,43

w ith an

41 Calculated by the authors: the present study uses a GDP per capita comparison as it describes the tax burden relative to theeconomic capacity of the population.

42 Peter Diamond and Emmanuel Saez (2011) The Case for a Progressive Tax: From Basic Research to PolicyRecommendations, in Journal of Economic Perspectives, Vol. 25, No. 4 (Fall 2011), pp.165-190.

43 This refers to tax rates alone; when elements of social contribution are included, the rate rises to 46%. See: http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7


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averag e upper incom e lim it of 2.38 tim es G D P per capita.44 O ne O EC D country, the U nited

King dom , has a m axim um rate of 45% , ap plicable to the highest-earning ind ividuals w ith

incom es of 5.6 tim es G D P per cap ita. In S outh A frica and Ind onesia, the top rates of incom e

are respectively 10 tim es and 13.8 tim es G D P per cap ita. O f the three countries, Brazil has

the low est incom e lim it for the highest tax rates, at only 2.42 tim es G D P per capita.

The personal taxation system in S outh A frica used to b e m ore p rog ressive. M ore than a

decad e ago, the country had tax brackets of 42% and 45% . H ow ever, as w ell as a reduction

in rates, the am ount of tax that can be obtained from personal taxp ayers has decreased.

Analysis by the A lternative Inform ation and D evelop m ent C entre (A ID C ) show s that the sam e

annual incom e that in 1994/95 w as taxed at 33.8% w as effectively taxed at only 18.2% in

2010/11.45

Prog ressiveness in the tax system is not only a m atter of how m uch H N W I should pay, but

also of red ucing the tax b urden on poor people. To m easure this, an analysis w as conducted

utilising annualized data for full-tim e w orkers paid the national m inim um w age46 in Indonesia,

South A frica and B razil and the thresholds for incom e tax. In Ind onesia and B razil, w orkers on

the m inim um w ag e are not taxed on their earning s; in South Africa, how ever, w orkers on the

m inim um w ag e, eq uivalent to U SD 7,649 annually, exceed the non-taxable threshold, w hich

m eans that they are taxed at a rate of 18% on the portion of their incom e that exceeds the

threshold (see Tab le 2.3).

Minimum wage Non-taxable incomeiv Subject to tax?

Indonesia 1,585 2,045 Tax-exem pt

B razil 3,697 8,736 Tax-exem pt

South A frica 7,649 6,187 Taxed at 18% rate

So urce: Pw C Personal Taxation G uide 2013–2014, C EIC D atab ase; Statistics S outh A frica:http://www.statssa.gov.za;

Inter-U nion D ep artm ent of Statistics and So cio-Eco nom ic S tud ies (D IEE SE),Brazil :http://www.dieese.org.br

Threshold system s such as these can potentially increase inequality. The highest m arginal

rates are still low and are set at too high a level of incom e, so m any high-earning ind ividuals

are taxed at a relatively low rate, and the prob lem is com pound ed by poor com pliance.

D ue to the low prop ortion of ind ividual incom e tax revenue generated from self-em ployed /professional w orkers, these three countries are also am ongst those losing the m ost throug h

international tax evasion schem es.

iv Figures in the non-taxable income (NTI) column are calculated as follows: (i) Indonesia – personal allowance (not includingother deductions); (ii) Brazil – income subject to zero tax rate (after a maximum deduction of 20% of gross income); (iii)South Africa – the threshold at which income becomes subject to tax.

44 2010 data, cited in Inter-American Development Bank (2013) More Than Revenue: Taxation as a Development Tool ,Development in the Americas Series, p.117.

45 Cited in Tax Justice Network Africa/Christian Aid (2014) Africa rising? Inequalities and the essential role of fair taxation,p.57.

46 These annual minimum wage rates were based on monthly minimum wage data obtained from CEIC and calculated by theauthors.


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A s w ith ind ividual incom e tax, high corporate tax rates do not necessarily m ean that a tax

system is prog ressive. For exam ple, high tariffs can encourag e capital to shift to countries

w ith low er rates,47 and stud ies have show n that the burden of corporate incom e tax is actually

borne m ostly b y the w orkforce; for exam ple, extra costs tend to result in cuts to job s or w ag es,

not reductions in d ividend s for the ow ners of cap ital.48 R esearch by C lausing 49 show s that

corporate tax revenues are higher in countries w ith low er tax rates. Furtherm ore, em erging

by the country do not com pensate for the tax revenue foreg one.50

Source: KP M G ,Corporate tax rates table .http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/

corporate-tax-rates-table.aspx

In contrast w ith ind ividual incom e tax rates, corporate incom e tax rates in Ind onesia, B razil

and South A frica are relatively high com pared w ith O EC D countries and the w orld averag e.

Indonesia has had a corporate incom e tax rate of 25% since 2009,51 w hile South A frica’s

current rate is sim ilar at 28% (thoug h both have fallen since 2006). B razil has a m uch higher

exceed B R L 240,000,52 plus a social contribution of 9% .

47 There is cross-country evidence that effective corporate tax rates have a large and signicantly adverse effect on corporateinvestment and entrepreneurship. Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho and Andrei Shleifer (2009)The effect of corporate taxes on investment and entrepreneurship. http://espanol.doingbusiness.org/methodology/~/media/FPDKM/Doing%20Business/Documents/Methodology/Supporting-Papers/DB-Methodology-Effect-of-Corporate-Taxes-on-Investment-and-Entrepreneurship.pdf

48 For example, Hassett and Mathur (2006) in Taxes and Wages, Working Paper 128 (Washington: American EnterpriseInstitute) nd a strong negative correlation between wages and the rate of corporate income tax, using examples from manycountries, including some in sub-Saharan Africa. Cited by Michael Keen and Mario Mansour (2009) Revenue Mobilizationin Sub-Saharan Africa: Challenges from Globalization, IMF Working Paper WP/09/157. http://www.imf.org/external/pubs/

ft/wp/2009/wp09157.pdf

49 K. Clausing (2007) Corporate Tax Revenues in OECD countries, in International Tax and Public Finance 14(2), pp.33-115.

50 See Ana Corbacho, Vicente Fretes Cibils and Eduardo Lora (eds) ‘Corporate Income Tax: The Art of Competing forInvestment and Increasing Revenues’, in Inter-American Development Bank (2013) More than Revenue: Taxation as aDevelopment Tool, pp.135-157.

51 For companies with a turnover of less than IDR 50 billion, the rate charged is 12.5%, applicable to a maximum taxableprot of IDR 4.8 billion. For companies with a turnover of less than IDR 4.8 billion, Indonesia implements a nal,presumptive tax rate of 1% of turnover.

52 Presumed prot, where taxpayers calculate their corporate income taxes (at the same rate applied to the actual protsystem) based on the application of a deemed prot margin. Brazilian entities may elect to compute corporate taxes basedon this presumed prot mechanism; provided they (a) do not have total gross revenues in the preceding year higher thanBRL 72 million; (b) are not nancial institutions, similar entities or factoring companies; (c) do not earn foreign prots,

Indonesia South Africa Brazil OECD Averge Global Averge

38

36

34

32

30

28

26

24

222006 2007 2008 2009 2010 2011 2012 2013 2014


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South Africa levies VA T at a rate of 14% . Exports, certain foods and certain other item s are

public transp ortation). South A frica also levies additional charges for luxury item s, w ith rates

ranging up to 60% .56

2.4 Gender justice in taxation policy

‘Inequality’has a b road m eaning and is not lim ited to injustices of econom ic capability.

In general, inequalities can be divided into ‘vertical inequality’and ‘horizontal inequality’.

Econom ic inequality is a typ e of vertical inequality,57 w hile horizontal inequality is b ased on

inequality are currently being ad dressed by a num ber of high-level U N panels w orking on

the post-2015 developm ent agend a.58

The type of horizontal inequality highlighted in this study is gender inequality, w hich

has been chosen for several reasons. A num ber of recent stud ies at the glob al level of

this area;59 for exam ple, the W orld B ank’s World Development Report 2012

com pound ing effect betw een g ender and other form s of inequality.60 Ind ividual w om en face

a social construct of gender perspectives that often leaves them m arginalized econom ically,

politically and culturally, w hile w om en as a group are often m arginalized econom ically and

politically. In Ind onesia, w elfare for m others and children is neg lected in state bud gets and is

not a prim ary policy.61

Analysis of pub lic p olicy can help to m ainstream w elfare policies that

and participatory.

O ne ind icator used to analyse gender im balances in the tax system is the units on w hich

taxation is based . A system based on fam ily units treats the fam ily as a sing le econom ic

and leg al entity, w ith a m an as the head of the household and the rights and ob ligations

of a w ife w ho w orks treated as p art of the husband’s tax obligations. A system based on

ind ividual units treats w om en separately, w ith taxation rights and obligations ind ep endent

of their husbands. From the p erspective of gender eq uality, the concept of individual units

56 PwC, Overview of VAT in Africa – 2014, p.153.

57 The term ‘vertical’ here refers to economic capacity.

58 Tax Justice Network Africa/Christian Aid (2014) Africa rising? Inequalities and the essential role of fair taxation, p.21.

59 Ann Mumford (2010) Tax Policy, Women and the Law, Cambridge; Kim Brooks, Asa Gunnarson, Lisa Philipps, Maria Wersig(eds) (2011) Challenging Gender Inequality in Tax Policy Making, Hart Publishing; Caren Grown and Imraan Valodia (eds)(2010) Taxation and Gender Equity, Routledge. See also Anthony C. Infanti and Bridget J. Crawford (eds) (2007) Critical TaxTheory, Cambridge.

60 World Bank (2012) World Development Report 2012: Gender Equality and Development.

61 Independent Budget Commission (2012) The 2012 state budget is still conservative and residual.


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is p referable, as this treats w om en eq ually, giving them the sam e rights and ob ligations as

m en. A nother useful ind icator is tax ded uctions. For w om en, relevant ded uctions includ e

those for dep endants and for w orking w ives w ho are the m ain breadw inners.

O f the three countries under review , only Ind onesia b ases its taxation system on fam ily units.

need s to com bine her incom e w ith that of her husband to calculate the incom e tax that they

should jointly pay, w hich is levied in p roportion to their resp ective net incom es. A s a result,

m arried w om en w ho w ork and w ho have their ow n TIN potentially face a higher tax b urden

due to the prog ression of incom e tax rates. The system s in S outh A frica 62 and B razil are

based on ind ividual units, w hich m eans that m arried w om en are taxed separately from their

husbands.

The d ifferences betw een fam ily and individual taxation also affect gender equality in term s

of em ploym ent. C hang ing from a taxation system based on fam ily units to one based on

ind ividual units can increase the am ount of lab our in aggreg ate. A stud y by the IM F has

show n that w om en are m ore responsive to taxes than m en,63 and this is reinforced by another

stud y that show s that a reduction in the tax b urden on the second earner contributed to an

increase in the num ber of w om en w orkers in C anad a betw een 1995 and 2001.64

In Ind onesia, different treatm ents are ap plied to w ives w ith incom e from a sing le em ployer

and those w ho are self-em ployed . Incom e from an em ployer is not com bined w ith the

husband’s incom e, w hile incom e from self-em ploym ent is. This m eans that w ives w ho are

self-em ployed m ay be taxed at a higher rate w hen their incom e is ad ded to that of their

husbands. A fam ily in w hich a w orking w ife is not an em ployee potentially faces a higher tax

burden than one w here she is.

In S outh A frica, VA T is a heavier burden on m en than on w om en, by a m argin of about 8% .

For each ZA R 1 sp ent, it is calculated that fam ilies w ith a m ale head pay 9.23 cents in V A T

w hile fam ilies w ith a fem ale head pay 8.13 cents.65

is consum ption behaviour: ind irect taxes are higher on alcohol and tob acco and on m otor

fuel, and this tends to affect m en m ore.

62 This provision came into force in 1994, having been proposed by the Commission of Enquiry into Certain Aspects of the TaxStructure of South Africa (KATZ), which was set up by the new government. See Imraan Valodia and Terence Smith, Genderand Taxation in South Africa, University of KwaZulu-Natal, Durban.

63 IMF (2012) Fiscal Policy and Employment in Advanced and Emerging Economies, Board Paper, Washington DC. Cited inKatrin Elborgh-Woytek et al. (2013) Women, Work, and the Economy: Macroeconomic Gains from Gender Equity , p.13.

64 E. Tsounta (2006) Why Are Women Working So Much More in Canada? An International Perspective , IMF Working Paper06/92, Washington DC.

65 See: http://sds.ukzn.ac.za/les/GenderTaxSA_policy_brief_nal.pdf


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Ind onesia’s taxation policy is gender-neutral and does not exem pt goods from tax on g ender

lines. H ow ever, this m eans that there is no clear vision prom oting fairness and eq ual treatm ent

for w om en. B asic good s need ed by w om en and children should b e excluded from taxation

to protect their access to them .

2.5 The informal sector, tax avoidance and tax evasion

2.5.1 The informal sector

The inform al sector is a g row ing prob lem for state revenue collection in m any em erging

businesses b ut also large enterprises that are not registered . In general, inform al sectors

can be divided into tw o categ ories: (i) legal activities, w hich generally consist of incom e not

rep orted by em ployers, w ag es of inform al em ployees and exchang e transactions; and (ii)

illeg al activities, such as d rug s, prostitution and sm uggling . Tab le 2.4 show s inform al sector

Table 2.4: Taxonomy of activities in the informal sector

Type of activity Monetary Transactions Non Monetary Transactions

ILLEG AL

AC TIVITIES

Trade w ith stolen g oods, drug

dealing and m anufacturing;prostitution; gam bling ; sm ug glingand fraud

Barter of drug s, stolen goods,

sm uggling etc. Produce or grow ingdrugs for ow n use. Theft for ow n use

Tax Evasion Tax Avoidance Tax Evasion Tax Avoidance

LEG AL AC TIVITIES U nreportedincom efrom self-em ploym ent;W ag es, salariesand assets fromunrep orted w orkrelated to legalservices andgoods

Em ployeediscounts, fringe

Barter of legalservices andgoods

All do-it-yourselfw ork andneighb or help

Source: C hristop her B ajad a an d F ried rich S chneide r (2003)The Size and Development of the Shadow Economies in , p.4.

it is very large in Ind ia and Indonesia and in other develop ing countries such as B razil, C hina


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and South Africa. In South A frica, according to the national Labour Force Survey of 2007,

19.5% of workers are in the inform al sector.66 In B razil, m ost inform al w orkers are unskilled,

including w orkers in ag riculture and construction. In Ind onesia, the inform al sector includes

dom estic w orkers, street vendors and sub -contracted w orkers.67

Figure 2.7: Informal sectors in Brazil, South Africa, Indonesia and OECD High Income countries

Source: Fried rich Sc hne ider, A nd reas B ueh n and C laud io E . M ontenegro (201 0)Shadow Economies All Over

the World: New Estimates for 162 Countries from 1999 to 2007 , in International Economic Journal , Vol. 24 , N o. 4,

D ecem ber 2010, pp .455-457

A trad itional view argues that w orkers resort to the inform al sector w hen they are unab le to

get job s in other sectors, but stud ies dem onstrate that w orkers often choose the inform al

sector voluntarily because of the ad vantag es and op portunities it offers.68 From this, it can b e

conclud ed that the inform al sector does not alw ays correlate w ith low econom ic capab ility.

The inform al sector does have a close correlation w ith taxation, how ever. The larger the

inform al sector, the greater the tax potential that cannot be optim ized by tax authorities.

At the sam e tim e, the w eaker the ap plication of law enforcem ent by tax authorities and the

higher the tax burden, the bigger the inform al sector tends to be.69 For these reasons, an

alternative w ay to red uce the size of the inform al sector is to apply sim pler tax adm inistration

and low er rates for taxp ayers, w ith certain restrictions.

w ith sm all turnovers receive relief on tax rates. C om panies w ith a turnover of less than Z A R

66 Survey conducted by Statistics South Africa. Cited by Eliane El Badaoui and Riccardo Magnani (2013) Tax Policies andInformality in South Africa, p.2.

67 OECD (2011) Special Focus: Inequality in Emerging Economies, p.59.

68 Eliane El Badaoui and Riccardo Magnani (2013) Tax Policies and Informality in South Africa, p.2. This view is supportedby E. El Badaoui, E. Strobl and F. Walsh (2008) Is There an Informal Employment Wage Penalty? Evidence from South Africa, in Economic Development and Cultural Change, Vol. 56, pp.683-710.

69 According to research by N. Loayza (1996) The economics of the informal sector: a simple model and some empiricalevidence from Latin America, Carnegie-Rochester Conference Series on Public Policy, Vol. 45, No. 1, pp.129-162. The sameconclusion is reached by D.S. Saracoglu (2008) The informal sector and tax on employment: A dynamic general equilibriuminvestigation, in Journal of Economic Dynamics and Control, Vol. 32, No. 2, pp.529-549.

Indonesia19%

27%

39%

13%

South Africa

Brazil

OECD Hight Income


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70 In addition,

the g overnm ent provides adm inistrative relief for ‘very sm all com panies’by calculating direct

taxation on the basis of turnover (i.e. presum ptive tax). C om panies w ith an annual turnover

of less than ZA R 1 m illion can take ad vantag e of this schem e, w ith rates ranging from 0% to

6% depending on turnover.

Since 2007 B razil has applied a sim ple tax system know n as Simples Nacional . The system

allow s q ualifying com panies to pay all types of tax d ue (incom e tax, IPI, social contribution,

PIS, C O FIN S, IC M S and ISS ) in a single com bined paym ent, w ith progressive rates charged

based on turnover. The system is quite successful and encourag es com panies to p articipate

in the form al sector.71

In 2013 Ind onesia ad op ted special rules for ind ividuals and corporations w ith a turnover

of less than ID R 4.8 b illion, under G overnm ent R eg ulation N o. 46/2013. U nd er these rules,

rate of 1% of turnover each m onth. Im plem entation of this policy w as expected to ease the

som e types of business w ith sm all m argins are m ore burdened by this system com pared

w ith the previous one. Furtherm ore, it is p ossible that a tax sub ject m ay have to pay taxes

and via the norm al tax regim e on incom e that is exclud ed from the 1% schem e. Therefore it

is doubtful that this p olicy w ill result in a large reduction in the inform al sector or w ill reduce

the tax adm inistration burden to any great extent.

2.5.2 Tax avoidance and tax evasion

2.5.2.1 Losses arising from international tax evasion

A s m entioned in the introd uction, taxation has a vital role to play in m aintaining sustainable

and to red uce inequality. O ptim ization of tax revenue p otential is hindered by low levels of

com pliance by taxp ayers and by the poor ad m inistrative capacity of tax authorities. Stud iesconsistently rank Indonesia, South A frica and Brazil high on the list of countries suffering the

largest losses as a result of international tax evasion schem es, w hich are largely used by

H igh N et W orth Ind ividuals (H N W I) and m ultinational corporations (M N C s).

70 Tax year 2014–2015 , source: PwC Worldwide Tax Summaries.

71 FGV Projetos, Taxation Of Micro And Small Businesses In Brazil.


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schem es, investors –both ind ividuals and m ultinational com panies –can shift incom e earned

in one country to another country that has low er tax rates, or to tax havens w here there is little

or no real econom ic activity.72

N um erous rep orts have estim ated that the am ount of w ealth hidden out of reach of tax

authorities is very large. A rep ort by Tax Justice N etw ork estim ated that, by the end of 2010,

73

assets. The report put both B razil and Ind onesia in the top ten countries of origin for assets

sheltered in tax havens: B razil in fourth position w ith a total value of U SD 529 billion and

Ind onesia in ninth w ith a total of U SD 331 billion (see Tab le 2.5).

Rank Country

1 C hina 1,189

2 Russia 798

3 South K orea 779

4 Brazil 529

5 Kuw ait 4966 M exico 417

7 Venezuela 406

8 Argentina 399

9 Indonesia 331

10 Saudi A rabia 308

Source: Tax Justice N etw ork (2010)

A stud y by G lob al Financial Integrity, published in D ecem ber 2014, estim ated that illegal

74 deriving m ostly

from m is-invoicing for im ports and exports. A ccording to this study, Indonesia, South A frica

a total of U SD 217 billion, Indonesia seventh w ith U SD 188 b illion and South A frica tenth w ith

75

72 ‘Tax haven’ is dened as a state where income tax rates are very low or zero, and there is a high level of data secrecy.

73 The report did not attempt to establish whether these assets were owned by individuals or by companies. See Tax JusticeNetwork (2010) The Price of Offshore Revisited, press release, 19 July 2010, p.6.

74 Dev Kar and Joseph Spanjers (2014) Illicit Financial Flows from Developing Countries: 2003–2012, GlobalFinancial Integrity. http://www.gntegrity.org/report/2014-global-report-illicit-nancial-ows-from-developing-countries-2003-2012/. IFFs are movements of money or capital from one country to another that are illegally earned,transferred and/or utilized. One example would be the falsication of documents to evade taxes.

75 Eurodad (2014) The State of Finance for Developing Countries.


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76

Rank Country 1 C hina 1,252

2 Russian Federation 974

3 M exico 514

4 India 440

5 M alaysia 395

6 Brazil 217

7 Indonesia 188

8 Thailand 172

9 N igeria 157

10 South Africa 122

Sou rce: Dev K ar and Joseph Sp anjers (2014) Illicit Financial Flows from Developing Countries: 2003–2012

Tax can be evad ed in various w ays. H N W I can hide their assets in tax haven countries w here

high levels of secrecy protect them from tax authorities. M N C s can use their netw orks of

betw een countries (includ ing tax havens),77 so that the group’s overall tax b urden is g reatly

reduced .

Ind onesia, South A frica and B razil have som e of the biggest dom estic m arkets in the w orld 78

and are seeing a continuous exp ansion of their m iddle classes. This m eans that these

countries have very large p otential as sources of sales and revenue for M N C s, and a hug e

there is little or no econom ic activity, resulting in little or no overall corporate tax b eing paid.

N either develop ed nor develop ing countries can counter BEPS activities by M N C s on their

ow n: an international ap proach is need ed to tackle the prob lem . To this end , in July 2013

79

The 48-pag e A ction Plan w as negotiated and drafted w ith the active participation of O EC D

76 The study does not classify the source or payee of funds as either an individual or an entity. Dev Kar and Joseph Spanjers(2014) Illicit Financial Flows from Developing Countries: 2003–2012, p.13.

77 A tax treaty is a bilateral agreement between two countries concerning issues such as double taxation of passive and activeincome.

78 A survey by Global Intelligence Alliance ranks Brazil the second largest domestic market, Indonesia fth and South Africasixth.

79 OECD (2013) Action Plan on Base Erosion and Prot Shifting, OECD Publishing. http://dx.doi.org/10.1787/9789264202719-en


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m em ber states and contains 15 separate action points or w orkstream s, som e of w hich are

m inisters at a sum m it in S t. Petersburg in S ep tem ber 2013. A m ong the critical issues covered

in the B EPS A ction Plan that relate to d eveloping countries are the d igital econom y, transfer

pricing and transparency of inform ation.

The digital economy:80 The rap id develop m ent of inform ation technolog y (IT) in recent years

has created a new business m od el in the form of the digital econom y. O ne asp ect of the digital

econom y is a reduction in the relevance for transactions of space and tim e. For exam ple,

a com pany incorporated in country A m ay sell its prod ucts in country B through a w eb site

server estab lished in country C , w ithout ever having to set up a p hysic