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 paper analyses the implications of the globalization and the resulting greater integration of the world economy on tax systems in developing countries in general and Southeast Asian countries in particular.
Existing tax systems around the world have been shaped by historical, economic, political, social, ideological, and other factors; and they represent trade-offs among macroeconomic sustainability, allocation efficiency, equity, revenue generation, retaining and attracting economic activities to the concerned tax jurisdictions, and administrative and compliance effectiveness. Moreover, the present tax system 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. Globalization thus has necessitated significant tax reform leading to major adjustments among the trade-offs inherent in the existing tax systems. Moreover, countries now need to exhibit much greater awareness of the tax changes being undertaken by their trading partners and competitors, reducing autonomy concerning their tax policies.
The globalization process is also expected to make divergence between what is desirable for a particular tax jurisdiction in a federal country or internationally on the one hand and what is desirable from overall national or global viewpoints much sharper.