IN TERNATIONAL CONFERENCE ON - CIFBA 2020 TRADE LIBERALIZATION AND TAX STRUCTURE: NEW EVIDENCE FROM ASEAN COUNTRIES Xuan-Hang Tran1*, Van-Cuong Dang2, Minh-Hang Nguyen1 University of Finance Marketing University of Economics Ho Chi Minh City ABSTRACT The purpose of the study examines the impact of trade liberalization on tax structures from ASEAN-6 countries (Cambodia, Indonesia, Malaysia, Philippines, Thailand and Vietnam) for the period 2001 - 2018 Applying estimation FEM, REM, GLS methods for panel, the empirical results show that trade liberalization positively affects taxes on goods and services In addition, the trade liberalization has a negative impact on taxes on income, profits and capital gain while the effect of the trade liberalization on taxes on international trade is not clear in the surveyed countries On that basis, the study provides some policy suggestions for tax structure in Vietnam Keywords: ASEAN, trade liberalization; tax structure INTRODUCTION Trade liberalization has become an objective trend, attracting countries, promoting cooperation and increasing competition among economies The trade liberalization impacts countries in in three aspects: (1) restrictions on commercial rights (i.e import and export rights) have been loosed; (2) tariffs have been reduced; and (3) nontariffs measures have been reduced (Baunsgaard & Keen, 2010) to create an open business environment for entities At the same time, increasing the competitive pressure among economies face to pressure of tariffs reduction and easier trade barriers The total tax revenue will change when the tax revenue from reduction of import and export activities (Ebrill, Stosky & Gropp, 1999), creating pressure on government budget or balance trade In addition, some countries set up the business environment rankings which are based on the criteria for applying tax components Evidence from Bellak and Leibrecht research (2009) concludes that tax rates negatively affect the profitability of investment capital * Corresponding author Email address: xuanhangufm@gmail.com 380 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS Thus, a country with appropriate tax policies will improve production and business efficiency, ensure revenue for the State Budget and safety in the process of global economic integration A good tax structure is essential element for attracting businesses and enhancing economic development However, making the tax policy is not only a simple matter of a fully sovereign and independent nation, but the globalization have quickly become objective elements that govern the tendency of tax reform which is affected by the international economic relations and participant level in each So, what is the tendency of tax revenue of nations especially ASEAN and the changes of tax structure due to the effects of trade liberalization are concerned by these nations Besides, researches about trade liberalization and tax structure are carried out by many authors, with a variety of research objects and data The results of these authors are not yet consistent, so with the appropriate estimation techniques, the paper examines the impact of trade liberalization on the tax structure in the context of tax competition in ASEAN countries From this research objective, the paper will answer the research question posed as how trade liberalization affects types taxes? LITERATURE REVIEWS 2.1 Trade liberalization and tax structure: In theory and existing empirical studies Hinrichs (1966) shows that there is no best tax system for all countries or each country during the time Through the development process, the tax system in the countries has also changed significantly One of the most important reasons is reaching towards a tax system that meets market economy requirements and ensures international competitiveness (Rao, 2000) Lee et al (2008) emphasizes that developing countries have difficulty in expanding the scale of tax collection effectively and fairly This tax scale depends on the ability to collect taxes Therefore, these countries must have a long-term vision and specific strategies because they cannot have “a suitable model for all countries” The tax structure of a country includes many different taxes, which can be divided into three general categories: taxes on income, profits and capital gain, taxes on goods and services and taxes on international trade Personal income tax and corporate income tax are the main components of taxes income, profits and capital gain which has happened rarely General sales tax and excise tax are the main component of tax on goods and services The sale tax form are established in every nation which have taxes on goods and services or taxes on revenues or taxes on retails With international trade tax is the tax on the goods and services are in the import and export process Taxes on income, profits and capital gain: although the ASEAN region’s per capita income is still low (Figure 1), the collection from this tax also contributes about one-third of total tax revenue Over time, most countries have implemented tax policy amendments which create a good environment for businesses and match with international trends The current general trend of the countries shows that reducing corporate income tax to encourage investment and promote growth Trade liberalization take an important role which effects on income through changes in 381 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 the flexibility of imported goods and domestic manufacturers replace short-term and long-term imports Based on tax competition and tax harmonization, trade liberalization will reduce the income tax of countries Taxes on goods and services: many developing countries, including ASEAN countries, taxes on goods and services (also called indirect taxes) are a significant source of revenue (Ebrill, Keen, Bodin & Summers, 2001) In this tax revenue, there is a great proportion comes from export and import activities Trade liberalization has increased import value, compensating for this reduction due to tariff changes In addition, tax revenue may be reduced, due in partly to reducing import volume Actually, the tax collection effects on domestic goods and services is lower than for imported goods However, in the long run, if economic growth increases due to trade liberalization, the tax structure can be expandable The real currency devaluation will lead to an increase in excise taxes and taxes on goods and services from import activities The tax burden on goods and services is mainly transferred to consumers through the price adjustment Taxes on international trade: taxes on goods which are involved in the export or import process In the process of trade liberalization, countries participate in international organizations, accept free trade agreements so tariff lines which decrease taxes and affect the tax revenue from import and export activities However, in the long term, such revenues may be offset by the increase in cargo volume Figure Tax structure of ASEAN from 2001 to 2018 Source author’s own calculation base on WDI Notes: - Taxes on goods and services - TGS - Taxes on income, profits and capital gain - TIPC - Taxes on international trade - TIT - Other taxes - OT In fact, there are many research papers about trade liberalization and tax structure For researchers, trade liberalization has become an initiative important development policy in many countries around the world Trade liberalization is defined as "eliminating all or a part of trade barriers such as quotas, import taxes and nontariff barriers imposed by governments on goods on export and import process” (Marchant and Snell, 1997) Despite of trade liberalization implementation, many developing economies and emerging economies still rely on trade taxes as a major source of government revenue Most of studies focused on how to reduce tariffs, 382 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS eliminate tax exemptions and increase the tariffs which have low rate in an unified way, but can still increase tax revenues (Ebrill et al., 1999) Specifically, increasing the tax revenue, the researchers consider that tariffs (import-export taxes) should be replaced by domestic consumption taxes (Dixit, 1985; Hatzipanayotou et al, 1994; Keen and Ligthart, 2002) In the contrary, other researchers argue that when trade liberalization reduces import and export taxes as well as trade restrictions which cause a loss of tax revenue However, if trade volume increases, the tax revenue may increase (Tanzi, 1989; Glenday, 2002; Greenaway, Morgan and Wright, 2002, Suliman, 2005) The author examines empirical studies on the relationship between trade liberalization and tax structure These studies are developed in many different directions Essentially, based on research objectives, it is possible to classify empirical studies into the following main groups: Some studies focus on analyzing the long-term impact of trade liberalization on the tax structure The impact of trade liberalization will reduce import duties and other trade restrictions, resulting in a reduction in the total tax revenue, but if in the long run, the trade volume will increase the tax revenue (Tanzi , 1989; Glenday, 2002; Greenaway, Morgan and Wright, 2002; Suliman, 2005) Basirat and fortifications (2014) These researcher often use ARDL (Autoregressive Distributed Lag), which examines the long- term relationship between trade liberalization and tax structure, and using models correcting the variance (ECM) according to the ARDL approach to determine the short - term impact between them The findings of these studies are important references for policy makers to devise appropriate solutions in each specific stage Grossman & Helpman (1990); Krueger (1998) argues that trade liberalization will increase the long-term growth of an economy and enhance the overall economic development However, according to analysts on trade liberalization, adding evidence is quite necessary because this makes the assessment become more reliable Besides, previous researches shows that there are two opposing views Some researchers agree that trade liberalization bring benefits for the economy, but other researcher argue that this process bring the harmful things for economy development From a traditional point of view, researchers uniformly liberalize trade like an economy like Cameron (1978), Leamer (1988), Rodrik (1996), Rodriguez (2000), Andersen and Babula (2008) In general, researches about trade liberalization and tax structure are carried out by many authors, with a variety of research objects and data The results of these authors are not yet consistent, so with the appropriate estimation techniques, the paper examines the impact of trade liberalization on the tax structure in the context of tax competition in ASEAN countries 2.2 TECHNIQUE 2.2.1 Data acquisition To examine the impact to trade liberalization on tax structure, we choose the ASEAN - countries during the period 2001 - 2018 The description of variables 383 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 are presented in Table We extract data from several sources such as World Development Indicators (WDI), The Worldwide Governance Indicators (WGI) Table Variables description Variables Measurement Source TGS Taxes on goods and services (% of revenue) WDI TIPC Taxes on income, profits and capital gain (% of total taxes) WDI TIT Taxes on international trade (% of revenue) WDI OT Other taxes (% of revenue) WDI LIB Trade liberalization (trade openness) WDI GDP GDP per capita (current US$) WDI EDU Primary education, duration (years) WDI POP Annual population growth rate WDI COR Control of corruption WGI AGR Share of agriculture (% GDP) WDI GOV Government expenditure (% GDP) WDI METHODOLOGY Applying estimation FEM, REM, GLS methods for panel, the empirical results show that trade liberalization positively affects taxes on goods and services In table 2, we present the summary statistics of interested variables Overall, we have 108 observations from countries, the economic approach used follow that of Tosun (2005) by considering to analyze the impact of trade liberalization on the tax structure in ASEAN countries We construct an empirical model applied for panel data as follows: + Tax share)* = β + β0 LIB)* + β4 X )* + ε)* Where: + Tax share)* = β4 X )*in+total ε)* revenue (in percent); + βof LIB )* +type is β share jth tax LIB is index of trade liberalization that we use trade openness; X is a set of time and country varying explanatory variables, and control variables; is the vector of coefficients to be estimated; is the error term Tax share includes: - Taxes on goods and services - TGS - Taxes on income, profits and capital gain - TIPC - Taxes on international trade - TIT - Other taxes - OT RESULTS AND DISCUSSION Descriptive statistics provide an overview research dataset from 2001 to 2018 384 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS According to the results, the trade liberalization of countries base on the terms of trade openness which reaches an average rate of 118%, the largest percentage is 220% belonging to Malaysia and the smallest is 37% of Indonesia During that period, tax on income and profit contributed 33.69% of total tax revenue, tax on goods and services accounted for 32.27%, tax for international trade 10.52 %, finally another tax group of 1.9% Table Pearson correlation matrix TGS TIPC TIT OT AGR COR LIB PO P EDU AGR 0.3873* -0.8535* 0.5947* -0.4573* COR -0.4912* 0.7829* -0.5524* 0.1803* -0.7504* LIB -0.0181 0.1102 -0.0674 -0.3211* -0.0065 0.4579* POP -0.7051* 0.0386 0.3049* 0.4657* 0.1675* 0.0486 0.0559 EDU 0.1389 -0.7422* 0.5656* -0.1214 0.7576* -0.6779* -0.2176* 0.3264* GOV -0.2434* 0.5643* -0.5368* 0.1362 -0.7933* 0.7021* 0.0885 -0.2918* -0.6199* GDP -0.5195* 0.6510* -0.6946* 0.1008 -0.6731* 0.8709* 0.3480* 0.0547 -0.5345* GO V 0.7294* Note: *p F = 0.0191 Prob > F = 0.0425 Wald test Prob > chi2 = 0.0000 Prob > chi2 = 0.0000 Prob > chi2 = 0.0000 Prob > chi2 = 0.0000 Note: *p