Last week the Thai government hosted a forum on regional tax policy in Asia. One would think that a single market such as the ASEAN Economic Community would require harmonization of tax laws and coordination in their application, but this is not the case.
As reported in the Nation, Prapas Kong-ied, a judge at the Central Tax Court, illustrated several applications of national tax law which would appear to be inconsistent with the aims of the AEC: A Thai citizen, only identified as Mr P, worked for a Thai company which had its business in the Philippines.
How to tax Mr. P ?
P lived in the Philippines for a whole year and he received income from the parent company based in Thailand. The problem is to which country he should pay tax. According to the Revenue Code, he was not resident in Thailand that year, so he is not subject to tax payment.
But when his parent company paid his salary, the company levied withholding tax and transferred the deducted money to the Revenue Department. Thai tax experts do not have the same view about withholding tax. Some say there should not be any withholding tax since the source of income is derived from activities in the Philippines. But the Revenue Department insisted on collecting the tax.
The dispute was brought to the tax court, and the Supreme Court ruled in favour of the tax officials. With the Philippines tax officials also collecting tax, Mr P found himself making a double tax payment. Although the two countries have a double taxation agreement, it cannot be enforced in this case as Mr P did not live in Thailand in that year, so the agreement could not apply to this case, said Prapas.
Thus in this instance the Thai national was penalized because his time working in another ASEAN country did not count for purposes of residency in Thailand. Goods and services are accorded national treatment within ASEAN, but evidently this principle does not apply for determining tax residency. Another example involved value added tax: Another interesting case involves a Thai consultancy that provided advisory services to another firm based in Indonesia about which Thai firms the Indonesia-based firm should buy its products from. The Indonesian firm followed the advice of the Thai consulting firm. The Thai firm was paid for its services.
The firm thought that since it had exported its services, it was not subject to a 7-per-cent value-added tax (VAT). But the Revenue Department insisted on collecting VAT on the service by arguing that the service took place in Thailand as the Indonesian firm had imported products from a Thai firm. Prapas said that he himself – as a judge at the Central Tax Court then – had ruled that the consulting firm need not pay the tax. But the Supreme Court last month handed the final verdict in favour of the Revenue Department. This is another result which may be consistent with national law, but goes against the concept of having a single market.
Several corporate income tax from 17 to 35%
These problems in implementation can be resolved by greater cooperation in ASEAN, such as a set of taxation principles that would be followed by ASEAN national tax authorities. Of course, this is easier said than done. Even in the EU, harmonization of taxation is a controversial concept. Individual member states wish to set their own tax rates, set their own tax exemptions and pursue tax revenue for their national treasuries. With a single market in goods and services, taxation thus becomes one of the few policy tools available to national governments to compete for investment.
Similarly, corporate income tax rates in ASEAN, like in the EU, vary: ASEAN Member Maximum Rate Brunei 23.5% Cambodia 20.0% Indonesia 25.0% Laos 35.0% Malaysia 25.0% Myanmar 30.0% Philippines 30.0% Singapore 17.0% Thailand 30.0% Vietnam 25.0% Examined before deductions and incentives, Singapore’s corporate tax rate is the lowest and would encourage companies to book at least some of their profits in the city-state.
Hence tax coordination is limited by these national goals, and explains why tax policy has remained largely out of the scope of the AEC blueprint. Long-term tax policy harmonization will be a long-term goal for the AEC, something that will require both greater development of regional cooperation and improved legal and regulatory infrastructure. As this has proven difficult even in the most advanced regional market, it will be that more difficult for ASEAN. Yet it should be considered in the AEC’s post-2015 planning.
Edmund Sim is a U.S. international trade lawyer at the Singapore office of Appleton Luff and adjunct associate professor of law at National University of Singapore. There, he teaches the first course developed on the law and policy of the ASEAN Economic Community (AEC). You can follow him via AEC Blog.