Saturday, March 31, 2012

ASEAN Economic Community Developments

I haven’t posted recently, as I’ve been on a family vacation to Hanoi and Halong Bay in Vietnam. Also, most ASEAN watchers were focused on tomorrow’s elections in Myanmar and this weekend’s ASEAN Summit in Phnom Penh and corresponding ASEAN Council meetings.  I’ll have more on both developments in next week’s posts, in between a Utrecht-Airlangga ASEAN law conference I am attending in Surabaya.  In the meantime, here is a summary of other developments affecting the ASEAN Economic Community:

Sunday, March 18, 2012

Taxation and the AEC

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. 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.  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

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.

Thursday, March 15, 2012

Burma Sanctions: Waiting for April 1

I was in Washington, DC, this week.  The main ASEAN-related issue discussed around town is whether Myanmar will have successful by-elections on April 1, and if so, to what extent the U.S. Burma sanctions will be lifted.  Most observers expect Aung San Suu Kyi to get into the Myanmar parliament, but what she does after that remains a mystery. If she immediately calls for a complete end to the Burma sanctions, we can expect the U.S. Congress to respond in kind. However, most observers expect her to call for some moderated lifting of sanctions in order to maintain some leverage with the Myanmar regime.  The religious and ethnic issues, which some conservative U.S. politicians had cited in their support of Burma sanctions, appears to be of lesser priority these days.

In any event, I expect the U.S. to also take its cue from what the EU does.  The EU is scheduled in April to issue its annual review and renewal of its own sanctions.  If the April by-elections are even reasonably successful, we can expect the EU to relax its own, looser sanctions later in the month.  U.S. officials are aware that U.S. business will be losing out on opportunities in Myanmar and will at least offer some greater administrative clarity on what they can and cannot do. Nevertheless, the eventual lifting of U.S. Burma sanctions will take months to accomplish even on an expedited schedule.

Here’s some other ASEAN Economic Community news from this week:

Friday, March 9, 2012

ASEAN Banks Operating Regionally Need Regional Regulation

According to Kyodo News, ASEAN central banks plan to set up an “ASEAN bank” system that would give designated banks the automatic right of establishment within the regional bloc.    The selected banks must be headquartered in ASEAN, fiscally sound and already operating within the region.  Once accepted, the bank regulatory authorities of all ASEAN member states would have to grant such banks the right to operate in their jurisdictions.    Kyodo reported that ASEAN central banks are working on a minimum standard for the ASEAN bank program, and that so far only three banks from Malaysia, Singapore and Thailand met the anticipated standard. The program will be discussed at the ASEAN central bankers’ meeting scheduled for March 26-29 in Phnom Penh.

This is another benefit arising from the long-delayed implementation of the ASEAN Comprehensive Investment Agreement (ACIA) on March 1.  Banks and other financial institutions now gain protections for their investments and operations under ACIA, which had not been available under the previous ASEAN investment agreements.  The development of Cambodia, Laos, Myanmar and Vietnam as attractive financial markets also motivate expansion into all of ASEAN, not just the ASEAN-6.

However, what is missing from the “ASEAN bank” program as discussed in the report is a regional compliance and enforcement system.  Those qualifying banks would remain subject to primary regulation by their home countries.  Banks such as CIMB and DBS in Malaysia and Singapore are already subject to high national standards, which is why the Kyodo News article mentions those countries and Thailand as being the first countries to qualify for the program.  Hence the issue in qualifying for the “ASEAN bank” program is not necessarily the structural integrity of the applying banks, but the reliability of the national bank regulatory systems in their home countries, as discussed in the Kyodo News report.

Beyond this, ASEAN central banks need to ensure that the qualifying banks are properly monitored and regulated on a regional level.  This does not necessarily require creation of an ASEAN central bank regulator.  Although this would be preferable, ASEAN’s preference to govern by committee motivates against creating a unitary authority.

Nevertheless, the rapid flow of funds means that banks can undergo great financial stress very quickly, as evidenced during the Asian financial crisis of the late 1990’s (or even beforehand, during the Barings collapse, triggered by rogue trader Nick Leeson in Singapore) and of course during the recent Lehman Brothers and Eurozone crises.   ASEAN should thus devote staff and resources to ensure that the central bankers have real-time information on the qualifying banks, and that they are sufficiently cooperative to take immediate action where necessary.  Otherwise, the consensus-driven governance by committee approach could operate and react slowly, laying the seeds for a future ASEAN version of the Lehman Brothers collapse.   

Fortunately, the ASEAN central banks have access to good people and resources in the Asian Development Bank and the ASEAN Secretariat. They just need more funds, people and resources to ensure that the “ASEAN bank” system operates well on an ongoing basis.

Thursday, March 8, 2012

Wrap-up of the ASEAN Economic Ministers Retreat

As promised, we have more details on the ASEAN Economic Ministers’ retreat held in Naypyitaw, Myanmar, on February 25-26:

  • The ACIA would take effect on March 1, 2012, as discussed in the previous post.
  • Indonesia, Laos and the Philippines plan to start their own pilot program for self-certification of origin by the 2nd quarter of 2012.  Thus starts “2 * ASEAN – 6”. 
  • On the ASEAN Framework Agreement on Services (AFAS), seven ASEAN members have met the threshold requirements for the 8th AFAS package.  The other three are making progress in meeting the requirements.  To meet the AFAS 2015 targets, the ministers agreed for

  1.   Member states to expedite completion of the 8th AFAS Package as soon as possible;
  2. Combine the remaining 9th to 11th AFAS Packages into two Packages targeted for completion by 2013 and 2015, respectively, with additional 24 new subsectors in each Package and improvements to the existing offers made under the 8th Package;
  3. SEOM/CCS will develop a roadmap towards the completion of the AFAS targets by 2015; and
  4. (SEOM/CCS will look into putting more effort into facilitation matters, in particular to address regulatory obstacles needed to facilitate greater trade in services across ASEAN.

  • On the ASEAN Trade Repository (ATR), the ministers agreed to give priority to the ASEAN Single Window (ASW), as much of the requirements for establishing the ATR would also be satisfied once the ASW was in place. 
  • The AEM agreed to decide on Hong Kong’s request to accede to the ASEAN-China Free Trade Agreement (ACFTA) by August 2012.  The AEM reiterated that in the ASEAN-Japan Comprehensive Economic Partnership (AJCEP) negotiations on services and investment, ASEAN will maintain its stance that a positive list should be used, not a negative list.  The AEM also reiterated that ASEAN shall urge India in the ASEAN-India Free Trade Area (AIFTA) talks on services, investment and product-specific rules of origin to come up with one single MFN services offer to be extended to all ASEAN Member States. 
  • On the ASEAN Framework on Regional Comprehensive Economic Partnership (RCEP), it was agreed that that it would not neither be feasible nor realistic to get the highest and the lowest common denominator of the ASEAN bilateral FTAs (ACFTA, AJCEP, etc.) and use this for the RCEP, the ministers agreed that, at the very least, the RCEP should supplement, and therefore be better than, the ASEAN bilateral FTAs.  RCEP talks are targeted to begin by end 2012.

There should be more coming out of the Joint Preparatory Meeting that was held this week in Phnom Penh, and we’ll comment on that, too.

Thursday, March 1, 2012

ACIA Takes Effect Today; TPP Takes Another Step Forward

We had two major developments affecting ASEAN at mid-week.

First, three years after its signing, the ASEAN Comprehensive Investment Agreement (ACIA) will take effect today.  This was decided at the informal ASEAN Economic Ministers’ meeting in Naypyidaw, Myanmar, held this past weekend (we’ll have more on the AEM meeting in a later post). 

The ACIA attempts to ensure a single market for investment, by providing national treatment for ASEAN investors and investor-state dispute resolution (including arbitration). Of note, the ACIA automatically applies to portfolio investments and automatically applies to investments.  

The predecessor agreements, the agreement on the ASEAN Investment Area and the Agreement for the Promotion and Protection of Investments did not apply to portfolio investments and required the investor to invoke the agreements in writing with the local national government before making the investment.  The former excluded much of the investments in ASEAN, and the latter would be like asking for a pre-nuptial agreement before getting married.  In any event, the ACIA does away with both requirements.

Article 48.1 of the ACIA called for its ratification within 6 months after its signing.
The delay in the ACIA ratification was due to the delays in ratification in Thailand and Indonesia.  In addition, ASEAN member states had delayed submitting their reservations from the ACIA (e.g., those sectors for which the ACIA protections do not apply), even though Article 9.2 of the ACIA calls for submitting the reservations to the ASEAN Secretariat within 6 months after its signing.    In any event, the delay only affects the applicability of the ACIA to investments, not its substantive provisions. 

Second, US Trade Representative Ron Kirk said yesterday that the Obama administration will seek special trade negotiating authority from the U.S. Congress.  This is important because unlike in a Westminster parliamentary system, the U.S. executive branch does not have both negotiating authority and implementing authority.  The U.S. Congress has control of the latter.  The U.S. president thus needs so-called “trade promotion authority”  (TPA, formerly known as “fast track” authority) from the Congress in order to have full authorization.  Without TPA, trading partners are not assured that any deals negotiated by the U.S. president will not be later undone by the Congress.

USTR Kirk said that the Obama administration needed TPA to conclude the Trans Pacific Partnership (TPP) by the end of the year.  This should reassure the other TPP negotiation parties, which include ASEAN members Brunei, Singapore, Malaysia and Vietnam, that the United States will have full authority to implement any deals concluded in the TPP talks.   Whether or not TPP will actually get concluded this year depends on many other factors, but the step of asking for, and getting, TPA would be a major step forward.