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:

• The EU is hoping to announce completion of FTA talks with Singapore, either at the ASEAN Summit or shortly thereafter.  These were supposed to have been completed by last October, but the talks hit a snag. EU Trade Commissioner Karel De Gucht also announced the start of FTA talks with Vietnam.  Senior EU officials are participating in an EU-ASEAN business forum on the sidelines of the ASEAN Summit.
• Indonesia and Korea announced the initiation of FTA (Comprehensive Economic Partnership Agreement in Korean terms) talks.
• The US and ASEAN announced a three-year project to facilitate the trade of food commodities in ASEAN.
• The China-ASEAN legal center opened in Haikou, China. The center aims to promote legal cooperation between ASEAN and China.
• ASEAN finance and central bank officials agreed to double the size of the Chiang Mai initiative to US$ 240 billion.  This would enable ASEAN members to tap up to 40% of their quota, without having to have a parallel package from the IMF.   They also agreed to formalize the legal status of the ASEAN+3 Macroeconomic Research Office set up to support the Initiative.

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
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.

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:

• ASEAN members agreed to establish an ASEAN Energy Regulators’ Network (AERN).  The AERN will coordinate energy trade within the regional bloc.
• ASEAN + 3 members proposed to double the size of the Chiang Mai Initiative foreign currency fund.
• The ASEAN Coordinating Council set up a working group to review Timor Leste’s application for ASEAN membership.
• The Stock Exchange of Thailand proposed an exemption from capital gains tax for transactions made on the ASEAN Link of cross-border securities trade in Malaysia, the Philippines, Thailand, Singapore, Indonesia and Vietnam.  The exemption is intended to boost interest in the ASEAN Link.  Also, Malaysia, Singapore and Thailand signed a memorandum of understanding to expedite secondary listings on each others' exchanges.  
• Japan accredited a new resident ambassador to ASEAN.