Brick by Brick: The Building of an ASEAN Economic Community

7. ASEAN Tax Regimes: Impediment or Pathway to Greater Integration

132 Ian Farrow and Sunita Jogarajan 7 ASEAN Tax Regimes: Impediment or Pathway to Greater Integration Ian Farrow and Sunita Jogarajan 1. Introduction Taxation has the potential to either impede or become one of the pathways to greater integration and economic growth within ASEAN. Taxation is only one of many considerations made by businesses in making investment decisions; other factors such as transparency, supply chains, labour force, and markets are clearly important to investment decisions, but taxation is clearly a key factor that must be considered. ASEAN aims to become a more integrated economic entity, in many ways similar to the multi-nation model of the European Union.This economic community objective, with a specific focus on designated priority sectors, was detailed in the Vientiane Action Plan agreed by ASEAN in late 2004. While there has been considerable progress across a wide range of policy areas to enhance integration, taxation is a policy area in which progress has to date been more protracted. 07 BrickByBrick Ch 7 10/30/07, 8:21 AM 132 ASEAN Tax Regimes: Impediment or Pathway to Greater Integration 133 2. Double Tax Agreements between ASEAN Member Countries DoubleTaxation Agreements (DTAs), as the term suggests, are treaties between states that aim to avoid double taxation and prevent fiscal evasion. DTAs seek to resolve conflicts between states with respect to the income tax liability of taxpayers operating across jurisdictions. DTAs also provide mechanisms for cooperative action to prevent fiscal evasion. The DTA issue for ASEAN is that while many ASEAN member countries (AMCs) have bilateral tax treaty arrangements, both within ASEAN and with non-ASEAN economies, none have comprehensive tax treaty coverage across all the other AMCs. The typical DTA coverage by each AMC is often limited to just over half the other AMCs. Some AMCs also have very limited treaty networks, specifically Brunei Darussalam, Cambodia, Lao PDR, and Myanmar. A limited DTA network within ASEAN is an impediment to regional economic integration and development because it increases business tax costs, imposes administrative burdens, creates transaction uncertainties, and provides a general disincentive to regional investment and profit repatriation. The “age” of the ASEAN DTA network is also a salient issue. The average ASEAN DTA is between ten and fifteen years old.This may also be considered an impediment to cross-border investment because AMC fiscal and regulatory reform has overtaken DTA terms — making many DTAs de facto obsolete. In addition, economic and technological changes over the last decade have created “new income” unable to be readily characterized under some DTAs. This potentially increases the complexity and costs associated with transactions in selected value-adding service industries, such as R&D services. It may also lead to revenue losses for AMC governments. Recent DTA negotiations have also trended towards lower withholding tax rates. Older DTAs typically impose relatively high withholding tax rates. As a result of this, AMCs may miss investment opportunities based on the imposition of high headline withholding tax rates and lack of relief. Older DTAs may also force AMCs to take unilateral action to provide relief for inbound and outbound investors. Such a tax environment does little to foster regional economic integration. ASEAN best practice in DTAs, demonstrated by Indonesia, Singapore, and Vietnam, is to have an extensive, modern bilateral treaty network with other AMCs.The lack of comprehensive coverage and a guaranteed minimum standard of double tax relief within ASEAN results in additional costs and 07 BrickByBrick Ch 7 10/30/07, 8:21 AM 133 134 Ian Farrow and Sunita Jogarajan risks to investment into those non-treaty countries. The absence of a treaty can also create uncertainty; fail to provide “tie-breaker” rules to establish the tax jurisdiction and leads to inconsistent and often inadequate approaches to taxation and tax relief. 3. Treatment to Non-ASEAN Member Countries The treatment of income and capital flows between AMCs (intra-ASEAN) is also often not as favourable as the treatment between AMCs and nonASEAN countries. This is based on the proposition that the imposition of “high” withholding taxes will be a disincentive to income and capital flows. The impact of this inconsistent treatment is to make income and capital flows between AMCs and countries outside ASEAN more advantageous than intraASEAN ones, acting as a disincentive to greater regional investment and economic integration. This situation discourages investment into, and the repatriation of profits from AMCs to other AMCs. Different AMCs are in different DTA bargaining...