Last 17 September 2013, the Phnom Penh business community was treated to an interesting policy speech by the Delegate of the Royal Government of Cambodia in charge as Director General of the General Department of Taxation (GDT), His Excellency Vibol Kong. His speech focused on how the GDT is preparing for the projected ASEAN economic integration by 2015. Among the topics that His Excellency covered were Cambodia’s preparations for the negotiation of double tax agreements (DTAs), the development of transfer pricing rules, the broadening of the country’s tax base, and the development of procedures to make Cambodia’s tax rules clearer and more accessible to investors.
ASEAN businesses are anxious to know how the projected establishment of the ASEAN Economic Community (AEC) by 2015 will affect each member-state’s tax policies and the speech by the head of the GDT served to further pique the interest of those present.
All throughout the region, business leaders are justifiably very interested in, perhaps even excited at, the prospect of having the tax regimes of each member-state move towards greater harmonization in the same way that regional customs policies have progressed in the past 10 years. Unfortunately, the best that the region’s business community and tax professionals can do now is speculate on how (or even whether) such harmonization can be achieved.
Taxation and the ASEAN Economic Community.
ASEAN’s aspiration, according to the AEC Blueprint (the Blueprint), is to “transform ASEAN into a region with free movement of goods, services, investment, skilled labour and free flow of capital.” Among the thrusts of the AEC are to deepen and broaden economic integration and to establish ASEAN as a single market and production base.
One would think that the elimination or reduction of tax friction costs would be a priority area, especially since tax friction costs directly impact the free movement of investment and free flow of capital. They also undoubtedly affect the movement of goods, services and skilled labour.
It is too much to hope for tax integration. The member-states of ASEAN are not likely to accept the wholesale surrender of this sovereign function to a regional or supranational body. Harmonization of specific tax rules on the movement of investments and repatriation of profits may be a more achievable and desirable goal. However, judging from the ASEAN Blueprint, the leaders of ASEAN seem to have decided to take it slow on tax harmonization.
Taxation in the AEC Blueprint.
The Blueprint has five core elements under the aspiration to create a Single Market and Production Base: (i) free flow of goods, (ii) free flow of services, (iii) free flow of investments, (iv) free flow of capital and (v) free flow of skilled labour. Under each core element are statements of goals and action plans.
The Blueprint makes reference only to two tax –related action plans. One of them is under the core element of Free Flow of Investment and mandates ASEAN to “work towards establishing an effective network of bilateral agreements on avoidance of double taxation among ASEAN countries.” (This action plan is substantially repeated in the action plans to achieve a competitive economic region). The other action plan is under Free Flow of Capital and calls for the “enhancement of withholding tax structure, where possible, to promote the broadening of investor base in ASEAN debt issuance.”
Under the Blueprint’s 2009 to 2015 Workplan, a specific section on taxation has the following planned actions:
- Organize workshops and seminars on taxation matters;
- Provide necessary assistance related to developing bilateral agreement on avoidance of double taxation to CMLV countries that need assistance; and
- Provide technical assistance on tax structure enhancement to CMLV for the eventual harmonization with other ASEAN Member Countries’ tax systems.
The tax action plans are noticeably vague, very general and limited in scope.
Compare the above action plans to, for example, the action plans relating to Rules of Origin which are under the core element of Free Flow of Goods. One of them reads: “Simplify the Operational Certification Procedures under the CEPT ROO and ensure its continuous enhancement, including the introduction of facilitative processes such as electronic processing of certificates or origin; and harmonization and alignment of national procedures to the extent possible…” Or examine one of the action plans on Non-Tariff Barriers: “Remove all NTBs by 2010 for ASEAN-5, by 2012 for the Philippines and by 2015, with flexibilities to 2018, CMLV, in accordance with the agreed Work Programme on Non-Tariff Barriers elimination…” Clearly, these action plans convey a more definite and definitive guides to achieve free flow of goods.
There also does not seem to be much urgency in moving the ASEAN member states to complete the DTA network between all of the ASEAN states. While the target of 2010 is mentioned, this is followed by the qualifier, “to the extent possible.”
With regard to the enhancement of withholding structures, the mandate is limited to debt issuances and does not address the equally significant issue of how withholding taxes on dividends affect flows of equity. Note for example that most ASEAN countries seem to have recognized that removing taxes on dividends make for a more robust domestic capital market. The Philippines and Cambodia do not tax dividends distributed by a resident taxpayer to another resident corporate taxpayer. Malaysia, Singapore, Myanmar and Vietnam have established single-tier tax systems and generally do not tax dividend distributions. Indonesia and Thailand have adopted participation exemption rules that exempt dividends distributed to shareholders with significant ownership and control. If eliminating dividends would tend to grow the domestic capital markets, wouldn’t doing so regionally also enhance the regional investment climate?
It is also noticeable that the tax-related action plans do not mention important tax issues that affect the movement of goods and services such as the harmonization of value-added tax (VAT) rules. While most ASEAN states have adopted taxes on turnover (Myanmar’s turnover tax-equivalent, the Commercial Tax, is similar in a limited sense to VAT and Brunei does not impose consumption taxes, Malaysia imposes a sales/service tax) member-states have different interpretations of place of supply rules, different turnover tax coverage, and different documentary requirements to support input VAT credits. VAT or turnover tax harmonization should promote greater trade within ASEAN.
Another significant tax issue that has been left out is transfer pricing. Most, if not all ASEAN jurisdictions have accepted the desirability of adopting arm’s length principles, but not all have detailed transfer pricing rules and methodologies. In a more integrated regional economy, transfer pricing adjustments would likely lead to double taxation, but there is currently no effective mechanism to address this regionally.
And what about regional mergers? Addressing capital gains tax issues involved in the merger of companies that are tax residents of different countries should encourage consolidations and create more globally-competitive ASEAN businesses.
There is indeed a long way to go before ASEAN can achieve tax harmonization. If ASEAN wants its national businesses to venture freely outside their territorial comfort zones, it should do more than just exhort its members to enter into bilateral DTAs or just call for enhancing a withholding tax structure on debt issuances.
That said, there may be a silver lining in ASEAN’s deliberate speed in addressing regional tax policies. It can learn from the current efforts of the Organi
zation for Economic Cooperation and Development’s (OECD) to address base erosion, profit shifting and aggressive tax planning. There is no doubt that the relaxation of dividend, interest and royalty withholding tax rules in the EU contribute to the adoption of tax structures which erode the tax base of production and operating companies in many jurisdictions and which shift profits to low (or lower) tax states. If it learns from the OECD efforts to combat harmful international tax structures and transactions, ASEAN can adopt a more rational regional tax policy that truly leads to growth and economic prosperity.
Tax Director, DFDL Cambodia