Taxation under AEC 2015
Taxation under AEC 2015 by: Diendo M. Dupal
BY 2015, the Association of South East Asian Nations (ASEAN) envisions an ASEAN Economic Community (AEC) that boosts regional resilience with the following key characteristics: a single market and distribution base, a highly competitive economic region with equitable economic development, and a region fully integrated into the global economy.
Taxation plays a vital role in doing business in different parts of the world. It is one of the major considerations that most investors would look into if they intend to do business in a particular country or region. In fact, multinationals spend considerable amount of resources on tax planning in order to reduce tax burdens -- specifically taxes on regional and cross-border transactions -- by shifting capital from high-tax jurisdictions to low-tax counterparts.
The AEC blueprint, there is no single taxation regime for ASEAN member countries, thus, regional and/or global companies are faced with local taxation systems. Apart from free flow of goods (i.e., non-tariffs), the AEC blueprint only mentions taxation in two parts, namely: 1) enhance withholding tax structure, where possible, to promote the broadening of investor base in ASEAN debt issuance (Item 31, Action iv, AEC Blueprint); and 2) ASEAN member countries should complete the network of bilateral agreements on avoidance among all member countries by 2010 (Item 58, AEC).
It is believed that tax harmonization could be the key to achieve a tax competitive AEC 2015. The International Bureau of Fiscal Documentation defines tax harmonization as the elimination of differences or inconsistencies among the tax systems of various jurisdictions, or making such differences or inconsistencies compatible with each other. A harmonized taxation system is one in which the tax systems of the member countries agree to adopt the same taxation arrangements whereby the incentives to shift to lower taxed countries or to transfer from high-taxed to low-taxed countries would be eliminated. A good starting point for ASEAN tax harmonization lies in the area of double taxation through promulgation of tax treaties among the ASEAN members. Ironically, however, not all ASEAN members have tax treaties with each other or with other nations. The Philippines, for example, has not entered into a tax treaty with Brunei, Cambodia, Laos, and Myanmar. The lack of a comprehensive double taxation treaty among the member countries translates to missed investment opportunities as foreign investors naturally avoid increased business costs, administrative burden and profit repatriation disincentives.
Recent statistics show that the Philippines is one of the ASEAN member countries that impose the highest corporate income tax rate of 30% as opposed to Singapore which imposes corporate income tax of only 17%. With this disparity in corporate taxation, coupled with corruption and inefficiencies in government and infrastructure, no wonder the Philippines’ rank in doing business slid from 134th to 136th place according to the 2012 survey on doing business released by the International Finance Corp. (IFC).
However, the case of the Philippines is not a bleak situation. It is high time for the Philippine government to revisit its taxation structures and to come up with the ideal tax structure that would put the Philippines in a competitive advantage not only in the ASEAN region but also in the global arena without jeopardizing the domestic market. Another area of concern that the Philippine government should establish a solid ground work on is the inconsistent application of tax laws and regulations. Recent actions of the tax bureau have caused so much apprehension in the business community. Notably, there are various tax matters on which the Bureau of Internal Revenue (BIR) has issued new interpretations and reversed previously implemented tax positions. These uncertainties on the BIR’s positions caused so much apprehension in the business community. It prompted businesses to think twice before expanding their
business operations in the country. Some even considered transferring their businesses to other neighboring ASEAN countries where cost of doing business and taxes are relatively low. It is a challenge for the Philippine government not only to develop a tax efficient structure but also to ensure consistency in the application, implementation and interpretation of tax laws and regulations.
Thus, if the government sincerely intends to fully take advantage of AEC 2105 and maximize the benefits of the trade liberalization by attracting foreign direct investments, the government must provide sound and flexible regulatory frameworks that would align with the regional integration in 2015.
I cannot help but wonder how AEC 2015 would affect businesses and local industries in the Philippines. How will AEC 2015 impact the Philippine taxation system? Will AEC 2015 pave the way for new tax structure in the country that will be competitive enough, not only in the ASEAN region, but also in the global arena? These are just some of the critical concerns of the business community that will be tackled in the 2012 CEO Business Forum of Punongbayan & Araullo (P&A) on Oct. 23, 2012.