ASEAN Economic Profile.
Southeast Asia is one of the fastest growing regions in the world. 2013 saw the ASEAN region grow by at least 5% - led by the Philippines which outperformed forecasts and recorded GDP growth of 7.2%. The frontier markets of Cambodia, Laos and Myanmar also recorded impressive growth of more than 7%. The more mature economies of Thailand, Indonesia, Malaysia and Singapore saw their economies grow higher than global growth rates.
The huge potential of the ASEAN region has not escaped the attention of global investors which poured in more investments into the ASEAN than they have into China. In 2013, the top 5 ASEAN economies (Indonesia, Malaysia, Thailand, Philippines and Singapore) received a total of USD128.4 billion in foreign direct investments while China received USD117.6 billion.
Taxation in the context of ASEAN Integration
One of the main appeals of investing in ASEAN is the potential to be exposed to the diverse economies of its 10 member-states. Indeed, many ASEAN investors seek to expand their business activity to most, if not all of the members of the ASEAN and to use their presence in one economy to open opportunities in others. Intra-ASEAN trade and investments have been rising significantly in the past few years – fueled by the aspiration of the member-states to create an integrated regional market through the ASEAN Economic Community (AEC) initiatives. Through the AEC, the member-states of ASEAN seek to lower regional barriers to trade and harmonize rules and standards to further expand intra-ASEAN trade and investments.
The AEC has only been partly successful. Trade in goods has been facilitated by a drop in intra-ASEAN tariff rates, but certain technical barriers to trade still exist and rules covering trade in services and investments are far from achieving regional clarity and consistency. The ASEAN has also not seriously begun the process of examining, much less implementing, a harmonized or integrated tax system.
Investors into any of the 10-member states face diverse tax rules and systems. Investors who are familiar with the web of taxation directives that facilitate the European single-market may be surprised to find that the ASEAN member-states have not even started to formulate the ASEAN’s version of the Parent-Subsidiary Directive or the Value-Added Tax Directive. To assist foreign investors who have just started their foray into ASEAN or those who are thinking of investing into more than just one ASEAN economy, we provide below a high-level analysis of the tax issues that must be considered:
Diversity of Tax Systems
Seen at a high level, the tax systems of the member-states of ASEAN are similar in the sense that all of them have adopted systems which:
- distinguish between corporate and individual taxation;
- impose taxes on profits (such as the corporate income tax), on transactions (such as the value-added tax or sales tax); and on personal income from employment (such as the salary tax); and
- distinguish between resident taxpayers which are usually taxed on net income and non-resident taxpayers which are usually taxed on gross payments through a withholding mechanism.
Beyond these basic similarities are very significant differences in tax system, tax rates and tax coverage. For example, while most of the ASEAN countries tax both the domestic and foreign-source income of resident natural and legal persons, Brunei and Singapore have adopted rules that allow the exemption of foreign-source income – whether such income is active or passive.
ASEAN states also differ in their approach to taxing corporate income. Most impose a tax on dividends in addition to the corporate income tax. For example, in Cambodia, a corporation is subject to a tax of 20% on its corporate profits. When this corporation distributes the profits to its foreign shareholder, the distribution will again be subject to dividends withholding tax of 14%. Singapore, Malaysia and Myanmar deviate from this norm as they have adopted a single-tier system which imposes a tax only on the corporate profits and not on the distribution of such profits to shareholders.
Corporate income tax rates vary among the ASEAN countries:
- Brunei 20%
- Cambodia 20%
- Indonesia 25%
- Lao PDR 24%
- Malaysia 25%
- Myanmar 25%/35%
- Philippines 30%
- Singapore 17%
- Thailand 20%
- Vietnam 22%
Indirect taxes among the ASEAN countries are also diverse. Most of the ASEAN states have adopted the Value-added Tax (“VAT”) system and its consumption-based application. Like traditional VAT-systems, taxpayers are allowed to reduce the VAT on their turnover by the VAT they absorbed from their purchases. Exports of goods and services are also mostly applied a zero-rate. Countries that have adopted the VAT system are: Cambodia, Indonesia, Lao PDR, Philippines, Singapore (called the Goods and Services Tax), Thailand and Vietnam. Malaysia imposes a sales tax. Myanmar imposes a commercial tax that is more related to sales tax than VAT. Brunei does not impose indirect tax on sales/turnover.
International Tax Regime
European investors who are familiar with the extensive tax treaty network between European Union countries may also be surprised to learn that the intra-ASEAN treaty network is far from complete. Singapore has the most extensive regional tax treaty network. It has signed tax treaties with all ASEAN states except for Cambodia. Other ASEAN countries have tax treaties with most other ASEAN states except for Cambodia which has not concluded a treaty with any country, ASEAN or non-ASEAN.
The sophistication of the international tax rules also vary from one country to another. Not all countries have adopted clear general anti-avoidance, treaty-shopping or beneficial ownership rules, and those that have apply varying levels of strictness or permissiveness. Neither have transfer pricing rules been applied in all ASEAN states.
Permanent establishment rules are also not consistent within ASEAN. More advanced ASEAN economies with extensive treaty networks have more or less accepted the OECD definition of permanent establishment and have adopted domestic laws that conform to this standard. However, the domestic permanent establishment rules of some countries, notably Myanmar, Lao PDR and Cambodia are not in line with the general international tax practice. Myanmar and Lao PDR’s domestic tax laws do not have permanent establishment rules. Cambodia’s permanent establishment rules apply most of the OECD definition but do not have the usual exceptions for preparatory or auxiliary activities, making Cambodia’s permanent establishment coverage quite broad.
Tax administration also varies within ASEAN. Singapore is acknowledged as having the most efficient and most professional tax bureaucracy. The rest of ASEAN suffer from the perception or reality of a difficult tax administration system and even of corruption.
Tax rulings issued by the tax authorities are available in most of the ASEAN states, but the period to obtain these rulings vary on the country and the type of tax rulings. It is most difficult to receive written tax rulings in Cambodia, Lao PDR and Myanmar.
The integration and harmonization of the ASEAN economies are most successful with regard to customs rules. It doesn’t hurt that all ASEAN-member states are now also members of the World Trade Organization (WTO) and are therefore required to adopt the relevant WTO rules.
The ASEAN Trade in Goods Agreement (ATIGA) also facilitated the harmonization of customs rules and procedure regionally. All ASEAN countries, for example, have adopted the ASEAN Harmonized Tariff Nomenclature and have applied consistent customs valuation procedures.
Tariff rates between the six most advanced economies (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) are virtually at 0%. The rest of ASEAN will also adopt these rates by 2015.
Navigating Tax Issues in ASEAN
The growth of the ASEAN economies and the push towards greater regional integration make a compelling case for Southeast Asian investments for foreign companies. Considering the efforts of the ASEAN-member states to make the region a single market and production base, it makes sense to approach an investment in a Southeast Asian state as an exposure to the diverse economies in ASEAN. That said, because tax integration has lagged behind other regional initiatives, it is still best to look at tax issues on a country and not a regional level.