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.
Diendo M. Dupal
Business & Investment Opportunities
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