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

Summary

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.

Double Tax Agreements between ASEAN Member Countries

Double Taxation 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.