With the AEC soon to become a reality, the number of businesses in ASEAN engaged in cross-border trade and investment is expected to increase significantly. One of the core elements to realising the AEC is allowing for virtually no restrictions on ASEAN service suppliers providing services and establishing companies across national borders within the region, subject to domestic regulations. At the same time, the AEC blueprint does not contain any action points to harmonise national tax policies. The 10 member countries of ASEAN will continue as before, independently imposing taxes on businesses trading within or across borders. The AEC is expected to create some interesting challenges for Thailand’s tax authorities, and also for agencies promoting Thailand as a desirable investment location.
Attracting Investment
Thailand has responded to the challenge of competing for investment and trade within ASEAN by cutting its corporate tax rate to 20% and by lowering personal tax rates, for example, by cutting the highest personal tax rate to 35%. To increase competitiveness and attract new foreign investment, Thailand’s Board of Investment (BOI), the main body responsible for promoting new investment in the kingdom, has formulated new policies and incentives that are expected to take effect by 2015.
The BOI currently divides Thailand into three zones and typically determines what tax incentives to offer based on the zone in which an investment is located, with the purpose of encouraging firms to invest in less developed areas of Thailand. However, the BOI intends to do away with this method and instead adopt a more focused and prioritised approach to investment promotion. The basic tax incentives offered will generally be reduced and a merit-based programme will be introduced. This will be coupled with efforts to offer more non-tax incentives. The BOI has identified 10 industrial sectors they plan to promote, which include alternative energy and environmental services; basic infrastructure and logistics; hospitality and wellness; medical and scientific equipment; and advanced technologies.
We will still see the BOI offering attractive tax incentives to promote investment in the kingdom. Activities that are highly important to the country’s economic restructuring will be granted corporate tax exemptions, up to a maximum of eight years. Activities that the BOI believes do not require corporate tax exemptions will receive import duty exemptions on machinery and raw materials, as well as other non-tax incentives.
International Tax Planning
Recent initiatives announced by OECD countries to clamp down on tax evasion, aggressive tax planning and profit shifting by multinational enterprises highlights the need for ASEAN countries to appreciate that the AEC could see a rise in firms engaging in potentially abusive international tax planning. In this respect, Thailand is considering strengthening its international tax laws to prevent abusive tax planning by multinational enterprises. Such measures could include transfer pricing and thin capitalisation rules, controlled foreign company legislation, and general anti-avoidance rules. At the same time, Thailand will likely allocate more resources to the enforcement of its tax laws.
The country introduced transfer pricing guidelines several years ago, adopting internationally accepted methods for establishing transfer prices for transactions between related parties. As a result of those rules, the Thai Revenue Department has invested quite heavily in educating revenue officers on how to conduct transfer pricing tax audits. It is an area that we expect tax authorities in Thailand and other ASEAN countries will be focusing on when the AEC takes off, and we are already seeing a number of countries starting to enforce their transfer pricing rules in anticipation.
To support the free flow of investment, the AEC blueprint indicates that the 10 member countries will work towards establishing an effective network of bilateral agreements on avoidance of double taxation within the community. Thailand has agreements with most ASEAN countries and these will provide a mechanism for tax authorities in the region to share more information.
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