TAX ISSUES INASEAN INTEGRATION:AN OBSERVATION

By:Assoc Prof Stephen PhuaFaculty of LawNational University of Singapore

Contents

1. History and Profile of ASEAN2. ASEAN Economic Integration:

Towards a single market3. ASEAN and the world: FTAs and

DTAs4.Future “AEC 2015”: Milestones

and Pitfalls

History and Profile of ASEAN

The ASEAN Way• Origins can be traced back to the signing of the

Treaty of Amity and Cooperation in SEA in 1976• “An evolutionary approach, relying largely on

patient consensus-building to arrive at informalunderstandings”

• Key features▫ The consensus method of decision-making▫ Preference for informality and loose arrangements▫ Institutions follow substance

• Guiding principle: “a pace comfortable to all”

ASEAN Key Statistics 2009• Land Area: 4.44 m sq. km• Population: 590 m• GDP: US$1.5 tn• GDP per capita: US$2500• GDP growth: 1.5%• Inbound FDI: US$39 bn• Total trade to GDP: 100%• Intra-ASEAN trade: 24% of total trade• Top Trading partners: China, EU, Japan, USA

Source: ASEANstats 15Jul 2010

2. ASEAN Economic IntegrationFree Flow of Goods and Serviceswithin ASEAN

Pre-AFTA

• First attempts at Economic Cooperation▫ Cooperative establishment of large-scale

industrial projects in ASEAN countries▫ Intra-ASEAN Preferential Trading Arrangements

• Rested on two pillars▫ 1) Preferential trading arrangements▫ 2) Industrial complementation

• Conflicts of national interests resulted in pooroutcomes

The ASEAN Free Trade Area• Change in focus: Regional Integration.▫ Trade and investment decisions determined by

private entities on the basis of marketconsiderations▫ Government agreements limited to making trade

and investment freer and easier.• Main thrusts▫ Lower tariffs: the CEPT Scheme▫ Remove non-Tariff barriers

• Big step forward for economic regionalization

The ASEAN Economic Community (AEC)

• In order to push on to the next stage of ASEANeconomic integration, the AEC was born.

• Key additions▫ The liberalization of trade in services;▫ The ASEAN Investment Area;▫ Accelerated regional integration in the designated

priority sectors; and▫ The easier movement of “business people, skilled

labor and talents”.

Free Flow of Goods• Achievements▫ Tariff reduction All tariffs for products in the CEPT Inclusion Lists of

ASEAN-6 have been eliminated for intra-ASEANtrade as of 2010

▫ Simplification of the CEPT-ROO e.g. Alternative origin criteria to the 40% Regional

Value Content rule; back-to-back CO arrangements▫ The AHTN (8 digit TN based on HS code of WCO) Simplification and, more importantly,

harmonization of tariff nomenclature within ASEAN

Free Flow of Goods

• Challenge 1 – Non-Tariff Barriers (NTBs)▫ What has been done The ASEAN Trade Facilitation Framework and its

Work Programme The ASEAN Policy on Standards and Conformance The ASEAN GRP Guide▫ The same approach saw limited success in EU The EU has the SPS and TBT Agreements Nevertheless, EU member states have erected huge

technical barriers to trade

Free Flow of Goods• Challenge 2 – The ASEAN Single Window Project▫ Gist of the ASW: a centrallized web portal for

electronic processing of trade documents at thenational and regional levels▫ Implementation Issue identified: the integration

of member state NSWs may be problematic Under the ASW Plan, member states must first

operationalize their NSWs However, the inter-communicability of these different

NSWs utilized by various member states may be difficult▫ Suggestion: standardization of the NSW solution

platforms first, to avoid future integration problems.

Free Flow of Services

• In stark contrast to the flow of goods, theliberalization of the services sector has beendifficult

• Three reasons▫ 1) Services, unlike goods, are nebulous products▫ 2) Services account for a significant proportion of

some member state economies▫ 3) No clear industrial policy for the services sector

3. ASEAN and the world

FREE TRADE AGREEMENTS

ASEAN-Plus FTAs Signed

• 5 have been signed to date▫ ASEAN-China (2002)▫ ASEAN-India (2003)▫ ASEAN-Japan (2003)▫ ASEAN-Korea (2005)▫ ASEAN-Australia & NZ (2009)

• 2 other ASEAN’s major trading partners are theUS and the EU

• Account for 20% of total ASEAN trade

ASEAN-USA FTA: Progress Made

• US is the 4th largest trading partner of ASEAN• Milestones▫ Oct 2009: Draft resolution introduced to US

Senate Foreign Relations Committee▫ Nov 2009: 1st ASEAN-US Summit in Singapore Discussions centered on the ASEAN-US FTA▫ Sep 2009: 2nd ASEAN-US Summit in New York Focus was more on the recovery of the US economy

ASEAN-EU FTA: Discussions Stalled

• Talks launched in May 2007• Discussion halted in 2009 because of EU

concerns over Human Rights violations by someASEAN member states

• Recommendations▫ Fast-track process to speed up talks▫ Transitional provision, to provide different

timelines for ASEAN member states to who arenot yet up to the mark in terms of Human Rights

3. ASEAN and the world

DOUBLE TAXATIONAGREEMENTS

Distortions by taxes

• Tax can liberate or frustrate efficient movementof capital and impede trade linkages

• Differing goals of national tax policy and rules• AEC Blueprint aims to have complete DTA

network by 2010• Constraints in DTA

ASEAN Treaty Network CoverageYear Signed and Year EffectiveBrun Indo Mal Phil Sing Thai Camb LPDR Myan Viet

Brun2000

(2003)2009

(2011)-

2005(2007)

(ID) -2006(NIF)

-2007

(2010)

Indo1991

(1987)1993

(1994)1990

(1992)2001

(2004)- -

2003(NIF)

1997(2000)

Mal1982

(1984)2004

(2007)1982

(1983)- -

1998(2009)

1995(1997)

Phil1977

(1977)1982

(1983)- - -

2001(2004)

Sing1975

(1976)- -

1999(2010)

1994(1993)

Thai -1997

(1998)2002(NIF)

1992(1993)

Camb- - -

LPDR2009(NIF)

1996(NIF)

Myan2000

(2004)Source: IBFD

ASEAN Member State TreatyWithholding Rates

State

Lowest Treaty W/H Rate (ASEANMembers)

(%)

W/H Tax Rate(%)

Lowest Treaty W/H Rate(Non-ASEAN Members)

(%)Div. Int. Roy. Div. Int. Roy. Div. Int. Roy.

Brun 10Viet

10/51

Sing10

Viet0 Coy: 20

Ind: 0Coy: 10Ind: 0

0UK

10Japan

0UK

Indo 15/102

Sing10

Sing15

Sing20 20 20 10

China5

Kuwait5

UAEMal 0

Indo10

Sing8

Sing0 15 10 0

Kuwait0

Kuwait03

NorwayPhil 15/102

Viet15/104

Thai25/155

IndoCoy: 30/15

Ind:25/20

Coy: 30/20Ind: 25/20

Coy: 30Ind: 25/20/10

15/102

Bahrain10

UAE10

UAE

Sing 10/52

Myan10/51

Brun8

Mal0 15 10 0

Cyprus0

Mauritius0

NetherThai 15

LPDR15/10Viet

15Mal

10 15 15 10Oman

-/10/06

Italy15/5/07

FranceCamb - - - 14 14 14 - - -LPDR 15

Thai15/101

Thai15

Thai10 10 5 5

China5

China5

ChinaMyan 10/52

Sing10/81

Sing10

Viet0 15 20 0

UK10

Korea (PR)08

UK

Viet 10Mal

10Sing

15/59

Sing0 10 Coy: 10

Ind: 510/52

Ireland10

Russia10/710

HK

Source: International Bureau for Fiscal Documentation

5. Working towards “AEC 2015”

Milestones of Progress

1. Enhanced regional trade integration (1992)2. Lessons from the 1997 Asian Financial Crisis3. The signing of the ASEAN-China FTA (2002)4. Elimination and massive reduction in intra-

ASEAN tariffs (from 2005-2010)5. Effects of 2008 Global Financial Crisis on FDI6. Nego with US (4th largest partner) (2009)

Conclusion: Future Challenges• ASEAN Way ++• Current lack of Follow Through

“Regional economic integration seems to have becomestuck in framework agreements, work programmesand master plans”

• Trade liberalisation is precursor to FDIs• FDI promotes econ growth• Growth sustainable if distortions removed• Structural constraints to enhance tax integration• 100% DTA network• Capital importers reduce source taxation• Capital exporters enhance relief