At the end of 2015, the 10 states of Asean will form a common market — the Asean Economic Community (AEC). The idea of an Asean single market and production base is based on the free flow of goods, services, investment and skilled labour and the freer flow of capital. This is expected to bring about a number of benefits for participating countries.
Economically, the AEC is intended to drive growth for the countries involved, making it cheaper and easier to do business in the region and, possibly, globally.
Under the AEC, Asean-based businesses are likely to find greater ease operating in a more integrated production base. Besides lower trade barriers and increased trade flows, they can access larger markets and enjoy the same incentives as local businesses.
Global companies operating in Asia Pacific can also tap into the benefits under the AEC by shifting certain functions into the Asean region.
But more can be done on the tax front. As the Singapore government prepares to introduce Budget 2014 this coming Friday, it is timely to look at measures it can consider to get the city-state ready for the AEC.
The AEC Blueprint, signed in 2007, is fairly quiet with regard to tax, save for some exceptions. These include the reduction of customs tariffs, duties as well as the following:
- The withholding tax structure should be enhanced where possible, to promote the broadening of the investor base for Asean debt issues;
- Asean member states should complete the network of bilateral agreements on avoidance among all member countries by 2010.
However, these do not go far enough to enhance the Asean tax framework. One key issue with cross-border transactions is withholding tax. Typically imposed on payments for interest, certain types of services, royalties and dividends, an applicable withholding tax can be as high as 35% of any gross payment.
This means that if a Singapore company bills $1,000 for services provided to someone in another Asean country, the net payment received may amount to as little as $650, possibly wiping out any profit built into the service fee.
In the European Union (EU), withholding taxes on royalties, interest and dividends are eliminated for transactions among businesses in member states. This has proven effective in encouraging the movement of services, investments and capital among member states because of lower tax costs.
To promote greater uniformity and regional integration, Singapore may wish to advocate a multilateral tax treaty among Asean member states. At the same time, older tax treaties, such as those with Indonesia and Thailand, should be renegotiated and existing treaty networks extended to all Asean countries.
OTHER ENHANCEMENTS
Since the signing of the AEC Blueprint, Asean member states have been competing against one another for foreign direct investment by reducing corporate tax rates. At 17%, Singapore has the lowest corporate tax rate among the Asean member states.
Nonetheless, tax incentives, such as exemptions from or reductions in corporate tax, remain relevant. This is because such incentives will attract investments in certain promoted industry sectors.
Some existing tax incentives in Singapore primarily offer concessionary tax rates to bigger companies. Examples include the Headquarters Programme, the Global Trader Programme and the Finance & Treasury Centre scheme. These could be extended to cater to small and medium enterprises that are committed to continue using Singapore as a base for their operations in other Asean states.
Currently, where there is a tax treaty in place, relief from foreign taxes is not given where the service income is Singapore-sourced. Perhaps it is also time to think about providing such relief, regardless of the source of the income and whether there is a tax treaty in place.
To fully take advantage of an enlarged trade area, Singapore businesses also need to be strengthened to compete regionally. The government can show the way, by providing tax allowances for Singapore enterprises willing to invest in building their own uniquely Singapore brands.
To further support Singapore enterprises, the Double Tax Deduction for Internationalisation — which provides a double tax deduction for certain expenses incurred on overseas expansion — could be expanded to cover expenditure incurred by Singapore-based businesses recruiting and relocating staff to other Asean countries.
Likewise, the Integrated Investment Allowance could be expanded to allow Singapore enterprises to claim tax depreciation on plant and machinery used in the AEC.
Some financial grants, such as the Global Company Partnership and the Market Readiness Assistance schemes, can also be enhanced to help local enterprises enter the AEC market.
Business travelling within the AEC region could grow as trade rises. Regional cooperation could be further encouraged by allowing intra-regional business travellers to recover the Goods and Services Tax imposed on business travel expenses upon departure. This could pave the way for regional businesses to use Singapore as a training hub for their Asean activities.
Ideally, this concept should be applied at the AEC level to promote Asean as a conducive region for business and tourism.
The EU went through a long journey of economic integration to be where they are today. Even now, it is still very much a work in progress.
The Asean Free Trade Agreement will be expanded to impose zero tariffs on almost all goods by 2015 and the AEC will become more important to foreign investors as a single market.
With less than two years to the planned establishment of the AEC, Singapore should take bold and decisive steps in Budget 2014 to lead this endeavour. This will put Singapore businesses in a strong position to take advantage of the benefits the AEC stands to offer.
Harvey Koenig is the executive director for the tax practice, and Ho Kah Chuan is the director for tax with KPMG in Singapore. The views expressed here are their own. This article originally appeared in Business Times (Singapore) on Feb 8.