The Asean Economic Community (AEC) officially came into effect on Dec 31, 2015. Businesses may not have noticed any difference that day as many of the related agreements were already in place; the date was more of a milestone on a longer journey. The next milestone is in 2018 when all goods of Asean origin will be free of import tariffs within the region under the Common Effective Preferential Tariff (CEPT) scheme of the Asean Free Trade Area.
Building on the CEPT is the Asean Trade in Goods Agreement (Atiga). Both underpin the concept of a single market and production base with a free flow of goods. "Free flow" should not be confused with a European "open-border" style common market. The AEC free flow is more about goods being free of customs duty.
Free flow also reflects improvements to customs clearance processes such as the Asean Harmonised Tariff Nomenclature (AHTN) and Single Administrative Document (SAD), as well as the continuing work on the Asean Customs Transit System, e-origin certificates, and the ambitious Asean Single Window.
Customs import duties are a significant source of government income in Asean, in some cases accounting for more than 40% of a nation's tax revenue. Customs tariffs, as is their role, also provide some protection to domestic industry by making imports less competitive. As free trade expands, how have some governments responded to these issues? Among other things, they have reformed excise taxes, increasing rates and expanding the range of goods covered.
Excise tax traditionally has had a narrow scope, covering consumer goods that have an element of "sin" or "harm" such as alcohol, tobacco and fuel, as well as luxury items such as motor vehicles, jewellery, perfumes and yachts. However, in recent years the list has expanded to include sugary drinks, saturated fatty foods, and environmentally harmful goods such as engine lubricants, plastic bags and chemicals.
Excise tax rates have risen rapidly as governments have been trying to replace declining customs duty revenue; in some cases excise tax now exceeds the value of the goods. This gives rise to more smuggling of goods such as alcohol, cigarettes and fuel, moving from country to country until they "disappear" from the legitimate supply chain.
Honest traders face not just being undercut in the market, but also the logistical headaches arising from revenue agencies' attempts to curb smuggling, such as affixing tax stamps or special inks to goods sitting on wharves or in bonded warehouses.
As import taxes fall, the number and type of non-tariff barriers (NTB) to trade have been rising, which goes against the spirit of the AEC. For industries that pay excise, the tax itself has become an increasingly popular form of NTB.
Where excise taxes are so high that a product pays more if imported than if made locally, then the effect is to make the imported product far less competitive. Doesn't that sound like the role of customs tariffs? This is usually achieved by creating "special" lower tax categories that only local products can meet. Such practices are banned under Atiga and also breach "national treatment" rules under the World Trade Organization. The Philippines discovered this in 2012 when the WTO ruled that imported liquor was paying between 10 and 40 times more excise tax than similar domestic products.
Discriminatory excise taxes and other forms of NTBs have the potential to undermine the good work achieved under the AEC. The creation of a single market and production base is critical to the success of key regional industries such as automotive, which increasingly needs free access to all 630 million Asean consumers to thrive and also compete globally against the likes of Chinese and Indian automakers.
Sadly, the Asian Development Bank and others have found that the automobile sector has one of the highest incidences of NTBs, including excise-based levies, negating all benefits of free trade.
However, on a positive note, it would appear the issue is understood at the highest levels. Asean leaders at their summit in Kuala Lumpur last November signed off on a new AEC Blueprint 2025 that calls for the removal of NTBs over the next decade. Significantly, the document also calls for the region to better collaborate on excise taxation of goods commonly subject to this type of tax.
Perhaps this is an opportunity to follow the success of the AHTN and adopt a regional document that standardises how excise goods are defined, classified and applied. Such an agreement would not only start to introduce some consistency and certainty in trading excise-taxable goods, but would remove some of the opportunities to design excise tariff systems that operate as NTBs.
Rob Preece is course director of Excise Studies and the Southeast Asian representative for the Centre for Customs & Excise Studies at Charles Sturt University in Canberra, Australia. A 10-year resident in Bangkok, he is also a PhD candidate whose thesis looks at the question of excise tax policy coordination in Asean. The Link is coordinated by Barry Elliott and Chris Catto-Smith as an interactive forum for industry professionals. We welcome all input, questions, feedback and news at: BJElliott@ABf1Consulting.com, cattoc@freshport.asia