Article in The Nation, February 03, 2012
By Jonathan Blaine, KPMG Tax Associate Principal
Theeradaje Tansuwanrat, KPMG Tax Associate Director
One date looms large over Asean member states: 2015 will see the creation of the Asean Economic Community, or AEC.
The AEC will create a single market and production base among all 10 Asean members.
In order to accomplish these two objectives, Asean national governments have committed to ensuring measures are implemented that will provide for five freedoms, modelled along the lines of the European Union's four freedoms: 1) the free movement of goods; 2) the free movement of services; 3) the free movement of investment; 4) the free movement of capital; and 5) the free movement of labour across borders of member states. With only two years left before the AEC comes into effect, the Thai government is right to be pushing for graduated reforms now, rather than waiting for potentially disruptive changes to emerge once the AEC springs to life.
One significant consequence of the freeing up of capital and investment flows within the AEC is the potential for capital to migrate across borders in order to seek the most profitable returns. Some of these movements will be motivated by regulatory differences among the states (often referred to as regulatory arbitrage), as differences in compliance burdens between states equate to differences in compliance costs. One aspect of these differences will be variations in national income tax systems and income tax rates, creating corresponding tax arbitrage opportunities. Countries with higher rates of taxation could see significant outflows of capital and investment to neighbouring states with lower rates.
In recognition of the potentially negative impact of capital outflows to Asean neighbours and with a view to promoting Thailand as an investment hub within Southeast Asia, the government is preparing for the AEC by implementing timely reforms and proposals focused on improving Thailand's competitiveness as a location for capital and business investment. Included in recent government reform proposals and discussions is an acknowledgement that the historical 30 per cent corporate income tax rate is no longer competitive with the tax rates of other Asean member states.
To correct this, the Cabinet issued a resolution in October, stating its intent to lower the rate from 30 to 20 per cent. The government sought to initiate a phased reduction in the tax rate over a three-year period by issuing Royal Decree (RD) 530 on December 21. The RD provides for a reduction in the corporate income tax rate in two phases:
_ First, a reduction to 23 per cent for the tax year beginning on or after January 1, 2012, and
_ Second, a further reduction to 20 per cent for tax years beginning on or after 1 January 2013, but effective for only two periods (ie, for the tax years 2013 and 2014).
The RD does not accomplish a permanent reduction in the corporate income tax rate. Instead it gives parliament a three-year window of opportunity - 2012, 2013 and 2014 - to consider the permanent reduction in the corporate income tax rate envisaged by the Cabinet along with other measures geared toward effectively implementing the reforms needed to effectuate the transition to the AEC.
While concerns have been expressed that the 30 per cent corporate tax rate could come back into force in 2015 if the RD were to expire without the requisite legislative action, these appear to be unfounded as it is believed that the appropriate legislation can be enacted prior to the formation of the AEC. This position was confirmed earlier this month when the Federation of Accounting Professions (FAP) issued a pronouncement that the 20 per cent rate should be used for all computations based on estimated tax rates, such as provisions for deferred taxes, for accounting periods from 2013 onwards. The FAP based this determination on a judgement that while the change in rates from 2015 had not been formally enacted, it had been substantively enacted. It is therefore concluded that this reduction in business tax rates is here to stay, with long-term benefits for both future capital and business investment in Thailand.
This will come as welcome relief indeed, given the substantial rebuilding efforts and slower prospects for growth over the near-term as a result of last year's floods.
This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.
Corporate income tax rates for 2011