Tax harmonisation in Asean: Singapore should take the lead

[Singapore] Establishing the Asean Economic Community (AEC) after years in the making was a significant milestone for the regional economic integration agenda. The AEC was designed to eventually create a single regional market and production base by facilitating a freer flow of goods, services, investment, capital and skilled labour among member nations.

The reduction in trade costs through the simplification of cross-border trading processes, including customs procedures and harmonisation of technical regulations, has been an important achievement that reflects the promise of the AEC.

In the next phase of Asean economic integration from 2016 to 2025, the regional grouping, in its AEC Blueprint 2025, has proposed greater taxation cooperation among member states so as to underpin the competitiveness of the region.

The committed measures seek to improve the network of bilateral tax agreements and enhance withholding tax structures where possible, so as to promote the broadening of investor base in Asean debt issuance; address base erosion and profit shifting (BEPS); and explore the possibility of a global taxpayers' identification number.

One aspect that was notably excluded in the blueprint is income tax harmonisation. In the strictest sense, tax harmonisation encompasses making tax rules and rates more uniform across the region and prevents competition among nations through taxation.

However, given that Asean is such a diverse group with economies at varying stages of development, it begs the question of whether this "strong" form of harmonisation would be possible to achieve.

Asean is not alone in this challenge. In the European Union (EU), attempts to harmonise the corporate tax base has faced strong headwinds, with some quarters arguing that such moves could damage competition in the single market.

However, the push for harmonisation is not without merits. Proponents argue that such a move would significantly reduce tax compliance costs and the complexities in understanding different taxation rules, and eliminate unintended tax obstacles to cross-border business growth.

A 'middle-ground' approach

It would be beneficial to then land on a "middle ground" approach, where cross-border business in Asean is not hindered by diverse income tax policies, and foreign investors would be encouraged to view Asean as a single large growth market, rather than a collection of individual countries.

Perhaps even having a "soft" approach to harmonisation of income taxation in Asean might work towards this end.

For a start, the Asean Forum on Taxation Working Group has, among its initiatives, a strategic action plan to proceed with the harmonisation of withholding tax rates among Asean member states, and the exchange of information and training programmes for tax policy and administration in the region.

This is a good step forward in the desired direction. This is also in line with the work carried out by the Study Group on Asia Tax Administration and Research, of which most of the Asean countries are members and where Singapore was a recent chair too.

Apart from harmonising withholding tax rates, adopting and applying a consistent interpretation of certain tax terms and concepts, and implementing some form of common standards for tax administration is also needed to encourage foreign investment.

Consider this example, where a lack of consistency can lead to double taxation: A Singapore tax resident company receiving a software payment from another Asean tax treaty country, where it is viewed as a royalty payment and would attract withholding tax. However, Singapore may, under an OECD-based interpretation, not view the payment as a royalty and deny the granting of foreign tax credit for the withholding tax.

Consistency is also needed in the application of permanent establishment (PE) rules. Currently, there are varying definitions of PE in tax treaties and how different tax authorities interpret the PE concept, creating yet again another potential pitfall.

Another area of divergence is the views of tax authorities on the concept of beneficial ownership. This will affect how treaty relief, in the case of dividends, interest or royalty income, is obtained.

Varying standards

From an administrative standpoint, there are also varying standards applied by different tax authorities for the purpose of applying reduced or zero withholding tax rates specified in tax treaties. Certain countries require taxpayers to furnish only a certificate of residence (COR), while others require taxpayers to demonstrate beneficial ownership through a list of questions before granting the treaty reliefs.

With the increased focus on BEPS, many companies today face transfer pricing disputes in more countries than one. Thus having a uniform set of transfer pricing rules, such as a safe harbour mark-up for routine services, approaches or methodologies to determine arm's length price, transfer pricing documentation requirements and timelines to submit master files and country-by-country reports, will be useful.

Further, in view of the digital economy where more income is expected to be derived through e-commerce, there is a pressing need for Asean tax authorities to establish a common set of rules to tax e-commerce transactions.

Getting different countries with varying approaches and standards on taxation to agree on a consistent set of rules will be a gargantuan task. Notwithstanding, steps - no matter how small - can be taken towards the end goal of harmonising certain tax treatments within the Asean countries.

Recently, Singapore said that the country will pursue an Asean e-commerce agreement and an innovation network to help businesses expand and leverage the e-commerce market potential in South-east Asia. This will help to grow the intra-Asean market and position Asean as an integrated community for foreign trade and investments.

It is opportune for Singapore, as current chair of Asean and being known for its quality, reliability and pro-business stance, to take the lead in pushing for tax harmonisation as a means of realising the goals of economic integration.