Andrew Jackomos and Paul Ashburn, Senior Partners, BDO Advisory, on preparing for implementation of the AEC

The Association of South-East Nations (ASEAN) is moving towards a more integrated and interdependent future with creation of the ASEAN Economic Community (AEC) by 2015, of which Thailand will be a part.

With aspirations of turning the ASEAN region into a single market and production base, the AEC will serve as a catalyst for local businesses with international aspirations to expand in the ASEAN region.

The AEC blueprint does not contain action points to harmonise national tax policies, so member states may use tax legislation to compete for investment and trade within ASEAN. For its part, The Thai government is focused on implementing tax policies that will improve the country’s competiveness in preparation for 2015.

Thailand’s headline corporate tax rate has recently been reduced. The tax rate for the first accounting period commencing on or after January 1, 2012 was slashed from 30% to 23%. The tax rate will be reduced further to 20% for the next two accounting periods commencing on or after January 1, 2013.

The new tax rates compare favourably with other ASEAN countries, including Malaysia and Vietnam’s current standard corporate tax rate of 25%. Thailand will now move from being a nation with one of the highest corporate tax rates in ASEAN to the lowest, apart from Singapore’s 17% rate.

The economic development plan for ASEAN pays special attention to the development of small and medium-sized enterprises (SMEs) in the region. For the last several years, SMEs in Thailand have received preferential tax treatment, including lower corporate tax rates and accelerated depreciation benefits.

The first BT150,000 ($4785) of net profit of an SME is exempt from income tax and the next BT850,000 ($27,115) is subject to only 15% tax. The new tax rate of 23% will apply to profits exceeding BT1m ($31,900) for the accounting period commencing on or after January 1, 2012. Like the general corporate rate, the SME tax rate will then be reduced to 20% for accounting periods commencing on or after January 1, 2013.

To be eligible for the SME rates, two conditions must be met. First, the company’s paid-up share capital cannot exceed BT5m ($159,0000) on the last day of its accounting period. Second, the income derived from the sale of goods or provision of services during the accounting period must not exceed BT30m (9357,000). The lower corporate tax rates will have important benefits for Thai and foreign firms alike, as well as having wider implications for foreign investment in general.

Alongside the corporate tax reform, the Thai Revenue Department is also studying proposals to reduce personal income tax rates, again at the impetus of improving Thailand’s competitiveness in the ASEAN region.

On the international tax front, double tax agreements with Thailand’s trading partners continue to grow. A total of 55 such agreements are now in place – the latest one entering into force with fellow ASEAN member and neighbour Myanmar – helping to reduce tax costs and improving profitability for Thai and foreign companies engaged in international trade. The Thai Revenue Department has said that it is also seeking a double tax agreement with Cambodia as part of the effort to prepare for the implementation of the AEC.

Another important development has been the introduction of new tax incentives for regional operating headquarters. Such incentives make Thailand a more attractive and competitive location comparable with other countries in the ASEAN region.

Various tax incentives continue to be offered and refined for many industries by Thailand’s Board of Investment (BOI). Foreign investors may also find themselves considering BOI promotion for a number of reasons other than tax benefits. Land ownership rights, visa and work permit privileges for foreign experts, and securing majority ownership of their businesses are often also cited as important considerations for companies seeking BOI promotion.

The move to cut corporate tax rates and similar tax reforms signal that Thailand is serious about improving its competitiveness in the lead up to the AEC in 2015.