Tax certainty - another way to increase Thailand's competitiveness

All corporations need certainty in many ways, but particularly tax certainty. Ask foreign investors for the top things they want to know on tax matters, and one of the replies that are sure to make the list will be whether they will have to pay tax and, if so, what for and how much.

According to economic principles, there should be certainty in taxation, because uncertainty creates a favourable climate for tax evasion, hence compromising the taxation objectives. According to this principle, how much each individual taxpayer is bound to pay should be certain. The time, the manner of payment and the amount to be paid must also be clear. Thus there should be no element of arbitrariness as to what the tax amount is and when and where it is to be paid.

In fact, when corporations say they need “tax certainty”, what they really mean is whether taxes will go up, stay the same or go down, as this will have a significant impact on their costs, their profits and how they run and operate their businesses. It will also affect any decisions they make on new investment.

Corporate income tax is one of the major costs for businesses. Based on the current regulations, the reduced corporate rate of 20 per cent in Thailand will be going back to the statutory rate of 30 per cent after December 31, 2015. There is still no clue from the government on whether the 20-per-cent rate will be continued. 

What about value-added tax? The reduced VAT rate of 7 per cent will be increased to the statutory rate of 10 per cent after September 30, 2015. VAT is a consumption tax, and it isn’t a real cost to businesses but instead to end-users. Therefore, although the VAT rate will be increased, instead of directly affecting costs for businesses, it affects their administrative processes.

Thailand has a long track record of being foreign investors’ destination of choice. This is because of an integrated business infrastructure, attractive policies on foreign direct investment and a large workforce.

Despite prolonged political uncertainty, investors have remained resilient in their confidence. Nonetheless, because of uncertainty in tax policies compared with neighbouring countries, foreign investors are now unsure if Thailand is still the destination of choice.

If tax policies remain uncertain – for example, if the government still has no plan for what the corporate income-tax rate should be – it will be very difficult for investors to conduct a feasibility study and make a decision to put their money into Thailand. Foreign interests may eventually decide to invest in countries that provide similar incentives but are more certain in their tax policies, such as Malaysia or Singapore.

Setting aside the corporate income-tax rate (whether it’s 20 or 30 per cent or something else) for the time being, clear decision-making on tax policy (whether the tax rate will go up or down) is just as important as the rate that is actually chosen. The government should provide certainty through its tax policy.

From an investor’s point of view, if the law has not yet been changed, the corporate income-tax rate will be going back to the statutory rate of 30 per cent.

So what do investors need to see from the Thai government regarding its tax policy? 

Instead of issuing a Royal Decree to reduce the corporate income-tax rate for a temporary period, investors may want to see the government reassure investors by amending the Revenue Code to make the new tax rate permanent. This would allow the investors to know how much tax they will have to pay, and help them make decisions appropriately.

Each country should develop tax policies to encourage business, investment and growth. The globalisation of trade and investment has created an increasingly competitive environment. A stable tax regime is essential to enable corporations to make informed commercial decisions that will support and encourage growth. This would also make Thailand more competitive against other Asean countries.

So it’s better to make a hard and fast decision on taxation policy in order to support the country’s economy.