April 16, 2014 2:10 am JST

Newer Asean members' revenues pinched by free trade zone

MANABU ITO, Nikkei staff writer

HANOI -- Less-developed members of Asean are struggling to replace tax revenues being lost as they move to reduce tariffs in line with the Southeast Asian bloc's plans for regional economic integration.

     To promote free trade across the region, members of the Association of Southeast Asian Nations are aiming for the complete abolition of tariffs by 2018. Indonesia, Malaysia, Singapore, Thailand, Brunei and the Philippines had removed tariffs on 99% of targeted items by late last year.

     More recently developing nations that did not join Asean until the latter half of the 1990s -- Vietnam, Myanmar, Laos and Cambodia -- plan to do away with all tariffs by 2018.

     The hope is that trade liberalization will prop up economic growth over the long term, leading to increased tax revenues. But in the nearer future, slashing tariffs is seen contributing to budget deficits of the Asean latecomers.

     Vietnam has begun considering hiking special consumption taxes on domestic goods. The government seeks to raise the levy on tobacco products to 75% from the current 65%, while beer and wine would be taxed at 65%, up from 50%. A new tax would be slapped on carbonated beverages.

     The measures mark a change of course from recent years, when Vietnam effectively cut corporate and individual income taxes. The steps are to be reviewed by the legislature and could take effect as early as July of next year. The Ministry of Finance sees the hikes boosting 2016 tax revenue by an estimated 7.8 trillion dong ($369 million).

     The country has already cleared tariffs from 72% of targeted items and aims to gradually lower tariffs to zero by 2018. But its budget plans estimate that tariffs will still account for 11% or so of this year's 677 trillion dong in tax revenue, suggesting that their abolition will lead to a large and unavoidable revenue decline.

     Vietnam is not the only country that has hastened to shore up tax revenue. Laos adopted a 10% value-added tax in 2010, and Cambodia is considering raising special levies on luxury goods.

     Less-developed Asean members face difficulties in collecting taxes, lacking adequate mechanisms for keeping track of citizens' income. This is why they have relied on tariffs and corporate taxes to generate a large share of their revenues thus far.

     The latecomers also bear the weight of ballooning expenditures for infrastructure development, education and social security. Their budget deficits are feared to be on track to grow. Left unaddressed, this could plant the seeds for the financial collapse of Asean from within.

     At the same time, pressure is mounting for Asean members to lure foreign investment by expanding tax benefits and cutting corporate tax rates. Vietnam lowered its corporate tax from 25% to 22% this January. Myanmar had already reduced its rate from 30% to 25% in April 2012.

     Asean governments will have to strike a tricky balance between bolstering fiscal health with higher taxes and ensuring continued growth with tax incentives for businesses.