At a press conference held on August 4th in Bangkok, the Director General of the Revenue Department of Thailand Satit Rungkasiri revealed that new a report has been completed with projections for the fiscal effects likely to arise from the government’s planned corporate tax rate cuts.

As reported previously, the ruling Pheu Thai Party of Thailand intends to reduce the current 30 percent corporate tax rate to 23 percent by the end of 2012, and slash it to an even lower 20 percent in 2013. The Revenue Department has already prepared a draft of the Royal Decree, which will be presented to the government for approval shortly.

According to analysis prepared by the Department, the proposed tax cuts will cost the government approximately THB 150 billion in tax revenue losses over the next three years. It is expected that the change will see tax collections drop by THB 45 billion in 2012, THB 70 billion in 2013, and THB 35 billion in 2014. The revenue stream is expected to return to the levels seen in the fiscal year 2011 before 2015. The Director General explained that following the rate reduction, the country should see higher levels of foreign investment and business growth, and decreased levels of tax avoidance. He also pointed out that the lowered tax burdens should result in greater tax compliance and significant drops in the occurrence of tax evasion in Thai society.

International tax analysts believe that the diminished tax revenues from corporate income tax collections in Thailand will be balanced by the scheduled increase to national value added tax (VAT) rate. Earlier the Revenue Department announced that the VAT will rise from the current 7 percent to a new rate of 10 percent in September 2012.

The government’s tax revenues for this year are expected to be approximately 15 percent higher than targeted, which will also help balance the lowered tax collections of next year.

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According to a statement made by the director general of the Revenue Department of Thailand Satit Rungkasiri on July 25th, the Department is now ready to implement a cut to the country’s corporate income tax rate, as was proposed by the newly elected Pheu Thai Party. Although, the Revenue Department is also recommending that an increase to the national value added tax (VAT) rate be instated, in order to compensate for any losses in revenue.

On July 3rd the Pheu Thai Party of Thailand won the country’s general election, gaining 265 of the 500 seats in the House of Representatives. The party campaigned on a promise of slashing the national corporate tax rate if it wins the election.

In line with the ruling party’s promises, Satit Rungkasiri said that the Revenue Department is ready to immediately cut the corporate tax rate from the current 30 percent to 23 percent. Preparations are also underway to carry out the long term plan of cutting the rate by an adittional 3 percent when economic conditions allow.

According to the Revenue Department’s estimates, the rate cut will result in tax revenue losses of approximately THB 150 billion (USD 5.04 billion), although the move would improve the national economy and greatly increase levels of foreign direct investment into Thailand. Satit Rungkasiri recommended that the government should also consider raising the current 7 percent VAT rate, as the economy expands. He added that since many consumer necessitates are already VAT exempt, a tax increase would not have a large negative effect on low income earning taxpayers.

In conjunction with the impending tax changes, the Revenue Department is also planning to increase tax collections efficiency and national tax compliance, by establishing new information infrastructure between the Bank of Thailand and the Commerce Ministry. Once the project is complete the Revenue Department will have real-time information regarding business transactions carried out in the country.

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Over the weekend the Deputy Director General of the Revenue Department of Thailand Anant Sirisaengtaksin indicated that the country’s corporate tax rate could soon be reduced to 18 percent, from the current level of 30 percent. The move would be accompanied by a 3 percent increase in the Value Added Tax (VAT) rate, to a level of 10 percent, aiming to offset any revenue losses the Government might see from the tax rate reduction.

According to the Deputy Director, the rate slash is being considered in preparation for Thailand’s upcoming membership to the ASEAN Economic Community (AEC) in 2015. The AEC is an agreement between the 10 member nations of the Association of South East Asian Nations (ASEAN), which will allow the untaxed movement of goods, investment and labor between the partner states. Anant Sirisaengtaksin claimed that Thailand’s geographic location among the other nations of the ASEAN community gave the country a competitive economic advantage, and a favorable tax system would serve to greatly increase business investment and boost the country’s competitiveness.

Anant Sirisaengtaksin also said that the reformed tax rates would allow the Revenue Department an opportunity to review the national tax system and potentially expand the tax base to cover a greater number of revenue sources, ultimately increasing government revenue levels. He added that while some experts might frown at the possibility of raised VAT levels, Thailand still has one of the lowest VAT rates in the world and a small increase would do little, if any, significant harm to economic activity. The Deputy Director also indicated that the Board of Investment of Thailand, a Government agency concerned with promoting business investment into the country, could lose its privileges in granting tax breaks and incentives to any corporate entity subject to the reduced income tax rate.

No indication was given by Anant Sirisaengtaksin for a potential time-frame to the proposed changes, although all alterations would need to be carried out by 2015. Local political analysts have suggested that the rate changes would not be initiated in 2011, as the country will soon have an election and political figures are likely to shy away from the always controversial topic of taxes for these elections.

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On May 18th the Asian Development Bank (ADB) released its annual Asian Capital Markets Monitor report, which investigates the performance and outlooks for the equity, bond and currency markets in emerging economies. According to the report, several factors have cumulatively increased the risk of Asian economies facing sudden high levels of investment capitals, leading potential destabilization of currency and financial markets.

Amidst worries of a continued national debt crisis in Greece and the Euro-zone, international investors have been paying greater attention to Asian economies. The interest has been further increased by the area’s swift and secure return to a positive economic condition after the international economic crisis. The ADB claims that the increased capital inflows could trigger significant upwards pressure in national currency, leading to volatility in valuation and the financial markets. Additionally, national inflation, which among emerging Asian economies is widely considered to be manageable, could be caused to increase. Cumulatively, sudden burst in overseas investment capital might lead to limitations in short and mid-term growth potential for emerging Asian economies.

The ADB recommends that Governments of vulnerable economies take action now to ensure that appropriate national policies are ready for potential investment inflows. Suggested policy considerations consisted of sound macro-economic management, flexible foreign exchange regimes, increased resilience of national financial systems, along with temporary and targeted capital controls. The suggestion of capital controls is especially aimed at nations which expect capital inflows to be transitory with significant destabilizing effects on exchange rates, and with uncertain national macro-economic policies.

Under the ADB’s classification, the emerging Asian economies consist of the People’s Republic of China, Hong Kong, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taipei, Thailand and Vietnam.

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On April 26th the IMF published a previously unreleased transcript of a speech given by Naoyuki Shinohara, Deputy Managing Director of the IMF, at the 14th ASEAN Finance Ministers’ Meeting, held on April 8th 2010 in Nha Trang, Vietnam. The speech focused on the key economic challenges the IMF perceives as facing ASEAN member nations. According to the Deputy Managing Director, to see strong economic growth, ASEAN members must overcome the fragile external economic environment, the potential for surges of inward capital flows, and the need to expand private domestic demand over the medium term.

Naoyuki Shinohara said that Asian nations are showing greater levels of economic recovery and fiscal stability, when compared to advanced economies. Cumulatively, the ASEAN members are projected to increase economic output by 5.5 percent over the 2010 year. Despite the positive outlook, ASEAN economies are highly reliant on external economic factors. The IMF does not expect credit conditions across the US and the Euro-Zone to normalize until 2011, and the Deputy Managing Director warned that ASEAN members need to balance this factor into the timing of their 2009 stimulus package withdrawal policies. He advised that policymakers should consider taking precautions to allow for agility in any present decisions, to cope with unforeseen economic shifts.

According to Naoyuki Shinohara, ASEAN economies face the unique challenge of possible spikes in foreign capital inflows. As the international economy recovers, it is conceivable that ASEAN nations will see higher than expected investment. In preparation for such eventualities, policymakers have been advised to tighten fiscal regulations, allow for greater flexibility in exchange rate in decision making, create macro- and micro-level policies to handle the spikes, and begin accumulating fiscal reserve to use as a safe-guard.

A warning was given to ASEAN Governments that pre-crisis fiscal policies favoring expansion of exports over the growth of local private consumer demand need to be addressed. The Director gave broad directives for ASEAN economies to instate reforms to improve private investment, raise productivity in services, and improve the overall private sector consumer demand.

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