taxation, regulation, and rule of law reform challenges for the philippines and the asean

STRATBASE RESEARCH INSTITUTE

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TAXATION, REGULATION, TRADE and RULE of LAW: REFORM CHALLENGES for the PHILIPPINES and the ASEAN

Copyright 2014 SRi Stratbase Research Institute. All rights reserved.www.stratbase.com.ph

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The Association of South East Asian Nations (ASEAN) Economic Community (AEC), a common market for the 10 member-states of the association, will materialize in January 2015 or just more than a year from now. Various reform measures are being done by the member-states to attain various degrees of economic competitiveness to optimize freer trade not only with neighbors in the ASEAN but for the rest of the world in general.

As the title suggests, this paper will cover four subjects: taxation, regulation, free trade, and rule of law. This paper will argue that the Philippines and the rest of ASEAN should have less of the first two and more of the last two, if they wish to be more competitive economically, and in the process, create more higher-paying jobs, reduce unemployment and poverty.

Taxation, Regulation, Trade and Rule of Law: Reform Challenges for the Philippines and the ASEAN1

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A. ASEAN Taxation

Taxes in the region in general, are not that high compared to other regions and economic blocs around the world. The Philippines though, is a bit problematic because it has higher and plentier taxes and fees compared to its neighbors. For instance, while corporate income tax rates for the nine other member-states are just 20 to 25 percent, the Philippines has 32 percent. In personal income tax, the range is wide, from zero in Brunei to 35 percent in Thailand and Vietnam. The reform challenge for the Philippines and other ASEAN members except Brunei, is to approximate Singapore’s low and simple tax rates, 17 percent for corporations and 20 percent for individuals.

Expanding to other economies in the Asia-Pacific region, this is how the picture looks. The Philippines has one of the highest overall tax rates in the region, along with Australia, Myanmar and Japan. The colors brown-pink-orange represent profit tax, labour tax, and other taxes, respectively.

Table 1. Major Taxes in the ASEAN, 2013

Source: KPMG, 2013.ASEAN Tax Guide, Overview, p. 10.


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4Low and simple taxes are among the important incentives to attract many businesses and professionals from Europe and North America as they are looking for alternative countries and regions where their businesses can be based and escape high and complicated taxes in their home countries.

B. ASEAN Regulations

Regulations, restrictions and prohibitions are among the banes of entrepreneur-ship and job creation. Many regulators tend to think that “things should not move, no one should do something, unless they get our signatures and permit.” If the regulators can only do that philosophy and prohibitions to thieves, murderers and other criminals, we should have a very peaceful world.

Below are two tables showing how bureaucratic, how easy or uneasy it is to do business in selected countries in the Asia-Pacific. The Philippines is among the hard/bureaucratic-to-do-business in the region. To start a business, it will take or require 15 different procedures and permits from local to national government agencies, lasting for 35 working days on average. To get a construction permit, it will take about double these two numbers cited.

Table 2.Total Tax Rate, Asia-Pacific, 2013

Source: PWC, Paying Taxes 2014, p. 130


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5It is easier to do business in socialist Vietnam than in capitalist Philippines and Indonesia. Cambodia, Laos and Myanmar seem to be still in the “distrust and heavily regulated businesses” mindset. A consolation, if any, is the fact that it is much worse in many African and South American economies, than those in Laos, Cambodia and Myanmar.

Table 3. Ease and Unease in Starting a Business and Getting Construction Permits in ASEAN-9

Source: WB-IFC, Doing Business 2014 Report

Let us compare those numbers in ASEAN-9 with Singapore, Hong Kong and other developed economies in the region. These economies tend to be more business-friendly than those in the developing world. Note the top three economies around the world in ease and simplicity of doing business, Singapore, Hong Kong and New Zealand.


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Table 4. Ease in Starting a Business and Getting Construction Permit in Developed Economies of Asia-Pacific


C. ASEAN Free Trade

Despite business bureaucratism in a number of East Asian economies, there is higher appreciation for free trade compared to other regions in the world. There is higher recognition that high import tariff rates mean more expensive goods and services domestically. Two charts and three tables are presented here and they show this.

Acronyms below: CEPT - Common Effective Preferential TariffCLMV - Cambodia, Laos, Myanmar, VietnamASEAN 5 - Indonesia, Malaysia, Philippines, Singapore, Thailand.


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7From 13 percent intra-ASEAN tariff two decades ago, it is now down to zero for the ASEAN 5. CLMV is approaching the zero tariff very soon. And one result of free trade policy being slowly implemented in the region is the high and fast growth of merchandise exports as member-countries are integrated more and more to the rest of the world.

The socialist, supposedly anti-capitalist economies of China and Vietnam, were among the main beneficiaries of free trade and global capitalism and commerce. In just 17 years, 1995 to 2012, Vietnam’s exports expanded 21x while that of China’s expanded almost 14x. In contrast, many of their neighbors’ exports expanded by just 3x to 7x. Vietnam has twice the size of exports compared to the Philippines in 2012.

Protectionism though, can never be eliminated. It comes out in various forms, like local or domestic taxes that can be several times larger than tariff rates. Like the Philippines’ value added tax (VAT) of 12 percent, much higher than average tariff of 0-3 percent for ASEAN members. Then there are corruption issues. Tariff may be just 0.5 percent but Customs bureaucratism can delay the release of imported goods for days or even weeks, unless the importers will pay them extortion money.

Chart 1. Intra-ASEAN Preferential Tariffs, Average CEPT Rates,1993-2012, in Percent

Source: ASEAN Secretariat and the WB, 2013. ASEAN Integration Monitoring Report

Table 5. Mechandise Exports, in $ Billion

Source: ADB, Key Indicators for Asia and the Pacific 2013, www.adb.org/statistics


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Other examples of non-tariff barriers (NTBs) or non-tariff measures (NTMs), foremost are technical regulations, like sanitary and phytosanitary standards (SPS) and non-automatic licensing.

The “Doing Business” annual reports also give a glimpse of various types of trade protectionism. In the “Trading across borders” category, these data were shown in each country table.

Among the ASEAN-9, six ranked well globally. Myanmar, Cambodia and Laos ranked poorly. The developed and exports-oriented economies of Asia-Pacific showed very high global ranks, along with export giants USA and Germany. The Philippines and other Asian economies can learn from their policies of short and simple processing period.

Chart 2. Non-Tariff Measures (NTMs) in ASEAN by Type -- Officially Notified

Source: ASEAN Secretariat and the WB, 2013. ASEAN Integration Monitoring Report

Table 6. Ease or Unease of International Trade, ASEAN-9



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There is one trade agreement that is already in force in ASEAN, the ASEAN - Australia - New Zealand Free Trade Area (AANZFTA). It is a comprehensive and single-undertaking agreement that creates new opportunities for the 620+ million peoples of the 12 countries which have a combined economic output of USD 2.65 trillion.

Table 7. Ease of International Trade, Developed Asia-Pacific plus USA and Germany

D. Rule of Law

In the classical tradition and discussions of the “role of government” and “raison d’etre’ (reason for existence) of governments, rule of law and protection of three basic freedoms – freedom from aggression, freedom to


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own property and freedom of expression (right to liberty) – stood out. Yet, in many countries around the world, government corruption and lack of rule of law is a perennial problem.

The World Justice Project has produced the Rule of Law Index annual reports. Nine factors were considered in constructing the index: (1) Constraints on government powers, (2) Absence of corruption, (3) Open government, (4) Fundamental rights, (5) Order and security, (6) Regulatory enforcement, (7) Civil justice, (8) Criminal justice, and (9) Informal justice. Below is the result for this year’s report.

The Philippines ranked low, 60th out of 99 countries.

The report discussed the “Four Universal Principles of the Rule of Law”:

1. The government and its officials and agents as well as individuals and private entities are accountable under the law.

2. The laws are clear, publicized, stable, and just; are applied evenly; and protect fundamental rights, including the security of persons and property.

3. The process by which the laws are enacted, administered, and enforced is accessible, fair, and

4. Justice is delivered timely by competent, ethical, and independent representatives and neutrals who are of sufficient number, have adequate resources, and reflect the make up of the communities they serve.

While the four principles adopted by the WJP are generally fair, the Hayekian definition of rule of law -- equal application of the law to unequal people – is much easier to understand. Friedrich Hayek wrote in his book, “The Constitution of Liberty” (1961),

“By ‘law’ we mean the general rules that apply equally to everybody.… As a true law should not name any particulars, so it should especially not single out any specific persons or group of persons.”

Freedom Barometer Asia also has its ranking of countries based on (a) political freedom, (b) economic freedom, and (c) rule of law. To get the score or index for rule of law, three factors were considered: (1) Independence of the Judiciary, (2) Corruption, and (3) Human Rights. Here is the result for countries in East Asia.

Table 8. Overall Global Ranking, Rule of Law Index 2014, Out of 99 Countries Covered

Source: World Justice Project, Rule of Law Index 2014


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11ENDNOTES:

1 Presented at the forum, “An Economic Reform Agenda for ASEAN Competitiveness”, Citizen Watch Pre-SONA Round Table, sponsored by Stratbase Research Institute.Tower Club, 33rd Floor, Philam Life Tower, Makati City, July 23, 2014.

2 President, Minimal Government Thinkers, Inc., Manila Comments: http://funwithgovernment.blogspot.com/, [email protected]

E. Concluding Notes

1. The Philippines and other Asian economies need to reduce and simplify their tax rates. “Tax competition” will become the rule in the coming years along with exports and economic competition. Many businesses and profes-sionals will flock to economies that offer low and simple tax rates.

2. Likewise, the Philippines and other Asian economies need to reduce bureaucracies that affect business. Entrepre-neurship and job creation are not criminal acts that require lots of bureaucracies and permits from government.

3. Free trade results in cheaper products and services for the participating economies as it opens up plenty of op-portunities where to buy important capital and consumer goods, and where to sell the same to other countries.

4. High number of laws in each country can be a hindrance to rule of law, if one will consider national or federal laws (like Republic Acts) + state or provincial laws + city or municipal laws + village/barangay laws and ordinances. Plus Executive Orders, Department or Ministry Orders, Administrative Orders by Bureaus, one is talking about tens of thousands of laws and orders. This defeats WJP’s Principle #2: “The laws are clear, publicized, stable, and just...”. The numerosity of laws alienate the ordinary people, hence the need to get lawyers to understand those numerous laws and orders.

5. To encourage economic competitiveness of the Philippines and the rest of ASEAN, they need less taxation and business regulations, more trade and rule of law.

About the Author

Bienvenido “Nonoy” Oplas, Jr.2 is the founder and President of Minimal Government Thinkers, Inc. a free market think tank . Its primary objective is to advance the philosophy of limited government, small and simple taxes, free trade, personal responsibility, and rule of law.

Mr. Oplas received his AB Economics undergraduate degree and Diploma in Development Economics (DipDE) from the University of the Philippines. He is the author of Health Choices and Responsibilities (Central Book Supply Inc., 1991, 232 pages) and soon to be pub-lished Liberalism, Rule of Law and Civil Society. He is also a columnist for interaksyon.com, TV5’s news portal, under “Fat Free Economics.”

Table 9. Rank and Score in Rule of Law Category, Freedom Barometer 2013

Source: http://freedombarometer.org/start-page/asia/ranking/

taxation, regulation, and rule of law reform challenges for the philippines and the asean

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