Research finds tax incentives key for Asean FDI

Tax incentives have played a vital role in multinational firms investing in Asean, but their effectiveness has been reduced for high-tech companies and those that already operate in the region, according to research conducted by a lecturer at Chulalongkorn University’s economics department.

Tax holidays have a significant effect in attracting multinational companies to invest, particularly in Asean, where competition has intensified among member nations, said Athiphat Muthitacharoen.

The effective average tax rate has

declined over the past two decades as fierce competition among tax holidays has drawn more foreign companies to Asean.

If Thailand revokes all tax holidays, while tax incentives offered by other countries remain unchanged, the study found Thailand would lose 8.2% of multinational firm investment, he said.

By contrast, Thailand would gain 11% in multinational investment value if tax incentives’ were extended for another year, said Mr Athiphat. The effectiveness of the incentives would be neutralised if other Asean countries offer the same measures, he said.

His research was based on information

from 6,616 multinationals that invested in five Asean countries — Thailand, Indonesia, Malaysia, the Philippines, and Vietnam — during 2000 to 2016. The top five nations with multinational firms investing in Asean were Japan, Singapore, the US, Britain and Germany.

Mr Athiphat said tax holidays have a lower impact on the investment decisions of high-tech companies and return investors that already have operations in the region.

Rather than tax incentives, high-tech companies prioritise ease of doing business, policy continuity and regulations when deciding on investments, he said.

For return investors, who account for 30% of the 6,616 companies, tax holidays are less important than new investors as they are familiar with business opportunity, risk and supply chain in host countries.

Mr Athiphat recommends the government focus more on innovation than tax incentives to draw high-tech foreign companies to invest in Thailand.

“The research also found multinational companies that have operations in tax havens paid less attention to tax incentives than those without connection with tax havens,” he said.

Multinational companies with tax

haven connections represented 60% of the 6,616 companies, and tax evasion was found to have happened the most in Thailand of the five Asean countries, said Mr Athiphat.

“Thailand should seriously tackle international tax dodging by enforcing preventive measures to close loopholes. Transfer pricing laws will be enforced next year and the country does not have laws concerning thin capitalisation,” he said.

Transfer pricing describes a transaction where taxable income is distorted by a price strategy used by multinational enterprises to move profits to a lowertax jurisdiction.