Cablegate: "Cause I'm the Tax Man": Proposed Excise Tax Changes

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E.O. 12958:N/A
TAGS: ECON ETRD PINR PREL TH
SUBJECT: "CAUSE I'M THE TAX MAN": PROPOSED EXCISE TAX CHANGES
DISTRESS AMERICAN COMPANIES

REF: BANGKOK 2320 (DEPUTY FINANCE MINISTER ON CUSTOMS)

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1. (SBU) SUMMARY: U.S. companies have long complained about the
burden of Thailand's excise taxes, which are particularly high on
automobiles, gasoline, beer, wine, and distilled spirits. In recent
weeks, several U.S. companies have approached the Mission seeking
our advocacy efforts with regards to proposed amendments to the
already burdensome excise tax law regime. While the legislative
amendments are still being contemplated at the working level within
the Finance Ministry, business leaders are concerned that, should
they eventually become law, the amendments could adversely affect
imported goods. One of the amendments would give the Director
General of the Excise Department the discretionary authority to
determine the import value of a product, rather than relying on the
Customs-determined value. Another amendment would alter the tax base
calculation for imported goods from countries that have free trade
agreements with Thailand. As with customs issues, U.S. companies are
not alone in their complaints; Australian, Japanese, and other ASEAN
companies are discussing how these proposed changes could negatively
impact their businesses, too. The Mission has already raised
concerns over excise taxes with high-ranking Thai government
officials (reftel) to ensure progress made at Customs is not offset
by these backward steps at Excise. We fully expect several American
companies to raise this issue with Prime Minister Abhisit Vejjajiva
during his visit to New York for the UN General Assembly. Abhisit
will meet with U.S. business groups during three separate events on
the margins of UNGA and the G-20 Summit. END SUMMARY.

2. (SBU) COMMENT: With the Thai government's economic stimulus
packages depleting the government's coffers, the Ministry of Finance
may be looking for cash from its revenue-collecting agencies. While
the Revenue Department struggles to increase personal income tax
returns and the Customs Department collects fewer tariffs as
Thailand's free trade agreements kick into full gear, the Excise
Department is next in line to pony up to fill the treasury.
Unfortunately, the Department is looking at measures that could
adversely affect imported goods in particular -- giving
domestically-produced goods a competitive advantage in the market.
While customs reforms may be underway (reftel), companies are
concerned that these excise measures could counter any positive
gains made on customs and even negate some of the benefits of
Thailand's trade agreements.

"Don't Ask Me What I Want It For..."
------------------------------------

3. (SBU) In response to rumored pressure from the Ministry of
Finance to increase government revenues this year, the Excise
Department has proposed amendments to Thailand's excise tax laws to
give the Department more flexibility to increase its collections. Of
particular concern to foreign companies is that amendments could
result in discriminatory taxation of imported goods (therefore
raising national treatment concerns). Some business representatives
are concerned that the Ministry of Finance may attempt to fast-track
these amendments over the next few months, since customs collections
will decline with scheduled tariff reductions under the ASEAN Free
Trade Agreement in January 2010. So far, the proposed amendments
have not progressed beyond the Excise Department and would need to
be approved by the Ministry of Finance and the Cabinet before
Parliament could consider the legal changes.

"...If You Don't Want to Pay Some More"
---------------------------------------

4. The Excise Department currently collects taxes on more than
twenty commodities and services, as required by five separate tax
laws: the Excise Act, the Excise Tariff Act, the Liquor Act, the
Tobacco Act, and the Playing Card Act. The recently proposed
amendments would apply to all these laws uniformly; the only
exception would be the Playing Card Act, which the Excise Department
has proposed to repeal entirely. The following goods and services
are currently subject to taxes under these laws:

- The Liquor Act: beer, wine and other fermented liquors; distilled
spirits; ethyl alcohol

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- The Tobacco Act: shredded tobacco; tobacco products (i.e.,
cigarettes, cigars, rolled tobacco, blended shredded tobacco,
chewing tobacco)

- The Playing Card Act: playing cards.

- The Excise Tax Act and the Excise Tariff Act: petroleum and
petroleum products; non-alcoholic beverages (i.e., soda); electrical
appliances; lead crystal products; passenger cars and
public-transport motor vehicles seating not more than 10 people;
pick-up trucks; motorcycles; yachts; perfume and perfume products;
wool carpets; batteries and cells; ozone depleting substances
(CFCs); horse racing; golf courses; night clubs and discotheques;
spa, sauna and massage services; cellular phone services; baseline
services.

5. (U) Under the current laws, excisable goods are taxed based on
the price at which the goods enter the market. Thai domestic
producers of excisable goods must pay taxes based on the "ex-factory
price" of the product (the price of the product when it leaves the
manufacturing facility). The "ex-factory price" is reported by the
domestic producer, but determined and verified by the Excise
Director-General. In the case of imported excisable goods, however,
the Excise Department calculates the tax base as the CIF customs
value (cost, insurance, freight) plus the import duties. Foreign
companies that are subject to excise taxes have argued for many
years that because the Customs Department's valuations are often
inconsistent with WTO Customs Valuation Agreement, a higher excise
tax burden is imposed on imported products but not to the similar
domestically produced goods.

"Should Five Percent Appear Too Small..."
----------------------------------------

6. (SBU) U.S. businesses have expressed concerns to us about two
specific provisions in the proposed excise tax amendments. One of
the amendments would give the Director General of the Excise
Department the discretionary authority to determine the value of an
imported product, rather than relying on the Customs-determined
value of the good. The amendment states: "...The Director General by
approval of the Minister will be authorized to announce the product
value used for tax base which is in accordance with the
internationally certified method. And it shall be in accordance with
the rules and regulations determined in the Ministerial Rules."

7. (SBU) Currently, as noted above, the excise tax base is defined
as the declared CIF Price, as verified by the Customs Department,
plus the amount of import duty paid. The proposed amendment would
give the Excise Director General discretion to reject the importer's
CIF Price without rationale. The Customs Act already empowers the
Customs Department Director General to review and verify an
importer's CIF Price, using internationally-accepted customs
valuation methodologies. Since both Excise and Customs are under the
auspices of the Ministry of Finance, businesses have argued that
introducing two standards for the valuation of the same imported
product would be both unnecessary and confusing. The Joint Foreign
Chambers of Commerce, the umbrella association of thirty foreign
business groups, has also expressed concerns about WTO compliance of
this proposed amendment, arguing that excise taxes should be applied
equally to both imported and domestic goods.

"...Be Thankful I Don't Take It All"
------------------------------------

8. (U) A second amendment would change the method used to calculate
the base value of imported excisable goods from countries that have
free trade agreements with Thailand (i.e., ASEAN, Austrlia, Japan,
China). The proposed amendment states: "Where the importer is
exempted from or granted a reduction in the rate of import duties
pursuant to the law governing investment promotion or to other laws
or granted a reduction of the rate or exempted from the tax rate
lower than the rate generally used in the collection [of tax] of all
countries, such exempted or reduced import duties shall be included
in the calculation of the values under paragraph one."

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9. (SBU) According to several potentially-affected companies, the
Excise Department could use the higher Most Favored Nation (MFN)
duty rate when calculating the excise tax base rather than using the
preferential trade agreement duty rate, resulting in a significantly
higher excise tax burden on the companies. Several attorneys from
these affected companies have also argued that this provision
exacerbates violations of GATT Article III (2) which states
countries should not apply internal taxes on imported goods in
excess of those applied to the same type of domestic products.

10. (SBU) While this change would not directly affect goods produced
in the U.S., many major American firms export to Thailand from other
countries to take advantage of benefits under existing free trade
agreements. Ford and Philip Morris are particularly concerned, given
their large manufacturing plants in the Philippines that export to
Thailand. Australian firms have also been quick to review the
amendments and explain their concerns in Canberra as well as to the
Australian Embassy in Bangkok. Australian exports of excisable goods
(wine, automobiles) have significantly increased since the
implementation of the Thailand-Australia Free Trade Agreement
(TAFTA) in 2005; these amendments, if interpreted the way business
groups think they will be, could undo any gains of the reduced
tariffs under TAFTA.

11. (SBU) Some confusion persists over the exact interpretation of
the amendment's language: "such exempted or reduced import duties
shall be included in the calculation..." Several Excise Department
officials have privately told Australian emboffs that this phrase
means the lower, preferential duty rate will be used to calculate
the tax base. However, officials from the Fiscal Policy Office have
told them the opposite: that the intent of the amendment is to use
the MFN rate. The business community clearly interprets this phrase
to mean that the difference between the MFN rate and the
preferential duty rate will be added back into the value of the good
for the excise tax calculation. Regardless of the uncertainty,
companies convincingly argue that the vagueness of the phrase leaves
an opportunity for the Excise Department to use the MFN rate, rather
that the preferential duty rate, in the calculation -- even if the
amendment's language is not explicit.

"Cause I'm the Tax Man"
-----------------------

12. (SBU) On September 8, the Cabinet approved a new slate of
officials to lead the various Finance Ministry agencies, including
the Excise Department. Areepong Bhoocha-oom, the current Director
General of the State Enterprise Policy Office, will replace Sirinuj
Pisalayabutr as the new Director General of Excise. Similarly to the
newly appointed Director General at the Customs Department, Areepong
is US educated: Bachelor's from Boston University; Master's in
Finance from Marshall University; Doctorate in Finance from the
University of Mississippi. He first joined the Ministry of Finance
in 1988 and has spent his career working with the State Enterprise
Policy Office. The Excise Department is overseen by Deputy Finance
Minister Pruttichai Damrongrat. There are two Deputy Ministers at
the Ministry of Finance; these positions have typically gone to
coalition partners to secure the party's support for the Prime
Minister. Pruttichai from the Puea Paendin Party oversees the Excise
Department, while Pradit Phataraprasit oversees the Customs and
Revenue Departments.

13. (SBU) We plan to meet with both the new "Tax Man" Areepong and
his boss, Pruttichai, after Areepong takes office on October 1.
Business groups, including the American Chamber of Commerce and the
Joint Foreign Chambers of Commerce, are also planning on how to
tackle this issue once the new Director General takes over. The U.S.
ASEAN Business Council already wrote to the Minister of Finance to
express its members' concerns about these proposed legislative
changes. The U.S. ASEAN Business Council also plans to raise this
issue during Prime Minister Abhisit's visit to New York for the UN
General Assembly.

JOHN

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