"CAUSE I'M THE TAX MAN": PROPOSED EXCISE TAX CHANGES

UNCLAS SECTION 01 OF 03 BANGKOK 002387 STATE FOR EAP/MLS, EEB/TPP STATE PASS TO USTR FOR BWEISEL, DBISBEE, BKLEIN, AND VBROWN COMMERCE FOR EAP/MAC/OKSA FOR JKELLY DHS FOR CBP, ICE GENEVA FOR USTR TREASURY FOR OASIA SINGAPORE FOR FINATT BLEIWEIS SENSITIVE SIPDIS 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) BANGKOK 00002387 001.2 OF 003 ¶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 BANGKOK 00002387 002.2 OF 003 - 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." BANGKOK 00002387 003.2 OF 003 ¶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