Southeast Asia, as a region with significant economic growth and a young population, is a major target for foreign investment. ASEAN countries are competing to attract foreign investment with various tax incentives, such as reducing Corporate Income Tax (CIT) rates and providing tax holidays. However, this policy risks triggering a “race to the bottom,” where countries compete to reduce tax rates unfairly, reducing state revenues and regional economic efficiency. Although tax incentives are expected to attract foreign investment, data shows that these incentives do not have a significant influence on Foreign Direct Investment (PMA) compared to other factors such as good governance and legal certainty.
After the COVID-19 pandemic, FDI inflows into ASEAN have strengthened again, especially in Singapore, which is known as a tax haven. However, aggressive tax incentives are not the only factor attracting investment. Studies show that good governance, legal certainty and policy stability play a greater role in attracting foreign investment. This condition demands collective action from ASEAN countries to prevent the negative impact of excessive tax competition and ensure a healthy and sustainable investment environment.
The global minimum tax standard set by the OECD of 15% is considered too low in the context of ASEAN, which has a higher average CIT rate. ASEAN countries need to formulate an approach that is more suited to regional economic conditions and not just rely on tax incentives to attract investment. A holistic strategy that covers various aspects of regulation and business support is very necessary to create a competitive and sustainable investment environment.
Read the full Policy Brief volume 46 entitled "Bridging the Gap: Towards Fair Corporate Tax Practices in ASEAN" below:
