“Practical International Tax Planning Strategies”
presented by
Picharn Sukparangsee
at
the Conference on
“Tax Planning & Tax Risk Management Toward AEC 2015”
arranged by
Ideal Forum Co., Ltd.
from 3 to 4 April 2014
at Pullman Bangkok G, Silom, Bangkok
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Identifying critical factors to mitigate tax pitfalls in
international transactions
Doing business is made with Thailand or in Thailand.
Thailand is in the Civil Law Legal System.
Income tax of Thailand are levied on source and resident principles.
Corporate income tax of Thailand is based upon a worldwide income
basis, not on a territory basis.
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Income tax and capital gains tax are included in the same Revenue
Code of Thailand.
Categories of income provided under provisions of personal
income tax under Revenue Code of Thailand
- Income from employment
- Income from performance of work
- Income from use of intellectual property
- Income from dividend , interest and capital gain
- Income from letting of property , hire purchase and an
installment sale contract
- Income from liberal professionals
- Income from hire of work
- Income from business , commerce , agriculture, industry,
transport and other income
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However, categories of income have been heavily referred in
provisions of corporate income tax.
Revenue Code of Thailand was significantly amended in 1992.
Only existing rules and regulations of the Revenue Code are
exercised to defeat tax avoidance schemes. New provisions should
be enacted into the Revenue Code to cope with new changes in
international taxation law.
Precedent of cases is not required to be followed but persuasive in
Thailand.
20% Corporate income tax rate of Thailand is one of lowest rates of
members of the ASEAN.
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However, this 20% rate is valid until 30 September 2014 unless this
rate will be extended.
7% VAT of Thailand is among one the lowest rates of VAT of the
World.
The maximum rate of personal income tax is reduced from 37% to
35% of the net income but is still high in comparison of the maximum
rates of personal income tax in members of the ASEAN.
Provisions of domestic tax law and double taxation agreements
(”DTA”) should be reviewed.
Provisions of a relevant DTA should be taken into consideration.
The question is whether priority review should concentrate on
provisions of Revenue Code of Thailand or provision of DTA.
Resident is crucial in international taxation.
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Beneficial ownership represents a vexed issue.
Focus on principals of source country taxation and resident country
taxation
Stepping stones are applied in an international transactions.
Double non-taxation results in a source country and a resident
country to collect no tax on transactions.
An operating company can exercise rights under a DTA while a
holding company may not be entitled to benefits under the DTA if a
beneficial owner of the holding company is not a resident of a
country of the holding company.
An offshore company should have its management and should carry
on its operation in its country of operation.
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A company in a resident country should be an ultimate owner of
another company in the source country.
An individual and a company as a resident can benefit from
provisions of the DTA.
A resident of a legal entity is based upon:
- place of incorporation ;
- place of central control and management; and/or
- place of the head office.
Which country applies each of the principles of the resident of the
company ?
Form of a transaction is invented but substance of the
transaction may be missing.
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Tax evasion must be distinguished from tax avoidance.
Tax avoidance and tax planning are used to pay no tax or little tax in
transactions.
A company in no or low tax territories has been used for a tax
avoidance transaction.
Harmful tax competitions and tax avoidance schemes are heavily
combatted.
Base Erosion and Profit Shifting (“BEPS”) is being studied by the
OECD to defeat sham avoidance tax schemes and to collect more
taxes for governments.
Treaty shopping is not allowed for a non-beneficial owner of a
resident under the relevant DTA.
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A recipient of income may be required to be a beneficial owner of
such income to prevent treaty shopping.
Transfer pricing still represents a major issue in international
taxation.
Aggressive tax transactions are manipulated for the sole purpose of
no tax payment
Use of an offshore company results in no tax benefits under the
DTA.
Why is an offshore company without any DTA used in an
international transaction ?
A company in a country with the DTA is applied but double taxation
is imposed on certain income.
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A change of a category of income in an international transaction
may be rejected.
Certain Passive Income Transactions are chargeable to taxes in
Thailand.
Complicated transactions in a foreign country may not be workable
in Thailand.
56 Double taxation agreements or DTAs have been effective
between Thailand and its counterparties.
Some provisions such as those on PE, dividend , interest, royalties
of one DTA may be different from the provisions of another DTA.
Thailand entered into the DTA with no tax and low tax jurisdictions.
What are no or low tax territories ?
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Use of provisions of DTA may be hindered by laws, rules and
regulations of Thailand.
Permanent establishment or PE entitles the resident state to tax on
income.
- Asset PE
- Activity PE
- Agent PE
Does a PE under the DTA between Thailand and its counterparty last
for 6 months or 12 months ?
Is a representative office in Thailand considered to be a PE of a
foreign company ?
Is a subsidiary in Thailand regarded as a PE of its parent company in a
foreign country ?
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How a dependent agent and an independent agent are determined ?
Tests of PE
- Sale agreement ;
- Service agreement; and
- Loan agreement
PE in Thailand of a foreign entity results in tax liability in Thailand.
Avoid PE, if practicable,
Income from immovable property is taxed in a state which such
property is situated.
Anti-avoidance of Tax
- General anti-avoidance rules or GAAR
- Specific anti-avoidance rules or SAAR
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Thailand has no GAAR or SAAR.
Controlled Foreign Companies or CFC
How is a CFC determined ?
What is a minimum percentage of shareholding in CFC by a company
in a resident country ?
Thailand has no CFC rules.
An issue for tax sparing credit prevented entering into DTA between
Thailand and this country for a long term. At the end, tax sparing
credit cannot be used under this DTA and tax exemption in Thailand
under tax sparing credit is not recognized in the foreign country and
a foreign company shall pay tax in a foreign country.
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Thailand still has no Thin Capitalization rules.
Deductible interest is not restricted under laws of Thailand as thin
capitalization rules are not exacted in Thai taxation law however the
Thai company may be subject to the debt to equity ratio as
prescribed by the Board of Investment of Thailand or the foreign
business committee.
However, a lot of countries impose restrictions on thin
capitalization.
Treaty override may be challenged by the Revenue Department of
Thailand.
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Tax planning issues and techniques
Apply for investment promotion for any eligible project for
investment in Thailand to the Board of Investment of Thailand for
eligible activities for enjoyment of privileges.
A significant case on conflict between provisions of Revenue Code of
Thailand and provisions of the Investment Promotion Act is pending
consideration of the Supreme Court after the Revenue Department
of Thailand loses this case to a promoted company at the level of
Central Tax Court of Thailand.
Thailand has only 2 levels of court , i.e., the Central Tax Court of
Thailand and the Supreme Court, without the Appeal Court.
Setting up an operating company and a chain of holding companies.
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Use of a holding company to plan for diversion of investment in the
long term.
Change from dividends into capital gains.
Share purchase carries less tax burden than asset purchase.
However, share purchase may end up with hidden tax liability of a
target company while asset purchase does not concern tax liability of
the target company.
Share purchase may have tax liability.
Amalgamation of companies entitles exemption of taxes in Thailand
however amalgamation may not be popular in an international
transaction.
Entire business transfer is recommended for tax savings.
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Tax loss can be used by the transferring company , not by the
transferee company as Thailand does not have provision of group of
companies taxation.
Withholding tax is imposed on payment of money in Thailand or from
Thailand.
Distinction of categories of income
Business profits and royalty
Sale and service
Service and lease
Service fee and royalty
- Is payment made to a professional regarded as royalty ?
- Is payment for use of trade mark subject to tax ?
- Is payment for use of patent subject to tax ?
- Is tax chargeable for payment for technical assistance ?
- Is payment of operation of a hotel business or a leasing business 17
subject to tax ?
An international company face a major issue regarding payment for
use of software program and payment for training of personal.
Dividend
Withholding tax on dividend paid by a Thai company to a foreign
company may be reduced to 5% if a new DTA of Thailand and its
counterparty is applied.
Foreign dividend
Foreign dividend is exempt from Thai tax provided that its conditions
have been complied with.
- A Thai company holds at least 25% of the total shares of a foreign
company;
- The shareholding shall last for at least 3 months before and after
the date of the declaration of dividend; and
- The foreign company is subject to at least 15% tax of a foreign 18
Dividend and interest
Dividend and interest are normally be subject to tax
Dividend and interest may be exempted from tax in certain
circumstances
Interest is subject to higher withholding tax rate than dividend
Dividend and capital gains
Dividend are normally subject to tax
Capital gains may generally be exempted from tax.
Capital gains
Capital gains and sale of shares
A sale of shares in a Thai company by a foreign company in a
country having DTA with Thailand results in capital gains exempted
from tax in Thailand.
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Capital gains from a sale of securities are treated differently from
capital gains from a sale of real property.
Capital Gains , Sale of real property and taxes.
Capital gains from a sale of real property located in Thailand are
subject to Thai taxes.
Distribution of the profits payable to non-Thai corporate holder is
subject to 10% withholding tax.
Capital gains form a sale of investment units by the non-Thai
corporate holder shall be subject to 15% Thai withholding tax unless
they are exempt under provisions of a double taxation agreement.
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Share Premium
A Thai company issued 1 new share to a foreign company at Baht
4,000 million while the Thai company suffered huge loss.
Is tax chargeable to payment of Baht 4,000 million received by a
Thai company in Thailand ?
Interest
Debt financing is preferable than equity financing.
Thai taxation law allows for deductibility of interest for a Thai
company unless interest payable is prohibited in certain
circumstances.
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Interest and taxes
What is “interest” ?
Is interest payable from debt only ?
It is still disputable whether some payment should be deductible
as interest , especially in the case of thin capitalization.
Can interest be collected from installment payments for goods or
late payment for goods ?
Interest , sale and service
1.
payment of interest or late payment of the loan is regarded
as interest arising from the loan.
2.
payment for goods or service and late payment is regarded
as payments for goods or service.
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Compensation for a breach of contract is not regarded as interest.
Interest on late payment
A customer of a company delays in payment of the price of the
goods for 2 years. The company charged interest in the case of
delay in payment of interest, such interest is not a revenue from a
sale of goods or a provision of service and therefore is not subject
to VAT or SBT.
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Interest – Refinance of Domestic Loan by Foreign Loan
Bank C in
Foreign Country
Refinance
Company A in
Thailand
Loan
Bank B in
Thailand
Purchase
Land
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Interest on the loan, used to purchase land in Thailand paid by
Company A in Thailand to Bank B in Thailand is regarded as capital
expenditure and cannot be deducted as revenue expenses.
Guarantee fee paid by a Thai company to a foreign company is not
subject to Thai withholding tax.
Interest and shares not paid and deemed interest.
Share capital is not fully paid. Interest is chargeable on unpaid share
capital and is regarded as deemed interest.
Interest and sale of goods
Interest is subject to withholding tax but payment for sale of goods is
generally exempted from withholding tax.
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Interest and service
Interest payable by a Thai company to a foreign company is generally
subject to withholding tax unless interest is paid by a government
authority but service fee paid by a Thai company to a foreign
company may be taxed in Thailand unless exemption is granted under
provision of a double taxation agreement.
Interest – Installment payments – payment for goods or interest.
A foreign company sells machinery to a Thai company at Baht 100
million by allowing the Thai company to pay 3 installments for Baht
35 million in the total of Baht 105 million to the foreign company.
Is payment of Baht 5 million regarded as interest or payment for the
goods ?
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Interest or Coupon
Is a discount of the discounted bonds regarded as interest or capital
gains in the hand of a bondholder ?
Interest paid to or from an insurance company.
An insurance company receiving interest may be regarded as a nonfinancial institution or a financial institution depending upon a law of
a foreign country.
Interest and DTA
Interest on the loan should be paid by a Thai company to a foreign
bank, not a foreign company.
Interest and dividends
Interest is subject to higher withholding tax but may be deductible as
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expense.
Subscription for new shares are not deductible as expense and lower
withholding tax is chargeable to dividend payout.
Service fee and royalty
Is payment by an end user to a software company regarded as service
fee or royalty ?
Service fee or royalty
Technical Assistant Agreement
Depending upon nature of each of Technical Assistant Agreements of
whether a transaction is regarded as service or use of patent or
know-how, payment may be regarded as service fee or royalty.
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Royalty
Royalties may be reduced to the following:
1. 5% withholding tax on payment for the use of copyright;
2. 8% withholding tax on payment for the use of industrial ,
commercial and scientific equipment; and
3. 15% withholding tax on payment for the use of trademark,
patent and know-how.
Should payment for the use of industrial, commercial and scientific
equipment is regarded as royalty or business profit ?
Royalty
Payment for use ships or aircraft may be regarded as royalty under
certain DTA between Thailand and its counterparties.
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Lease Agreement
- withholding tax on the rental
- stamp duty on the rental for all periods and include free
payments
- land and building tax on the annual rentals
- lease registration fee on all rentals and payments
Leasing
- Payments of rentals under a leasing agreement are not subject
to withholding tax.
Leasing shall satisfy the following:
1. A lessor shall be a company or a juristic partnership which has
paid-up share capital of not less than Baht 60 million and shall
be a VAT operator;
2. A lessee is a juristic person; and
3. A period of lease shall be at least 3 years unless the leased
property is seized from another lessee , in this case, a period of
lease may be less than 3 years.
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Lease and service and VAT
Construction of a building is regarded as service , service is
subject to VAT.
Lease , assignment of lease and VAT
Assignment of lease of a building is regarded as sale of intangible
property and is subject to VAT.
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International Tax arrangements in operation
Company B
Company C
Foreign Country
Thailand
Company A
Company E
Company C
Company D
Foreign Country
Company A
Thailand
Company B
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Beneficial Owner
Foreign Co. 2
Foreign Co. 1
Thai Holding Co.
Foreign Country
Thailand
Thai Operating Co.
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Owner 1
Owner 2
Multinational Entity
100%
Com A
10%
Com C
Com B
41%
49%
100%
Second Foreign Holding Company
100%
First Foreign Holding Company
Thai Holding
Company
51%
49%
Thai Company
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- choose a company in country with a more beneficial tax for
investment in a source country
- only sale of goods from Thailand to a foreign country is generally
exempted from withholding tax unless a sale agreement is
executed in Thailand
- Service agreement should be entered into between a Thai
company and a foreign company.
- use of licensing agreement with a foreign country with low tax
on royalty for payment of less tax
- foreign direct investment in a profitable business in a source
country
- charge of service fees to a Thai company by a foreign company
- avoid a PE in a short term project
- assign a domestic company to provide construction work
- back-to-back transactions are applied for international
transactions
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-
-
maintain intellectual property and know-how in a favourable
tax jurisdiction
look for a company in a territory with taxation on a territory
basis
loan from a foreign bank to a company in Thailand as secured
by collateral in a foreign country
invest in shares by a company in a country with exemption of
tax on capital gains from a sale of shares in a Thai company
holding shares in a foreign company on a tax structure that
dividends from a foreign company are exempted from
taxation of Thailand
select a particular country with attractive tax system
a potential VAT for services provided or used in Thailand used
in Thailand posts VAT risk.
seek tax advice from a tax consultant
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Thank you for your kind attention.
Picharn Sukparangsee
SIAM CITY LAW OFFICES LIMITED
20th Floor, Rajanakarn Building,
183 South Sathorn Road, Bangkok 10120, Thailand
Tel: (662) 676-6667 – 8 Fax: (662) 676-6188-9
E-mail : picharn@siamcitylaw.com
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