LATEST TAX ISSUES AND PRACTICAL ASPECTS FOR SUCCESSFUL INVESTMENT IN THAILAND

Transcription

1 LATEST TAX ISSUES AND PRACTICAL ASPECTS FOR SUCCESSFUL INVESTMENT IN THAILAND Presented by : Picharn Sukparangsee at the Conference on : INVESTMENT STRATEGIES & ASEAN TAX & THAI TAX 2016 arranged by : Planet Pacific and Forum Company Limited From 28 to 29 April 2016 at Grande Centre Point Hotel RATCHADUMRI, Bangkok

2 Practical Approaches : Latest Tax Issues and Practical Aspects for Successful Investment in Thailand. Thailand is currently OECD s observer. Although Thailand follows the OECD s model of tax convention, Thailand has tendency to adopt the UN s model. Tax laws on Thailand are applicable on worldwide income basis. Not only provisions of tax laws of Thailand, but also tax policies must be taken into consideration for doing business with or in Thailand. Revenue Code of Thailand provides for personal income tax or PIT, corporate income tax or CIT, value added tax or VAT, specific business tax or SBT and stamp duty or SD. An individual who resides in Thailand for 180 days in any tax year is regarded as a resident of Thailand. An individual resident of Thailand shall pay PIT on a worldwide income.

3 Practical Approaches : Latest Tax Issues and Practical Aspects for Successful Investment in Thailand. A foreign individual receives income in Thailand shall pay PIT unless the income is exempted. A company include a partnership, association, foundation and a joint venture. A resident of the company is based upon the place of incorporation in Thailand, not the place of the central control and management, not the place of its parent company. A Thai corporate resident of must pay tax on a worldwide basis. A foreign company shall pay tax only on revenues or profits received in Thailand unless the revenue or the profit is exempted in Thailand.

4 Practical Approaches : Latest Tax Issues and Practical Aspects for Successful Investment in Thailand. Investment Promotion Act grants exemption for CIT up to 8 years. Tax holidays granted by the Board of Investment of Thailand or the BOI are still highly favourable. The Office of the BOI is highly admired by foreign companies doing business in Thailand. Tax disputes arise from time to time on exempted BOI profits and taxable non-boi profits. It is considered by the Ministry of Finance of Thailand of whether a new bill for provision of tax exemption for more than 8 years but not exceeding 15 years should be initialed. 20% rate of corporate income tax or CIT is changed from a temporary basis into the permanent basis. The rate of CIT may be exempted or reduced by provisions of the Revenue Code or double taxation agreements between Thailand and its counter parties.

5 KEY TAX UPDATES IN THAILAND I. INTERNATIONAL HEADQUARTER AND INTERNATIONAL TRADE CENTER II. CLUSTER POLICY III. SPECIAL ECONOMIC ZONES (SEZS) IV. INHERITANCE TAX ACT AND GIFT TAX V. TAX AMNESTY VI. TAX EXEMPTION FOR SMES VII. TAX EXEMPTION FOR VENTURE CAPITAL BUSINESS VIII. TAX EXEMPTION ON CORPORATE INCOME TAX FOR EXPENSES USED FOR RESEARCH AND DEVELOPMENT OF TECHNOLOGY AND INNOVATION IX. TAX EXEMPTION FOR TRANSACTIONS RELATED TO CONVERSION OF PROPERTY FUND INTO REAL ESTATE INVESTMENT TRUST

6 I. INTERNATIONAL HEADQUARTER AND INTERNATIONAL TRADE CENTER

7 I. INTERNATIONAL HEADQUARTER AND INTERNATIONAL TRADE CENTER In 2015, the new investment promotion strategy was introduced to enact tax incentives as the creation of the International Headquarter ( IHQ ) and International Trading Center ( ITC ) replacing the previous scheme i.e. the Regional Operation Headquarter ( ROH ) and International Procurement Office ( IPC ) in the past years. 1.1 International Headquarter (IHQ) IHQ is defined as a company incorporated under Thai laws that provides managerial services or technical services, supporting services, or financial management to its branches or affiliated companies, whether located in Thailand or overseas.

8 A. Tax Incentives for IHQ (1) Corporate income tax exemption for 15 accounting years on the following: 1.1 Income derived from managerial services or technical services, supporting services, or financial management services to its affiliated companies incorporated under foreign law 1.2 Royalties received from its affiliated companies incorporated under foreign law 1.3 Dividends received from affiliated companies incorporated under foreign law 1.4 Capital gains from the share transfer in foreign affiliated companies; 1.5 Income derived from out-out transactions

9 (2) Reduction of corporate income tax rate to 10% on the following: 2.1 Income derived from managerial services or technical services, supporting services, or financial management services to its affiliated companies incorporated under Thai law 2.2 Royalties received from its affiliated companies incorporated under Thai law However, on a condition that amount of income in (2) must not be more than the income entitles for corporate income tax exemption in items 1.1 and 1.2. (3) Withholding tax exemption on the following: 3.1 Dividends paid by the IHQ to a foreign company 3.2 Interest paid by the IHQ to a foreign company not carrying on business in Thailand for a loan borrowed for re-loan to affiliated companies (4) Specific Business Tax exemption for the gross receipts from loans lend to affiliated companies (5) Reduced personal income tax of 15 percent flat for expatriate employees.

10 B. Non-Tax Incentives for IHQ 1. Permission to bring in skilled personnel and experts into Thailand to work in investment promoted activities. 2. Permission to own land 3. Exemption of import duty on machinery (only machinery for R&D and training activities) 4. Exemption of import duty on raw materials and parts used in the production for export

11 C. Requirements 1. Must be a Thai incorporated entity with a paid-up capital of at least THB 10 million in each accounting period 2. Must provide qualifying services to an overseas associated enterprise 3. Must have annual operating expenses of at least THB 15 million which are paid to recipients in Thailand 4. Must submit application and obtain the IHQ status from the Director- General of the Thai Revenue Department 5. Must comply with other rules, procedures and conditions as prescribed by the Director General of the Thai Revenue Department

12 1.2 International Trading Center ( ITC ) An ITC is defined as a company registered in Thailand performing international trade business (purchase and sale of goods, materials or parts) or providing trading-related services to overseas customers. Trading-related services shall include specifically only: (1) Procurement of goods (2) Maintenance of goods in transit (3) Packaging of goods (4) Delivery of goods (5) Insurance of goods (6) Advisory and technical support services and training on goods (7) Other related services

13 A. Tax Incentives for ITC 1. Exemption from corporate income tax on profit derived from international trading of goods with overseas entities whereby goods are not imported into Thailand (out-out transaction) 2. Exemption from withholding tax on dividends paid to its corporate shareholders abroad who are carrying on business in Thailand (provided such dividends are paid out of the ITC s net profits or CIT exempt income) 3. Reduced personal income tax of 15 percent flat rate on the gross income for expatriate employees

14 B. Non-Tax Incentives for ITC 1. Permission to bring in skilled personnel and experts into the Kingdom to work in investment promoted activities. 2. Permission to own land 3. Exemption of import duty on machinery (only machinery for R&D and training activities) 4. Exemption of import duty on raw materials and parts used in the production for export

15 C. Requirements 1. Must be a Thai incorporated entity with a paid-up capital of at least THB 10 million in each accounting period 2. Must have annual operating expenses of at least THB 15 million which are paid to recipients in Thailand 3. Must submit application and obtain the IHQ status from the Director-General of the Thai Revenue Department 4. Must comply with other rules, procedures and conditions as prescribed by the Director General of the Thai Revenue Department

16 II. CLUSTER POLICY

17 II. CLUSTER POLICY The Cluster projects must also be located in any of the specified provinces of each industry: (1) Super Cluster (1.1) Automotive and parts: Phra Nakhon Si Ayutthaya, Pathum Thani, Chonburi, Rayong, Chachoengsao, Prachinburi, Nakhon Ratchasima (1.2) Electrical appliances and telecommunications equipment: Phra Nakhon Si Ayutthaya, Pathum Thani, Chonburi, Rayong, Chachoengsao, Prachinburi, and Nakhon Ratchasima (1.3) Eco-friendly petrochemicals and chemicals: Chonburi and Rayong (1.4) Digital and electronics: Chiang Mai and Phuket

18 (2) Targeted Cluster (2.1) Agricultural processing: Chiang Mai, Chiang Rai, Lampang, Lamphun, Khon Kaen, Nakhon Ratchasima, Chaiyaphum, Buriram, Kanchanaburi, Ratchaburi, Phetchaburi, Prachuap Khiri Khan, Rayong, Chanthaburi, Trad, Chumphon, Surat Thani, Krabi, and Songkhla (2.2) Garments and textiles: Bangkok, Kanchanaburi, Nakhon Pathom, Ratchaburi, Samut Sakhon, Chonburi, Chachoengsao, Prachinburim, and Sa-Kaeo

19 Incentives for Super Cluster and Targeted Cluster are as follows: Super Cluster a) Up to 8 years corporate income tax exemption and reduction of 50% corporate income tax for the next 5 years which for Future Industries with significant importance, the ministry of Finance will consider granting years exemption; b) Exemption from import duties on machinery; c) Exemption from personal income tax for Thai and non-thai experts working in the indicated areas; Targeted Cluster a) 3-8 years corporate income tax exemption and addition 5 years 50% reduction b) Exemption from import duties on machinery; c) Non-Thai experts may be granted Permanent Residence; and d) Allowing a land of promoted business be owned by a foreigner. d) Non-Thai experts may be granted Permanent Residence; and e) Allowing a land of promoted business be owned by a foreigner.

20 III. SPECIAL ECONOMIC ZONES (SEZS)

21 III. SPECIAL ECONOMIC ZONES (SEZS) 3.1 SEZs There are 10 targeted border areas to be promoted under SEZs project. In 2015, the first phase of the SEZs has been currently covered 6 border areas in the provinces of Tak, Mukdahan, Sa-Kaeo, Trad, and Songkhla (Sadao and Padang Baesar).The second phase of the SEZs to be further established shall include another 5 border areas of Kanchanaburi, Chiang Rai, Nakhon Phanom, Nong Khai, and Narathiwat.

22 3.2 Incentives for operation in SEZs For tax incentives under the Revenue Department, the Royal Decree No. 591 provides the following incentives: - Corporate income tax exemption shall be provided to a promoted project under the BOI for a period of 8 years, whereas, other projects without the BOI promotion shall be entitled to a reduction of corporate income tax from 20% to 10% for 10 accounting periods. - Import duty on machinery and raw materials shall be exempted. - Other non-tax incentives, such as permission on land lease by foreigners and foreign unskilled workers, including facilitation on work permit, shall be granted to promoted project. 3.3 Conditions In order to be granted the above incentives, a business shall be registered as a business operated in SEZs before or in 2017 and shall not use other BOI incentives.

23 IV. INHERITANCE TAX ACT AND GIFT TAX

24 IV. INHERITANCE TAX ACT AND GIFT TAX In August 2015, the Inheritance Tax Act of Thailand was enacted and took effect on 1 February In addition, the Royal Decree for amendment of the Revenue Code with a result of imposing tax on gifts was also effective on 1 February 2016.

25 On 12 January 2016, the Cabinet approved the secondary legislations of inheritance and gift tax as proposed by the Finance Ministry. The Cabinet approved secondary legislations that issued under the Inheritance Tax Act B.E (2015) and the Amendment of Revenue Code Act no. 40 B.E (2015) which involve: - Rules on registration of rights and transactions related to transfer of immovable properties inherited; - Types, rules, conditions, and verifying procedures for a person exempted from inheritance tax; - Defining property located in Thailand; - Deduction of encumbrance in calculation of inheritance of immovable property; - Calculation of asset; rules, procedures, and conditions for payment of inheritance tax by installment; - Rules and conditions related to heirs who shall use inheritance for religious, educational, or public benefit purposes as intended by the testator; and - Revocation of income tax exemption in case of ownerships or possession transfer without remuneration to the transferor s descendants excluding an adopted child.

26 V. TAX AMNESTY V. TAX AMNESTY According to the emergency decree for tax amnesty, any tax examination or assessment, fine, or criminal prosecution with connection to profit of a business before 1 January 2016 shall be waived provided that conditions including preparation of the actual financial statements of a company must be fulfilled.

27 VI. TAX EXEMPTION FOR SMEs

28 VI. TAX EXEMPTION FOR SMEs SMEs shall be offered exemption and reduction of corporate income in 2016 and Incentives (1) Exemption from corporate income tax for profit in financial year 2016 (2) Exemption and reduction of income tax for the profit in the financial year 2017 as follows: - Exemption for profit not more than THB 300,000 - Reduction of income tax rate to 10% for the profit from THB 300,001 upwards 6.2 Qualifications (1) A legal entity incorporated before 1 January 2016 with paid-up capital not exceeding 5,000,000 THB and having income from sale and services in each accounting year not exceeding 30,000,000 THB (2) A legal entity must be registered as an operator under the law on exemption and support of

29 VII. TAX EXEMPTION FOR VENTURE CAPITAL BUSINESS

30 VII. TAX EXEMPTION FOR VENTURE CAPITAL BUSINESS Exemption of income tax for certain income of venture capital business and its shareholders are provided. A. Incentives for venture capital business - Exemption on dividends derived from a targeted company that is one of businesses that the Government supports - Exemption on capital gain of a targeted company

31 B. Qualifications of venture capital business - A company incorporated under Thai law - Paid-up capital at the last date of each accounting year is not less than 20 million THB - A company must either hold shares only in a target company or hold shares in a target company and other companies that do not engage in any businesses requiring the Government s support - Register the status of venture capital business to the Office of Securities Exchange Commission and the Stock Exchange of Thailand within 31 December Not using tax exemption for SMEs under Section 5 of the Royal Decree No. 10 B.E. 2500

32 C. Incentives for Shareholders of Targeted Company and Venture Capital Business - Exemption on dividends derived from a targeted company that is one of businesses that the Government supports or from a Venture Capital Business only for the portion that from investment in a targeted company - Exemption on capital gain from transfer of shares in a targeted company or unit in a Venture Capital Business only for specific portion that meet the requirements. However, the exemption for the above income derived from Venture Capital Business shall be available only for shareholders of venture capital business that meet required conditions.

33 VIII. TAX EXEMPTION ON CORPORATE INCOME TAX FOR EXPENSES USED FOR RESEARCH AND DEVELOPMENT OF TECHNOLOGY AND INNOVATION

34 VIII. TAX EXEMPTION ON CORPORATE INCOME TAX FOR EXPENSES USED FOR RESEARCH AND DEVELOPMENT OF TECHNOLOGY AND INNOVATION Exemption on corporate income tax for expenses used for research and development of technology and innovation is granted. The exemption can be up to 200% of the actual expenses used for research and development of technology and innovation. The first 100% portion of the total 200% exemption is given to all companies with such expenses provided it meets all the requirements of the Revenue Department Notification that is to be announced in the future. However, for another portion of 100% shall be given only for expenses occurred during 1 January 2016 until 31 December 2020 that not exceeding the following proportion between all amounts to be exempted and the actual income used in computation of net profit during any accounting year: (1) 60% of income not exceeding 5,000,000 THB (2) 9% of portion of income that exceeding 5,000,000 THB but not more than 200,000,000 THB (3) 6% of portion of income that exceeding 200,000,000 THB

35 IX. TAX EXEMPTION FOR TRANSACTIONS RELATED TO CONVERSION OF PROPERTY FUND INTO REAL ESTATE INVESTMENT TRUST

36 IX. TAX EXEMPTION FOR TRANSACTIONS RELATED TO CONVERSION OF PROPERTY FUND INTO REAL ESTATE INVESTMENT TRUST Exemption on income tax, VAT, specific business tax (SBT), and stamp duty for certain income related to property fund and REIT is provided. Any income derived from conversion of property fund into a Real Estate Investment Trust (REIT) is not subject to income tax, and therefore, a unit holder of such property fund is not reliable to pay income tax for such income. However, such conversion of property fund into REIT is required to take place from February 2016 to 31 December Moreover, VAT, SBT and stamp duty are exempted for any income or any documents resulted from conversion of property fund into REIT.

37 SME and Tax benefits The tax rates for SMEs for accounting year of 2016 are as follows: Net profit Tax Rate (%) Less than 300,000 Exempt 300,000 3,000,000 15% More than 3,000,000 20%

38 Additional tax incentives on SMEs that meet requirements are as follows: 1. Exemption of income tax for the accounting year 2016; 2. Lower income tax rate for the accounting year 2017 as shown below: Net profit Tax Rate (%) Baht 300,000 Exempt More than Baht 300,001 10% More than 3,000,000 20%

39 Conditions 1. SME must be incorporated prior to 1 January 2016; 2. SME must have its registered capital of not more than Baht 5 million; 3. SME must have its revenues from sale of goods and provision of services of not more than Baht 30 million in any accounting period, not per year. 4. Profits derive from sale of goods and provision of services from 1 January to 31 December 2016; 5. Profits derive from sale of goods and provision of services from 1 January to 31 December 2017;

40 Proposed amendment to expenses, allowances and tax bracket for personal income tax of Thailand for year 2017 has been approved by the cabinet of Thailand. Personal expense of an individual taxpayer of Thailand will be increased from 40% to 60% of the assessable income from Baht 60,000 to Baht 100,000 per annum. Parents are allowed to have a lot of children with an amount of allowance of Baht 15,000 for each of children without limit of the maximum of 3 children. The maximum tax bracket for the net income subject to 35% rate of PIT will be increased from Baht 4 million to Baht 5 million.

41 Tax structure for PIT Current taxable income (Baht) New taxable income (Baht) Tax Rate (%) 1-300, ,000 5 % 300, , , , % 500, , , , % 750,001-1,000, ,001-1,000, % 1,000,001-2,000,000 1,000,001-2,000, % 2,000,001-4,000,000 2,000,001-5,000, % More than 4,000,000 More than 5,000, %

42 T a x a l l o w a n c e s Expenses and Allowances Current structure New structure Personal expense Capped at 40% of annual income but not exceeding Baht 60,000 Up to 50% of annual income but not exceeding Baht 100,000 Personal Allowance Baht 60,000 Baht 30,000 Child allowance Baht 15,000 per child; Limited to three kids with an education allowance of Baht 2,000 per child Baht 30,000 per child; no limit for the number of kids, With no education allowance

43 The proposed maximum amount of land and building in a draft bill of Property was sharply increased from Baht 4 million to Baht 50 million with objection from critics. E-payment will be introduced for collection of more taxes and expansion of tax base. VAT is chargeable for a sale of goods, provision of services, import of goods or services into Thailand. Export of goods or services may be exempted or 0%. Only services provided in Thailand and used in Thailand are subject to VAT. Arguments are made of whether a service provided to a foreign company is used in Thailand. The standard rate of VAT at 10% has been reduced to 7% for many years. Study is made whether or not the reduced rate of VAT at 7% should be increased from 30 September 2016.

44 SBT is applicable to banking business, casualty insurance business, life insurance business, pawn business, real estate business carried on in Thailand. Rates of SBT range from 0.1% to 3.3 on the gross receipt. SD is chargeable on any of instruments listed in the Revenue Code and made in Thailand. Rates of SD mainly varies from 0.1% to 0.5 % of an amount in an instrument. SD may be exempted if SBT is payable for a real estate translation. An arrangement can be made for avoidance of SD. As at 28 April 2016, Thailand has 60 DTA with its counterparties.

45 DTA provides for exemption or reduction of tax between a source country and a resident country. Frequently, a third company in a third country applies for a stepping stone to reach a benefit entered into between the source country and the resident country. International tax avoidance has been widely for exemption of tax which may lead to double non-taxation. Measures are applied to by a relevant state to prevent aggressive tax avoidance. Depending upon facts and circumstances in each case, complicated tax avoidance schemes without any substance may be defeated by the Revenue of Thailand and the Tax Court of Thailand.

46 Foreign companies challenges imposition of tax by the Revenue Departments in a lot of cases including sale and services, service fee and royalties, interest, dividends, capital gains, VAT, BOI profits and non-boi profits. Thailand has no provisions of the following: - Controlled foreign companies or CFC - Generally anti avoidance principles or GAAP - Special anti-avoidance principles or GAAP - Thin capitalization - Group of companies taxation Provisions of the DTA are the same but interpretation of the provisions may be different from one country to another country.

47 Anti- tax avoidance measures are adopted by judicial review. Payment of too little tax out of a huge amount of revenues of multinational corporations leads to tax stringent measures. Panama Papers became an issue in Thailand as a lot of residents in Thailand have been included. Tax fraud, Tax evasion and aggressive tax avoidance for offshore companies have been used by the media. It is still arguable whether legal form or economic interest should be used to decide on tax liability. 15 Action Plans in respect of Base Erosion and Profit Shifting or BEPS of the OECD has been under study by the Revenue Department of Thailand.

48 CASE STUDY

49 CASE STUDY Sale and services may be subject to tax or exempted from tax which depends upon structure of transaction. Services relation to sale or provision of software may be deemed to be royalties. Payment for each of services is service fee but payment of use of experience of the whole business may constitute know-how payment. Payment for technical assistance may be regarded as service fee or royalty depending upon provisions of an agreement and facts on the transaction. Payment for lease of industrial equipment may be regarded as royalty depending upon provisions of each of the DTA. Marketing expenses incurred in connection with royalties under a franchise agreement may be considered as royalty. Whether actions are rendered is a matter of facts but whether the payment under an agreement is service fee or royalty is a matter of law.

50 CASE STUDY Payment for subscription of few shares at a substantial amount in a heavy loss company is regarded as financial assistance and subject to tax. Loan provided by a foreign bank in connection with a branch in Thailand may be deemed to be profits of the Thai branch. Hybrid instruments such as convertible bonds and perpetual bonds have legal and tax issues. Loss of a BOI project to be carried forward is disputed by the Revenue Department. Use of services provided by a Thai company to a foreign company may be regarded as use of service in Thailand.

51 Charts on Cases

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