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“Practical International Tax Planning Strategies” presented by Picharn Sukparangsee at the Conference on “Tax Planning & Tax Risk Management Toward AEC.

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Presentation on theme: "“Practical International Tax Planning Strategies” presented by Picharn Sukparangsee at the Conference on “Tax Planning & Tax Risk Management Toward AEC."— Presentation transcript:

1 “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 1

2 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. 2

3 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 3

4 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. 4

5 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. 5

6 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. 6

7 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. 7

8 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. 8

9 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. 9

10 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 ? 10

11 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 ? 11

12 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 12

13 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. 13

14 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. 14

15 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. 15

16 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. 16

17 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 subject to tax ? 17

18 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 country. 18

19 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. 19

20 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. 20

21 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. 21

22 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. 22

23 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. 23

24 Interest – Refinance of Domestic Loan by Foreign Loan Refinance Loan Purchase Bank C in Foreign Country Bank B in Thailand Company A in Thailand Land 24

25 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. 25

26 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 ? 26

27 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 non- financial 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 expense. 27

28 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. 28

29 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. 29

30 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. 30

31 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. 31

32 International Tax arrangements in operation Company BCompany C Company A Foreign Country Thailand Company CCompany D Company ACompany B Foreign Country Thailand Company E 32

33 Beneficial Owner Foreign Co. 2 Foreign Co. 1 Thai Holding Co. Foreign Country Thailand Thai Operating Co. 33

34 10% 41% 49% Owner 1Owner 2 Multinational Entity Com A Com B Com CSecond Foreign Holding Company Thai Holding Company First Foreign Holding Company Thai Company 100% 49% 51% 100% 34

35 -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 35

36 -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 36

37 Thank you for your kind attention. Picharn Sukparangsee SIAM CITY LAW OFFICES LIMITED 20 th Floor, Rajanakarn Building, 183 South Sathorn Road, Bangkok 10120, Thailand Tel: (662) 676-6667 – 8 Fax: (662) 676-6188-9 E-mail : 37

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