“Practical Corporate Tax Planning Strategies”

“Practical Corporate Tax Planning Strategies”
presented by Picharn Sukparangsee at the Conference on “Thai Tax Forum 2012 : Tax Planning & Regulations towards AEC 2015” arranged by the Asia Business Connect on May 14-15, 2012 at Royal Orchid Sheration Hotel, Bangkok

Picharn Sukparangsee SIAM CITY LAW OFFICES LIMITED 20th Floor, Rajanakarn Building, 183 South Sathorn Road, Bangkok 10120, Thailand Tel: (662) – 8 Fax: (662)

Practical Corporate Tax Planning Strategies
Unlike tax system in some jurisdictions based on territorial application such as Hong Kong or Singapore, Thai tax system is based on the worldwide basis. Thai taxation law includes capital gain tax as part of income tax. Personal income tax or PIT is levied at progressive rates.

Practical Corporate Tax Planning Strategies (cont.)
Corporate income tax or CIT are chargeable for a company with its resident in Thailand or doing business in or with Thailand. Thailand has value added tax or VAT and specific business tax or SBT. Thailand has no controlled foreign companies or CFC provisions. Thailand has no thin capitalization rules.

ASEAN Economic Community or AEC 2015 - consisting of 10 state members
- approximately 600 million people - GDP of more than US$ 1.5 trillion

- free movement of capital , labour , goods and services
AEC 2015 - free movement of capital , labour , goods and services - AEC will enhance competitiveness on trade and investment - tax and customs competitiveness will be provided - more foreign direct investment is expected to come to ASEAN - ASEAN will greatly benefit from economic development in Asia including China and India

Key issues and elements of effective corporate tax planning
Tax measures in Thailand Adjustment of Corporate Income Tax or CIT Companies and Juristic Partnership in general for 3 consecutive accounting years 1. Rate of CIT for net profits of company and juristic partnership is reduced from 30% to 23 % of the net profits for an accounting period from or after 1 January 2012. 2. Rate of CIT for net profits of company and juristic partnership is reduced from 23% to 20 % of the net profits for an accounting period from or after 1 January 2013.

SME SME – company or juristic partnership with the paid-up share capital of not more than 5 million and revenues from sales and services in an accounting period of not more than Baht 30 Million - net profits of not more than Baht 150,000 – exemption from CIT - net profits of more than Baht 150,000 but not more than Baht 1,000,000 – 15% in 2012 - net profits of more than Baht 1,000,000 – 23% in 2012 - net profits of more than Baht1,000,000 – 20% in 2013

Listed companies 1) listed companies on the Stock Exchange of Thailand or the SET - net profits – 23% in 2012 - net profits – 20% in 2013 2) listed companies on Market for Alternative Investment or MAI

International Procurement Center or IPC
Tax benefits 15% CIT on net profits from the qualified income for 5 consecutive accounting years. 15% PIT on the gross income to a maximum of 3 foreigners at the management level or at the level of experts for 5 consecutive years (subject to qualified income threshold)

Conditions An IPC shall have its paid-up share capital of not less than Baht 10 million; 2. the IPC shall have minimum annual expenses payable to recipients in Thailand of either of the following;

2.1 the IPC shall have operating expenses of at least Baht 15 million in each accounting period (excluding depreciation, expenses paid in foreign countries, cost of goods, raw materials, goodwill, royalties, parts and packing materials) ; or 2.2 the IPC shall have its capital expenditure of at least Baht 30 million in each accounting period;

3. Foreign associated companies shall have management and employees to operate the business as notified to the Revenue Department; 4. Employees of the IPC shall have qualified education of at least secondary school or primary vocational institution or its equivalent; and

5. From the third accounting period onwards, the IPC shall have qualified income of not less than Baht 1 billion in each accounting period and pay compensation of not less than Baht 2.5 million per person to at least 3 employees.

Cancellation of tax benefits, Penalties and Surcharge
If any of the conditions cannot be fulfilled in any year, exemption or reduction of corporate income tax for the IPC and the personal income tax for foreigners shall be cancelled with effect from the first year. The IPC and the foreigners shall be subject to 200% penalties and 1.5 % monthly surcharge.

Regional Operating Headquarters or ROH
Tax Benefits CIT 1. 10% CIT for qualified royalties , service fees and interest income for 10 years 2. Exemption of CIT for dividend received from associated enterprises for 10 years 3. Exemption of CIT for dividend paid out of profits of ROH to foreign corporate shareholders not carrying on business in Thailand for 10 years

Tax Benefits PIT 1. 15% PIT for foreigners for 8 consecutive years 2. Exemption of PIT for foreigners for services rendered in foreign countries provided that such income is not deducted as expenses of ROH in Thailand

Conditions the ROH shall have its paid-up share capital of Baht 10 million; the ROH shall have the one foreign affiliate company in year 1 , the second foreign associated company in year 3 and the third foreign associated company in year or at least foreign associated companies in 3 countries within 5 years, to receive services from the ROH;

Conditions the ROH shall have the minimum annual operating expenses of Baht 15 million and/or the capital expenditure of Baht 30 million; the ROH shall have at least 75% skilled employees and the minimum annual employee remuneration of Baht 2.5 million per person for at least 5 employees; and The foreign associated enterprises shall have physical presence and operation in their countries.

Cancellation of tax benefits, Penalties and Surcharge If any of the conditions cannot be fulfilled, exemption or reduction of corporate income tax for the ROH and the personal income tax for foreigners shall be cancelled with effect from the first year. The IPC and the foreigners shall be subject to 200% penalties and 1.5 % monthly surcharge.

Energy saving equipment exemption of not more than 25% of expenditure incurred in acquisition of property being materials or equipment used for energy saving excluding vehicle or materials or machinery used with the vehicle. the property shall be acquired by an individual or a legal entity from 1 January 2011 to 31 December 2012. the property shall have been certified by the Department of Alternative Energy Development and Efficiency within 31 December 2012.

Export of service Previously , all services partly used in Thai and outside Thailand is subject to 7 % VAT. Regulation has been amended to split services used in Thailand and outside Thailand. Service is wholly used outside Thailand = 0% VAT Service is partially use of service in Thailand = 7% VAT

Flooding and tax relief by the Revenue Department Tax exemption for donation in cash only by an individual to government authorities or public charities or any company or other organization being an agent for receipt of money or property provided that the total amount of the donation shall not exceed 10% of the income after all allowances and deductions.

Flooding and tax relief by the Revenue Department Tax exemption for donation in cash or property by companies or juristic partnership to government authorities or public charities or any company or other organization being an agent for receipt of money or property provided that the total amount of money or the property shall not exceed 2% of the net profits.

Flooding and tax relief by the Revenue Department exemption of VAT to an operator for donation of products donated from 1 January 2011. exemption of compensation received from the government. exemption of compensation received from an insurance company which exceeds the remaining value of the property after depreciation.

Partial Business Transfer Exemption of VAT, SBT and Stamp Duty for partial business transfer to a private company or a public company in the same associated companies made from 1 January 2011 onwards.

Trust for transactions in the capital market Exemption of PIT for dividend paid by the trustee to a beneficiary provided that the dividend is subject to 10% withholding tax and no tax credit or no tax refund is made. Exemption of CIT for income received by a trustee excluding fees or other benefits that the trustee receives from service of the trustee under a trust deed.

Trust for transactions in the capital market Exemption of 50% CIT for dividend received by a settlor being a company incorporated under law of Thailand which receives the return for the whole or a part of shares from a paying company unless the settler holds at least 25% of voting shares and the paying company does not holds shares in the settlor for not less than 3 months from the date of acquisition of the shares and the settlor holds the at least 25% shares for not less than 3 months from the date on which income arises, in this case exemption of 100 % CIT is provided.

Trust for transactions in the capital market exemption of CIT, VAT , SBT and Stamp Duty to a settlor and a trustee for income , value of tax base, revenues and execution of an instrument for a transfer or creation of ownership or any right under a trust deed.

Dividend from foreign investment
Current rules A Thai company shall hold at least 25% of voting shares of a foreign company. shareholding period shall be at least 3 months from the date of acquisition of shares and at least 3 months after the date of declaration of dividend payment. Dividend shall be derived from taxable net profits in a foreign country at the income tax rate of not less than 15% (regardless of whether reduction or exemption of tax for the net profits of a foreign company is provided.

Proposed changes A company which pays dividend shall be subject to corporate income tax in a country of its operation. No minimum tax rate would be required. A Thai company shall directly or indirectly hold at last 10% of the total shares for at least 3 months after the acquisition of the shares and at least 3 months after the date of declaration of the dividend. Dividend is exempt from Thai tax even though the dividend is derived from a non-taxable holding company.

Merchant shipping business Exemption of CIT from a sale of a ship used in an international transport registered as a Thai ship within 1 year prior to the date of a sale of the old ship or a purchase of a new ship; proceeds from a sale of an old ship shall be used to purchase a new ship or build a new ship which shall be registered as a Thai ship within 2 years from the date of the sale of the old ship under the following conditions:

Merchant shipping business (cont.) 1) if the new ship cannot be registered as a Thai ship within 2 years from the date of the sale of the old ship, the Director-General of the Revenue Department may extend the time period; 2) the new ship shall have been used for a shorter period and the new ship bought or built shall have no less freight capacity than the old one; and

Merchant shipping business (cont.) 3) a notice in writing of the sale of the old ship and the purchase of the new ship or the building of the new ship shall be given to the Director-General of the Revenue Department within 30 days from the date of the sale of the old one or from the date of registration of the new one as a Thai ship. If CIT is exempted , the outstanding cost of the old ship that has been sold shall not be included as expenses in computation of the net profit or the net loss.

Minimum wage increase and tax measures The increase of the minimum wage to Baht 300 per day from 1 April 2012 significantly affected small and medium enterprises or SME in Thailand. 1. tax exemption for sale of old machinery 2. 100% tax reduction for purchase of new machinery 3. the difference between the old minimum wage and the new minimum wage is entitled to 1.5 time of deductible expenses.

Board of Investment or BOI
Investment privileges exemption of import duties on importation of machinery and raw materials exemption of corporate rate income tax for up to 8 years reduction of 50% of corporate income tax for 5 years after the tax exemption period exemption of tax on dividend paid out of a BOI business bring in foreigners and their family to Thailand

Board of Investment or BOI
Tax measures for flood relief by BOI 150% tax exemption for 8 years for a company maintaining its production base at an area affected by flood 100% tax exemption for 8 years for a company moving to invest in another province Dividend of BOI companies shall be paid out of the tax benefits period.

Use of double taxation agreement or DTA
Thailand has DTAs with most members of ASEAN but has not entered into DTA with Cambodia . As of 9 May 2012 , Thailand has 55 DTAs effective with its counterparts.

Thailand also signed DTAs with the following: However, 10 new DTAs have not been entered into force. Brunei Papua New Guinea Estonia Philippines (amendment) Ireland Kenya Tajikistan Lithuania Zimbabwe Morocco

Business profits business profits may be subject to 15 % withholding tax but are exempted from withholding tax if the business profits are received by a company which is incorporated in a foreign country and has no permanent establishment or PE in Thailand.

Technical Service Agreement Is payment under a technical service agreement regarded as royalty or business profit ?

Facts A Joint venture or JV consisting of Company A as a company in Canada and Company B as a Company in Malaysia. The JV entered into an agreement with a Thai company as the JV provided engineering and design services.

Facts The JV signed an agreement with Company C in Malaysia and Company B to provide experts for technical assistance in this project for the following: technical assistance rendered from Malaysia and Canada payment of salaries and benefits recruitment and payroll handling administrative support services

Technical Assistance and Service Agreement Is payment under a technical assistance and service agreement regarded as royalty or business profit?

Facts Under Clause 2 of technical Assistance and Service Agreement, Company A in Germany shall provide the following services to Company T in Thailand: technical assistance in engineering design of a chemical plant and other industrial plants training on technique and management in a foreign country to employees of Company T upon request by Company T

Facts assist in selection of computer software to Company computer and analysis services to Company T procure project management and support system for projects of Company T comprehensive analysis and data update to Company T provide other assistance as requested by Company T

Facts Under Clause 5 of the Agreement, Company A shall provide good engineering standards services and shall be responsible for success of work. In the case of any defects, Company A shall correct the defects without any additional fees. Services provided under the Agreement does not involve transfer of know-how to Company T but Company A applied its engineering knowledge and experience to Company T and shall be responsible for the success of the works.

Dividend Dividend paid by a Thai company to a foreign company is subject to 10 % withholding tax. Interest Interest paid by a Thai company to a foreign company is generally subject to 15% withholding tax unless interest is paid to a financial institution incorporated under law of a foreign country having a DTA with Thailand and having no PE in Thailand, 15% withholding tax can be reduced.

Royalty Royalty paid by a Thai company to a foreign company is levied at 15% withholding tax. However, 15 % withholding tax may be reduced to 5% or 10% received by a foreign company which is incorporated in a foreign country and has no permanent establishment or PE in Thailand depending upon terms of each DTA.

Capital gains capital gains paid to a foreign company is subject to 15% withholding tax. However, no withholding tax is chargeable to capital gains received from a sale of shares in a Thai company by a foreign company in a country having a DTA with Thailand and having no PE in Thailand.

Securities House in Country 1
Chart on an offshore company Listed Company BVI Company Thai Securities House Securities House in Country 1 Custodian in Country 2 Foreign bank A,B

Some issues to be taken into consideration Sale of goods provides more tax benefits than service. Payment for financial service, accounting service , management service, legal service is considered to be service fee. Payment for the hotel management business, supermarket business , insurance business is regarded as royalty.

Some issues to be taken into consideration Business profits and royalty issues are important to be determined. Interest is deductible as expense but subscription for new shares is not. Capital gains may be exempted from tax while dividend is subject to withholding tax.

Some issues to be taken into consideration Request for tax refund - No request for tax refund shall be made to a tax office unless a company maintains good tax documents and fully and strictly complies with tax requirements.

Some issues to be taken into consideration Legal and beneficial owner - The concept of legal and beneficial ownership under the common law is opposed to the concept of absolute ownership under Thai law.

Some issues to be taken into consideration plan a proper corporate structure have a genuine transaction , not a sham transaction select appropriate agreements prepare and keep legal documentation effect payments in line with transactions closely follow new regulations and tax rulings tax regulations and policies becoming more complex

Some issues to be taken into consideration a lot of tax exemptions provided conditions of exemptions or reductions to be strictly complied with apply tax avoidance , not tax evasion. the term “tax avoidance” is changed to a financial service and a tax planning. tax planning is beneficial in the case of tax anti-avoidance Tax evasion is illegal.

Some issues to be taken into consideration use of provisions of the DTA enhances more trade and investment between countries. foreign companies to be utilized for offshore transactions Companies should keep low profile on investment and contractual transactions but raise high profile on goods and services. Provisions of double taxation agreements should be taken into account for tax planning. engage legal and tax advisors

Thank you for your kind attention
SIAM CITY LAW OFFICES LIMITED 183 Rajanakarn Building, 20th Floor, South Sathorn Road, Bangkok 10120, Thailand Tel: (662) Fax: (662)

“Practical Corporate Tax Planning Strategies”

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