Taxpayers and the Revenue Department have been locked in endless disputes over the nature of fees paid to offshore service providers. Should such fees be classified as "royalties" or "service fees" under an agreement for avoidance of double taxation, more commonly known as a tax treaty?
If any fee is regarded as a "royalty", it continues to be subject to 15% withholding tax without regard to the application of a tax treaty (a reduced tax rate of 5%, 8% or 10% may be available under some treaties). Yet, if the service fee is regarded as "business profit", it will be eligible for withholding tax exemption in Thailand, provided the foreign company has no "permanent establishment" in the country.
As the interpretation of this matter could give rise to 15% withholding tax, the term "royalty" needs to be considered carefully. Basically, it includes "consideration for information concerning industrial, commercial and scientific information", but most assessment officers broaden the interpretation. Their view is that if, in the relevant service agreement, the foreign company represented that "it has expertise or experience and it is qualified to provide certain technical services" to the Thai company, they would treat it as "information concerning industrial, commercial or scientific experience" and the fee would be considered a "royalty" for withholding tax purposes.
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