Thai companies are increasingly looking to capitalise on opportunities, and one of these is to invest abroad, a trend that will no doubt accelerate now that the Asian Economic Community (AEC) is in place.
For commercial and regulatory reasons, most aspiring Thai multinationals prefer to invest via an intermediate jurisdiction even though such a structure may increase administrative costs in the short run. This preference is driven as much by the perceived shortcomings of the Thai taxation of ventures abroad as the commercial and regulatory advantages in foreign jurisdictions such as Hong Kong and Singapore. A good offshore structure could also promote increased control over regulatory compliance and lower costs.
It comes as no surprise that Singapore is often the jurisdiction of choice for Thai multinationals venturing abroad as well as inbound foreign investment to Thailand due to its proximity and ease of doing business. Singapore's tax regulations contribute significantly to its attractiveness. Among these are tax incentives for various sectors such as trading or shipping, a tax regime that exempts capital gains from tax and, importantly, imposes no taxes on the earning and repatriation of dividends. Singapore's tax treaties are also in many cases more advantageous than those signed by Thailand.
The new Thailand-Singapore Double Tax Treaty, once ratified, will replace the treaty in place since 1975. It contains a number of changes that could adversely affect some structures set up to use the benefits of the current one.
Equipment leases: Equipment lease payments will be subject to Thai withholding tax. Under the current treaty, lease rentals (for "dry leases") paid from Thailand to a lessor in Singapore are not subject to Thai withholding tax.
Many international offshore drilling companies providing services to petroleum exploration and production firms in Thailand use a Singaporean affiliate to provide bareboat charters. Rental payments from Thailand are not subject to Thai withholding tax and, if the lessor qualifies, may not be taxed in Singapore.
This benefit will no longer be available under the new treaty as the definition of "royalty" will be changed to include "the right to use industrial/commercial/scientific equipment". Such royalties will be subject to 8% Thai withholding tax.
Land-rich companies: The current treaty grants favourable capital gains treatment to Singaporean companies. Gains from divestment of assets (other than immovable assets) in Thailand are exempt from Thai tax. (The gains could also be exempt in Singapore if certain conditions are met.)
Due to regulatory constraints, foreigners often take a minority equity stake in ventures requiring significant investment in real estate in Thailand. When the foreign investor exits, it is generally by way of a sale of shares. This has a lower tax cost as it is not subject to any taxes imposed on the sale of immovable property such as the land transfer fee and specific business tax.
An additional advantage to a Singaporean shareholder is the gains from the sale of shares on exit are treated on a par with any other sale of shares and not subject to Thai tax.
Under the new treaty, however, that advantage will be lost. Taxing rights will be granted to Thailand on gains derived by a Singaporean resident shareholder on a sale of shares of a "land-rich" Thai company. The condition is the shares must be in a non-listed Thai company deriving at least 75% of its value directly or indirectly from immovable properties in Thailand. There is a similar provision in the Thai- Hong Kong treaty, but the threshold is lower at 50%.
Foreign investments held via Singapore in sectors such as hotels, hospitals and hypermarkets in Thailand may be affected as well as investments in real estate development. However, we are still awaiting guidance as to how the 75% threshold will be calculated and whether book value or market value will be considered.
Not all bad news: The new treaty does have some good news. The time test for the provision of services to constitute a permanent establishment will be 183 days in any 12-month period, lifting the reliance on an old Revenue Department ruling that unilaterally granted this benefit. Thai companies providing services in Singapore will also benefit.
There is also a 12-month time test for "construction, assembly or installation" services provided by Thai companies in Singapore (or vice versa). This is longer than under any other tax treaty Thailand has signed.
There has been some discussion on the absence of a "limitation of relief" clause in the new treaty, and the consequent potential for "treaty shopping". However, in practice the clause in the old treaty presented no obstacle to the use of the treaty, and the authors are aware of no cases in which it was invoked.
Orawan Phanitpojjamarn is a tax director and Phinyada Saicheua a tax manager in PwC Thailand's international tax structuring service. We welcome your comments at leadingtheway@th.pwc.com