A news report last week about VAT fraud of 3.6 billion baht by more than 30 companies claiming exports of empty containers reminds everyone of the 1997 incident that misled the government to believe that Thailand's economy was still doing well due to healthy exports.
If the VAT fraud report is confirmed, at the rate of 7%, it means that the government will need to deduct least 50 billion baht from export figures during 2012 and 2013.
Not all news stories about the world of tax get such high-profile attention. Today we'd like to talk about another issue that many people might have missed entirely, since it has taken so long to develop.
On July 9, 1999, Thailand and Taiwan signed a treaty on avoidance of double taxation, commonly known simply as a "tax treaty". However, for various reasons it did not take effect until Dec 12, 2012, and applies to taxes incurred from Jan 1, 2013 onward.
Although the treaty applies to both income tax and petroleum income tax, both sides agreed in December to delay its application to the petroleum income tax until the Thailand Trade and Economic Office in Taipei informs the Taipei Economic and Cultural Office in Thailand otherwise.
Apart from the fact that the treaty, out of diplomatic necessity, was signed by the trade and economic offices rather than the governments of both countries, most of its provisions look familiar to everyone in the industry. It provides exemption from income tax (as well as withholding tax) to a company that does not have a "permanent establishment" (PE) with regard to income in the nature of business profits.
A PE is deemed to exist if a Taiwanese company has conducted a construction, installation, supervision or assembly project in Thailand for more than six months. For consultancy services, a PE also exists if activities continue for the same or for a connected project for a period or periods exceeding six months within any 12-month period.
Once a PE is deemed to exist, general administrative expenses incurred at the head office are tax-deductible in Thailand unless such items are normally prohibited under local law. The treaty has not yet taken into account the new OECD concept that adopts functional analysis to allocate expenses, and the old school of thought still plays the key role.
If you wish to allocate overhead costs, you should consult your tax adviser, as the Thai Revenue Department as well as the courts do not necessarily uphold what has been endorsed in this article. They reject most items of costs unless you can really prove their necessity and reasonableness item by item.
One of the most important features of the Thailand-Taiwan tax treaty is the withholding tax rate on dividends payable by a Thai company to a Taiwanese shareholder. The rate may be reduced from 10% to 5% if the Taiwanese shareholder holds more than 25% of the capital in the Thai company. But don't get any ideas about using a Taiwanese company as a front to obtain this preferential tax rate. It is granted only where the Taiwanese company is the beneficial owner of the shares.
Using a securities brokerage set up under Taiwanese law to act as a registered owner of Thai shares also does not work unless you plan not to disclose this fact in Thailand _ which would be an abuse of the tax treaty anyway.
The withholding tax rate on interest income is also reduced from 15% to 10% if such interest is paid from Thailand to a financial institution set up under the laws of Taiwan. Royalty payments are also eligible for the 10% tax rate, which covers compensation for the use of software, patents, trade names or trademarks.
Similar to dividend income, the recipient of interest and royalties must be the beneficial owner of such income. This prevents taxpayers from "shopping" for more favourable treaties. Hence, using a banking structure as a front to receive interest and claim the preferential tax rate can be denied.
Unfortunately, payments for the use of equipment including ships, aircraft or platforms could be treated as royalty payments and subject to withholding tax as for royalties rather than exempt from tax as for business profits. This implies that Taiwan is not a good jurisdiction for a cross-border lease transaction.
The strict use of the "beneficial owner" test to prevent abuse by a third-party nation is compensated for by a capital gains tax exemption. The sale of shares or other securities by Taiwanese is exempted from 15% withholding tax in Thailand. Thus there is no more need to use a securities brokerage in Singapore to hold Thai shares for Taiwanese investors.
In cases where both jurisdictions impose tax, Taiwanese companies can use the tax paid in Thailand as a credit against Taiwanese tax. The amount of the credit also includes tax that should have been imposed but was not because of exemptions under an investment promotion law.
For example, if a Taiwanese company receives a tax-free dividend from a BoI-promoted subsidiary, it can use the Thai tax that was exempted as a credit against Taiwanese tax even if there was no actual tax paid in Thailand. This "tax sparing credit" will apply only for the first five years of the treaty, or until 2017, but can be extended by mutual agreement.
The Thailand-Taiwan tax treaty has some unique characteristics uncommon in other Thai tax treaties. Nonetheless, it is essential that you study the details thoroughly and refrain from applying your familiarity with other tax treaties to any cases you encounter.
By Professor Piphob Veraphong. He can be reached at admin@lawalliance.co.th