How to use the tax treaty with Cambodia
Thai investors stand to benefit but regulations require careful study
published : 23 Jan 2018 at 04:00
newspaper section: Business
The new double-taxation agreement between Thailand and Cambodia officially took effect on Jan 1 for withholding tax and corporate income tax. The two countries only signed the agreement on Sept 7 last year but rushed to complete the ratification process on Dec 26. This super-fast track is a part of a consolidated strategic action plan for the Asean Economic Community (AEC) to support regional competitiveness.
The Agreement between Thailand and Cambodia for the Avoidance of Double Taxation, as it is formally known, is of great interest to Thai businesses given the scale of their investments in the neighbouring country. These include businesses ranging from banking, construction and power production to telecommunications, hotels and resorts, entertainment, hospitals and wellness.
Cambodia has one of the most business-friendly investment regimes in Asia. Full foreign ownership is allowed for any business, with foreign businesses receiving the same treatment as their local counterparts. There are no legal requirements on local content of goods, or for price and label controls. Consequently, Cambodia can be a good logistics base for Thai investors.
Thai companies that qualify: Similar to most tax treaty models, the new DTT grants benefits only to a resident of Thailand and Cambodia. In the case of a Thai corporate entity, "resident" means those liable to tax in Thailand by reason of "place of incorporation, place of management, principal place of business or any other criterion of a similar nature". A company that pays Thai tax merely by reason of having income sourced in Thailand is generally not considered a tax resident and therefore not eligible.
Unlike old tax treaties, the DTT makes it very clear that state and local authorities of both countries are also considered tax residents for the purpose of DTT benefits even if they do not pay tax in that country. This will help eliminate interpretation disputes.
In determining tax residency status, regardless of what a treaty states, Thai tax authorities tend to focus solely on the place of incorporation, while Cambodian tax practitioners view the place of management and principal place of business as the key. The DTT features a tiebreaker which clearly states that where a company is a tax resident in both countries at the same time, the place of incorporation will prevail in determining tax residency status.
Permanent Establishment or PE: A Thai company carrying on business in Cambodia will be deemed to have a PE in Cambodia and pay Cambodian income tax where there is a building site, construction, installation or assembly project, or related supervisory activities for more than six months. For other service activities, if the same or related project continues in Cambodia for more than an aggregate period(s) of 183 days during any 12-month period, it will constitute a PE and trigger tax in Cambodia.
For exploration or exploitation of natural resources including the operation of substantial equipment, an aggregate period(s) of more than 90 days within any 12-month period will be sufficient to create a PE. Notwithstanding, the PE provisions of the treaty do have some unique features, for example:
While the use of facilities and maintenance of a stock of goods solely for the purpose of delivery are clearly excluded from the PE definition, having an agent that habitually maintains inventory in Cambodia from which it regularly delivers goods on behalf of the Thai company could create a PE in Cambodia;
A Thai insurance company that collects premiums from customers in Cambodia through an agent could also be deemed to have a PE in Cambodia; and
For an agent in Cambodia to be treated as a PE for a Thai company, not only must it carry out its activities "wholly or almost wholly" on behalf of the Thai company, but the conditions of the commercial and financial relationship between them must differ from those that would have been made between independent enterprises.
In other words, independent agent status, which will be exempted from the PE tax, will be determined not only by the frequency of activities acting for the Thai company but also by the terms of their engagement.
Withholding tax: Cambodia normally imposes 14% withholding tax on what it deems to be fees paid for "technical services". As Article 13 of the treaty allows Cambodia to continue to collect such tax but at the reduced rate of 10%, whoever plans to export services from Thailand to Cambodia should watch for further clarifications from Cambodian tax authorities.
As for other types of income received by the Thai company, the 10% withholding tax will be applied (reduced from 14%) to the following:
interest where the beneficial owner is a financial institution or an insurance company. As the DTT allows the maximum tax rate of 15% to be imposed on other types of entities, the normal rate of 14% will apply in other cases; and
royalties including rents paid for the utilisation of industrial, commercial or scientific equipment;
Capital gains: Article 14 allows Cambodia to collect withholding tax on capital gains from the sale of shares in a Cambodian company. Cambodia currently does not impose tax on such gains, though it imposes a 0.1% registration tax (similar to stamp duty) on the transfer value. Nonetheless, the Thai company is still required to include capital gains earned from the sale of Cambodian shares in its Thai tax base.
Tax-sparing credit: Last but not least, the treaty also offers the elimination of double taxation by way of a credit method -- meaning Thailand must allow a Thai company to use Cambodian tax as a credit against Thai tax as long as the credit does not exceed Thai tax on the amount in question.
The most unique feature of the DTT is that the credit method includes a "tax-sparing credit", which unlike other tax treaties applies not only to dividends but also other income. That is, taxes on any income that is exempted or reduced in Cambodia due to an investment promotion law will continue to be treated as a tax credit as if there had been no such incentives, for a period of 10 years starting from Jan 1 this year.
By Rachanee Prasongprasit and Professor Piphob Veraphong of LawAlliance Limited. They can be reached at email@example.com