A lever to capture corporate tax scofflaws
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A lever to capture corporate tax scofflaws

EXPLAINER: Thailand is making progress on a law meant to limit profit shifting by multinational enterprises

The global minimum tax mandates large multinational enterprises pay a minimum tax rate of 15% in each country where they operate.
The global minimum tax mandates large multinational enterprises pay a minimum tax rate of 15% in each country where they operate.

Global tax reform efforts, led by the Organisation for Economic Co-operation and Development (OECD), have been building momentum since 2021, reaching agreement on one of the two pillars of tax reform: the establishment of a global minimum tax.

A total of 160 countries, representing about 90% of the world's economy, agreed in October 2021 to implement this agreement by setting a minimum corporate income tax rate of 15% to close loopholes that allow profit shifting to countries with lower tax rates, thus preventing the erosion of the tax base in those countries.

Q: Why is global tax reform needed?

Over the past half-century, as the global economy has expanded, many countries seeking foreign direct investment have competed by lowering their domestic tax rates to attract investors.

This competition led to the average global corporate income tax rate dropping from 50% to 24% between 1980 and 2020.

The competition to reduce taxes allowed large multinational enterprises (MNEs) to evade taxes by shifting profits to subsidiaries in countries with lower corporate tax rates.

As profits were transferred from parent companies located in countries with higher tax rates to subsidiaries in countries with lower tax rates, the G20 and OECD proposed collaborative efforts to prevent tax competition and profit shifting.

In October 2021, these discussions resulted in an agreement to set a global minimum tax (GMT) at 15%.

Q: What is the GMT agreement?

The principle of the GMT is to mandate that large MNEs pay a minimum global tax rate of 15% in each country where they operate. If taxes paid in any country are less than 15%, the difference must be paid to the country where the parent company is headquartered.

The GMT agreement applies only to MNEs with global revenue exceeding €750 million per year (around US$870 million).

Countries participating in the agreement can impose a minimum corporate income tax rate of 15% on these MNEs operating within their borders. If a subsidiary of an MNE operates in a country with a corporate tax rate lower than 15%, the parent company's home country can collect the difference up to the 15% minimum.

While some countries have not joined this agreement and have corporate tax rates less than 15%, the mechanism allowing the parent company's home country to collect the tax difference creates an incentive for non-participating countries to raise their corporate tax rates to 15%.

This gives countries an incentive to collect the tax revenue themselves, rather than allowing the parent company's home country to benefit from collecting the difference in tax revenue.

Q: What has Thailand done to implement the tax?

Thailand, as one of the 140 countries that signed the global tax reform agreement, drafted the Top-Up Tax Act.

This draft law prepared by the Revenue Department passed a series of public hearings, in accordance with the constitution.

The draft includes the Top-Up Tax Act, which aligns with the principles of OECD Pillar 2, as well as secondary or subordinate legislation.

The Revenue Department submitted these to the secretariat of the cabinet and they are awaiting scheduling for a cabinet meeting.

If the law is approved by parliament and published in the Royal Gazette, it will take effect from the first day of the year following its publication.

The Revenue Department expects this law to come into force by 2025.

The draft law applies to constituent entities located in Thailand that are part of an MNE group, with the ultimate parent entity (UPE) having a total consolidated revenue of no less than the baht equivalent of €750 million, based on at least two of the four accounting periods preceding the accounting period under consideration for the top-up tax.

The UPE is the primary entity in an MNE group responsible for financial reporting and compliance, ensuring that the group's activities are reflected accurately in a single set of consolidated financial statements.

Certain entities within an MNE group may be exempt from this draft law, including government agencies, international organisations, non-profit organisations, pension funds, investment funds that are UPEs, real estate investment vehicles that are UPEs, and other entities specified in the royal decree.

If a top-up entity disagrees with the assessment results, it can appeal to the Appeals Committee within 30 days from the date of receiving the top-up tax assessment notice.

If the appellant is dissatisfied with the decision of the Appeals Committee, it can file a petition with the Central Tax Court within 30 days from the date of the decision.

In addition, Thailand's competent authority, or the director-general as applicable, has the power to disclose top-up tax information under this draft law for (1) the economic and financial security of the country, or (2) compliance with international obligations regarding the exchange of top-up tax information under the Global Anti-Base Erosion Rules, to which Thailand is committed.

Although Thailand's current corporate income tax rate is 20%, which is higher than the GMT, some MNEs benefit from Board of Investment incentives, reducing their corporate income tax burden to less than the Revenue Department's statutory rate.

If the Top-Up Tax Act is enforced, MNEs in Thailand paying less than 15% tax will have to pay top-up tax to reach the 15% threshold, according to this draft law and international Pillar 2 tax standards.

Revenue from the Top-Up Tax Act is designated to be allocated to the Competitiveness Enhancement Fund for Targeted Industries at a rate of at least 50%, but not more than 70% of the revenue.

The Revenue Department expects to generate about 12 billion baht per year from this tax.

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