The Top-Up Tax law is now being enforced in Thailand following its publication in the Royal Gazette.
The tax applies to large multinational enterprises (MNEs) with annual revenue of at least €750 million (26.8 billion baht) for accounting periods beginning on or after Jan 1, 2025.
The Top-Up Tax is a mechanism designed to ensure MNEs pay a minimum level of corporate income tax, typically aligned with the global minimum tax (GMT) initiative led by the Organisation for Economic Co-operation and Development (OECD).
Q: What is the objective of the law?
The concept of global tax structure reform originates from proposals put forward by the OECD. The Top-Up Tax is a key component of the OECD's global tax reform initiative.
This initiative introduces a GMT to reduce incentives for MNEs to shift their profits to low-tax jurisdictions, a practice that undermines government revenues and creates inequities in the tax system.
The rule also aims to mitigate tax competition, through which countries attract foreign investment by offering very low or zero tax rates, often resulting in significant revenue losses.
The implementation of the GMT globally is expected to generate additional tax revenue, with the OECD estimating an increase of roughly US$220 billion (7.63 trillion baht) annually.
This revenue is intended to support essential public services, such as healthcare and education, while contributing to economic stability.
The GMT also promotes fairness in taxation by ensuring all countries receive a fair share of taxes paid by MNEs. This is particularly significant for developing nations, which often struggle to compete with low-tax jurisdictions.
The GMT seeks to create a more equitable global tax environment, fostering greater economic balance.
Q: What would happen if Thailand did not adopt this law?
The Revenue Department, which is the authority responsible for this law, said the legislation allows Thailand to preserve its right to collect taxes, thereby protecting national interests.
Without the Top-Up Tax, Thailand would lose potential revenue from this tax to other countries that already have such a law in place, until Thailand enacted similar legislation, noted the department.
If the effective tax rate (ETR) of an MNE fell below 15%, countries that enacted this law and host investments from the MNE can collect the difference in tax between the 15% rate and the ETR paid by the MNE.
For instance, if Thailand did not have the Top-Up Tax law and an MNE invested in the country under an investment promotion scheme, resulting in a tax burden of 5%, there would be a 10% difference (15% minus 5 percentage points). This difference could be claimed by the home country of the MNE, provided it has a Top-Up Tax law in place.
Some 28 countries implemented a Top-Up Tax law commencing in fiscal 2024: Austria, Belgium, Bermuda, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Liechtenstein, Luxembourg, the Netherlands, Norway, Romania, Slovakia, Slovenia, South Korea, Sweden, Switzerland, the United Kingdom, Vietnam and Thailand.
Countries and territories expected to enforce the law starting in fiscal 2025 include Malaysia, Singapore, Indonesia and Hong Kong.
The Top-Up Tax regulation applies to large MNEs operating in Thailand, including both Thai MNEs investing abroad and foreign MNEs investing in Thailand, with consolidated revenue of the parent company totalling at least €750 million for at least two of the four fiscal years preceding the relevant tax year.
These entities are required to pay a GMT at the prescribed rate to reduce tax competition.
The Revenue Department estimates the Top-Up Tax law will increase its annual revenue by roughly 12 billion baht.
The law requires 50-70% of the revenue collected must be allocated to the National Competitiveness Enhancement Fund, which targets specific industries.
Q: What will be the impact on investment in Thailand?
Although Thailand set its corporate income tax rate at 20%, companies that receive investment promotion privileges from the Board of Investment (BoI) benefit from a tax rate of less than 15%. These companies will be affected by this law.
However, the government introduced remedial measures by revising the conditions for investment promotion and utilising the National Competitiveness Enhancement Fund as an incentive to attract investment.
Over the past decade, the Finance Ministry has pushed the idea of reducing the role of the BoI because of the significant loss of tax revenue resulting from investment promotions.
Studies both in Thailand and abroad have found investment promotion through tax incentives has less impact than other factors that investors consider more important, such as the size of the domestic market, the quality of the local workforce's education, and economic and political stability within the country.
Studies also found if the tax revenue lost from investment promotion were redirected to infrastructure investment, it would create more investment growth than the BoI's tax incentives.
Since the Tom Yum Kung financial crisis in 1997-1998, the total investment ratio for both the public and private sectors remained below 25% of GDP for a period of 25 years.
In 2023, the value of investments reached 2.6 trillion baht, only recently nearing the level recorded 25 years ago of 2.7 trillion.
Q: Which countries benefit most from the GMT?
According to Tanapoom Chansawang, an economist at Thammasat University, countries benefiting from the GMT are developed nations or groups of developed countries.
Considering the potential global revenue from the Top-Up Tax, the US and EU member states are estimated to receive 89% of the total share, while large developing economies such as China, Brazil and South Africa will receive around 10%. The remaining 1% will be allocated to developing countries, said Mr Tanapoom.
Q: What will be the impact of the new global tax on large Thai corporations?
According to Asia Plus Securities (ASPS), the new global tax is expected to affect SET-listed companies with annual global revenues exceeding 26.8 billion baht.
The brokerage identified several companies likely to be affected by the tax, with findings indicating it could reduce net profit estimates for 2025 by as much as 13%.
According to ASPS, the companies expected to be affected include Delta Electronics (Thailand), Thai Union Group, Gulf Energy Development, Banpu Power, Electricity Generating, B.Grimm Power, Global Power Synergy, Ratch Group, and Regional Container Lines.