HNP Counsel - Taxand
The Thai government has spent the last 12 months focusing on tax incentives and trying to achieve the status of most competitive tax system in the region, argues Chinapat Visuttipat of HNP Counsel – Taxand
Until now, the Thai government encouraged foreign direct investment (FDI) through tax holidays and non-tax incentives. From the first half of 2011, the amount of investment under Board of Investment (BOI) schemes hit Bt 247.1 ($8.03 billion) from the applicants of 882 projects. The top five ranking investors were Japanese, Chinese, Singaporean, Korean, and Hong Kong respectively.
Recently, the Thai Ministry of Finance proposed to end the tax privileges under BOI schemes. This would save $5 billion annually. Under the proposal, the cessation will be done in two stages: Existing BOI operators can utilise the tax privileges until the end of the tax holiday; and then the investors will be motivated to invest in the target zone designated by the Thai government. As a result of the proposal, the corporate tax rate will be reduced from the standard rate of 30% to 23% in 2012 and 20% in 2013.
From the state's view, the government will lose tax revenue worth $500 million for every 1% reduction in the tax rate.
In addition, value added tax (VAT) will be increased from the current single rate of 7% to a higher rate to be concurrent with other countries (10-30%).
The above situation can be explained in terms of tax neutrality on a fair basis between local investors and FDI offshore investors. In view of tax competition, the Thai government is in the process of preparing its fiscal mechanism to support the implementation of entering into the ASEAN Economic Community (AEC) in 2015.
From comparison of other major countries in ASEAN, Thailand and Philippines has the highest corporate income tax rate (30%) in the region. The comparing table can be illustrated below.
||Corporate tax rate
Tax competition among ASEAN countries will motivate the member countries and non-ASEAN countries to utilise the advantage from investment in the AEC. If Thailand can reduce its standard corporate tax rate to 20% in 2013, it is interesting to see which country will adjust its tax rate and tax mechanism to achieve the best tax rate in this region.
The Thai government has three major sources of revenue: Revenue Department (60%); Customs Department (5%); and Excise Department (20%). At present, the major source of income are taxes collected by the Revenue Department from corporate and personal income tax, VAT, specific business tax, stamp duty and petroleum income tax.
Troubled debt restructuring (TDR)
Tax exemption on corporate income tax, personal income tax, VAT, specific business tax and stamp duty will be provided to the debtors of the creditors that are commercial bank, state-owned bank, financial institutions for the TDR under the supervision of the Bank of Thailand on the following taxable income:
- Income arising from debt hair-cut or debt release both partially and fully made by the creditors;
- Income from asset disposal, sale of goods, provision of service, execution of instrument made by the debtor.
The other creditors which are non-financial institutions will be entitled to such tax exemption if such creditor engages with the financial institution creditors to proceed with the TDR project. The eligible TDR must be done during January 1 to December 31 2011.
Reorganisation of financial institutions
To strengthen the financial institutions in Thailand, tax incentives will be provided to both shareholders of financial institutions and the financial institutions itself if the financial institutions reorganise its corporate entity under the Financial Institutions Development Plan: Stage 2 on the following:
- Exemption on corporate income tax and personal income tax on gain of share investment deriving by shareholders from the amalgamation or entire business transfer of financial institutions;
- Exemption on specific business tax and stamp duty on income or instrument engaging by the financial institutions from the amalgamation or entire business transfer of financial institutions;
- Exemption on VAT, specific business tax and stamp duty on income or instrument engaging by the financial institutions from the partial business transfer of financial institutions.
The reorganisation must be done by December 31 2011.
The above tax exemptions are provided to support the sustainable activities of commercial bank and financial institutions in Thailand especially as the universal bank concept is the target of the government to encourage the local financial institutions to be stronger for the opening of free trade in banking service in the near future. In practice, the major local banks reorganised their business entities after the economic crisis in 1997. Most of them provide not only banking business but also include securities, asset management, leasing, hire-purchase, factoring, insurance (life and non-life),
After the 1997 economic crisis, the Thai government provided many tax privileges to corporate reorganisations by ways of amalgamation, entire business transfer and partial business transfer. Merger concept is not applicable in Thailand but in practice the business operators can utilise this tax incentives under amalgamation and entire business transfer. The rationale of this encouragement is to develop the capital market to respond the upcoming competition in the region.
Until now, entire business transfer has been used not only for the purpose of corporate reorganisation but also for the tax planning of asset management and property fund (REITs). Tax incentives for amalgamation and entire business transfer have no limitation of time while partial business transfer was limited on a yearly basis. However, limitation of time has been cancelled by the new law enacted in 2011 but the conditions of partial business transfer are different from amalgamation and entire business transfer.
Partial business transfers will be exempt from VAT, specific business tax and stamp duty, if the transfer has been done among the same group of companies under the shareholding relationship. This is a good sign for business operators who have various corporate entities with different expertise to improve its structure to strengthen the business for future competition.
Amalgamation and entire business transfer will be exempt from corporate income tax, VAT, specific business tax and stamp duty without condition of associate companies. This situation can be understood that partial business transfer is a corporate reorganisation in a narrow meaning from inside while amalgamation and entire business transfer can be explained in terms of business exit, business diversification, and business restructure.
Regional operating headquarter (ROH)
ROH is a company incorporated in Thailand with minimum paid capital of THB10 million to provide supporting services to its offshore associate companies in no less than three countries. Supporting services include the centralised services in the group of companies, for example, general management, business planning, procurement of raw material and parts (not trading), R&D, technical support, sale and marketing promotion, HR management and training, financial consulting, economic and investment analysis, credit control and management.
Thailand provided tax incentives for ROH since 2002 with the ROH operators around 89 companies including nine liquidated ROH companies. In late 2010, the Revenue Department released new tax incentives for ROH option 2 while the ROH option 1 is still ongoing. After ROH option 2 comes into effect, the amount of ROH companies hit 100 companies. It is interesting to understand what are the differences of tax incentives between ROH option 1 and 2.
Table 1 is set out to compare between the key existing and new tax incentives for ROH in Thailand.
|ROH option 1
||ROH option 2
|CIT at 10% on net profit deriving from offshore associated companies – no period of tax reduction
||CIT exemption for 10 years on net profit deriving from offshore associated companies.
Morethan five years for CIT exemption when the accumulated expenses in 10th year exceed Bt 150 million.
|CIT at standard rate (30%) on net profit deriving from local branches and associated companies
||10 years for CIT at 10% on net profit deriving from local associated companies.
More than five years for CIT exemption when the accumulated expenses in 10th year exceed Bt 150 million.
|PIT at 15% (reduced from 5-37% to 15%) for foreign employees working with ROH – four consecutive years
||PIT at 15% for foreign employees
working with ROH – eight consecutive years subject to overseas income at
least 50% of total revenues deriving by ROH
|Key conditions of CIT incentives
||Key conditions of CIT incentives
|CIT incentive is required at least three offshore entities from the beginning of ROH
||1st offshore entity in the 1st and 2nd year
2nd offshore entity in the 3rd and 4th year
3rd offshore entity in the 5th year onward
It is important to note that dividend derived by or from ROH will be exempt from withholding tax under both options.
ROH option 2 has been launched to compete with ROH in Singapore and Malaysia, and again, this is a tax competition issue among the ASEAN members.
International procurement centre (IPC)
An ROH company is required to provide the supporting service only. An ROH cannot do the trading transaction among the group of companies. The Thai government issued tax incentives in 2011 to fulfill the absence of trade transaction among the group of companies under the IPC schemes.
Key tax privileges for IPC are as follows:
- IPC is a Thai incorporated company with paid up capital not less than THB10 million and carrying on business of purchase and sale of raw materials and parts to its offshore associate companies.
- CIT at 15% on net profit only for five consecutive years for the purchase and sale outside Thailand (out-out) and for the purchase outside or in Thailand and sale outside Thailand (out/in-out).
- Other tax incentives provide to the foreign staff working with IPC under the certain conditions.
Nissan Motor (Thailand) Co is the first IPC company in Thailand to procure and export the raw materials and parts to the ASEAN region.
Both ROH and IPC are the tax mechanism to attract the offshore investor to set up a regional business operator in Thailand. On the other hand, it can be a tool to encourage Thai business operator to undertake the offshore investment.
In early 2011, the Thai government released the tax incentives for the business operator who sale the carbon credit whether local or offshore for corporate tax exemption.
The business operator who operates the project under the Certified Emission Reductions (CERs) and Voluntary Emission Reductions (VERs) will be entitled to corporate tax exemption on net profit deriving from such project for three consecutive years.
In mid-2011, the Thai Revenue Development (TRD) issued its guidelines on advance pricing agreements (bilateral APA) to support its Departmental Guideline on transfer pricing (firstly issued in 2002). This guideline follows to the concept of OECD, however, it is not enacted to become the law under the Revenue Code.
In practice, the TRD encourages the taxpayer to enter into the APA to control tax avoidance, however, it will take around two to three years to conclude an APA.
The future of tax in Thailand will not focus on local dimension but will consider the environment from the region as well as more tax-base expansion. Investors should aware on this trend and consider tax in the regional perspectives.
Chinapat Visuttipat (firstname.lastname@example.org)