“practical corporate tax planning strategies”

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““Practical Corporate Tax Planning Practical Corporate Tax Planning Strategies”Strategies”

presented bypresented byPicharn SukparangseePicharn Sukparangsee

at the Conference on at the Conference on “Thai Tax Forum 2012 : “Thai Tax Forum 2012 :

Tax Planning & Regulations towards AEC 2015”Tax Planning & Regulations towards AEC 2015”

arranged by arranged by the Asia Business Connectthe Asia Business Connect

on May 14-15, 2012on May 14-15, 2012at Royal Orchid Sheration Hotel, Bangkokat Royal Orchid Sheration Hotel, Bangkok

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Picharn Sukparangsee

SIAM CITY LAW OFFICES LIMITED

20th Floor, Rajanakarn Building,

183 South Sathorn Road, Bangkok 10120, ThailandTel: (662) 676-6667 – 8 Fax: (662) 676-6188-9

E-mail : [email protected]

mailto:[email protected]

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Practical Corporate Tax Planning Strategies• Unlike tax system in some jurisdictions based on territorial application such as Hong Kong or Singapore, Thai tax system is based on the worldwide basis. •Thai taxation law includes capital gain tax as part of income tax. •Personal income tax or PIT is levied at progressive rates.

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Practical Corporate Tax Planning Strategies (cont.)•Corporate income tax or CIT are chargeable for a company with its resident in Thailand or doing business in or with Thailand. •Thailand has value added tax or VAT and specific business tax or SBT.•Thailand has no controlled foreign companies or CFC provisions.•Thailand has no thin capitalization rules.

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I.I. AEC 2015AEC 2015

ASEAN Economic Community or AEC 2015ASEAN Economic Community or AEC 2015-- consisting of 10 state membersconsisting of 10 state members-- approximately 600 million peopleapproximately 600 million people-- GDP of more than US$ 1.5 trillion GDP of more than US$ 1.5 trillion

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I.I. AEC 2015AEC 2015

-- free movement of capital , labour , goods and free movement of capital , labour , goods and services services

-- AEC will enhance competitiveness on trade and AEC will enhance competitiveness on trade and investment investment

-- tax and customs competitiveness will be providedtax and customs competitiveness will be provided-- more foreign direct investment is expected to come more foreign direct investment is expected to come

to ASEANto ASEAN-- ASEAN will greatly benefit from economic ASEAN will greatly benefit from economic

development in Asia including China and Indiadevelopment in Asia including China and India

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II.II. Key issues and elements of effective Key issues and elements of effective corporate tax planningcorporate tax planning

Tax measures in Thailand Tax measures in Thailand Adjustment of Corporate Income Tax or CITAdjustment of Corporate Income Tax or CITCompanies and Juristic Partnership in general for 3 Companies and Juristic Partnership in general for 3

consecutive accounting years consecutive accounting years 1. Rate of CIT for net profits of company and juristic 1. Rate of CIT for net profits of company and juristic

partnership is reduced from 30% to 23 % of the net partnership is reduced from 30% to 23 % of the net profits for an accounting period from or after 1 profits for an accounting period from or after 1 January 2012.January 2012.

2. Rate of CIT for net profits of company and juristic 2. Rate of CIT for net profits of company and juristic partnership is reduced from 23% to 20 % of the net partnership is reduced from 23% to 20 % of the net profits for an accounting period from or after 1 profits for an accounting period from or after 1 January 2013.January 2013.

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SME SME SME – company or juristic partnership with the paid-up SME – company or juristic partnership with the paid-up

share capital of not more than 5 million and revenues share capital of not more than 5 million and revenues from sales and services in an accounting period of not from sales and services in an accounting period of not more than Baht 30 Million more than Baht 30 Million

-- net profits of not more than Baht 150,000 – exemption from net profits of not more than Baht 150,000 – exemption from CITCIT

-- net profits of more than Baht 150,000 but not more than Baht net profits of more than Baht 150,000 but not more than Baht 1,000,000 – 15% in 20121,000,000 – 15% in 2012

-- net profits of more than Baht 1,000,000 – 23% in 2012net profits of more than Baht 1,000,000 – 23% in 2012-- net profits of more than Baht1,000,000 – 20% in 2013net profits of more than Baht1,000,000 – 20% in 2013

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Listed companiesListed companies1)1)listed companies on the Stock Exchange of listed companies on the Stock Exchange of

Thailand or the SETThailand or the SET-- net profits – 23% in 2012net profits – 23% in 2012-- net profits – 20% in 2013net profits – 20% in 20132)2)listed companies on Market for Alternative listed companies on Market for Alternative

Investment or MAIInvestment or MAI-- net profits – 23% in 2012net profits – 23% in 2012-- net profits – 20% in 2013net profits – 20% in 2013

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III.III. International Procurement Center or IPCInternational Procurement Center or IPC

Tax benefitsTax benefits15% CIT on net profits from the qualified income for 5 consecutive accounting years.

15% PIT on the gross income to a maximum of 3 foreigners at the management level or at the level of experts for 5 consecutive years (subject to qualified income threshold)

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ConditionsConditions1.1.An IPC shall have its paid-up share capital of An IPC shall have its paid-up share capital of not less than Baht 10 million;not less than Baht 10 million;2. the IPC shall have minimum annual expenses 2. the IPC shall have minimum annual expenses payable to recipients in Thailand of either of the payable to recipients in Thailand of either of the following;following;

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2.1 the IPC shall have operating expenses 2.1 the IPC shall have operating expenses of at least Baht 15 million in each accounting of at least Baht 15 million in each accounting period (excluding depreciation, expenses paid period (excluding depreciation, expenses paid in foreign countries, cost of goods, raw in foreign countries, cost of goods, raw materials, goodwill, royalties, parts and packing materials, goodwill, royalties, parts and packing materials) ; ormaterials) ; or

2.2 the IPC shall have its capital 2.2 the IPC shall have its capital expenditure of at least Baht 30 million in each expenditure of at least Baht 30 million in each accounting period;accounting period;

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3.3. Foreign associated companies shall have Foreign associated companies shall have management and employees to operate the management and employees to operate the business as notified to the Revenue business as notified to the Revenue Department;Department;4.4. Employees of the IPC shall have qualified Employees of the IPC shall have qualified education of at least secondary school or education of at least secondary school or primary vocational institution or its equivalent; primary vocational institution or its equivalent; and and

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5.5. From the third accounting period From the third accounting period onwards, the IPC shall have qualified income of onwards, the IPC shall have qualified income of not less than Baht 1 billion in each accounting not less than Baht 1 billion in each accounting period and pay compensation of not less than period and pay compensation of not less than Baht 2.5 million per person to at least 3 Baht 2.5 million per person to at least 3 employees.employees.

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IV.IV. Cancellation of tax benefits, Penalties and Cancellation of tax benefits, Penalties and SurchargeSurcharge

• If any of the conditions cannot be fulfilled in If any of the conditions cannot be fulfilled in any year, exemption or reduction of any year, exemption or reduction of corporate income tax for the IPC and the corporate income tax for the IPC and the personal income tax for foreigners shall be personal income tax for foreigners shall be cancelled with effect from the first year.cancelled with effect from the first year.

• The IPC and the foreigners shall be subject to The IPC and the foreigners shall be subject to 200% penalties and 1.5 % monthly surcharge.200% penalties and 1.5 % monthly surcharge.

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Regional Operating Headquarters or ROH Regional Operating Headquarters or ROH

Tax BenefitsTax BenefitsCITCIT1. 10% CIT for qualified royalties , service fees 1. 10% CIT for qualified royalties , service fees and interest income for 10 yearsand interest income for 10 years2. Exemption of CIT for dividend received from 2. Exemption of CIT for dividend received from associated enterprises for 10 yearsassociated enterprises for 10 years3. Exemption of CIT for dividend paid out of 3. Exemption of CIT for dividend paid out of profits of ROH to foreign corporate shareholders profits of ROH to foreign corporate shareholders not carrying on business in Thailand for 10 yearsnot carrying on business in Thailand for 10 years

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Tax BenefitsTax BenefitsPIT PIT 1. 15% PIT for foreigners for 8 consecutive years1. 15% PIT for foreigners for 8 consecutive years2. Exemption of PIT for foreigners for services 2. Exemption of PIT for foreigners for services rendered in foreign countries provided that rendered in foreign countries provided that such income is not deducted as expenses of such income is not deducted as expenses of ROH in ThailandROH in Thailand

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ConditionsConditions•the ROH shall have its paid-up share capital of the ROH shall have its paid-up share capital of Baht 10 million;Baht 10 million;•the ROH shall have the one foreign affiliate the ROH shall have the one foreign affiliate company in year 1 , the second foreign company in year 1 , the second foreign associated company in year 3 and the third associated company in year 3 and the third foreign associated company in year or at least foreign associated company in year or at least foreign associated companies in 3 countries foreign associated companies in 3 countries within 5 years, to receive services from the ROH;within 5 years, to receive services from the ROH;

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ConditionsConditions•the ROH shall have the minimum annual operating the ROH shall have the minimum annual operating expenses of Baht 15 million and/or the capital expenses of Baht 15 million and/or the capital expenditure of Baht 30 million;expenditure of Baht 30 million;•the ROH shall have at least 75% skilled employees the ROH shall have at least 75% skilled employees and the minimum annual employee remuneration and the minimum annual employee remuneration of Baht 2.5 million per person for at least 5 of Baht 2.5 million per person for at least 5 employees; andemployees; and•The foreign associated enterprises shall have The foreign associated enterprises shall have physical presence and operation in their countries. physical presence and operation in their countries.

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Cancellation of tax benefits, Penalties and SurchargeCancellation of tax benefits, Penalties and Surcharge•If any of the conditions cannot be fulfilled, exemption or If any of the conditions cannot be fulfilled, exemption or reduction of corporate income tax for the ROH and the reduction of corporate income tax for the ROH and the personal income tax for foreigners shall be cancelled with personal income tax for foreigners shall be cancelled with effect from the first year.effect from the first year.

•The IPC and the foreigners shall be subject to 200% The IPC and the foreigners shall be subject to 200% penalties and 1.5 % monthly surcharge. penalties and 1.5 % monthly surcharge.

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Energy saving equipmentEnergy saving equipment•exemption of not more than 25% of expenditure exemption of not more than 25% of expenditure incurred in acquisition of property being materials or incurred in acquisition of property being materials or equipment used for energy saving excluding vehicle or equipment used for energy saving excluding vehicle or materials or machinery used with the vehicle.materials or machinery used with the vehicle.•the property shall be acquired by an individual or a legal the property shall be acquired by an individual or a legal entity from 1 January 2011 to 31 December 2012.entity from 1 January 2011 to 31 December 2012.•the property shall have been certified by the the property shall have been certified by the Department of Alternative Energy Development and Department of Alternative Energy Development and Efficiency within 31 December 2012.Efficiency within 31 December 2012.

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Export of serviceExport of service•Previously , all services partly used in Thai and outside Previously , all services partly used in Thai and outside Thailand is subject to 7 % VAT.Thailand is subject to 7 % VAT.•Regulation has been amended to split services used in Regulation has been amended to split services used in Thailand and outside Thailand.Thailand and outside Thailand.•Service is wholly used outside Thailand = 0% VATService is wholly used outside Thailand = 0% VAT•Service is partially use of service in Thailand = 7% VATService is partially use of service in Thailand = 7% VAT

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Flooding and tax relief by the Revenue DepartmentFlooding and tax relief by the Revenue Department•Tax exemption for donation in cash only by an individual Tax exemption for donation in cash only by an individual to government authorities or public charities or any to government authorities or public charities or any company or other organization being an agent for receipt company or other organization being an agent for receipt of money or property provided that the total amount of of money or property provided that the total amount of the donation shall not exceed 10% of the income after the donation shall not exceed 10% of the income after all allowances and deductions. all allowances and deductions.

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Flooding and tax relief by the Revenue DepartmentFlooding and tax relief by the Revenue Department•Tax exemption for donation in cash or property by Tax exemption for donation in cash or property by companies or juristic partnership to government companies or juristic partnership to government authorities or public charities or any company or other authorities or public charities or any company or other organization being an agent for receipt of money or organization being an agent for receipt of money or property provided that the total amount of money or the property provided that the total amount of money or the property shall not exceed 2% of the net profits.property shall not exceed 2% of the net profits.

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Flooding and tax relief by the Revenue DepartmentFlooding and tax relief by the Revenue Department•exemption of VAT to an operator for donation of exemption of VAT to an operator for donation of products donated from 1 January 2011.products donated from 1 January 2011.•exemption of compensation received from the exemption of compensation received from the government. government. •exemption of compensation received from an insurance exemption of compensation received from an insurance company which exceeds the remaining value of the company which exceeds the remaining value of the property after depreciation. property after depreciation.

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Partial Business Transfer Partial Business Transfer Exemption of VAT, SBT and Stamp Duty for partial Exemption of VAT, SBT and Stamp Duty for partial business transfer to a private company or a public business transfer to a private company or a public company in the same associated companies made from 1 company in the same associated companies made from 1 January 2011 onwards.January 2011 onwards.

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Trust for transactions in the capital market Trust for transactions in the capital market •Exemption of PIT for dividend paid by the trustee to a Exemption of PIT for dividend paid by the trustee to a beneficiary provided that the dividend is subject to 10% beneficiary provided that the dividend is subject to 10% withholding tax and no tax credit or no tax refund is withholding tax and no tax credit or no tax refund is made.made.•Exemption of CIT for income received by a trustee Exemption of CIT for income received by a trustee excluding fees or other benefits that the trustee receives excluding fees or other benefits that the trustee receives from service of the trustee under a trust deed.from service of the trustee under a trust deed.

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Trust for transactions in the capital market Trust for transactions in the capital market •Exemption of 50% CIT for dividend received by a settlor Exemption of 50% CIT for dividend received by a settlor being a company incorporated under law of Thailand being a company incorporated under law of Thailand which receives the return for the whole or a part of which receives the return for the whole or a part of shares from a paying company unless the settler holds at shares from a paying company unless the settler holds at least 25% of voting shares and the paying company does least 25% of voting shares and the paying company does not holds shares in the settlor for not less than 3 months not holds shares in the settlor for not less than 3 months from the date of acquisition of the shares and the settlor from the date of acquisition of the shares and the settlor holds the at least 25% shares for not less than 3 months holds the at least 25% shares for not less than 3 months from the date on which income arises, in this case from the date on which income arises, in this case exemption of 100 % CIT is provided.exemption of 100 % CIT is provided.

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Trust for transactions in the capital market Trust for transactions in the capital market •exemption of CIT, VAT , SBT and Stamp Duty to a settlor exemption of CIT, VAT , SBT and Stamp Duty to a settlor and a trustee for income , value of tax base, revenues and a trustee for income , value of tax base, revenues and execution of an instrument for a transfer or creation and execution of an instrument for a transfer or creation of ownership or any right under a trust deed.of ownership or any right under a trust deed.

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Dividend from foreign investmentDividend from foreign investment

Current rules Current rules •A Thai company shall hold at least 25% of voting shares of a foreign company.•shareholding period shall be at least 3 months from the date of acquisition of shares and at least 3 months after the date of declaration of dividend payment.•Dividend shall be derived from taxable net profits in a foreign country at the income tax rate of not less than 15% (regardless of whether reduction or exemption of tax for the net profits of a foreign company is provided.

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Proposed changes Proposed changes •A company which pays dividend shall be subject to corporate income tax in a country of its operation.•No minimum tax rate would be required.•A Thai company shall directly or indirectly hold at last 10% of the total shares for at least 3 months after the acquisition of the shares and at least 3 months after the date of declaration of the dividend.•Dividend is exempt from Thai tax even though the dividend is derived from a non-taxable holding company.

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Merchant shipping business Merchant shipping business •Exemption of CIT from a sale of a ship used in an international transport•registered as a Thai ship within 1 year prior to the date of a sale of the old ship or a purchase of a new ship;•proceeds from a sale of an old ship shall be used to purchase a new ship or build a new ship which shall be registered as a Thai ship within 2 years from the date of the sale of the old ship under the following conditions:

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Merchant shipping business (cont.)Merchant shipping business (cont.)•1) if the new ship cannot be registered as a Thai ship within 2 years from the date of the sale of the old ship, the Director-General of the Revenue Department may extend the time period;•2) the new ship shall have been used for a shorter period and the new ship bought or built shall have no less freight capacity than the old one; and

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Merchant shipping business (cont.)Merchant shipping business (cont.)•3) a notice in writing of the sale of the old ship and the purchase of the new ship or the building of the new ship shall be given to the Director-General of the Revenue Department within 30 days from the date of the sale of the old one or from the date of registration of the new one as a Thai ship.•If CIT is exempted , the outstanding cost of the old ship that has been sold shall not be included as expenses in computation of the net profit or the net loss.

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Minimum wage increase and tax measuresMinimum wage increase and tax measuresThe increase of the minimum wage to Baht 300 per day from 1 April 2012 significantly affected small and medium enterprises or SME in Thailand.1. tax exemption for sale of old machinery2. 100% tax reduction for purchase of new machinery3. the difference between the old minimum wage and the new minimum wage is entitled to 1.5 time of deductible expenses.

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Board of Investment or BOIBoard of Investment or BOI

Investment privilegesInvestment privileges1.exemption of import duties on importation of machinery and raw materials2.exemption of corporate rate income tax for up to 8 years3.reduction of 50% of corporate income tax for 5 years after the tax exemption period4.exemption of tax on dividend paid out of a BOI business5.bring in foreigners and their family to Thailand

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Board of Investment or BOIBoard of Investment or BOI

Tax measures for flood relief by BOI Tax measures for flood relief by BOI •150% tax exemption for 8 years for a company maintaining its production base at an area affected by flood•100% tax exemption for 8 years for a company moving to invest in another province Dividend of BOI companies shall be paid out of the tax benefits period.

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Use of double taxation agreement or DTAUse of double taxation agreement or DTA

DTA DTA

Thailand has DTAs with most members of ASEAN but has not entered into DTA with Cambodia .

As of 9 May 2012 , Thailand has 55 DTAs effective with its counterparts.

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DTA DTA

Thailand also signed DTAs with the following:

However, 10 new DTAs have not been entered into force.

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Business profits Business profits

business profits may be subject to 15 % withholding tax but are exempted from withholding tax if the business profits are received by a company which is incorporated in a foreign country and has no permanent establishment or PE in Thailand.

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Technical Service Agreement Technical Service Agreement

Is payment under a technical service agreement regarded as royalty or business profit ?

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Facts Facts

A Joint venture or JV consisting of Company A as a company in Canada and Company B as a Company in

Malaysia. The JV entered into an agreement with a Thai company as the JV provided engineering and design

services.

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Facts Facts The JV signed an agreement with Company C in Malaysia and Company B to provide experts for technical assistance in this project for the following:•technical assistance rendered from Malaysia and Canada•payment of salaries and benefits •recruitment and payroll handling •administrative support services

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Technical Assistance and Service AgreementTechnical Assistance and Service Agreement

Is payment under a technical assistance and service Is payment under a technical assistance and service agreement regarded as royalty or business profit?agreement regarded as royalty or business profit?

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FactsFactsUnder Clause 2 of technical Assistance and Service Agreement, Company A in Germany shall provide the following services to Company T in Thailand:1.technical assistance in engineering design of a chemical plant and other industrial plants 2.training on technique and management in a foreign country to employees of Company T upon request by Company T

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FactsFacts3.assist in selection of computer software to Company 4.computer and analysis services to Company T 5.procure project management and support system for projects of Company T6.comprehensive analysis and data update to Company T7.provide other assistance as requested by Company T

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FactsFacts•Under Clause 5 of the Agreement, Company A shall provide good engineering standards services and shall be responsible for success of work. In the case of any defects, Company A shall correct the defects without any additional fees.•Services provided under the Agreement does not involve transfer of know-how to Company T but Company A applied its engineering knowledge and experience to Company T and shall be responsible for the success of the works.

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DividendDividendDividend paid by a Thai company to a foreign company is

subject to 10 % withholding tax.Interest Interest

Interest paid by a Thai company to a foreign company is generally subject to 15% withholding tax unless interest

is paid to a financial institution incorporated under law of a foreign country having a DTA with Thailand and having no PE in Thailand, 15% withholding tax can be reduced.

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RoyaltyRoyalty•Royalty paid by a Thai company to a foreign company is levied at 15% withholding tax. However, 15 % withholding tax may be reduced to 5% or 10% received by a foreign company which is incorporated in a foreign country and has no permanent establishment or PE in Thailand depending upon terms of each DTA.

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Capital gainsCapital gains•capital gains paid to a foreign company is subject to 15% withholding tax.•However, no withholding tax is chargeable to capital gains received from a sale of shares in a Thai company by a foreign company in a country having a DTA with Thailand and having no PE in Thailand.

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Chart on an offshore company

Listed Company

BVI Company

Thai Securities

HouseSecurities House in

Country 1 Custodian in

Country 2

A,B

Foreign bank

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Some issues to be taken into considerationSome issues to be taken into consideration•Sale of goods provides more tax benefits than service.

•Payment for financial service, accounting service , management service, legal service is considered to be service fee.

•Payment for the hotel management business, supermarket business , insurance business is regarded as royalty.

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Some issues to be taken into considerationSome issues to be taken into consideration•Business profits and royalty issues are important to be determined.•Interest is deductible as expense but subscription for new shares is not.•Capital gains may be exempted from tax while dividend is subject to withholding tax.

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Some issues to be taken into considerationSome issues to be taken into consideration•Request for tax refund- No request for tax refund shall be made to a tax office unless a company maintains good tax documents and fully and strictly complies with tax requirements.

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Some issues to be taken into considerationSome issues to be taken into consideration•Legal and beneficial owner•- The concept of legal and beneficial ownership under the common law is opposed to the concept of absolute ownership under Thai law.

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Some issues to be taken into considerationSome issues to be taken into consideration•plan a proper corporate structure• have a genuine transaction , not a sham transaction• select appropriate agreements• prepare and keep legal documentation•effect payments in line with transactions• closely follow new regulations and tax rulings• tax regulations and policies becoming more complex

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Some issues to be taken into considerationSome issues to be taken into consideration•a lot of tax exemptions provided• conditions of exemptions or reductions to be strictly complied with•apply tax avoidance , not tax evasion.• the term “tax avoidance” is changed to a financial service and a tax planning.• tax planning is beneficial in the case of tax anti-avoidance Tax evasion is illegal.•

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Some issues to be taken into considerationSome issues to be taken into consideration•use of provisions of the DTA enhances more trade and investment between countries.•foreign companies to be utilized for offshore transactions• Companies should keep low profile on investment and contractual transactions but raise high profile on goods and services. • Provisions of double taxation agreements should be taken into account for tax planning. • engage legal and tax advisors

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Thank you for your kind Thank you for your kind attentionattention

SIAM CITY LAW OFFICES LIMITED SIAM CITY LAW OFFICES LIMITED 183183 Rajanakarn Building Rajanakarn Building, 20, 20thth FloFlo

or, or, South Sathorn Road, South Sathorn Road,

BangkokBangkok 10120 10120 , Thailand , ThailandTel: (662) 676-6668 Tel: (662) 676-6668 Fax: (662) 676-6188Fax: (662) 676-6188

- E mail : [email protected] E mail : [email protected]

“practical corporate tax planning strategies”

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investment tax

citnet profits

net profits of company

mainet profits

setnet profits

personal income tax

tax planning regulations

thai tax system