BDO ADVISORY LIMITED · •Foreign capital gains are taxable as ordinary income ... - old regime...

BDO ADVISORY LIMITEDOutbound Investment

Key International Tax Update

Paul Ashburn

26 June 2013

Outbound Investment: Key International Tax Update

Outline

• Corporate tax rules for foreign income

• Foreign tax credit relief

• Foreign dividend taxation

• AEC developments

• ROH for Thai corporates

Corporate taxation of foreign income

• General principle is that a Thai company is taxed on its worldwide income - overseas income such as branch profits/dividends are taxable

• Foreign capital gains are taxable as ordinary income

• Unrealised foreign exchange gains and losses are taxable


Corporate taxation of foreign income

• Market value rules for international transactions –transfer pricing rules to consider for transactions with related parties

• Generally, expenses incurred for the purpose of acquiring profits or for conducting business overseas are deductible

• No quarantining of foreign tax losses

• Regional operating headquarters have special tax privileges for foreign income


Foreign tax credits

Royal Decree No.300 under the Revenue Code

• Foreign tax credit (“FTC”) is available for tax paid on income in a foreign country.

• Separate income from a business carried on overseas e.g. an overseas branch and income paid from overseas e.g. a service fee

• Separate income on a country per country basis


Foreign tax credits

• Compare FTC per country with Thai tax payable on the

foreign income

• FTC cannot exceed the Thai tax payable

• Detailed rules, procedures and conditions for claiming FTC

can be found in Notification of the Director General of

Revenue on Income Taxes No 65.

• A double tax agreement may provide greater scope for

foreign tax credits


Foreign tax credits

- Example for branch profits


Foreign country

A (35% tax rate)

Foreign country

B (20% tax rate)

Branch profit before tax 500 500

Thai corporate income tax @

20%

100 100

Foreign tax credit (175) (100)

Thai tax payable (foreign tax

credit excess)

(75) 0

Thai holding companies

- old regime

• Repatriation of profits to Thailand not attractive -dividends fully taxable

• Limited ability to claim underlying tax credits - indirect double taxation

• Capital gains fully taxable

• Thai companies keen to retain profits offshore e.g. exchange controls limit capital flows

• Tax haven countries an attractive option


Thai Taxation of Foreign Dividends

- some rules

Generally

• Foreign source dividends are subject to Thai tax

• A foreign tax credit (“FTC”) is available for tax paid on the dividend in the foreign country

• Where a DTA permits, the FTC available can include the tax paid by the dividend paying company, in its home jurisdiction, on the profits out of which the dividend is paid (“Underlying Tax”)



• Royal Decree No 442 under the Revenue Code

- Provides for foreign source dividends to be exempt from Thai tax where:

- Thai shareholding company holds at least 25% of the voting shares of the foreign dividend paying company; and

- the shares on which the dividend is paid were held by the Thai shareholding company for at least 6 months prior to the receipt of the dividend; and



- the dividend must be paid out of net profits which were subject to income tax in the home jurisdiction of the dividend paying company at a rate of not less than 15%, regardless of whether or not the law in the foreign country allows for reduction or exemption from tax on net profits.

- Applies to qualifying dividends received on or after 24 November 2005.



• Minimum “headline tax rate” concept adopted

• Actual tax paid in foreign country could be less than the tax rate

• Popular tax haven countries will not qualify

• Effectively solves the problem regarding limited access to underlying foreign tax credits

• Dividend withholding tax planning becomes the focus



• The 25% minimum shareholding rule is similar to some DTAs

that allow underlying tax credits

• Some DTAs with Thailand provide minimum shareholding rule

of 10% or 15% only in order to access underlying foreign tax

credits

- A DTA may therefore still be beneficial for shareholdings

less than 25%


Taxation of Foreign Dividends

- Thai income tax calculation (old rules)


Japan Singapore Malaysia Total

Dividend 100 100 100 300

Foreign WHT payable 20 - - 20

Thai tax payable @ 20%

Foreign Tax credit

Underlying tax credit

20

(20)

-

20

-

-

20

-

(25)

60

(20)

(25)

Tax payable in Thailand 0 20 0 20

Net dividend after tax 80 80 100 260


- Thai income tax calculation (RD 442)


Japan Singapore Malaysia Total

Dividend 100 100 100 300

Foreign WHT payable 20 - - 20


(exempt)

- - - -

Tax payable in Thailand - - - -

Net dividend after tax 80 100 100 280

ASEAN Economic Community


ASEAN – Association of South East Asian Nations

January 2007, ASEAN Leaders agree to hasten the establishment of the AEC by

2015 and transform ASEAN into a region with:

• free movement of goods, services, investment, skilled labour; and

• freer flow of capital

• AEC Blueprint adopted 20 November 2007

• Increases interdependence of the ASEAN economies

ASEAN Economic Community


1. AEC blueprint to support free flow of investment provides that the ten

member nations should work on network of DTAs

2. The only action point on tax policies, excluding measures to eliminate

tarriffs on the flow of goods

3. No action point to harmonise tax policies

ASEAN Snapshot

10 nations including Thailand make up ASEAN


No. Country DTA with Thailand

1 Indonesia Yes

2 Laos Yes

3 Malaysia Yes

4 Myanmar Yes

5 Philippines Yes

6 Singapore Yes

7 Vietnam Yes

8 Brunei No

9 Cambodia No

AEC example

Proposed investment structure


Thailand

Vietnam Myanmar

1. Both countries have income

tax rate >15%

2. Dividend WHT rates

Vietnam NIL

Myanmar NIL



- Thai income tax calculation

Vietnam Myanmar Total

Dividend 100 100 200

Foreign WHT payable - - -


(exempt)

- - -

Tax payable in Thailand - - -

Net dividend after tax 100 100 200


Regional Operating Headquarters

-Definition

• Company incorporated under Thai law providing the following

services to its branches or associated enterprises located in

Thailand or abroad:

• Management and administrative services

• Technical services

• Support services

• Registration with the Revenue Department required to receive

either

• Old scheme tax incentives under Royal Decree No 405 or;

• New Scheme tax incentives under Royal Decree No 508 (register within 5 years from the date the new law is effective)


ROH

- some of the tax benefits (previous scheme)

• 10% corporate income tax on net profits from qualifying ROH services, royalties and interest

• Tax exemption for dividends received from associatedenterprises incorporated under Thai or foreign laws

• Tax exemption for dividends paid out of ROH income to foreign company not carry on business in Thailand

Thai Tax 2012: Regulatory Updates and Efficient Tax Planning

Benefit

- In 1st fiscal year, have one operating company in

another country; a second within 3rd year; a third

within 5th year

- Have annual expenses in Thailand of Bht 15 million,

or have invested at least Bht 30 million in Thailand

- By end of 3rd year, 75% of ROH personnel to be

qualified staff, have 5 specialised professionals, and

5 top executives earning at least Bht 2.5 million in

annual salary and benefits each

- All companies must be real operating companies

with a physical presence and staff

For portion of income from

OVERSEAS OPERATIONS

EXEMPT CORPORATE INCOME

TAX for 15 years

Key Conditions

Benefit

For portion of income from

LOCAL OPERATIONS

10% CORPORATE INCOME TAX

for 15 years

TOPLINE OF BENEFITS & CONDITIONS FOR REGIONAL OPERATING HEADQUARTERS

(Source Revenue Department)

Benefit

In addition to conditions

for income from

overseas and local

operations:

- Income generated from

services to overseas

companies must be at

least 50% of total

revenues

For income of

EXPATRIATE EMPLOYEES

15% PERSONAL

INCOME TAX

for 8 years

Key Conditions


ROH

- some of the tax benefits (new scheme)

• CIT exemption on net profits for income from services provided to ROH’s foreign branches or associated enterprises for 10 years

• 10% CIT on net profits for income from services provided to ROH’s domestic branches or associated enterprises, for qualified royalties, for interest received on loan grant for 10 years

• CIT exemption on dividend received by ROH from associated

enterprise for 10 years

• CIT exemption for dividend paid out of ROH’s concessionary

profits to its juristic shareholders incorporated abroad and not

carrying on business in Thailand for 10 years


ROH

-Definition of associated companies

• Royal Decree No 405 contains its own definition of associated company

• Includes:

• where the ROH holds at least 25% of a company’s capital

• A company controlled by the ROH

• Royal Decree No 508 adds that associated enterprises

• have executive or senior manager employees working for ROH services

• have actual business operation


Offshore Holding company -

Proposed objectives

Establishing an offshore holding company often takes into account the following objectives:

• retain offshore income outside Thailand in a tax efficient manner

• mitigate capital gains tax

• allow for possible repatriation of profits to Thailand in a tax efficient manner should such profits need to be repatriated

ASEAN Snapshot

Capital gains tax examples


No. Country Tax on capital gains

1 Indonesia Yes

3 Malaysia No

5 Philippines Shares not listed are taxed

6 Singapore No

7 Vietnam Yes

8 Thailand Yes


Investment through a holding company in

SingaporeDiagrammatic Illustration

Thai

Singapore

Vietnam Myanmar


Singapore

Foreign dividend tax treatment

• A foreign source dividend, being a dividend paid by a company that is not a tax resident of Singapore, may be exempt from Singapore tax.

• If paid as a dividend to Thailand, then may not qualify for tax exemption under Royal Decree No 442 i.e. not paid out of profits subject to income tax in Singapore.

In summary


1. Thailand has some tax privileges in its law for investing outside Thailand

2. Look for DTA benefits

3. Capital gains tax planning – offshore holding co consideration

4. Obtain tax advice on tax laws in other countries


BDO THAILAND

Tax & Legal Contacts

Name Paul Ashburn

Position Partner, Tax & Legal Services

Expertise Tax planning for foreign investment,

international taxation, mergers &

acquisitions

Contact Tel: +66 2 260 7290

details Fax: +66 2 260 7297

E-mail: [email protected]


BDO profile

BDO Advisory Limited specialises in providing tax and legal

services to multinationals operating in Thailand and the

Asia Pacific region.

BDO Advisory Limited, the Thailand member firm of BDO

international, is one of the largest accounting and advisory

firms in Thailand.


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international clients. Each BDO Member Firm is an

independent legal entity in its own country.

BDO International is the world's fifth largest international

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BDO Advisory Limited

Tax & Legal Services

28th Floor, CTI Tower

191/16 New Ratchadapisek Road

Klongtoey, Bangkok 10110

Thailand

Telephone: +66 2 260 7290

Fax: +66 2 260 7297

Website: www.bdo-thai.com

BDO ADVISORY LIMITED · •Foreign capital gains are taxable as ordinary income ... - old regime...

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