Special report: Regional taxation |
Operational headquarters incentives. This incentive provides tax exemption on service fees (including research and development income) and royalty income from offshore-affiliated companies, dividends from equity investment, and capital gains from the disposal of offshore-affiliated companies. Although the tax benefit appears attractive, the qualifying criteria are rather stringent.
International distribution center incentive. This incentive is available to foreign companies with branch offshore in Taiwan or with Taiwan-based business agents engaged in international distribution center activities. The tax exemption applies to Taiwan source income from the distribution of goods stored in distribution centers in Taiwan. In the absence of this incentive, foreign companies are required to pay income taxes on profits generated from the sales of goods in distribution centers in Taiwan. Taxable income is determined based on the profit attributable to the distribution activities (contribution rate) over the standard profit ratio of the same kind of business, as published by the Ministry of Finance at the end of every year. The corporate tax rate is 25 percent of taxable income. Companies must have the following criteria to qualify for the incentive:
Tax incentives. At the end of 2001, the government introduced a new tax incentive regime with aims to promote Thailand as a hub for regional headquarters of multinational enterprises: the Regional Operating Headquarters (ROH) regime. The incentive is similar to the Operational Headquarters incentive introduced in Singapore in 1986.
Under the new regime, an ROH must be a company established under Thai law to render various commercial services such as management, technical assistance and support, research and development services, and training services. These services must be performed for the benefit of associated companies, or partnerships, or branch offices, both in Thailand and abroad. An ROH may have non-qualifying activities besides the qualifying service activities that benefit from the reduced tax rate of 10 percent (instead of 30 percent).
Income classification and withholding tax issues for swaps. The Thai Revenue Department recently issued Department Instruction No. Paw 114/2545, confirming the position that swap payments should be regarded as assessable income rather than income in the nature of interest. Guidelines and examples for the determination of tax implications on swap payments in respect of interest rate swap, cross-currency interest rate swaps are provided in the instruction. Clarifications of the instruction include the following:
• Where a swap transaction is undertaken to hedge against fluctuation in interest rates, without the provision of a principal amount from the swap counterparty, the net payment is classified as "other income". As such, the net payment received by a non-resident is not subject to withholding tax, provided that the non-resident does not have a permanent establishment in Thailand. For a Thai recipient and a non-resident with a permanent establishment in Thailand, there is also no withholding tax, as the payment is not considered as service fees.
• However, if the swap counterparty is also the lender (e.g., the lender provides the borrower a principal amount in a lower interest rate currency and the lender enters into an interest rate swap with the borrower), the revenue department considers the net payment under the swap by the borrower as interest. Accordingly, withholding tax at 15 percent is applicable if the payment is made to a non-resident.
• Interest or penalties charged on default are regarded as income in the nature of interest and hence are subject to withholding tax.
Transfer pricing. The revenue department issued specific transfer pricing guidelines for the first time last May 2002. The guidelines are written in the form of an internal departmental instruction, which provides guidance to tax officials for tax audit purposes. The departmental instructions are based on the OECD (Organization for Economic Cooperation and Development) model and were written with assistance from the Australian Taxation Office. Although the departmental instructions do not constitute a regulation and contain grey areas within its provisions, the guidelines are a step towards better transparency.
Under the guidelines, the preferred methods for setting transfer prices are the comparable uncontrolled price, resale price, and the cost-plus methods. Where the methods are not applicable, it may be possible to ply other methods that are used commercially. The burden of proof remains with the taxpayer and, in this regard, it is critical that the taxpayer maintains supporting documents to defend transfer prices during the tax audit.
It is also possible to negotiate an APA with the revenue department. In a public statement, the department has indicated that APAs are the safest way for a taxpayer in Thailand to set transfer prices. (Courtesy of HSBC)