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BDO ADVISORY LIMITEDOutbound Investment
Key International Tax Update
Paul Ashburn
26 June 2013
Outbound Investment: Key International Tax Update
Page 2
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
Outbound Investment: Key International Tax Update
Page 3
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
Outbound Investment: Key International Tax Update
Page 4
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
Outbound Investment: Key International Tax Update
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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
Outbound Investment: Key International Tax Update
Page 6
Foreign tax credits
- Example for branch profits
Outbound Investment: Key International Tax Update
Page 7
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
Outbound Investment: Key International Tax Update
Page 8
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”)
Outbound Investment: Key International Tax Update
Page 9
Thai Taxation of Foreign Dividends
• 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
Outbound Investment: Key International Tax Update
Page 10
Thai Taxation of Foreign Dividends
- 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.
Outbound Investment: Key International Tax Update
Page 11
Thai Taxation of Foreign Dividends
• 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
Outbound Investment: Key International Tax Update
Page 12
Thai Taxation of Foreign Dividends
• 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%
Outbound Investment: Key International Tax Update
Page 13
Taxation of Foreign Dividends
- Thai income tax calculation (old rules)
Outbound Investment: Key International Tax Update
Page 14
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
Taxation of Foreign Dividends
- Thai income tax calculation (RD 442)
Outbound Investment: Key International Tax Update
Page 15
Japan Singapore Malaysia Total
Dividend 100 100 100 300
Foreign WHT payable 20 - - 20
Thai tax payable @ 20%
(exempt)
- - - -
Tax payable in Thailand - - - -
Net dividend after tax 80 100 100 280
ASEAN Economic Community
Outbound Investment: Key International Tax Update
Page 16
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
Outbound Investment: Key International Tax Update
Page 17
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
Outbound Investment: Key International Tax Update
Page 18
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
Outbound Investment: Key International Tax Update
Page 19
Thailand
Vietnam Myanmar
1. Both countries have income
tax rate >15%
2. Dividend WHT rates
Vietnam NIL
Myanmar NIL
Outbound Investment: Key International Tax Update
Page 20
Taxation of Foreign Dividends
- Thai income tax calculation
Vietnam Myanmar Total
Dividend 100 100 200
Foreign WHT payable - - -
Thai tax payable @ 20%
(exempt)
- - -
Tax payable in Thailand - - -
Net dividend after tax 100 100 200
Outbound Investment: Key International Tax Update
Page 21
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)
Outbound Investment: Key International Tax Update
Page 22
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
Page 23
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
Outbound Investment: Key International Tax Update
Page 24
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
Outbound Investment: Key International Tax Update
Page 25
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
Outbound Investment: Key International Tax Update
Page 26
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
Outbound Investment: Key International Tax Update
Page 27
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
Outbound Investment: Key International Tax Update
Page 28
Investment through a holding company in
SingaporeDiagrammatic Illustration
Thai
Singapore
Vietnam Myanmar
Outbound Investment: Key International Tax Update
Page 29
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
Outbound Investment: Key International Tax Update
Page 30
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
Outbound Investment: Key International Tax Update
Page 31
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]
Outbound Investment: Key International Tax Update
Page 32
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.
Outbound Investment: Key International Tax Update
Page 33
BDO International is a worldwide network of public
accounting firms, called BDO Member Firms, serving
international clients. Each BDO Member Firm is an
independent legal entity in its own country.
BDO International is the world's fifth largest international
accounting and advisory network, with over 600 offices in
105 countries and more than 27,000 professionals.
BDO International
Outbound Investment: Key International Tax Update
Page 34
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