THAILAND has replaced three tax-incentive regimes with one, in response to a report that found the previous approach was creating harmful tax incentives.
Thailand’s International Business Centre (IBC) came into effect last December 29, replacing three prior headquarter incentive regimes -– International Headquarters (IHQ), Regional Operating Headquarters (ROH) and International Trading Centre (ITC).
Current beneficiaries of these regimes can continue to enjoy tax benefits until the originally granted incentive period runs out. The exception to this are companies operating under the 2002 ROH regime that lacked such a time limit – they will only enjoy the incentives until the end of 2020.
The new IBC scheme was introduced in response to an OECD review conducted last year, which concluded that the tax incentive regimes of Thailand presented opportunities for harmful tax practices and needed to be amended. The review was performed in the context of the inclusive framework on base erosion and profit shifting (BEPS).
The new IBC regime offers reduced corporate income tax rates of 8 per cent, 5 per cent or 3 per cent on qualifying services income received from affiliates. The rate will depend on the level of annual expenditure in Thailand – Bt60 million, Bt300 million and Bt600 million, respectively. Unlike its predecessor schemes, IHQ and ROH, IBC does not distinguish between Thai and foreign sourced income.
Dividends received by IBC from its subsidiaries are exempt from Thai tax. Tax exemption on gains realised from disposal of shares in subsidiaries, which was one of the attractive features of IHQ, is no longer available under IBC.
Qualifying dividends and interest paid by the IBC to foreign recipients are exempt from Thai withholding tax. Companies considering transitioning from their existing IHQ or ROH will need to pay all existing profits out as dividends within a year from the conversion in order to be able to obtain withholding tax exemption.
Eligible expatriate employees of IBC will be entitled to the flat personal income tax rate of 15 per cent, consistent with the benefits provided under ROH and IHQ. Details of expatriate employees who will be eligible will be prescribed in rules and regulations to be issued by the director-general of the RD.
In order to be eligible for tax incentives under IBC, companies will have to meet certain criteria, including maintaining paid-up capital of at least Bt10 million and employing at least 10 skilled employees. If a company with IBC status fails to satisfy the criteria for more than one consecutive year, its IBC status may be revoked and the tax incentives clawed back, with penalties and surcharges, from the first year the incentive was granted.
The duration of tax incentives under IBC is 15 years.
The headquarter tax preferential regimes have been a feature of Thai tax law for nearly two decades. The government introduced them as it strove to compete with Singapore, Hong Kong and Malaysia for the regional hub status and to create incentives for multinational companies to locate their headquarters and shared centres in Thailand.
It is good to see that, amid the current international tax developments, the Thai government continues to focus on this strategy and promote Thailand as an attractive regional hub.
Contributed by TATIANA BESPALOVA , tax partner, international tax, KPMG Thailand.