New incentive regimes in Thailand IHQ and ITC June 2015 Anthony Visate Loh
Overview 2
Overview of incentive regimes in Thailand Old regimes Regional Operating Headquarters (ROH) Regime The first ROH regime was introduced by the Thai Government in 2002 to encourage Thai and foreign MNCs to use Thailand as a regional hub to serve their group operations in other countries The ROH regime was amended in 2010 to provide more incentives and relaxes certain criteria required by the 2002 ROH scheme The incentives provided under the current ROH regime are only available to the eligible ROH that has notified its ROH status to the Thai tax authority within 15 November 2015 (i.e., 5 years from the date of the law enactment) International Procurement Centre (IPC) regime The Thai Government later introduced the IPC regime in 2011 to complement the ROH regime by providing incentives for international trading activities Nonetheless, IPCs were not widely adopted due to stringent requirements imposed and less attractive package compared to the neighboring countries and the IPC regime was expired in 2013 2015. For information, contact Deloitte Touche Tohmatsu Limited. 3
Overview of Incentive Regimes in Thailand Newly enacted regimes International Headquarters (IHQ) and International Trading Centers (ITC) In the hopes to boost Thailand's competitiveness and to make Thailand the economic hub of Asia, the Thai government has recently introduced the IHQ and ITC regimes as a way to achieve the objectives the ROH and IPC regimes were unable to accomplish The IHQ and ITC regimes were enacted as laws under Royal Decrees No. 586 and No. 587 on 1 May 2015. The Notification of the Director-General of the Thai Revenue Department outlining the relevant application of the laws is expected to come soon 2015. For information, contact Deloitte Touche Tohmatsu Limited. 4
Requirements 5
Requirements for the IHQ and ITC regimes General Requirements for the IHQ and ITC regimes Must be a Thai incorporated entity with a paid-up capital of at least THB 10 million in each accounting period Must provide qualifying services to an overseas associated enterprise Must have annual operating expenses of at least THB 15 million which are paid to recipients in Thailand Must submit application and obtain the IHQ status from the Director-General of the Thai Revenue Department in accordance with the rules, procedures and conditions as prescribed by the Director-General of the Thai Revenue Department Must comply with other rules, procedures and conditions as prescribed by the Director- General of the Thai Revenue Department 6
Incentives 7
Tax incentives Headquarters Function Corporate income tax exemption on qualifying services and royalty income derived from its overseas associated enterprises 10% corporate income tax on qualifying services 1 and royalty income derived from its associated enterprises in Thailand 1 Treasury Center Function Corporate income tax exemption on treasury support income derived from its overseas associated enterprises 10% corporate income tax on treasury support income derived from its associated enterprises in Thailand 1 Interest withholding tax exemption for overseas entities relating to a loan provided to the IHQ for re-lending as a treasury center Specific business tax exemption on income derived by the IHQ from provision of a loan to associated enterprises as a treasury center 15% personal income tax for management level expatriates (non-thai nationals) Dividend withholding tax exemption if made from profits that are entitled to 0% corporate income tax under the IHQ regime Trading Function Corporate income tax exemption on income derived from trading of goods and tradingrelated services with overseas entities, whereby goods are not imported into Thailand (out-out transaction) Holding Company Function Corporate income tax exemption on dividend received from overseas associated enterprises Corporate income tax exemption on capital gains derived from the transfer of shares in overseas associated enterprises 1 To be entitled to this incentive, revenue from qualifying services and royalty received from Thai associated enterprises must be less than the same types of revenue received from overseas associated enterprises 2015. For information, contact Deloitte Touche Tohmatsu Limited. 8
A. Headquarter Function IHQ Service fee Thai associated enterprises Service fee Overseas associated enterprises Provision of services to overseas associated enterprises Provision of services to Thai associated enterprises Please refer to the Appendix for the definition of qualifying services The following revenue received by the IHQ: - Management and technical services fee IHQ support services* fee Royalty from overseas associated enterprises would be exempt from Thai corporate income tax The following revenue received by the IHQ: - Management and technical services fee IHQ support services* fee Royalty from Thai associated enterprises would be subject to 10% corporate income tax (To be entitled to this incentive, revenue from qualifying services and royalty received from Thai associated enterprises must be less than the same types of revenue received from overseas associated enterprises) 9
B. Treasury Centre Function IHQ Interest / Treasury service fee Thai associated enterprises Interest / Treasury service fee Overseas associated enterprises Provision of treasury services to overseas associated enterprises Provision of treasury services to Thai associated enterprises Interest payment made from IHQ to overseas corporate shareholder Revenue received from the provision of treasury services* received by the IHQ from overseas associated enterprises would be exempt from Thai corporate income tax Revenue received from the provision of treasury services* received by the IHQ from Thai associated enterprises would be subject to 10% corporate income tax (To be entitled to this incentive, revenue from qualifying services and royalty received from Thai associated enterprises must be less than the same types of revenue received from overseas associated enterprises) Interest payment made to overseas entities in connection to a loan the IHQ borrowed for re-lending to its associated enterprises as a treasury centre would be exempt from Thai withholding tax Interest income received by the IHQ Interest income received by the IHQ from a provision of loan to its associated enterprises would be exempt from specific business tax Please refer to the Appendix for the definition of treasury services 10
C. Holding Company Function (Dividend) Ultimate Parent Co Dividend IHQ Dividend Overseas associated enterprises Thai associated enterprises Dividend Dividend income received by IHQ Dividend payment made from IHQ to Ultimate Parent Co IHQ Dividend income received by IHQ from overseas associated enterprises would be exempt from Thai corporate income tax, while dividend income received by IHQ from Thai associated enterprises would be subject to 20% corporate income tax Dividend paid from IHQ to overseas corporate shareholders (i.e., Ultimate Parent Co) from profits that are entitled to 0% corporate income tax under the IHQ regime would be exempt from Thai withholding tax 11
C. Holding Company Function (Capital gains) IHQ Capital gains derived upon future disposal of shares in subsidiaries Overseas associated enterprises Thai associated enterprises Future disposal of shares in overseas subsidiaries Capital gains derived by IHQ from the future disposal of shares in overseas associated enterprises would be exempt from Thai corporate income tax Future disposal of shares in Thai subsidiaries Capital gains derived by IHQ from the future disposal of shares in Thai subsidiaries would be subject to the normal 20% corporate income tax (applicable tax rate for FY2015) 12
D. Trading Function Overseas entities Sale of goods IHQ Sale of goods Overseas entities Delivery of goods Trading of goods Income received by IHQ from trading of goods with an overseas company, whereby goods are not imported into Thailand would be exempt from Thai corporate income tax IHQ Trading-related service fee Overseas entities Trading-related services Income received by IHQ from trading-related services* with an overseas company would be exempt from Thai corporate income tax Please refer to the Appendix for the definition of trading-related services 13
E. Expatriates PIT reduction PIT incentive for expatriates 15% personal income tax for management level expatriates (non-thai nationals) employed by the IHQ that qualifies for the IHQ status and satisfies the prescribed conditions 14
Non-tax incentives In addition to tax incentives, non-tax incentives are also granted by the Board of Investment IHQ Exemption of import duty on machinery used in R&D and training activities Other non-tax incentives Permission to bring expatriates (and their spouses) into Thailand to work on the BOI business activities for a period as deemed appropriate by the BOI; Permission to own land for carrying BOI-promoted business activities; Permission to remit foreign currency abroad; and Permission to operate the restricted business under 100% foreign ownership ITC Exemption of import duty on machinery Other non-tax incentives Permission to bring expatriates (and their spouses) into Thailand to work on the BOI business activities for a period as deemed appropriate by the BOI; Permission to own land for carrying BOI-promoted business activities; Permission to remit foreign currency abroad; and Permission to operate the restricted business under 100% foreign ownership 15
Major Enhancements 16
Major Enhancements - IHQ Enhancements Old Regime (2010 ROH regime) New Regime (IHQ) Tax incentives for holding company function Tax incentives for treasury center function Period of corporate income tax incentives Period of personal income tax incentives for expatriates Minimum number of associated enterprises outside of Thailand that services must be provided to Claw back rules None None 10 years but extendible to 15 years if certain conditions are met Corporate income tax exemption on capital gains derived from the transfer of shares in overseas associated enterprises Specific business tax exemption for interest income derived from providing a loan to associated enterprises 15 years 8 years 15 years 3 countries within the 5th accounting year Disqualification of tax incentives since the first accounting year 1 country Disqualification of tax incentives only in the accounting year prescribed conditions are not met 2015. For information, contact Deloitte Touche Tohmatsu Limited. 17
Major Enhancements - ITC Enhancements Old Regime (IPC) expired in 2013 Tax incentives for qualifying trading income from overseas companies for out-out transaction 1 Scope of qualifying trading income for out-out transaction Period of corporate income tax incentives Period of personal income tax incentives for expatriates Claw back rules New Regime (ITC) 15% Exempt Only trading income Trading income and tradingrelated services 5 years 15 years 5 years 15 years Disqualification of tax incentives since the first accounting year Disqualification of tax incentives only in the accounting year prescribed conditions are not met 1 Goods are purchased and sold from/to overseas companies without being physically imported into Thailand 2015. For information, contact Deloitte Touche Tohmatsu Limited. 18
Transitioning into the new regimes 19
Our understanding of application procedures Companies wishing to apply for the IHQ/ITC regimes would be required to file an online application (Form Sor Yor Kor 1 ส.ญ.ค.1), which includes the following: - Scope of activities to be performed by the IHQ Details of the proposed business operations and business plans of the IHQ/ITC Option of having the incentives applied in the accounting period the Director- General grants the status (could be less than 12 months) or having the incentives applied in the next accounting period (entitled to incentives for full 12 months) Number and details of Thai and/or overseas associated enterprises of the IHQ Number and details of expatriates to be employed by the IHQ/ITC Hard copy of the application (with authorized signature and Company Seal (if any)) must be submitted to the Large Taxpayer Office (LTO) within 5 working days of filing the online application The Thai tax authority will take around 30 working days to deliberate and consider the application The Thai tax authority will not conduct a site visit before granting its approval 2015. For information, contact Deloitte Touche Tohmatsu Limited. 20
Practical considerations Companies have to weigh the costs and benefits in using an existing entity vs. setting up a new entity as the IHQ/ITC As such, companies should consider the following: Is the existing entity is currently a holding company? Is the existing entity is currently providing HQ functions? Should the existing company function as a captive finance company? For the trading function, does the company currently have contracts in place? Can the contracts be assigned? Benefits of using the existing company include: existing company with substance, relevant contracts and registrations already in place, no transference costs, etc. Costs of implementation include: termination costs, costs of transferring contracts, costs of transferring people, exit charges, wind-down time, start-up time, etc. Transfer pricing considerations also arise in that, as a regional hub, the IHQ may be asked to gather and submit to the Thai tax authorities information regarding group subsidiaries under its supervision/ownership 2015. For information, contact Deloitte Touche Tohmatsu Limited. 21
Appendix 22
Definition Co A Holds 25% or control ROH / IHQ Holds 25% or control Co B Associated Enterprise The Thai tax authority would consider the following criteria in determining whether an entity can be regarded an associated enterprise of an IHQ: - Shareholding basis IHQ directly or indirectly holds at least 25% of shares in Co A; or Co A directly or indirectly holds at least 25% of shares in IHQ; or Co A directly or indirectly holds at least 25% of shares in IHQ and Co B in such case, the IHQ and Co B would be considered associated enterprises Control basis IHQ has control over Co A; or Co A has control over IHQ; or Co A has control over IHQ and Co B in such case, the IHQ and Co B would be considered associated enterprises 23
Definition IHQ Support Services General administration, business planning and coordination Procurement of raw materials and components Research and development of products Technical support Marketing and sales promotion planning Personnel management and regional training Financial advisory services Economics or investment research and analysis Credit control and administration Other managerial services Treasury Support Services of a Treasury Centre as permitted under the Exchange Control Act Borrowing and lending in Thai currency, as follows: - Borrowing in Thai currency from a Thai financial institution or associated enterprises in Thailand Re-lending in Thai currency the amount received from the above permitted activities to associated enterprises in Thailand 2014 Deloitte Touche Tohmatsu Jaiyos Co., Ltd. 24
Definition Trading-related Services Procurement of goods Maintenance of goods in transit Packaging of goods Delivery of goods Insurance of goods Advisory and technical support services and training on goods Other related services 2014 Deloitte Touche Tohmatsu Jaiyos Co., Ltd. 25
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals, all committed to becoming the standard of excellence. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network ) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. 2015. For information, contact Deloitte Touche Tohmatsu Limited.