Next move: Thailand as HQ and trading hub of Asean
THAILAND has offered tax incentives for regional operating headquarters and international procurement centres for more than 10 years, but there are fewer than 300 companies operating ROHs or IPCs.
Recently, the Cabinet approved a measure promoting Thailand as the shared-services hub of the Asean Economic Community. It is expected that the establishment of the AEC will bring more trade and investment among the Asean member countries and from outside the region. Given the significant increase in supply-chain management, there is a growing trend to use shared service centres to reduce costs and make management more efficient.
The government will promote the establishment of international headquarters (IHQs) and international trading centres (ITCs) in Thailand by granting both tax and non-tax benefits to qualified applicants.
It is understood that this measure will provide more incentives in the form of both tax and non-tax benefits than the ROH and IPC frameworks, so as to attract multinational companies to use Thailand as their hub.
Besides the corporate administrative services and technical support covered under the ROH scheme, the new IHQ scheme will cover international trading, similar to what is offered by the IPC.
One main difference is the tax rate. Under the IPC, the same reduced income-tax rate of 15 per cent applies to both out-out transactions (the purchase/sale of goods outside Thailand to/from associated companies without bringing said goods into Thailand) and in-out transactions (the purchase/ sale of raw materials and parts to/from associated companies for manufacturing its goods outside Thailand).
However, under the IHQ and ITC schemes, a complete income-tax exemption will be granted for out-out transactions, while in-out transactions will be eligible for a reduced income-tax rate of 10 per cent.
Similar to the ROH, the tax exemption will be granted for any fees derived from services rendered to foreign associated companies – offshore service fee – while a reduced income-tax rate of 10 per cent will be applied to fees derived from services rendered to local associated companies – onshore service fee – with the condition that the total for onshore service fees does not exceed that for offshore service fees.
Other tax benefits, such as a withholding-tax exemption on dividend payments, royalties and the 15-per-cent tax rate for expatriate income, are likely to be the same as for ROHs and IPCs.
It should be noted that local withholding tax is not exempted. In this regard, if an IHQ derives an onshore service fee, that income will have income tax deducted at a rate of 3 per cent, which represents the IHQ’s prepaid tax.
In the case of ROHs, this prepaid tax most often exceeds the income tax at the end of the year because offshore service fees are exempted while onshore service fees are taxed at a reduced rate of 10 per cent.
The result is often that an ROH that also provides services to local associated companies ends every year in position for a tax refund. This creates an administrative burden for most ROHs in dealing with authorities in a tax-refund audit.
Because of the increased use of ROHs by local associated companies, this issue cannot be avoided unless the Revenue Department reduces the local withholding-tax rate on service transactions.
However, it is likely that the tax-refund situation will cease to be an issue under the IHQ, which will also be allowed to operate in-out transactions. It is proposed that in-out transactions will be taxed at the reduced rate of 10 per cent, but there will be no withholding tax on trading transactions.
In this regard, the future IHQ may be able to utilise withholding tax on onshore service fees against income tax on in-out transactions.
Another experience learned from practice with ROHs is that other non-ROH income, such as income from the sale of assets and interest received from bank deposits, must be reported as non-ROH income in a separate tax return and is subject to the normal income tax rate of 20 per cent. Because the actual tax may be minimal, it is often impractical for an ROH to file two tax returns in order to report the types of income that are generated as an indirect consequence of normal ROH business. Many are hopeful that when the new scheme is launched, the Revenue Department will also consider a rectification of this issue.
Benjamas Kullakattimas is tax partner in charge at KPMG Phoomchai Tax. This information is intended as a general guide. Tax law is complex and professional advice should be received before acting on the information provided.
