Tax reform the key to making Thailand an attractive place to set up a treasury centre
With the expansion of business globally and mobilisation of investments, businesses are facing challenges on managing their cash flows, funds, and financial risks to increase competitiveness. Having a “treasury centre” is one of the solutions.
A treasury centre helps a business significantly reduce its transaction costs and increase financial efficiency. When businesses grow and have many companies operating in various locations, it’s better that all financial transactions and risks are centralised and managed by dedicated treasury experts. Financial risks, cash flows, and liquidity will be taken care of; for example, receivables and payables can be initially offset within the group. And interest rates from internal funding are typically lower than commercial banking rates.
Despite these benefits, only four companies have established treasury centres in this country since 2004, when the Bank of Thailand allowed corporations to obtain a licence for such a facility.
So why is Thailand unfavourable to this idea?
The objective of a treasury centre is to improve the overall financial efficiency of a group, and this includes taxation. So tax factors are a very important consideration when setting up such a centre. This is why low-tax jurisdictions with wide networks of double-taxation treaties are preferable locations.
So in Southeast Asia, it’s not surprising that Singapore is the most popular place. The Lion City not only allows a corporate treasury centre to enjoy a 10-per-cent income-tax concession for a period of five to 10 years, it also provides withholding-tax exemption on interest payments on borrowings by the treasury centre. And, with a wide network of double-taxation treaties and strong banking and financial infrastructures, it is unquestionable why many companies choose to set up treasury operations there.
Malaysia has also made a move. It recently launched a tax package giving a 70-per-cent exemption on income from treasury services for five years and offering a withholding-tax exemption similar to Singapore’s. It even offers a stamp-duty exemption on loan and service agreements related to opera-tions executed by a treasury centre.
Although Thailand has a wide network of double-taxation treaties, unfortunately, we don’t have a tax package for treasury centres. Even though the tax incentives under the regional operating headquarters scheme can be used with treasury operations, embedding the treasury activities in an ROH makes it harder for businesses to maintain conditions to enjoy an ROH’s 10-per-cent tax rate. Because the “50 per cent foreign-service income” threshold must be met, interest income from treasury activities is not counted as foreign-service income but expands the ROH’s total revenue base.
So what do we need in Thailand? We need a tax package, especially for treasury centres. This should offer a competitive corporate-income-tax rate and withholding-tax exemption on interest payments on borrowings by a treasury centre. And there are other tax obstacles that need to be resolved. For example, the government should:
_ issue a guideline on the acceptable interest-rate spread (that is, setting the safe-harbour rate) to reduce the burden of proof that borrowings and re-lending are done at the market rate;
_ provide exemption on domestic withholding tax on interest from loans, similar to those commercial banks receive;
_ allow the interest income to be exempt from specific business tax for group company lending (not only those qualifying through “at least 25 per cent direct shareholding”);
_ allow use of the “mid-rate” for revaluing foreign-currency transactions instead of using the buying rate to revalue receivables and selling rate to revalue payables;
_ change the current regulation so that exporters whose net payments with the treasury centre are still entitled to receive full tax coupons based on the export value (not on the actual cash being received as they currently do);
_ consider an appropriate debt-to-equity ratio requirement.
To promote treasury centres in Thailand, it is essential that tax matters are addressed. Without any change, it will be very difficult to develop Thailand as a financial hub for attracting investment and resources. The Thai business sector and multinational companies may simply choose to set up their treasury centres somewhere else. What a lost opportunity!
Nopajaree Wattananukit is PricewaterhouseCoopers associate director.