On March 26, 2019, the Thai Cabinet passed a resolution approving the issuance of three Royal Decrees in order to abolish the tax measures that promote the establishment of Regional Operating Headquarters (ROH2), International Headquarters (IHQ) and International Trading Centers (ITC), effective from June 1, 2019. The tax measures for ROH1 have already been cancelled.
The tax measures have been cancelled following the introduction of tax measures to promote the establishment of International Business Centres (IBC) to replace ROH1, ROH2, IHQ and ITC. The new IBC tax measures will promote investment in Thailand as the centre of the Southeast Asian region, as well as align Thailand’s tax measures with international standards.
Cancellation of tax measures to promote ROH2, IHQ and ITC will take effect on June 1, 2019. However, tax incentives for foreigners who are currently working for ROH2, IHQ and ITC will continue until 31 December 2019. For foreign companies or juristic partnerships that hold shares in an ROH2, IHQ and ITC the tax measures will continue until 31 December 2020.
ROH1, ROH2 and IHQ that request to change to be an IBC will be granted some relaxed conditions and receive assistance when making an application. In addition, an ITC that will expands its business scope to be promoted as an IBC will receive assistance when making an application. The Revenue Department will start receiving applications to be an IBC in April 2019.
Background to the changes
Strategically located within Southeast Asia with networks of modern infrastructure, quality skilled labor and easy access to raw materials, Thailand has strived to compete with other regional contenders for the regional hub status. This has led to the introduction of a number of tax incentive packages to attract multinationals to locate their headquarters and shared service centers in Thailand.
In 2017, Thailand joined the OECD's Inclusive Framework on base erosion and profit shifting (BEPS). BEPS Action 5 is one of the four BEPS minimum standards which all Inclusive Framework members have committed to implement. One part of the Action 5 minimum standard relates to preferential tax regimes where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions.
In the OECD’s 2017 Progress Report on Preferential Regimes that feature harmful tax practices, it identified Thailand’s International Headquarters, Regional Headquarters, Treasury Centre and International Trade Centre regimes as Preferential Regimes that feature harmful tax practices.
In response to this, the four regimes were suspended in October 2018, paving way for the New International Business Centre (IBC) Regime.
The tax incentives offered to an IBC are contained in Royal Decree no. 674 issued under the Revenue Code (“Royal Decree”).
Now companies must meet a higher expenditure threshold to qualify for tax incentives, with a minimum annual expenditure in Thailand of Baht 60m a year.
Conditions to qualify as an IBC
- The company must be setup under Thai law to provide qualifying support services or treasury services to its affiliates
- The company must have paid up capital of at least THB 10 Million on the last day of each accounting period
- The company must have annual operating expenditure in Thailand of at least THB 60 Million
- The company must have at least 10 qualified employees or at least 5 if it acts only as a treasury centre
Tax Benefits/Incentives available
Under the Royal Decree, qualifying companies under the new IBC regime will be eligible for a number of benefits/incentives for a standard period of 15 years, including:
- Reduced corporate tax rate on qualifying income as follows:
- A 3% rate if the IBC incurs at least THB 600 Million expenditure locally per annum
- A 5% rate if the IBC incurs at least THB 300 Million expenditure locally per annum
- A 8% rate if the IBC incurs at least THB 60 Million expenditure locally per annum
- Tax exemption on both domestic and foreign sourced dividend income derived from affiliates
- Withholding tax exemption on dividends paid to offshore shareholders and on interest payments to foreign beneficiaries in relation to loans for treasury activities
- Exemption from specific business tax on qualifying treasury centre income
- Flat personal income tax rate of 15% for eligible expatriate employees
A company must apply to the Revenue Department in order to obtain approval to use the tax incentives.
Revocation of benefits
Where any of the conditions are not met in a particular year, the incentives would cease to apply for that year.
However, if the IBC does not meet the prescribed conditions in consecutive years as well, the IBC status may be revoked and the incentives granted in previous years withdrawn.
Conversion to IBC
Companies promoted under the current regimes may apply to convert to the IBC regime, subject to meeting the prescribed conditions.
Non-Tax Benefits available
In accordance with the government’s policy to promote the new IBC regime, Thailand’s Board of Investment (BOI) also offers non -tax incentives.
An IBC promoted by the BOI would be entitled to receive non-tax incentives, such as:
- Permission for 100% foreign ownership of the IBC
- Visa and work permit privileges for foreign nationals working for the IBC
- Permission to own land for use in the business of the IBC
Machinery used for R&D or in training can receive import duty exemption.
Other key considerations
Thailand has recently legislated transfer pricing rules for related party transactions.
It will therefore be imperative for businesses contemplating to establish an IBC in the Kingdom, to adequately consider the pricing of its transactions with related parties.
Taxpayers are suggested to be cautious while framing policies for inter-company services as these charges are highly likely to be reviewed by recipient country(s) tax authorities as well.
It is recommended that an IBC establishes and documents specific protocols for identifying chargeable costs to each affiliate. A benchmarking exercise should be undertaken to determine the appropriate pricing of charges to affiliates.