Bid to close profit shifting loophole

The Revenue Department is drafting legislation to collect taxes from multinational enterprises (MNEs) to prevent profit shifting to subsidiaries in countries with lower tax bases.

According to Vinit Visessuvanapoom, deputy director-general of the Revenue Department, the draft legislation is called the Top-up Tax Act, which aligns with the resolutions of the Organisation for Economic Cooperation and Development (OECD) and the G20, a framework for international cooperation with 140 member countries, including Thailand.

The framework aims to address measures to prevent tax base erosion and profit shifting, known as Pillar 2 Global Anti-Base Erosion Rules, and to prevent tax competition to attract investment by setting a minimum corporate income tax rate (global minimum tax) of 15%.

Under the framework of the cooperation, if the profits of MNEs are shifted to subsidiaries in countries with tax rates below 15%, the MNEs would be required to pay the difference in taxation.

In March 2023, the cabinet approved the proposal by the Board of Investment (BoI) regarding the principles of the aforementioned legislation.

Subsequently, the Revenue Department was tasked with drafting the legislation.

From March 1-15 this year, the Revenue Department conducted a public hearing on the draft legislation in accordance with the constitution’s requirement through its website and www.law.go.th. There were 2,886 visitors to the website, with 35 commenters in agreement, none in disagreement, and 2,851 not expressing an opinion. The next step is to submit this draft bill to the Finance Ministry for consideration.

If this legislation is approved by the parliament and published in the Royal Gazette, it will take effect from the first day of the following year.

Revenues from the Top-up Tax Act (Pillar 2) will be allocated to funds to enhance the competitiveness of targeted industries at a rate of at least 50%, but no more than 70%, of such revenues.

The global tax reform initiated by the OECD established the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to develop mechanisms for member countries to address tax base erosion and BEPS.

Accordingly, the OECD has set criteria to collect taxes from businesses in the digital era through a reform of tax collection, divided into two principles (the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy).

Pillar 1 requires international companies with total revenues exceeding €20 billion to allocate at least 25% of their profits in excess of 10% to countries where their customers or users are located.

The Revenue Department must sign the multilateral agreement and enact additional laws to enforce the agreement for the benefit of maintaining Thailand’s tax base and tax collection rights in the country where added value is created in the economic system, as Thailand has customers or service users from the products or services of those multinational companies.

In the past, several digital businesses were able to generate income from a country without having any physical assets there. The signatories to a contract did not have a permanent establishment in the country where the income was generated, thus making it impossible to collect taxes from such digital businesses. Nevertheless, Pillar 1 is still pending clear Model Rule consensus among countries before legislative drafting under Pillar 1 can proceed.

Pillar 2 makes large international companies pay a global minimum tax rate of 15% in each country where they operate.

If they pay a tax rate lower than 15% in any country, they must pay additional taxes to reach the 15% threshold in the country where the parent company is based. Furthermore, the revenue from taxes under Pillar 2 will be allocated to a competitiveness enhancement fund as stipulated in the Competitiveness Enhancement Act 2017 of the BoI.

‘‘ The draft legislation is called the Top-up Tax Act.

VINIT VISESSUVANAPOOM Deputy director-general, Revenue Department