ALL UNDER ONE ROOF
After being in effect for more than 35 years, the Thailand-Singapore tax treaty is undergoing a major revamp. Representatives of both countries recently negotiated changes to the treaty in Singapore. Although it will take a while before the new version is completed and comes into force, it is quite amazing to learn from the draft that Thailand has offered a number of tax benefits never granted in any tax treaty before. For example:
The existing treaty stipulates that a building site, construction, installation or assembly will be considered a permanent establishment (PE) for tax purposes if it has been in existence for more than six months. The new version extends the period to 12 months, the longest ever agreed by Thailand. No other country, not even Japan, China or the United States, enjoys this privilege.
Nonetheless, the draft does contain at least one good feature. It specifies a time test of 183 days for a service business and consultancy services for the determination of a PE. The existing treaty is silent on this matter although the period of six months has been adopted for practical purposes under the PE time test.
A withholding tax rate reduction (from 15% to 5%) will be applied to payments for the use of software. Hence, you will no longer need to find another country to act as a ‘‘front’’ party in granting the right to use software to a Thai company in exchange for fees; a direct license agreement between Thai and Singaporean entities can be entered into. Other royalty incomes are also eligible for the lower tax rates of either 8% or 10%. The 15% rate under Section 70 will no longer apply to royalty income received by a Singaporean company.
It is also expected that Singapore will enjoy a ‘‘most favoured nation’’ clause whereby Thailand will guarantee better tax privileges for interest income and income from international transport, insofar as Thailand has provided or will provide to another country, above whatever is specified in the new version of the tax treaty.
Businesspeople know that Singapore imposes corporate income tax only on income ‘‘sourced’’ in Singapore. Hence, a Singaporean company is often set up by a non-Singaporean merely to receive income from Thailand — tax-free under the existing tax treaty and at the same time not taxable in Singapore.
However, during the last couple of years, Singapore has started to lose its appeal as a ‘‘front’’ jurisdiction from a tax planning perspective. Singaporean tax authorities have become stricter in interpreting the treatment of such newly set up companies as carrying on business in Singapore, and in treating capital gains from the sale of Thai shares as trading income, which is taxable in Singapore.
Singapore does allow a company to be set up as ‘‘non-resident’’ so that it will not be subject to Singaporean tax and a number of people use this structure to deal with Thai tax planning. Unfortunately, this non-resident Singaporean company is technically not qualified for tax treaty benefits.
Nonetheless, not many people in Thailand know this fact or perhaps pretend not to know, and always apply tax treaty benefits to transactions insofar as the recipient of the income is a company incorporated under the law of Singapore.
Apart from the definition of the term ‘‘tax resident’’ (a party that qualifies for tax treaty benefits) in Article 4, the existing treaty provides for an anti-tax treaty shopping measure or ‘‘Limitation of Relief’’ in Article 22 to deal with this situation.
It denies tax treaty benefits insofar as the Singaporean company keeps the Thai-sourced income outside Singapore so that it does not have to pay Singaporean tax. As the Thai-sourced income will not be subject to Singaporean tax, there is no double taxation. Hence, Article 22 allows Thailand the right to deny tax treaty benefits to such Thaisourced income and Thailand maintains its taxing power.
Many of you may not have heard of this anti-tax treaty shopping measure before. The fact is, most tax advisers in Thailand have overlooked Article 22 and rarely issued opinions on its impact. Unfortunately, the law is always the law and some tax authorities have started to catch up with this concept, and more people are aware of its impact. Hence, Article 22 has begun to play a key role in the battle against abusive tax planning — one of the reasons why Singapore is losing its appeal.
The new version of the tax treaty is a godsend for people wishing to abuse the Thailand-Singapore agreement. It is coming at the right time and in the right place. It precludes the ‘‘Limitation of Relief’’ article from the draft, which is equivalent to crippling Thailand’s right to deny tax treaty benefits.
Once the new version of the tax treaty model comes into force, Singapore will be back in the business of cross-border tax planning due to these generous tax privileges and the lack of the anti-tax treaty shopping measure. From that point, the only limitation on the use of a Singapore company should be Singaporean tax itself, if any.