May 2019
On 26 March 2019 the Thai Cabinet passed a resolution approving the issue of three Royal Decrees abolishing the tax measures that promote the establishment of Regional Operating Headquarters (ROH2), International Headquarters (IHQ) and International Trading Centres (ITC), with effect from 1 June 2109. 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 1 June 2019. However, tax incentives for foreigners who are currently working for ROH2, IHQ and ITC will continue until 31 December 2019. Tax measures for foreign companies or juristic partnerships that hold shares in ROH2, IHQ and ITC will continue until 31 December 2020.
Any ROH2, IHQ and ITC that request to change to be an IBC will be granted some relaxed conditions and receive assistance when making an application.
Strategically located within Southeast Asia with networks of modern infrastructure, quality skilled labour 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, Thailand’s International Headquarters, Regional Headquarters, Treasury Centre and International Trade Centre regimes were identified as Preferential Regimes that feature harmful tax practices.
In response to this, the four regimes were suspended in October 2018, paving the 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”).
Companies must now meet a higher expenditure threshold to qualify for tax incentives, with a minimum annual expenditure in Thailand of THB 60 million a year.
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:
A company must apply to the Revenue Department in order to obtain approval to use the tax incentives.
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.
Companies promoted under the current regimes may apply to convert to the IBC regime, subject to meeting the prescribed conditions.
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:
Machinery used for R&D or in training can receive import duty exemption.
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 their transactions with related parties.
We suggest that taxpayers are cautious when 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.
Paul Ashburn
paul.a@bdo.co.th