On 7 September 2017 Thailand and Cambodia signed an agreement for the avoidance of double taxation (“DTA”).  The newly signed DTA which is expected to become effective on January 2018.  The key highlights include: 

The DTA provides for the following withholding taxes:

• 10% on dividend; 
• 10% on interest paid to a financial institution or insurance company, and 15% on interest paid to all other recipients (with the exception of the Government);
• 10% on royalties.  The definition of royalty specifically includes the use of, or the right to use, industrial, commercial or scientific equipment; and
• 10% on fees for technical services.

 

Notably, the DTA contains a specific article (Article 13) that applies to fees for technical services, which is not commonly seen in Thai DTAs. Under Article 13, 10% WHT will be applicable on fees for technical services paid by an enterprise in one country to an enterprise in the other country. (provided there is no Permanent Establishment (“PE”) in the first mentioned country in which case Article 7 would apply.) Fees for technical services are defined as a payment of any kind made in consideration for the rendering of any managerial, technical or consultancy services, including the provision of the services of technical or other personnel (but does not include the provision of independent personal services to which separate Article 15 applies). Where a payment made from Thailand may fall under both Article 12 (Royalties) and Article 13 (Fees for technical services), the Protocol to the DTA explicitly states that Article 13 prevails. Given the withholding tax rate is 10% under both articles, there should be no significant practical implications, absent any changes in Thai domestic law.  

 

It should be noted that the benefits of the DTA, in respect of dividend, interest, royalties and fees for technical services, will be limited to the “beneficial owner” of such income.  While the meaning of “beneficial ownership” is not defined in the DTA or any prevailing Thai tax law, it should generally refer to a person who is entitled to the benefit of the income, even though the person may or may not hold the legal title to, or be the recipient of such income.

 

A PE would arise where a combination of various activities such as, storage, display, delivery, purchasing of goods etc. (which in isolation would not create a PE), is not of a preparatory or auxiliary character in relation to the business as a whole.  This is a common feature in most recent Thai DTAs.

 

The definition of a PE addresses specific industries.  The carrying on of activities, including the operation of substantial equipment, for the exploration or for exploitation of natural resources for an aggregated period of more than 90 days within any 12 month period would create a PE.  Likewise, a PE may be created where an insurance enterprise located in one country collects premiums in the other country or insures risks situated in that other country through a dependent agent.  

 

Thailand retains the right to tax capital gains on disposal of shares and debt instruments.

 

The DTA contains a tax sparing provision for a period of 10 years after the DTA enters into force.  Broadly, this is a tax treaty provision whereby a contracting state agrees to grant relief from residence taxation with respect to source taxes that have not actually been paid (i.e. taxes that have been ‘spared’) due to specific laws and regulations in the source country designed to promote economic development in that country.

 

KPMG’s observation

The newly signed DTA contains a separate article (Article 13) that applies to “fees for technical services” that is not commonly seen in other Thai DTAs.  Fees for technical services refer to managerial, technical or consultancy services that are normally fall into the scope of Article 12 – Royalties or Article 7 – Business Profits of other Thai DTAs.  Although the Protocol to the DTA defines the term “managerial service” and “technical or consultancy service”, in order to determine what article of the DTA should apply to a particular type of income, detailed analysis will be required as it may lead to different tax consequences.