Thailand Taxation 2012

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The new tax regime in Thailand and the implications for your Business in Thailand:

The new tax regime in Thailand and the implications for your Business in Thailand

Promised in July ...:

Promised in July ... “Ms. Yingluck said an aggressive, nationwide increase in the minimum wage, by 40% to 300 baht, about $10, per day in Bangkok, is set to take effect at the beginning of 2012. ... ... But employers will benefit from a cut in corporate tax rates that she plans - to 23% from 30%. That rate will fall further, to 20% in 2013.” Wall Street Journal, July 7, 2011

... and delivered in December:

... and delivered in December On December 21, 2011, the Thai Government announced in Royal Decree No. 530 B.E. 2554 the following CIT reduc-tions: 23 % of net profits of the juristic person for the first accounting period which begins on or after 1 January 2012; 20 % of the net profits of the juristic person for the following two accounting periods which begins on or after 1 January 2013 and 2014. The Revenue Code has not been modified. PIT has not been changed.

CIT rate comparison:

CIT rate comparison Source: OECD Tax Database 2011

CIT rate of SME commencing 2012:

CIT rate of SME commencing 2012 Royal Decree No. 530 reduces in Section 6 the CIT rate for small and medium sized enterprises (SME), that means paid up capital not exceeding THB 5 million and gross annual revenue from sale of goods or services not exceeding THB 30 million The CIT rates for SME: Net taxable profit THB 1 to 150,000 is tax exempt in the accounting year 2012 and thereafter. Net taxable profit THB 150,001 to 1 Million, CIT rate is 15% in the accounting year 2012 and thereafter. Net taxable profit THB 1 million is taxed at a CIT rate of 23% in the accounting year 2012. Net taxable profit THB 1 million is taxed at a CIT rate of 20% in the accounting year 2013 and thereafter. Maximal tax savings 2013: (850,000 x 5%) + (150,000 x 20%) = THB 72,500, approximately equivalent to a MacBook Pro

The good old times: Tax planning 2011:

The good old times: Tax planning 2011 Roughly the same tax rate Irrespectively, in which country profits arise Not important, where expenses are deductible Transfer pricing has minor importance Consequences: non-tax aspects are decisive: Supply chain costs Customs Bureaucracy, corruption, ease of doing business International tax planning mainly by shifting profits offshore

Now: Tax planning 2012/2013/2014:

Now: Tax planning 2012/2013/2014 Substantial differences in tax levels between Thailand and Europe, etc. Now it matters, in which country profits arise. Now it matters, in which country expenses are deductible. Transfer pricing now has significant importance. Substantial taxes can be saved by international tax planning without the need to involve notorious offshore jurisdictions like Singapore, Hong Kong and BVI.

Profit migration strategies for the manufacturing company: Contract / Toll Manufacturing:

Profit migration strategies for the manufacturing company: Contract / Toll Manufacturing General idea of the tax planning scheme Manufacturer in a high tax country limits his risks, assets and key personal and, as a consequence, will gain only a small (taxable) profit. R&D, marketing, distribution is done from a low tax country and will result in substantial profits which are taxed at a low CIT rate or not taxed at all. Consequences under the new Thai CIT regime Existing contract/toll manufacturing schemes have to be reviewed whether they are still profitable in 2012 ff. or should be remodeled to a fully fledged production company Existing or planned manufacturing facilities abroad might use the adman-tages of contract/toll manufacturing by repatriation of R&D, marketing and distribution activities to Thailand. Typical tax issues in the establishment or termination of such scheme are compensation payments, profit taxes and exit taxes for the early termi-nation of agreements, the loss of future profits, a transfer of the customer base and the transfer of marketing intangibles.

Profit migration strategies for the distribution company: Stripped or Limited Risk Distributorship:

Profit migration strategies for the distribution company: Stripped or Limited Risk Distributorship General idea of the tax planning scheme Normally distributors are fully fledged sales subsidiaries with respective stock, service and collection risk. Under the scheme, distributor will not bear inventory, credit or currency risks, and has no financial exposure. Instead, important functions and risks are shifted to the principal. Risks, profits and tax burden will be transferred to the principal in a low tax jurisdiction. In conformity with its functions and risks the principal attracts a larger proportion of the corporation's sales margin. Taxation of the limited risk distributor is comparable to the arrangement with a commission agent (commissionaire). He is reimbursed for his costs, plus a markup on those costs (cost plus). Consequences under the new Thai CIT regime Re-adjustment of existing and planned distribution agreements to reflect the changed CIT tax rates. Potential exit taxation risks have to be analyzed carefully.

Financing strategies:

Financing strategies Till 2011 a shareholder‘s loan financing resulted in equal tax burden and tax deductibility The lower CIT rate results in an unbalanced situation. The reduced taxes in Thailand fall below the tax burden in Germany. Appropriate international tax planning strategies: Hybrid financing International financing company Profit migration in the form of management fees, service fees, royalties, dividends, etc. Other

Conclusions on offshore tax planning:

Conclusions on offshore tax planning The marginal lower tax rates in HK (16,5) and SIN (17) versus Thailand (20 in 2013) do not justify the use of these jurisdictions. The CIT rate advantages of HK and SIN may in many cases be insignificant compared to the tax risks involved when doing offshore tax planning. Territory taxation advantages versus resident taxation disadvantages are unchanged (0 vs. 20). Business activities in tax free areas are still attractive and should be maintained. Operational advantages and privacy advantages of offshore jurisdiction remain unchanged. The Thai CIT rate change is not accompanied by non-tax easements. In contrary, the tax audits are promised to me tougher and more strict. A detailed analysis has to be made to distinguish between the pros and cons of tax treaty countries (SIN 1976, HK 2005, Mauritius 1998) versus offshore jurisdictions without tax treaty (BVI, Panama, Cayman Isles, etc.).

Recommendations on international tax planning in the light of the reduced CIT rate in Thailand:

Recommendations on international tax planning in the light of the reduced CIT rate in Thailand For many years international tax planning was a useful but not very effective tool to reduce the overall tax burden of multi-national companies. This situation has changed. Non-application of the tools and modules of international tax planning instruments will result in a voluntarily and unnecessarily high tax burden. Therefore, international tax planning is much more attractive than before. An old (i.e. 2011) tax optimized supply chain management will in many cases not be balanced any more. Therefore, the cross-border profit and loss allocation as well as the overall transfer pricing policy has to be re-adjusted. Existing contract manufacturing / toll manufacturing schemes or stripped / limited risk distributor agreements might not be tax efficient any more. In other cases, it might be beneficial to establish these tax schemes a.s.a.p. The lower CIT rate could result in an unbalanced situation with respect to corporate financing structures. A review and adjustment is required as well. Typical offshore advantages are not affected by the CIT change. However, the low CIT rates of Hong Kong and Singapore lose attractiveness.

Contact:

Contact Dr. Ulrich Eder Rechtsanwalt Steuerberater Managing Director PUGNATORIUS Ltd. 29th Fl., Central World Tower 999/9 Rama I Road Bangkok 10330, Thailand Telephone: +66 2 2072647 Telefax: +66 2 207 2657 [email protected] www.pugnatorius.com

Sophisticated solutions in a complex legal environment. Serious legal and tax advice in the land of smile. INTERNATIONAL LAWYERS | KINGDOM OF THAILAND THAI ไทย | DEUTSCH | ENGLISH | ESPAÑOL :

Sophisticated solutions in a complex legal environment. Serious legal and tax advice in the land of smile. INTERNATIONAL LAWYERS | KINGDOM OF THAILAND THAI ไทย | DEUTSCH | ENGLISH | ESPAÑOL PUGNATORIUS Ltd. 29th Floor, Central World Tower 999/9 Rama 1 Road, Pathumwan Bangkok 10330, Thailand Office: 0066 2 2072647 Telefax: 0066 2 207 2657 e-mail: [email protected] Internet: www.pugnatorius.com

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