Thailand International Services Payments Withholding Tax
Under Thailand's double tax treaties, payments made to a foreign company for services are not subject to Thai withholding tax, but payments made to a foreign company for the use of or the right to use information concerning industrial, commercial or scientific experience i.e. know-how are subject to Thai withholding tax at the rate of 15%.
The words of this know-how prescription in the double tax treaties have, for a long time in Thailand, been used to assert that services fee payments to a foreign company are subject to 15% withholding tax in Thailand.
In March 2013, the Thailand Supreme Court ruled against this widespread practice.
Supreme Court Case No 13993/2555
A Thailand company entered into two separate agreements with a Dutch company -- an Intellectual Property License Agreement and an Offshore Services Agreement.
Under the Intellectual Property License Agreement, the Dutch company provided a right to the Thailand company to use the Dutch company’s expertise and know-how for the design, construction, operation and maintenance of a petrochemical and petroleum terminal. The payment to the Dutch company under this agreement was 0.5% of the gross income of the Thailand company, and the Thailand company deducted withholding tax at the rate of 15% when it made its payments to the Dutch company.
Under the Offshore Services Agreement, the Dutch company provided assistance services to the Thailand company in connection with various aspects of management of the terminal, including budgetary control, staff recruitment and training, managing materials and systems and security, fire fighting and environmental management etc. The Dutch company did not require the Thailand company to keep any information it received from the Dutch company secret, nor did the Dutch company require the Thailand company to return anything back to the Dutch company at the end of the agreement. The payment to the Dutch company under this agreement was two fee amounts - a monthly fixed fee for the first 6 years of the agreement (Monthly Fixed Fee) and a variable fee being 1% of the gross income of the Thailand company for the whole term of the agreement (Variable Fee). The Thailand company did not deduct any withholding tax when it made these payments to the Dutch company.
The Thailand Revenue Department's tax audit officers allowed the Variable Fee as a services fee payment not subject to withholding tax, but assessed 15% royalty withholding tax on the Monthly Fixed Fee, asserting it to be a payment for know-how.
The Board of Appeals found for the Revenue Department, as did the Central Tax Court, but the Thailand company kept going and referred the matter to the Supreme Court.
The Supreme Court's Ruling
A royalty, as it is prescribed in Section 40(3) of the Revenue Code, is a payment made for “goodwill, copyright or any other rights". The term "or any other rights" means rights that are similar in nature to a copyright, such as rights under a license or a franchise. Royalty payments are paid to the owner of the rights for the use of or the right to use the rights of the owner. For payments for “know-how” to be a royalty, the payments must be made to the owner of the information or experience for the use of or the right to use the owner's information or experience, which information or experience is unpublished information and experience, in the same way as payments made to an owner of a right for the use of or the right to use the owner's copyright, license or franchise.
Unlike a royalty, a service fee payment is paid to an owner of information or experience, not for the use of or the right to use the owner's information or experience, but for the purpose of the owner of information or experience to supply or provide something to the payer, such as payments that are made to an engineer who uses his information or experience to design a factory for the payer.
From the testimony and evidence presented to the Court it was clear that the Monthly Fixed Fee payments were paid to the Dutch company for the services of the Dutch company, not for the use of or the right to use any of the information or experience that the Dutch company owns, and therefore the Court ruled that the Monthly Fixed Fees were payments for services, which are entitled to exemption from Thailand withholding tax under the Business Profits Article 7 of the double tax treaty between Thailand and the Netherlands.
In handing down its decision, the Supreme Court also made some rather scathing remarks about how the Revenue Department's officers arrived at their decision, including their issuing of a tax assessment for 15% royalty withholding tax based only on the personal view of one particular Revenue officer, the Revenue officer's thinking that he can assess 15% withholding tax on a services fee when he thinks it's a royalty without any evidence or proof of it being a royalty, the Revenue officer's thinking that different tax treatment can apply simply because one fee is fixed and one fee is variable, which is groundless, and the Revenue officer's thinking that the Monthly Fixed Fee was a disguised royalty because the 0.5% royalty payment under the Intellectual Property Agreement was too low for him, again without any evidence or proof of that.
This Tax Insight is general information only. It should not be used to determine any particular matter without consulting with an experienced Thailand tax advisor.