Thailand International Services Payments Withholding Tax
Under Thailand's double tax treaties, international payments of services fees are not subject to 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 (know-how) is subject to 15% withholding tax in Thailand.
But the words of this know-how prescription 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 legal 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 for the unloading, storage and distribution of oil products in Thailand. The amount paid to the Dutch company under this agreement was 0.5% of the Thailand company’s gross income, and the Thailand company deducted 15% withholding tax when it made its payments to the Dutch company under this agreement.
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 payable for the first six years of the agreement (Monthly Fixed Fee) and a variable fee being 1% of the Thailand company’s gross income for the whole of the agreement (Variable Fee) - and the Thailand company did not deduct any withholding tax when it made its payments to the Dutch company under this agreement.
The Thailand Revenue Department's audit officers allowed the Variable Fee as a services fee payment not subject to withholding tax, but assessed the 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. 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 that payments are made to an owner of a copyright, license or a franchise for the use of or the right to use the owner's copyright, license or franchise.
Unlike a royalty, a service fee 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 owner's own use of his own information or experience for the purposes of supplying something to the payer, such as payments are made to an engineer who uses his own 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 Dutch company's information or experience, and the Court ruled that the Monthly Fixed Fee payments were service fee payments, 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 audit 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 audit officer, the Revenue audit officer's thinking that 15% tax can be charged on a services fee when he only thinks it's a royalty without any evidence or proof of it being a royalty, the Revenue audit officer's thinking that different tax treatment can apply simply because one fee is fixed and one fee is variable, which is groundless at law, and the Revenue audit officer's thinking that the Monthly Fixed Fee was a disguised royalty because the 0.5% royalty payment under the Intellectual Property License Agreement was too low for him, again without any evidence or proof of that, to which the Supreme Court remarked that the Revenue audit officer should have exchanged information with the tax authorities in the Netherlands under the provision in Article 26 of the double tax treaty between Thailand and the Netherlands.
This is a general information Tax Insight Article only. It should not be used to determine any matter without consulting with an experienced Thailand tax advisor.