On 10 Mar 2008, the Thailand Supreme Court ruled that an international group company's services charges to its Thailand branch office are allowable for tax.

Supreme Court Case No 1229/2551

An international Bank operates its business in Thailand through a Branch Office. The Bank's head office in Germany and the regional office in Singapore charged group services to the Thailand Branch Office.

The Thailand Revenue Department's tax audit officers did not allowed the group services charges as expenses of the Branch Office and issued tax assessments to the Branch Office on the basis that the group services charges were not incurred exclusively for the purposes of the business in Thailand under Section 65 ter (14) of the Revenue Code and Departmental Instruction No Paw 13/2529, and also tax assessments for profits remittance tax on the basis the payments by the Branch Office for the group services charges were deemed remittances of the profits of the Branch Office out of Thailand under Section 70 bis of the Revenue Code.

The Decision of the Supreme Court

The Royal Decree issued under the Revenue Code (No 18) BE 2505 provides that there shall be exemption from tax under the Revenue Code for persons entitled thereto under Agreements for the Avoidance of Double Tax with other countries.

This means that if there is a prescription in the Agreement for the Avoidance of Double Tax between Thailand and Germany that reduces or mitigates tax under the Thailand Revenue Code the provision in the Agreement for the Avoidance of Double Tax prevails to reduce or mitigate that tax.

Article 7 (3) of the Agreement for the Avoidance of Double Tax between Thailand and Germany prescribes:

• For the determining the profits of a permanent establishment, there shall be allowed as deductions, expenses incurred for the purposes of the permanent establishment, including executive and general administrative expenses as so incurred, whether in the State of the permanent establishment or elsewhere.
  

The meaning of Article 7 (3) is that expenses incurred directly for the purpose of permanent establishments in Thailand are allowed as deductions, as well as the appropriate portions of executive and general administrative expenses incurred for the purposes of the whole enterprise and not just only for the purpose of the permanent establishment in Thailand.

If Article 7 (3) is interpreted as the Revenue Department has, meaning that only executive and general administrative expenses incurred for the purposes of the permanent establishment in Thailand are allowable as expenses there would be no need for Article 7 (3) to mention anything at all about executive and general administrative expenses in the 2nd limb of the Article 7 (3), because executive and general administrative expenses incurred for the purpose of the permanent establishment are deductible anyway under the 1st limb.

As the Revenue Department could not prove to the Court that the portions of the group service charges of the Bank's head office in Germany and regional office in Singapore were not properly charged to the Branch Office according to generally accepted rules and methods around the world, the Branch Office is entitled to deduct the portion of the group service charges, and additionally the payments made by the Branch Office for the group services charges could not be a deemed distribution of the Branch Office's profits out of Thailand.

Application of the Ruling

Whilst Court decisions are not precedent under Thailand's legal system, you can use Court decisions for formulating and putting your arguments to the Revenue Department's tax audit officers. And as the Thailand Revenue Department audit officers apply Instruction No Paw 13/2529 to not only Thailand Branches but also Thailand companies, you can use this Court's decision for your arguments to the tax audit officers about group services charges to a Thailand company as well.

---