Thailand Transfer Pricing Group Services Court Ruling
Thailand's Supreme Court has handed down a favorable decision on transfer pricing group services.
Supreme Court Case No 1229/2551
Deutsche Bank operates its business in Thailand through a Branch office. The bank's head office in Germany and its regional office in Singapore allocated group services costs to the Thailand Branch, and the Thailand Branch claimed the costs as expenses in its tax returns.
The Thailand Revenue Department issued a tax assessment to the Branch office for non-allowed group services costs on the basis the services costs were not exclusively incurred for the purpose of the business in Thailand under Section 65 ter (14) of the Revenue Code and Departmental Instruction No Paw 13/2529, and additionally a tax assessment for profit remittances out of Thailand on the basis that the Branch's payments of the services costs were a deemed distribution of the Branch's profits out of Thailand under Section 70 bis of the Revenue Code.
The decision of the Supreme Court:
Royal Decree Issued Under the Revenue Code (No 18) BE 2505 provides exemption from tax under the Revenue Code to persons who are entitled thereto under Agreements for the Avoidance of Double Taxation entered into between Thailand and other countries. If there's a provision in the Agreement for the Avoidance of Double Taxation between Thailand and Germany that limits or mitigates a provision in the Thailand Revenue Code the provision in the Agreement for the Avoidance of Double Taxation shall prevail.
Article 7(3) of the Agreement for the Avoidance of Double Taxation between Thailand and Germany states that “in determining the profits of a permanent establishment, there shall be allowed as deductions, expenses that are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere”.
The meaning of this provision is that expenses that are incurred directly for the purposes of a permanent establishment in Thailand are allowed as deductible expenses, as well as a portion of executive and general administrative expenses that are incurred for the whole enterprise and not just only for the purposes of the permanent establishment in Thailand.
If this Article 7(3) is interpreted as meaning that only executive and general administrative expenses that are incurred directly for a permanent establishment in Thailand are allowed as deductible expenses, there would be no need for Article 7(3) to mention anything about the executive and general administrative expenses for the whole enterprise in the second limb of the Article, because such executive and general administrative expenses incurred directly for the purposes of a permanent establishment are deductible expenses anyway under the first limb of the Article.
As the Thailand Revenue Department could not prove the proportion of the group services costs of the head office in Germany and the regional office in Singapore were not properly allocated according to generally accepted rules and methods used around the world, then Deutsche Bank is entitled to deduct the proportion of the group services costs allocated to the Thailand Branch as expenses of the Thailand Branch and additionally, the payments of the services costs to the head office are not a distribution of profits of the Thailand Branch 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 tax audit officers. And as the Thailand Revenue Department applies its Instruction No Paw 13/2529 to not only Thailand Branches but to Thailand companies as well you should be able to use this Supreme Court's decision for arguments about services to a Thailand company also.
This Tax Insight Article is general information only. It should not be used to determine any matter without consulting with an experienced Thailand tax advisor.