Last month, the Revenue Department announced the introduction of a new headquarter tax regime called International Business Centre (IBC). The existing tax incentive regimes – International Headquarters (IHQ), Regional Operating Headquarters (ROH) and International Trading Center (ITC) – as of 10 October 2018 are no longer available to new applicants. Current beneficiaries of these regimes will continue to enjoy tax benefits until the originally granted incentive period runs out.
The headquarter tax preferential regimes have been a feature of Thai tax law since 2002, as the government has strived to compete with Singapore, Hong Kong and Malaysia for regional hub status and incentivize multinational companies to locate their headquarters and shared centers in Thailand. This strategy, in combination with the growing economy, improving infrastructure and advancing human capital, has seen some success.
However, decisions on taxation policies and their fiscal impact are no longer strictly a national matter.
Last year, Thailand joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the Inclusive Framework, over 100 countries and jurisdictions are collaborating to implement measures to tackle BEPS.
In signing up for this Inclusive Framework, the Thai government has committed to implementing BEPS minimum standards that include combating harmful tax practices. A review conducted last year by the OECD, and later the EU, concluded that the tax preferential regimes of Thailand present opportunities for harmful tax practices and need to be amended, which leads us to where we are now.
Full details of IBC are yet to be released, however, it is expected that the scheme will be designed to address the concerns of, and receive a blessing from, the OECD and EU.
In a nutshell, IBC will continue to offer a number of incentives to multinationals intending to invest or currently holding investments in Thailand, similar to those provided under the previous regimes. This is in line with the government’s aim to continue to promote Thailand as an operating and administrative hub in Asia.
A reduced corporate income tax rate of 8%, 5% or 3% will apply depending on the level of annual expenditure in Thailand, being THB60 million, THB300 million and THB600 million, respectively. Dividends received by IBC from its subsidiaries will be exempt from Thai tax. Exemptions on withholding taxes on dividends or interest paid from IBC will be introduced, as well as exemption from Specific Business Tax on financial management services provided to associated enterprises.
There will be no change to personal income tax for foreign nationals with the reduced flat rate of 15% still applicable.
There has been no announcement about when the proposed law will be enacted or when the new scheme will be open to applications.
The next progress report by the OECD is imminent. It is expected to reveal the status of discussions between the OECD and the Thai government on the acceptability of IBC from the BEPS perspective, which may then influence the timeframe for implementation of the legislation.