Tax Newsletter JULY-AUGUST 2017

DLO’S Tax Newsletter

Issue 79-80 July and August 2017

Inside this Issue

Tax Laws Update

1. Reduction of the Withholding Tax rate for a taxpayer who receives income from a Juristic Person carrying on a target industry business (Western Thailand).

2. Tax benefit for capital expense for assets under the Royal Decree (No. 642) B.E. 2560 and the amendment of the conditions on capital expense for assets under Royal Decree (No. 604) B.E. 2559.

3. The Revenue Department issues a new regulation regarding preparation, delivery and storage of electronic tax invoices and electronic receipts.

4. Amending the rules for tax exemption on business transfers (natural person transfers to a new start-up)

5. Additional rules for corporate income tax exemptions on target industries in the Special Development Zone (South of Thailand – only for the provinces of Narathiwat, Pattani, and Yala)

6. Additional rules for corporate income tax exemptions for target industries

Tax News

1. Windfall Tax Bill;

2. Revenue Code Draft Bill on e-Business; and

3. Revenue Code Draft Bill on Transfer Pricing.

Interesting Deka (Supreme Court Judgment)

Dika                 (Supreme Court Judgment) No.5230/2559, in re:

Between          Mr. P                                                              Plaintiff

Revenue Department                                    Defendant

Issue:               Service Agreement

Tax Law Update

1. Reduction of the withholding tax rate for a taxpayer who receives income from a Juristic Person carrying on a target industry business (Western Thailand)

Royal Decree (No. 641) B.E. 2560 provides for the reduction of the withholding tax rate for a taxpayer (manager, expert or employee) up to 17 percent of income derived from a corporation or a juristic partnership, that carries on a target industry business and is located in the provinces of Chachoengsao, Chonburi or Rayong. The taxpayer also receives the right not to include such income (already subject to withheld tax) in the computation of their personal income tax at the end of the tax year but they must not request a tax refund or use such withholding tax as a credit, either wholly or partly.

The taxpayer also needs to comply with all relevant rules, procedures and conditions as prescribed by law.

For more details, please see: https://goo.gl/WQrPzS

2. Tax benefit on capital expense of assets under the Royal Decree (No. 642) B.E. 2560 and the amendment of the condition on capital expense of assets under Royal Decree (No. 604) B.E. 2559

Royal Decree (No. 604) B.E. 2559 provided an exemption on corporate income tax on expenses for investment, addition, change, expansion or improvement of an asset of a business (excluding repairs), in the amount of 100% of the expense that is spent during the period starting from November 3^rd, 2015 through until December 31^st, 2016.

Thereafter, Royal Decree (No. 642) B.E. 2560 has recently been released, and provides an exemption on corporate income tax on expenses on investment, addition, change, expansion or improvement of an asset of a business (excluding repairs) in the amount of 50% of the expense that is spent during the period starting from January 1^st, 2017 through until December 31^st, 2017.

Furthermore, Royal Decree (No. 642) B.E. 2560 provides a definition of the word “Machine” and this definition has also been amended in Royal Decree (No. 604) B.E. 2559.

The Notification of the Director-General of the Revenue Department (No. 300) has amended the conditions applicable to the deduction on capital expenses of assets by giving rights to applicants who submitted a request for a construction license (for constructing or modifying a building) and who informed  the competent local official in relation to the construction or modification of the building before November 3^rd, 2015, but the construction or modification of the building as specified in the construction license had been not yet commenced and thereafter, the contract of service or the purchase order contract for such construction/ modification works was made in the effective period of the Royal Decree (No. 604) B.E. 2559, in such case the taxpayer is still able to receive the tax benefit as provided under the Royal Decree (No. 604) B.E. 2559.

The taxpayer also needs to comply with all relevant rules, procedures and conditions as prescribed by law.

For more details, please see: https://goo.gl/XAuZqw and https://goo.gl/nPnckT

3. The Revenue Department issues a new regulation regarding the preparation, delivery and storage of electronic tax invoices and electronic receipts

The Regulation of the Revenue Department regarding the preparation, delivery and storage of electronic tax invoices and electronic receipts B.E. 2560 has cancelled the Regulation of the Revenue Department regarding preparation, delivery and storage of electronic tax invoices and electronic receipts B.E. 2555 and has amended the conditions applicable to the preparation, delivery and storage of electronic tax invoices and electronic receipts. Examples of these changes are as follows:

1) A VAT registrant, who is a person or a juristic person, can request for the preparation, delivery and storage of electronic tax invoices and electronic receipts. In the past this was not the case as only private limited companies and public limited companies that had registered capital exceeding 10 million Baht could apply.

2) There are no limits or restrictions with respect to the amount of registered capital for such applicant.

3) After receiving  permission from the Revenue Department, a person or juristic person must submit on a monthly basis, the relevant documents regarding electronic tax invoices and electronic receipts to the Revenue Department via the electronic system within the  15th day of the next tax month. Previously, the documents were required to be submitted within the 25^th day of the next tax month.

For more details, please see: https://goo.gl/x5tVZy

4. Amending rules for tax exemptions on business transfers (Transfers from a natural person to new start-up)

The Notification of the Director-General of Revenue Department (No. 5) cancelled Article 2 of the Notification of the Director-General of Revenue Department (No. 4) subject to the rules, procedures and conditions regarding the exemption on income tax, value added tax, specific business tax and stamp duty according to Royal Decree (No. 630) B.E. 2560. As a result, a person or a new corporation established will receive such tax benefits and must follow the new amended conditions which are as follows:

1) Assets that are transferred must be used in business. Previously the assets that were transferred were not subject to limitations.

2) Lands or land with a building must be transferred at the higher of the following:

a. The available appraised price applicable on the date of transfer; OR

b. The cost price of the lands or land with a building that the transferor purchased according to the sale contract made with the competent officer.

Previously only the market price applied.

For more details, please see: https://goo.gl/GMF6sy

5. Additional rules for corporate income tax exemptions on target industries in the Special Development Zone (–only applicable for the following 3 southern provinces Narathiwat, Pattani, and Yala)

Royal Decree (issue no. 628) B.E 2560 (2017) provides a tax deduction on personal income tax that is withheld and paid to an employee (skilled workers, specialists) for labour contact. It also exempts corporate income tax at the rate of 2 times for expenditure that has paid for an investment in stock or a partnership which is doing business in the special development zone (this comprises the 3 southern provinces of Narathiwat, Pattani, and Yala).

The Notification of the Director General of the Revenue Department (No. 294) specifies the following rules which must be complied with in order to be able to receive the above mentioned benefits:

1) An employee

– The Specialist must graduate with a bachelor’s degree or higher, however a High Vocational Certificate or Certificate of Technical Vocation is acceptable for skilled workers only.

– If the person has an educational background which is related to their working field, they require experience of at least 5 years. However, if the person’s educational background is not related to their field of work then they require at least 8 years of work experience and such person must obtain a certificate of work to prove their length of employment experience.

2) A juristic person

– A juristic person must not be situated in a special development zone for 1 year or more before an investment;

– A juristic person must not sell or transfer stocks or partnership of itself except if it has reasonable cause to do so.

For more details, please see: https://goo.gl/S746Gj and https://goo.gl/YXYHz6

6. Additional rules for corporate income tax exemptions for target industries

Royal Decree (issue no. 637) B.E 2560 (2017) and the Notification of the Director General of the Revenue Department (No. 302) provide an exemption on corporate income tax for 5 years for certain target industries, such tax exemptions are subject to the following rules which must be complied with:

1) It shall apply for New Start-ups which are approved (using form Ror. Mor. 1) by the Director General of the Revenue Department via its online lodgment system available the through Revenue Department’s website and the approval must be made within December 31, 2017;

2) If it desires to add more businesses and the type of business in the target industries, the applicant must apply for approval to the Director General of the Revenue Department (using form Ror. Mor. 2) via the online lodgment system available through the Revenue Department’s website.

If a juristic person is carrying on a business in the target industries as well as a normal business, it will receive a tax exemption for the business in the target industries only. However, if the profit and loss of both businesses cannot be calculated separated then it shall be allocated.

For more details, please see: https://goo.gl/cxpBWS  and https://goo.gl/S4xB36

Tax News

1. Windfall Tax Bill

The Deputy Permanent Secretary of Ministry of Finance has revealed that the Windfall Tax Bill is currently being considered by the Ministry of Finance. Following this step, the Bill will then be sent to Cabinet for its consideration. The Windfall Tax Act shall be a tax levied on the excess value of land and immovable properties that receive a benefit as a result of government infrastructure projects such as railway stations, BTS stations and expressway.

For more details, please see: https://goo.gl/qdzCwC

2. Revenue Code Draft Bill  for Tax on e-Business

The Revenue Department has announced that it has plans to tax e-Business entrepreneurs and that they have already received comments and suggestions from the public, the initial details of this new e-Business tax Bill are as follows:

1) Corporate Income Tax

– Juristic persons that are carrying on a business in Thailand

If a juristic person receives income or profit from Thailand through using a Thai domain name, Thai Baht currency payment system or a money transfer from Thailand, then such juristic person shall be taxed in Thailand.

– Juristic persons that are not carrying on a business in Thailand

If a juristic person receives an online commercial service or a web hosting service, the payer shall be required to deduct tax from such income and remit it to the Revenue Department at the rate of 15%.

2) Value Added Tax

If a foreign juristic person receives income or profit from the sales of goods or the provision of services via an electronic system which exceed 1.8 million Baht per tax year, then it must apply for approval as a tax registrant in Thailand. Moreover, if there are transactions relating to the sales of goods or the provision of services via a website or the application by another entrepreneurs who is the owner of the website or application, such other entrepreneur will be considered as an agent of their clients and as such will be required to apply for an approval for tax registration in Thailand and have right, duty and liability for their clients.

The details relating to the rules and conditions applicable to this new tax will be stipulated and announced in the future.

For more details, please see: https://goo.gl/NKQcWj

3. Revenue Code Bill Drafting for Transfer Pricing

The Ministry of Finance has proposed a draft Bill to prevent transfer pricing between related companies by adding a new law in the Revenue Code; the details of this new proposed law are as follows:

1) An assessment official shall have the power to adjust the amount of income and expenses to market price for the purpose of calculating corporate income tax of related companies;

2) A juristic person has the right to claim a tax refund that an assessment official has adjusted under 1) within 3 years from the due date of the filing of the tax return or 60 days from the date that it receives an adjustment statement from an assessment official;

3) An assessment official shall have the power to inform a tax payer to provide documents or necessary evidence for analyzing transfer pricing between related companies. A juristic person must provide documents within 60 days from the date they are informed or up to 120 days from the date they are informed if they have a reasonable excuse for the delay. However, if a juristic person fails to comply with such requests then they shall be fined not more than 200,000 Baht.

The details relating to the rules and conditions of this new law will be stipulated and announced in the future.

For more details, please see: https://goo.gl/VSRTxQ and https://goo.gl/mA98tN

Interesting Deka (Supreme Court Judgment)

Dika                 (Supreme Court Judgment) No.5230/2559, in re:

Between          Mr. P                                                              Plaintiff

Revenue Department                                    Defendant

Issue:               Service Agreement

The fact of the case are that the Plaintiff made an agreement with a Company for taking care of a rubber plantation. This agreement specified that the wage payment from the Company to the Plaintiff would be according to details as contained in an attached amendment and that the Plaintiff agreed to grow 76 rubber trees per 1 rai, in the plantation which comprised an area of 1,000 rai. The agreement further provided that if the Company could not provide the Plaintiff with sufficient rubber seeds to plant then the Plaintiff will provide the young rubber tress by himself at the rate of 15 Baht per tree. This objective of the agreement between the Plaintiff and the Company was essentially the successful growing of rubber trees in the plantation. The agreement assigned the plaintiff to maintain and find workers to take care of the rubber plantation for a term of 3 years and to take care of the rubber trees according to the recommendations of the Thai Rubber Research Centre. This agreement did not contain any clauses which provided that the Plaintiff was working under the commands of the Company. The Plaintiff argued that the agreement was an employment agreement (Hire of Services) and that his wages were not subject to VAT whereas the Defendant was arguing that the agreement was an agreement based on Hire of Work so that the Plaintiff would be subject to paying VAT on monies he received from the Company. The Court found in favor of the Defendant by deciding that this agreement was not an employment agreement but rather an agreement based on hire of work thus making the monies received by the Plaintiff from the Company subject to VAT,

Legal Opinion

Employment agreements (also known as a hire of service agreement) and hire of work agreements often closely resemble each other as both may provide that an employee or contractor must undertake work for an employer in consideration for the employer paying salary or wages in return. However, there are several key differences between an employment/hire of service agreement and a hire of work contract, which include:

1. Power to command – If the employer has the power of command the other party providing the work then this is strong evidence to support the argument that the agreement is an Employment Agreement or Hire of Service Agreement rather than a Hire of Work Agreement;
2. Tools & Equipment/ Resources – If the employer provides the person providing the work with the tools and resources to do the work then this will support the argument that the agreement is an employment agreement rather than a Hire of Work Agreement;

In determining whether an agreement is an employment contract or a hire of work agreement, the Court considered the Civil and Commercial Code together with relevant Supreme Court judgements on the matter.

The definition of ‘The hire of work’ under the Civil and Commercial Code is provided under “section 587 where it provides that “The hire of work is a contract whereby a person, called a contractor, agrees to accomplish a definite work for another person, called employer, who agrees to pay him a remuneration of the result of the work”. This definition is in contrast to that provided under the Royal Thai Dictionary where it states that “hire of work” means the “name of a contract which provides that a person who is a contractor agrees to do something for a customer until success is achieved, and the customer agrees to pay wages to the contractor when this action is successful. This same dictionary provides that “Employment” is defined as “the name of a contract whereby an employee agrees to work for another, called the “employer” and the employer agrees to pay salary to the employee until the end of work”

In relation to the issue of taxation, the interpretation of “hire of work” according to the Royal Thai Dictionary is in the writers opinion more beneficial to taxpayers than the definition as provided under the Civil and Commercial Code, moreover, the writer thinks that the Court in deciding the case should have considered the contract using the doctrine of substance over form which requires ignoring the legal form of an arrangement and instead looking at its actual substance or its content. The writer contends that such an approach would better enable the Revenue Department to prevent artificial structures from being used for tax avoidance purposes. In such cases, if a contract is actually found to be a Hire of service agreement it shall be subject to VAT in accordance with the Revenue Code.

With respect to this Supreme Court’s judgement in this case, the writer is of the view that the grounds which the Court used for making this decision, i.e. using the definition provided in section 587 of the Civil and Commercial Code are inconsistent with the Revenue Code given that the Revenue Code is specific and effects the rights and duties of tax payers and entrepreneurs while the Civil and Commercial Code is non-specific and not only performs as a public law like the Revenue Code but also performs as a private law too which may sometimes not give benefits to tax payers. The Supreme Court interpreted the word “employment” using the definition from the Civil and Commercial Code which is a more narrow interpretation and thus arguably unsuitable from the perspective of taxation and fairness. Therefore, the writer is of the opinion that the Supreme Court should have used the interpretation which was more beneficial to tax payers, which in this case would have been the definition of “employment” according to the Royal Thai Dictionary which is broader and more beneficial to taxpayers.

In relation to this Supreme Court Judgement the writer is of the opinion that the Court decided correctly when it held that the agreement between the Plaintiff and a Company should have been found to be a Hire of Work Agreement given that the Plaintiff was not under the control or any rules of the Company and he used his equipment, machinery or other resources for taking care of the rubber plantation. However, the writer contends that the grounds for making its decision are incorrect according to taxation principles.

Mr. Thaninrath Leongthavornpot

Should you require any legal advice on Thai tax law then please contact us at Dharmniti Law Office Co., Ltd. 2/2 Bhakdi Building 2nd Floor, Witthayu Road, Lumphini, Pathumwan, Bangkok 10330 Tel: (66) 2680 9777 Fax: (66) 2680 9711  Email: budhimak@dlo.co.th or chatwaleem@dlo.co.th