Key features of the new Singapore-Thailand tax pact
SINGAPORE first entered a double taxation agreement (DTA) with Thailand in 1975. After 40 years, Singapore and Thailand signed a new DTA on June 11, 2015. The newly signed DTA has not yet been ratified by either country, and will go into force after it is. Below are some of the key features of the new treaty compared with the current DTA.
Permanent establishment (PE): The new DTA updates its definition of a PE to include the provision of services, including consultancy, by an enterprise through employees or other personnel, provided such activities continue for the same or a connected project for a period or periods aggregating more than 183 days within any 12-month period. Most DTAs adopted in the past 10 years have this provision, and this update provides more clarity for situations where a service is provided through employees or other personnel. In addition, the new PE article provides more benefits by extending the threshold period for a building site, construction, assembly or installation projects or supervisory activities in connection therewith only if the site, project or activity lasts more than 12 months (up from six months in the current DTA).
lCapital gains: This article has been updated to allow capital gains on disposal of shares in a property-rich non-listed company to be taxed in the state in which the property is located. For example, a capital gain derived by a Singaporean tax resident from the disposal of non-listed shares, deriving at least 75 per cent of their value directly or indirectly from immovable property (“property rich”) situated in Thailand, will be taxed in Thailand. Share disposals of companies that are not property-rich remain taxable only in Singapore.
lRoyalties: A significant update has been made to this article. First, the term “royalties” under the new DTA has been extended to include “the use of, or the right to use, industrial, commercial, or scientific equipment”. Under the current DTA, the payment of rent by a Thai resident to a Singaporean resident that does not have a PE in Thailand is not subject to withholding tax in Thailand, as it is defined as “business profits”. In the new DTA, the rental shall fall under the definition of “royalty”. Second, there are three royalty withholding tax rates under the new DTA, which vary depending on the type of payment, whereas the current DTA stipulated only one 15-per-cent rate . Under the new DTA, withholding tax on royalties should not exceed:
l5 per cent of the gross amount of royalties for the use of, or the right to use, copyright literary, artistic or scientific work (including cinema films, or films or tapes used for radio or television broadcasting);
l8 per cent for the use of, or the right to use, patents, trademarks, designs etc, or industrial, commercial or scientific equipment; and
l10 per cent of the gross amount of royalties in all other cases.
In view of the above, companies should revisit their current royalties agreements to find out the effective tax rate, which is reduced from 15-per-cent flat rate under the old DTA, that is applicable for the particular royalties. Current lease agreements should also be reviewed as to whether they fall under the new definition of royalties, which covers any income received for the use of, or the right to use, industrial, commercial, or scientific equipment.
One of key updates that should also be highlighted is that under the new DTA, the term ” beneficial owner” replaces the term “recipient” in several articles, including those on royalties, dividends, and interest.
For example, under the current DTA, treaty protection is available for the “recipient” of royalties, while the new DTA refers to the “beneficial owner” of the royalties instead. A “recipient” refers to a person who receives the income, and in practice it also means a legal owner, which is a person who holds the legal title.
The meaning of “beneficial owner” is not defined in the new DTA or the prevailing Thai Revenue Code. The normal and general meaning of a “beneficial owner” is a person who is entitled to the benefit of the income even though the person may or may not hold the legal title. According to this change, the benefits of the new DTA will be limited to the “beneficial owner” of the respective income.
It is suggested that companies should review whether the new DTA will have an impact on their current tax treatment and be prepared for the changes if any transactions with Singapore are executed in the near future.
