The Singapore-Thailand Double Tax Treaty
Thailand, a traditional agrarian economy, is swiftly evolving into a manufacturing economy. Strong influx of Foreign Direct Investments (FDI) into the electronics and automotive sectors has transformed this Asian tiger into a regional manufacturing base. Thailand embraced an open market policy following the 1997-1998 economic crisis and actively pursued export growth. These strategies have paid-off well for the country, which has since become the world’s top ten automobile exporting nations. Thailand is the second largest economy in Southeast Asia and is regarded as one of the economic success stories in the region. The country’s rich natural resource and abundance of labor make it an ideal manufacturing base.
Singapore-Thailand RelationshipSingapore and Thailand share a long and strong economic relationship that dates back to as early as the 19th century. Bilateral relations are underpinned by the strong ties between Singaporean and Thai officials cultivated through broad institutional linkages like the Thailand-Singapore Civil Service Exchange Programme (CSEP) and the Singapore-Thailand Enhanced Economic Relationship (STEER).
Thailand is Singapore’s ninth largest trading partner, with total trade amounting to S$32.2 billion in 2012. Key sectors driving trade include manufacturing, electronics, as well as service industries between Thailand and Singapore. Some of the major trade commodities between the countries include refined petroleum products, electronics and telecommunication equipment.
Singapore was the second largest foreign investor in Thailand in 2011, after Japan. According to the Board of Investments (BOI), Singapore companies invested S$1.36 billion across 95 projects in 2011, a significant increase of 57% compared to 2010.
Bilateral relations are being enhanced through increasing cooperation in the trade and investment, and tourism sectors. When the ASEAN economic community becomes a reality in 2015, Thailand will become even more attractive as an investment location. The Thai government’s plan to revitalize its economy and to attract investments provides positive impetus for Singapore-based companies. The Singapore-Thailand DTA, concluded in 1975, assures attractive tax proposition to the investors operating across borders of both countries. The following is an overview of the key provisions of the DTA.
Singapore-Thailand DTAThe Government of the Republic of Singapore and the Royal Government of Thailand concluded the Agreement for Avoidance of Double Taxation on 15 September 1975, which came into force on 1 January 1976. After more than 35 years in existence, it is currently being renegotiated with more liberal provisions for the partner countries. Representatives of both countries recently negotiated changes to the treaty in Singapore. However, it will take a while before the new version comes into force.
Scope of ApplicationThe provisions of the DTA apply to persons who are residents of one or both of the Contracting States. “Person” includes an individual, a company and any other body of persons, which is treated as an entity for tax purposes. The provisions of the DTA shall be applicable to all taxes imposed on income on behalf of a Contracting State. The provision covers all taxes imposed on total income or on elements of income including taxes on gains from the alienation of movable or immovable property, taxes on the total amount of wages or salaries
In the case of Thailand, the provisions shall apply to the income tax and petroleum tax. In the case of Singapore, the agreement covers income tax.
ResidencyThe term “a resident of a Contracting State” means any person who is resident in a Contracting State for tax purposes of that Contracting State.
In case of an individual who is a resident of both countries, his tax residency shall be determined by the location of his permanent home; but if the permanent home is in both countries or in neither of them, then the center of vital interest shall be taken into account. When both permanent home or vital interest factors fail to determine the residency, then habitual abode will be considered; and if the individual does not have habitual abode in both the countries, then the nationality will be taken into consideration; and where the individual is a national of both countries or neither of them, then the contracting states shall determine the residency through mutual agreement.
If the person, other than an individual, is a resident of both the contracting states, then the residency shall be determined by the state in which its place of effective management is situated. In cases of doubt, the competent authorities of the contracting States shall determine the residency through mutual agreement by taking into consideration all relevant factors.
“Permanent establishment” (PE) means a fixed place of business through which the business of an enterprise is wholly or partly carried on. PE includes office, factory, workshop, farm, plantations, installations such as drilling rig, places of extraction of natural resource, such as mines, quarry, oil wells, etc. Building site or construction, assembly or installation project constitutes a permanent establishment only if it lasts more than six months. It is of interest to note that the new version proposes for a 12-month period.
Storage facilities held for certain purposes, such as storage of goods for the purpose of display, delivery, processing, etc., would not amount to a PE. Likewise, maintenance of a fixed place solely for the purpose of carrying on activities that are of a preparatory or auxiliary in character will also not amount to PE.
Engagement of a broker, general commission agent or any other agent of an independent status for carrying out business in one of the contracting state will not amount to PE. If the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise, or if the agent is acting on behalf of an enterprise and habitually exercises an authority to conclude contracts, secure orders, or maintains and delivers stock of goods or merchandise on behalf of the enterprise in a contracting state, then the agent is deemed to be a PE. However, if the activities carried out by the agent are auxiliary in nature, it will not amount to a PE.
A resident company of a contracting state controlled or being controlled by a resident company of other contracting state shall not by itself amount either company a PE of the other.
Tax on Dividends
Dividends paid by a resident company of a Contracting State to a resident of the other Contracting State may be taxed in that other State. However, it may be subjected to tax in the Contracting State of which the company paying the dividends is a resident.
But the tax so charged shall not exceed 20% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the voting shares of the company paying the dividends.
This provision shall not apply if the recipient has a PE in the contracting state of which the company paying the dividends is a resident and such dividend received is effectively connected to that PE. Such income from dividends connected to a PE will be treated as a Business Profit and subjected to tax treatment accordingly.
Singapore does not impose tax on dividends in the hands of the recipient, because of its single tier taxation system. In the absence of the treaty, non-resident recipients of dividends from resident Thailand companies are presently charged a withholding tax rate of 10% therefore the provision falls obsolete.
It is of interest to note that dividend paid by a foreign company to a Thai company after November 2005 will be exempt from Thai corporate income tax if the paying company has a minimum corporate tax rate of 15% and the Thai company has a 25% or more equity interest in the foreign entity and maintains its shareholding in that company for a six-month period. Singapore charges 17% on corporate income therefore qualifying Thai companies receiving dividends from Singapore companies will go tax-free on that portion of their income.
Tax on Interest
Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may also be taxed in the Contracting State in which it arises but the tax shall not exceed:
- 10% of the gross amount if the recipient is a financial institution including an insurance company
- in all other cases 25% of the gross amount of the interest
The Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived from that other State. In the case of Thailand it means the Royal Government of Thailand and shall include the Bank of Thailand, and in the case of Singapore it means the Government of Singapore and shall include the Monetary Authority of Singapore and the Board of Commissioners of Currency. It also includes an institution, the capital of which is wholly owned by the government of the contracting or the local authorities, as may be agreed from time to time between the Governments of the two Contracting States.
The provisions shall not be applicable if the recipient of the interest has a PE or fixed base in the contracting state in which the payer is resident and the interest paid is effectively connected with such PE or fixed base.
If, due to the special relationship existing between the payer and the recipient, the interest paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of interest paid will be taxable according to the laws of each Contracting State.
It must be noted that in the absence of the DTA, foreigners receiving interest from Thailand residents will be subjected to 15% withholding tax, and Singapore charges a 15% withholding tax on interest paid to Non-Residents. We can look forward to more competitive rates in the newer version of DTA.
Tax on Royalty
Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State.
However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15% of the gross amount of the royalties. Royalties encompass payments of any kind received as a consideration for the use of, or the right to use, any copyright patent, trade mark, design or model, plan etc.
If, due to the special relationship existing between the payer and the recipient, the royalties paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of royalty will be taxable according to the laws of each Contracting State.
The provisions shall not be applicable if the recipient of the royalty has a PE or fixed base in the contracting state in which the payer is resident and the royalty paid is effectively connected with such PE or fixed base.
The general Withholding tax rate on royalties paid to non-residents in Thailand is 15% and the corresponding Singapore rate is 10%. The treaty does not provide any special privilege against the general framework.
Tax on Capital Gains
Gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated. Gains derived by a resident of a contracting state from the alienation of movable property connected to a PE or a fixed base located in the other contracting State may be taxed in the other state. Gains derived from the alienation of such PE or the fixed base itself may also be taxed in the other state.
Gains derived by a resident of a Contacting State from the alienation of ships or aircraft operated in international traffic by an enterprise of that Contracting State or movable property pertaining to the operation of such ships or aircraft are taxable only in that Contracting State.
Gains from the alienation of any property or assets, not covered under this provision shall be taxable only in the State of which the alienator is a resident.
Singapore does not tax capital gains. In Thailand capital gains are treated as ordinary income and taxed accordingly for corporate income tax purposes.
Treatment of Income from Property
Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. Income from immovable property of an enterprise and income from immovable property used for the performance of independent personal services shall also be covered by this provision.
Income from direct use, letting or use in any other form of immovable property shall be covered by the agreement. The term “immovable property” shall comprise of properties as defined by the law of the contracting state in which the property is located. It shall include accessories, equipment, livestock, rights and usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral.
Treatment of Business Profits
The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. But only that portion of the profit that can be effectively attributable to the PE can be taxed in the other Contracting State.
For the purpose of determining the profits of the PE, it shall be allowed all expenses and deductions that could be reasonably attributable to the PE, and deductible if the PE were an independent enterprise; and profits of the PE shall be determined as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE.
A PE’s mere purchase of goods or merchandise for the enterprise shall not render profits attributable to that PE. Profit attribution to the PE must be made by the same method every year unless there is a valid reason for the contrary.
Where information available to the competent authority is inadequate, the provisions of the agreement shall not impede the laws of the contracting state or the discretion of the competent authority.
Treatment of Income from Shipping & Air Transport
Income from the operation of aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
Income from the operation of ships in international traffic by an enterprise having a place of effective management in a Contracting State may be taxed in the other Contracting State, but the tax thus imposed shall be reduced by 50%.
The provisions applies to the share of the income from the operation of ships or aircraft derived by an enterprise of a Contracting State through participation in a pool, a joint business or an international operating agency.
Treatment of Associated Enterprises
If an enterprise or persons involved in an enterprise of a Contracting State participate directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, the enterprises involved are said to be associated enterprises.
The terms and conditions of operations and transactions between the associated enterprises will differ from those made between independent enterprises, thus affecting the profitability and income of the enterprises.
In the case of associate enterprises, the DTA provides that the contracting states may deem a taxable income that would have otherwise accrued if the parties were independent and tax the enterprises accordingly.
Treatment of Individual Income
Income derived by a resident of a Contracting State in respect of personal or professional services taxable is only in that State unless such services are rendered in the other contracting state.
However, income derived by a resident of a contracting state in respect of services rendered in the other contracting state shall be taxed only by the state where he is resident on the following conditions:
- If the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the fiscal year.
- If the service is rendered for or on behalf of a person who is a resident of the first-mentioned State, and
- the remuneration or income is not borne by a PE which the person paying the remuneration or income has in the other Contracting State.
Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company, which is a resident of the other Contracting State, may be taxed in that other State.
Entertainers, Artists & Athletes
Income derived by a resident of a State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other State, may be taxed in that other State.
However, such incomes shall be exempt from tax if they are accrued for such activities exercised in one of the contracting state if the visit to the contracting state is substantially supported by public funds of the other Contracting State, including any political subdivision, local authority or statutory body thereof.
If the activities are performed in a Contracting State by an enterprise of the other Contracting State, the profits derived from providing these activities by such an enterprise may be taxed in the first-mentioned Contracting State unless the enterprise is substantially supported from the public funds of the other Contracting State, including any political subdivision, local authority or statutory body thereof, in connection with the provision of such activities.
Pensions and other similar remuneration arising in a Contracting State and paid to a resident of the other Contracting State in consideration of past employment may be taxed in the first-mentioned State.
Persons on Government Service
Salaries, wages and other similar remuneration, other than a pension, paid by a Contracting State, a political subdivision, a local authority, or a statutory body thereof to an individual in respect of services of governmental nature rendered to that State, subdivision, authority or body would be taxed by that State.
For remuneration and pensions received for services rendered in connection with any trade or business carried on by a Contracting State or a political subdivision or local authority or statutory body thereof, provisions relating to personal services and Director’s Fees shall apply.
Students and Trainees
Students and trainees who were a resident of a contracting state immediately before visiting the other contracting state, where he receives training or education and is temporarily present in the other contracting state solely for the purpose of education or training, shall be exempt from tax in the other state.
Taxation in the other state shall be exempted on all remittances and grants received from abroad and any remuneration not more than SGD 12,000 or THB 96,000 per annum in respect of services in that other State, provided the services are performed in connection with his study, research or training or are necessary for the purposes of his maintenance.
However, the provision shall not apply to cases in which the study, research or training occupies a secondary character to the personal services rendered that produce any remuneration.
Teachers Professors and Researchers
An individual, who is a resident of a Contracting State immediately before making a visit to the other Contracting State, on invitation visits that other Contracting State for a period not exceeding two years solely for the purpose of teaching or research or both at any university, college, school or other similar educational institution, which is recognized by the competent authority in that other Contracting State shall be exempt from tax in that other Contracting State on his remuneration for such teaching or research.
Elimination of Double Taxation
The DTA provides relief from double taxation where income is subject to tax in both Contracting States.
In the case of Thailand, Singapore tax payable in respect of income derived from Singapore shall be allowed as a credit against the Thailand tax payable in respect of income derived from Singapore. The Thailand tax payable in respect of income derived from Thailand shall be allowed as a credit against Singapore tax payable in respect of that income. The credit thus provided shall not exceed the respective country’s tax as computed before the credit is given.
Where it is a dividend income paid by a Singapore company to a Thailand company owning a minimum of 25% voting rights in the paying company, such income may be exempt from Thailand tax; however, Thailand shall apply a tax rate that would have been applicable to the remaining taxable income of the recipient, if no such exemption was made. Correspondingly, in the case of a Singapore recipient, a credit equivalent to Thai tax payable by the company on the dividend income received shall be taken into account.
Singapore is a highly sought after destination among international investors for setting up a holding company. Singapore’s pro-business tax regime and its extensive treaty arrangements and close bilateral relationship between the key economies of the region have attracted investments to be channelized through holding companies resident in Singapore. The Singapore-Thailand DTA has remained a key traction since its inception nearly 40 years ago, and while its significance has began to dwindle recently, the authorities from both sides have been prompt in discussing a more relevant and updated arrangement. Businesses and investors on both sides should be able to enjoy more elaborate privileges when the revised version takes effect.
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