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Interesting Trends of Anti-avoidance in Thailand

By Chinapat Visuttipat
Posted: 15th September 2011 09:53

Why ‘Pizza Hut Inc.’ was deemed to receive ‘taxable income’ in Thailand?

The  Supreme Court of Thailand ruled in mid 2010 on the case of withholding tax and value added tax (VAT) against Minor Food Group (MFG: a listed company in the Stock Exchange of Thailand) and Pizza Hut Inc. was deemed to receive a part of franchise fee from MFG.  In this case, MFG was assessed withholding tax and VAT by the Thai Revenue Department (TRD) on the cost and expenses paid to 3rd party local suppliers in relation to marketing activities and promotion of pizza products under Pizza Hut’s brand including goodwill and trademark in Thailand.

The Supreme Court has overridden the decision of the Central Tax Court (court of first-instance) that terms and conditions under the Franchise Agreement required MFG to spend its marketing expenses not less than 3% of MFG’s annual gross revenue is a condition to save the marketing cost of Pizza Hut to expand its brand in Thailand.  The amount of cost saving shall be deemed as ‘assessable income’ derivable by Pizza Hut Inc. although such costs were not directly paid to Pizza Hut Inc.

When the marketing expenses were deemed a part of franchise fee which is a ‘royalties’ in terms of local tax laws and double tax agreement between Thailand and the USA, MFG is required to deduct (withhold) tax when the ‘royalties’ is paid from or in Thailand.  In addition, a franchise fee is a consideration of service utilized by MFG in Thailand, and therefore, MFG is required to self assess the VAT on part of such franchise fee.

As a result, the Supreme Court considered that this is a contract planning to avoid tax liabilities and ordered MFG to pay withholding tax, VAT and surcharge on late payment around USD 800,000.  Unfortunately, the case was ruled after both parties terminated the Franchise Agreement many years.  It is a questionable issue whether MFG can claim from Pizza Hut Inc. for the amount of withholding tax paid on behalf of Pizza Hut Inc. or not.

Why ABB Switzerland was deemed to receive dividend via local ABB subsidies?

In late 2010, the Central Tax Court ruled in favor of the TRD that local subsidies of USD 3.3 million paid by ABB subsidiary company to other local ABB companies is deemed a distribution of dividend to offshore parent company (ABB Switzerland).  Consequently, distribution of dividend to offshore shareholder is subject to withholding tax at the rate of 10% following to local tax laws and double tax agreement between Thailand and Switzerland.

In this case, the TRD assessed tax against ABB Engineering and Construction (subsidiary in Thailand) for its subsidies made to ABB Distribution and ABB Power (other ABB local companies) without consideration and justifiable grounds.  The rationale of subsidies is to assist ABB Distribution and ABB Power to ultimately repay the intra-company loan to ABB parent company in Switzerland.  Therefore, such subsidies transactions were disallowed and withholding tax on deemed payment of dividend is required.

As above, it is unforeseeable whether the Supreme Court will rule in concurrent with the decision of tax court or not.  After ABB appealed the decision of tax court to the Supreme Court, it is a normal practice that the final decision will be spent at least 5 years to rule out.

Why the Thai tax laws were broadly interpreted in Diageo’s case?

In early 2011, the Central Tax Court ruled against the position of Diageo Moet Hennessy (Thailand) on its expenses deducted for corporate income tax purposes in relation to (i) penalty on shortfall import duty; (ii) duty surcharge; and (iii) penalty on interior tax charged by the Thai Customs Department.

The TRD found that Diageo Thailand deducted such expenses for corporate tax computation and disallowed such expenses in the tax return of Diageo Thailand.

More than 20 years in the past, the TRD accepted that penalty and criminal charges under other (tax) laws rather than the Thai Revenue Code (TRC) shall be allowable as deductible expenses for corporate income tax purposes.  The TRD followed to the ruling of the Board of Tax Ruling released in 1985 that non-deductible expenses arisen from penalty, surcharge, and criminal charges should be narrowly interpreted to restrict only the penalty, surcharge, and criminal charges under the TRC.

It is worthwhile to note that the TRD considered that (i) penalty on shortfall import duty; (ii) duty surcharge; and (iii) penalty on interior tax (‘Non-deductible Expenses’) arising from the under-declared custom value of USD 6 million in which Diageo Thailand and Diageo Offshore party involved in the netting transaction.  The netting transaction includes the price of goods purchased from Diageo Offshore and offset against the amount of advertising and promotion expenses paid by Diageo Thailand for Diageo Offshore in Thailand.

The TRD argued that the advertising and promotion expenses are not expense for the business of Diageo Thailand exclusively in Thailand, and therefore, it is regarded as non-deductible expense.  In view of the TRD, when the underlying transaction is a source of disallowed expense then penalty, surcharges and charges subsequently arisen from such disallowed expenses shall not be utilized for tax purposes.

As above, Non-deductible Expenses of USD 8 million were rejected by the TRD and they are required to be added back for taxable profit adjustment of Diageo Thailand.  However, this case is not the final process of tax litigation and it is interesting to look for the final decision of the Supreme Court.

Interesting trend of anti-avoidance in Thailand

It is not a surprise phenomenon from our view that the government tries to use its best effort to collect more tax at all level i.e. administrative level (TRD) and judicial level (Central Tax Court and Supreme Court).

As a tax practitioner, we found that the TRD in many cases challenged its positions adopted in previous practices in different way to collect more tax. In addition, TRD tries more and more to challenge the decision ruled in the past by the Supreme Court in favor of the taxpayer.  In some cases, the TRD failed in the level of court of first-instance but success in the final court procedure, for example, Pizza Hut’s case. In many cases, the TRD achieve in the lower court but the higher court’s decision is unforeseeable e.g. cases of ABB and Diageo.

Thailand plans to involve in the ASEAN Economic Community (AEC) in 2015, the corporate income tax rate will be reduced from standard rate of 30% to be 23% in 2012 and 20% in 2013.  From the state’s view, the government will lose tax revenue worth USD 500 million for every 1% reduction in the tax rate.  It is a good sign for taxpayers to proactively respond the heavier tax audit to challenge tax planning transactions especially cross-border activities. A simple tool of tax audit is to adopt the anti-avoidance mechanism under the relevant tax laws to challenge the abusive transactions and get more tax revenues.  Thailand has no general anti-avoidance rules (GAARs) and no specific anti-avoidance rule under the TRC. We can say that it will be an opportunity for both taxpayers and the government to take risks and benefits on this absence.



Chinapat Visuttipat has over 20 years of experience providing tax and legal advisory services to local and multinational companies. His industry experience includes hospitality and property, manufacturing, energy, logistics, and retails business.

He can be reached at

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