Royalties to include rentals under the new Thailand – Singapore DTA
The new Double Tax Agreement between Thailand and Singapore becomes effective on 1 January 2017. If a Thai resident company has an outstanding rental payable to a Singaporean resident company, they should consider settling the debt before the end of 2016 in order to utilize the tax relief under the current DTA. Under Section 70 of the Thai Revenue Code, a Thai payer of income is required to deduct 15% withholding tax on certain types of income paid out, including rental payments. Under the current DTA, a rental payment by a Thai resident to a Singaporean resident who does not have a permanent establishment in Thailand is not subject to withholding tax in Thailand, as currently rental payments are defined as “business profits”.
However, the new DTA defines the term “royalties” to include “the use of, or the right to use, industrial, commercial, or scientific equipment” and be subject to tax at a rate no greater than 8%. So, starting 1 January 2017, rental payments to a Singaporean resident are subject to Thai withholding tax at 8% as opposed to 0% under the current DTA. In fact, the withholding tax should not be the Thai payer‘s cost of business. However in some instances, a Thai payer may agree to absorb the tax paid in Thailand. In other cases, the price is agreed on for an amount net of Thai withholding tax. With the above in mind the companies may wish to settle the outstanding balance of rental payable to Singaporean resident before the end of this year to take advantage of no Thai withholding tax liability.
We suggest that the lease agreements be revisited, in particular any with a provision relating to the tax burden, to determine which parties will bear the 8% Thai withholding tax starting on 1 January 2017. On the other hand, if a Thai company has an outstanding royalty balance, which is subject to reduced withholding tax rate under the new DTA, the company may consider settling the balance after December 31, 2016. Even if the tax is not borne by the Thai company, a Singaporean resident may wish to enjoy the reduced tax rate. Note that the new DTA stipulates three different royalty withholding tax rates which vary based on the type of payment, whereas the current DTA stipulates only one 15% rate.
Under the new DTA, withholding tax on royalties should not exceed (1) 5% of the gross amount of royalties for the use of, or the right to use, copyright literary, artistic or scientific work (including cinematograph films, or films or tapes used for radio or television broadcasting); (2) 8% for the use of, or the right to use, a patent, trademark, design, etc., or industrial, commercial or scientific equipment; and (3) 10% of the gross amount of royalties in all other cases.
We suggest that the companies review whether the new DTA will have an impact on their current tax treatment and be prepared for the tax liability changes.
© 2017 KPMG Phoomchai Tax Ltd., a Thailand limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.