Guide to The Singapore-Thailand Double Tax Treaty
Thailand’s traditionally agrarian economy is rapidly transforming into a modern, 21st century manufacturing economy. Growing Foreign Direct Investment (FDI) into Thailand’s flourishing automotive and electronics sectors have transformed the nation into a major regional manufacturing base. After the 1997-98 economic crisis, Thailand’s embracing of an open market policy combined with its active pursuit of export growth paid off handsomely, leading to its becoming one of the top ten global exports of automobiles. The second largest economy in Southeast Asia, Thailand is widely regarded as a regional economic success story, and its rich supply of natural resources and large workforce make it an ideal manufacturing base.
The Thai government offers a variety of tax and non-tax benefits for the stimulation of foreign investment through the Investment Promotion Act. With 67 million consumers, Thailand is considered to be one of the fastest growing markets anywhere in the world. Economics continue to tout the country’s growth and rebound potential despite the 2014 coup d’état and ongoing political turmoil. Thailand is in the top ten prospective host economies for the period of 2014-16 as reported in a survey by the United Nations Conference on Trade and Development (UNCTAD).
The Singapore-Thailand Relationship
Strong economic ties between Thailand and Singapore date back as far as the 19th century. Broad institutional connections such as the Singapore-Thailand Enhanced Economic Relationship (STEER) and the Thailand-Singapore Civil Service Exchange Programme (CSEP) under the countries’ bilateral relations.
Thailand is Singapore’s ninth largest trading partner. Key sectors driving trade between the nations include electronics, manufacturing, and service industries between the two. Total trade between the two was valued at more than S$32 billion in 2012 and has only increased in the years since. Major trade commodities flowing between the two countries include electronics, petroleum products and telecommunication equipment.
After Japan, Singapore was the second largest foreign investor in Thailand in 2011, and Singapore companies invested more than S$1.36 billion in the country across 95 projects in the calendar year.
Increasing cooperation through trade, investment and tourism has enhanced bilateral relations. With the strengthening of the ASEAN economic community, Thailand has become an even more attractive investment location for foreign entrepreneurs and enterprise. The Singapore-Thailand double taxation agreement – originally concluded in 1975 – ensures an attractive tax position for investors operating across the borders of both countries. The following article provides a broad overview of the provisions of the double taxation agreement.
The Singapore-Thailand DTA
The Royal Government of Thailand and the Government of the Republic of Singapore concluded the agreement on the Agreement for Avoidance of Double Taxation on 11 June 2015. This new agreement came into force on 15 February 2016 and is effective from 1 January 2017. The previous agreement was signed on 15 September 1975 and came into force on 1 January 1976.
Scope of the agreement
The provisions of the double taxation agreement apply to persons resident in one or both Contracting States. ‘Person’ refers to an individual or body of persons such as a company treated as an entity for tax purposes. Provisions of the double taxation agreement apply to all taxes imposed on income by or on behalf of a Contracting State. The provisions cover all taxes imposed on total income and elements of income such as taxes on the total amount of salaries or wages or gains derived from the alienation of immovable or movable property.
The provisions apply to Thai income tax and petroleum tax, and Singapore income tax.
‘A resident of a Contracting State’ refers to any person residing in a Contracting State for the purposes of taxation.
Where an individual is resident in both Contracting States, their tax residency is to be determined by the location of their permanent home. Should they maintain a permanent home in both or neither Contracting State, their centre of vital interest shall determine their tax residency. Should both the location of their permanent home and their centre of vital interest fail to determine their tax residency, their habitual abode shall be considered. Should this also be insufficient to determine residency (because they do not maintain habitual abode in both countries), then the nationality of the individual shall be considered. Where they are a national of both or neither Contracting State, then the competent authorities of the States shall determine the residency through mutual agreement.
Where a person other than an individual is resident in both Contracting States, tax residency is to be determined by the State in which the person maintains the place of effective management. Where this is in doubt, the competent authorities of the Contracting States are to determine the residency via mutual agreement that takes into account all relevant factors.
Defining Permanent Establishment
‘Permanent Establishment’ refers to a fixed place of business through which an enterprise wholly or partly carries on its business. PEs can take a variety of shapes, including factories, workshops, offices, plantations, farms, drilling rigs and similar installations, oil wells, quarries, mines and other similar places of extraction of natural resources, and so on. A construction, assembly or installation project or building site only constitutes a permanent establishment if it is maintained for a period exceeding 12 months.
Storage facilities retained for the storage of goods for display, delivery, processing and other similar certain purposes are not to be considered a Permanent Establishment. Similarly, the maintenance of a fixed place for the purpose of carrying on activities auxiliary or preparatory in character shall not solely amount to that fixed place’s constituting a PE.
The engagement of an agent of independent status such as a broken or general commission agent by an enterprise for the carrying out of business in a Contracting State is not to amount solely to their constituting a Permanent Establishment. Where the activities of the agent are devoted either almost wholly or wholly to the benefit of the controlling enterprise, or should the agent act on behalf of the enterprise and wield and habitually exercise an authority to conclude contracts and secure orders, or maintains and delivers stocks of merchandise or goods on behalf of the controlling enterprise, then the agent may constitute a PE. Where the agent’s activities can be considered auxiliary in nature, they will not amount to a PE.
A situation in which a company resident in a Contracting State controlling or being controlled by a company resident in the other Contracting State shall not by itself constitute a Permanent Establishment for either company.
Dividend payments received by a resident of a Contracting State paid by a company resident in the other Contracting State may be taxed in the first-mentioned State (the State in which the recipient is resident). However, payments may also be subject to tax in the Contracting State in which the paying company resides.
Dividends refer to income resulting from shares, “jouissance” shares/rights, mining shares, founders’ shares or other rights not being debt-claims, participation in profits, or from any other corporate rights “subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident” per Article 10(3) of the Singapore-Thailand DTA.
Any tax charged is not to exceed 20 per cent of the gross dividend amount where the recipient is a company in possession of at least 25 per cent of the voting shares of the paying company.
Should the recipient have a Permanent Establishment in the same Contracting State in which the paying company resides and the payment received is effectively connected to the aforementioned Permanent Establishment, this provision is not to apply. Income derived from dividends connected to a PE are to be treated as a business profit and tax appropriately.
Because of its single-tier tax system, Singapore does not a levy a tax on dividends in the hands of recipients. In the absence of the treaty, non-residents receiving dividends from companies resident in Thailand are currently charged a withholding tax rate of 10 per cent, meaning this provision is obsolete.
After November 2005, any foreign company that has a minimum corporate taxation rate of 15 per cent and holding 25 per cent or more equity interest in the foreign entity and maintains it for a period of six months shall be exempt from Thai corporate income tax on any dividend paid. Singapore levies a 17 per cent headline corporate tax rate, meaning qualifying Thai companies receiving dividends from Singapore are exempt from taxation on that portion of their income.
Interest received by a resident of a Contracting State that arose in the other Contracting State may be taxed in the first-mentioned State (the State in which the recipient resides). These interests payments may also be taxed in the Contracting State in which they arise, but any tax charged is not to exceed:
- 10 per cent of the gross interest amount where the recipient is a financial institution, including an insurance company.
- 10 per cent of the gross amount of the interest if the interest is beneficially owned by a resident of the other Contracting State and is paid with respect to indebtedness arising as a consequence of a sale on credit by a resident of that other Contracting State of any equipment, merchandise or services, except where the sale was between persons not dealing with each other at arm’s length; and
- 15 per cent of the gross interest amount in all other cases.
A government of a Contracting State is to be considered exempt from taxation in the other Contracting State on interest income derived from sources in the other State. This covers the Royal Government of Thailand and extends to the Bank of Thailand, and covers the Government of Singapore, the Monetary Authority of Singapore and the Board of Commissioners of Currency. It shall also extend to any institution whose capital is wholly owned by the government of the Contracting State or the local authorities, as may be agreed upon from time to time between the respective governments of the Contracting States.
The provisions of the double taxation agreement shall not apply where the recipient of the interest payment has a Permanent Establishment or fixed base in the same Contracting State in which the payer is resident and the interest is effectively connected with the PE or fixed base.
Should a special relationship exist between the recipient of the interest payments and the payer, and because of this special relationship the interest paid is in excess of what would have otherwise been paid did the relationship not exist, then the provision of the treaty shall only apply to the amount that would have otherwise been paid. Any excess amount is to be taxed according to the laws of each Contracting State.
Please note that in the absence of the double taxation agreement, foreigners receiving interest derived from Thai residents shall be subject to a withholding tax of 15 per cent, and Singapore charges a 15 per cent withholding tax on any interest paid to non-resident.
Where a resident of a Contracting State receives royalty payments that arose in the other Contracting State, this income may be taxed in the first-mentioned State (the State in which the recipient resides). Royalties may be said to arise in the Contracting State in which the payer is resident.
Royalties are considered to include payments of any kind received as consideration for the right to use or use of any trade mark, design or model, plan or copyright patent by another.
Royalties may also be taxed in the Contracting State in which they arise according to the respective laws of that State. Any tax charged by the Contracting State in which the royalties arise must not exceed 10 per cent of the gross royalty amount. The payment may be subject to a concessionary rate of 8 per cent where the royalty payment regards patents, trade marks, designs, models, plans, secret formulas or prcesses, or the right to use or use of any industrial, commercial or scientific equipment. The payment may be subject to a concessionary rate of 5 per cent where it is paid for the right to use copyrights of literary, artistic, or scientific works.
The provision of the double taxation agreement shall not apply where the recipient of the royalty payment has a Permanent Establishment or fixed base in the same Contracting State in which the payer is resident, and the royalty paid was effectively connected with the aforementioned PE or fixed base.
The general withholding tax rate on royalties paid to non-residents in Singapore is 10 per cent and the corresponding rate in Thailand has been dropped from 15 per cent to 10 per cent as of the most recent double taxation agreement. This treaty does not provide any special privilege against the general framework.
Capital gains taxation
Gains derived from the alienation of immovable property are to be taxed in the Contracting State in which the property is located. Where a resident of a Contracting State derives gains from the alienation of movable property connected to a Permanent Establishment or fixed base situated in the other Contracting State may be taxed in the other State (the State in which the property is located). Equally, gains derived from the alienation of such a PE or fixed base are also to be taxed in the other State.
Where a resident of a Contracting State derives gains through the alienation of aircraft or ships operated by an enterprise of the same Contracting State in international traffic – or movable property pertaining to the same – these gains are only to be taxed in that State.
Gains derived from the alienation of any property or asset not explicitly covered by this provision are to be taxed in the Contracting State in which the alienating party resides.
Thailand treats capital gains as ordinary income and these gains are taxed appropriately for the purposes of corporate income tax. Singapore does not levy a tax on capital gains.
Income derived from immovable property
Where a resident of a Contracting State derives income from immovable property situated in the other Contracting State – including immovable property used for the performance of independent personal services and immovable property held by an enterprise – that income may be taxed in the other Contracting State (the State in which the property is situated).
Income derived from the use in any form of immovable property such as letting or direct use is to be covered by the double taxation agreement. ‘Immovable property’ refers to any properties defined as such by the law of the Contracting State in which the property is located. It is to include equipment, accessories, livestock, usufruct and rights of immovable property as well as any rights to fixed or variable payments made as consideration for the right to work or working of minerals.
Profits derived by an enterprise resident in a Contracting State are only to be taxed in the State in which it is resident, unless the enterprise carries on business in the other Contracting State through the operation of a Permanent Establishment located therein. Only the portion of the profit effectively attributable to the PE is to be taxed in the other Contracting State.
The Permanent Establishment shall be allowed all expenses that could be reasonable attributed to it and all deductions deductible were the PE an independent enterprise for the purposes of determining its profits. The profits of the PE are to be determined as if it were a separate and distinct enterprise that is engaged in similar or identical activities under similar or identical conditions as the controlling enterprise, and deals wholly independently with the enterprise of which it is a PE.
The mere purchase of merchandise or goods for the controlling enterprise by a Permanent Establishment shall not render profits attributable to it. Unless there is a valid reason to alter it, profit attribution to the PE must be made by the same method every year.
Where the information available to the competent authority is inadequate or insufficient, the provisions of the double taxation agreement are not to impede the discretion of the competent authority nor the laws of the Contracting State.
Income derived from air & shipping transport
Income derived from the operation of aircraft in international traffic is only eligible for taxation in the same Contracting State in which the place of effective management is situated.
Income derived from the operation of ships in international traffic by an enterprise with a place of effective management in a Contracting State is to be taxed in the other Contracting State, however the tax imposed is to be reduced by 50 per cent.
The provisions of the double taxation agreement are to apply to the share of the income derived by an enterprise resident in a Contracting State from the operation of aircraft or ships through their participation in a joint business, pool or international operating agency.
Where persons involved in an enterprise or an enterprise resident in a Contracting State participate either indirectly or directly in the management, control or capital of an enterprise resident in the other Contracting State, the involved enterprise are considered to be associated enterprises.
The profitability and income of the associated enterprises will be affected by the terms and conditions between the associated enterprises, which will differ from those agreed to by independent enterprises.
The double taxation agreement provides that the Contracting States may in the case of associate enterprises deem a taxable income in that the parties would have otherwise accrued were they independent and tax the enterprises accordingly.
Where a resident of a Contracting State derives income as remuneration for the performance of personal or professional services, that income may only be taxed in the State in which they reside unless the relevant services are rendered in the other Contracting State.
Income derived by a resident of a Contracting State as remuneration for the performance of services in the other Contracting State may only be taxed by the State in which the individual is resident under the following conditions:
- The recipient of the income was present in the other Contracting State for a period or periods measuring fewer than 183 days in the aggregate.
- The service was rendered on behalf of or for a resident of the Contracting State of which the recipient is resident.
- The income or remuneration was not born by a PE in the other Contracting State held by the person paying the income or remuneration.
Where a resident of a Contracting State derives income from the payment of directors’ fees and other similar payments in their capacity as a member of the board of directors of a company resident in the other Contracting State, that income may be taxed in the other Contracting State (the State in which the company is resident).
Athletes, artists and entertainers
Where a resident of a Contracting State derives income as a musician, athlete or entertainer such as a theatre, radio, television or motion picture artiste from personal activities exercised in the other Contracting State, that income may be taxed Iin the other State.
However, where activities exercised in one Contracting State were substantially supported by public funds provided by the other Contracting State or a political subdivision, local authority of statutory body of the same, any resulting income is to be exempt from taxation in the first mentioned State.
Where the activities were performed in a Contracting State by an enterprise resident in the other Contracting State, any profits derived from the provision of these activities is to be taxed in the first-mentioned Contract State. The income may be taxed in the Contracting State in which the enterprise is resident where it is substantially supported by public funds of the other Contracting State or a political subdivision, local authority of statutory body of the same, in connection with the provision of such activities.
Pensions and annuities
Remuneration such as pensions, annuities and any similar payments that arise in a Contracting State and are paid to a resident of the other Contracting State as consideration for past employment are to be taxed in the first-mentioned State (the State in which the payment arose).
Income derived from government service
Wages, salaries and any other similar remuneration other than a pension received by an individual in respect of services of governmental nature rendered to a Contracting State or a political subdivision, local authority or statutory body of the same and paid by that State, subdivision, authority or body are to be taxed in that State.
In regards to pensions and remuneration received for services rendered in connection with a trade or business carried on by a Contracting State or a political subdivision, local authority or statutory body of the same, the provisions of the double taxation agreement relating to personal services and Directors’ Fees are to apply.
Trainees and students
Students and trainees resident in a Contracting State immediately before temporarily visiting the other Contracting State for the purposes of receiving training or education are to be exempt from taxation in the other State.
Taxation in the other Contracting State shall be exempted on all grants and remittances the individual receives from abroad any remuneration received in respect of services in the other State not exceeding SGD 12,000 or THB 96,000 per annum, providing the services were performed in connection with the individual’s study, research or training, or are considered necessary for the purposes of maintenance.
The provision is not to apply where the study, research or training occupies are of a secondary or auxiliary character to the personal services that produce the individual’s remuneration.
Researchers, teachers and professors
An individual resident in a Contracting State immediately before temporarily visiting the other Contracting State on invitation for a period not greater than two years for the sole purpose of teaching or conducting research at any educational institution such as a school, university or college, shall, upon recognition by the competent authority, be exempt from taxation in the other Contracting State on remuneration paid for such research or teaching.
Provisions for the elimination of double taxation
The double taxation agreement provides relief for persons from double taxation where their income is subject to taxation in both Contracting States.
In the case of Thailand, any Singaporean tax payable on income derived from a Singaporean source is to be allowed as a credit against any Thai tax payable on any income derived from Singapore. The Thai tax payable in respect of income derived from Thailand is to be allowed as a credit against Singaporean tax payable in respect of the same income. The credit provided is not to exceed the respective country’s tax as computed before the granting of any credit.
Where dividend income is paid by a Singaporean company to a Thai company holding a minimum of 25 per cent voting rights in the paying company, the income is to be exempt from Thai tax. However, where no such exemption is made, Thailand may apply a tax rate that would have been applicable to the recipient’s remaining taxable income. Correspondingly, should the recipient be a Singapore resident, a credit equivalent to the Thai tax payable by the company on dividend income received is to be taken into account.
For international investors looking to set up a holding company, Singapore remains a highly sought after destination. It’s pro-business tax regimen and extensive treaty arrangements and the close bilateral relations between the key economies of the ASEAN Community have led to increased investment channelled through holding companies resident in Singapore.
The Singapore-Thailand double taxation agreement remains a key pillar of the economic relationship between the two countries from its inception 40 years ago, and the conclusion of a new agreement in 2015 has only enhanced the privileges available to businesses and investors in both nations.