Published in the Bangkok Post on August 7, 2001 © Seri Manop & Doyle

Disclosure requirement is stumbling block

Uncertainty is increasing over the fate of the treaty for the avoidance of double taxation between Thailand and the United States.

The treaty, not to be confused with the Treaty of Amity and Economic Relations between the two nations, is designed to reduce the occurrence of double taxation in cross-border business transactions between the two countries.

To give the document its full name, it is the Treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to taxes on Income.

The uncertainty centres around the treaty's requirement that the Thai revenue Department provide information "necessary for carrying out the provisions" of the treaty to the US government upon request.

The treaty offers significant benefits to qualifying locally owned and foreign owned firms in Thailand. One of these benefits concerns exemptions from and reductions of certain types of withholding taxes generally applicable in Thailand.

Thai law attaches a withholding tax to different types of payments made by parties in Thailand to parties offshore.

The rate of the withholding tax in a given transaction depends upon the legal classification of the offshore payment to be made as defined by the Thailand Revenue Code. The payment classifications in which these withholding taxes are generally applicable include dividend payments, royalty payments and payments for specific types of services.

This withholding tax is payable by the paying Thailand party within seven days of the last day of the month in which the payment offshore is made. The treaty provides qualifying Thailand parties with exemptions from and reductions to the withholding tax generally payable in many of these transactions.

Consider the following example.

A party in Thailand engages a firm in the United States having no permanent establishment in Thailand to perform engineering services in the United States.

The US firm charges the Thailand party a professional fee of 100 baht for providing this service. The Thailand party pays the professional fee to the firm in the United States on July 15.

Normally, when a Thailand party pays a professional fee to a company outside Thailand a withholding tax of 15% of the total amount of the fee payment (15 Baht) is payable by the Thailand party to the Thailand Revenue Department. This amount is payable within seven days of the last date of the month in which payment was made (Aug. 7).

In the above example, however, the transaction may be exempt from the 15% withholding tax due to the presence of the treaty. If the transaction otherwise qualifies under the terms of the treaty, the withholding tax payable by the Thailand party may be reduced from 15% (normal rate) to 0% (treaty rate for this transaction).

Accordingly, the treaty is particularly significant to many firms in Thailand which regularly transact business with firms in the United States. Many of these firms fear that the tax privileges afforded by the treaty may be cut off effective Jan. 1, 2003, due to a provision of the treaty concerning its automatic termination.

The treaty contains requirements that both Thailand and the United States "exchange such information as is necessary for carrying out the provisions" of the treaty. One of these requirements is that the Thai government submits a "diplomatic note" to the US government by June 30, 2002.

This diplomatic note is required to state that the Thai government agrees to provide the US government information as is "necessary for carrying out the Provisions" of the treaty on request. This note is also required to confirm that if the United States requests Thailand to provide such tax information Thailand "shall obtain the information to which the request relates in the same manner and to the same extent" as if the request originated within the Thai government.

According to the terms of the treaty, the Thai government must submit this diplomatic note to the US government by June 30, 2002, or the treaty shall automatically terminate effective Jan. 1, 2003.

To date the Thai government has not provided this diplomatic note to the US government and has made no official indication if or when it will be submitted.

Michael Doyle is a partner of the Bangkok law firm of Seri Manop and Doyle Ltd. and may be reached by email at .'; document.write( '' ); document.write( addy_text17815 ); document.write( '<\/a>' ); //-->