Seven tax structuring aspects for BOI promoted companies
BOI-efficient tax structuring
The Thailand Board of Investment is the governmental agency to promote foreign direct investments in Thailand. Key benefits of a BOI promotion are (i) the waiver for a Foreign Business License to do business in Thailand with up to 100% foreign shareholders, (ii) the right to acquire legal ownership in real estate, and (iii) tax holidays. Tax holidays give a BOI promoted project a tax-exempted period of up to eight (or even more) years, followed, as the case may be, by a 50% tax reduction for an additional period of time. Terms and conditions apply. More complex rules apply in the EEC.
The foreign investor enjoys tax holidays with a corporate income tax rate of 0%, withholding taxes of 0%, and Thai income taxes of 0%. The 50% tax reduction will result in a 10% Thai corporate income taxation – if tax rates remain unchanged in the future. In addition, the investor has his specific tax burden in his country of residence and, if he is part of an international group of companies, certain other tax rates. These different tax rates apparently create the perfect storm for a highly efficient tax structuring.
The tax planning for BOI companies has to be distinguished from the structuring of the transfer of such companies under careful consideration of current, future, and past investment promotion.
Seven tools and modules of BOI tax planning
To successfully apply for a BOI promotion certificate that gives some sort of tax holiday is just the half battle. From the tax advisor’s point of view, it is sad to see that possible tax advantages are generously wasted by ignorance and lack of knowledge. These are the tools and modules of efficient tax planning under a BOI promotion scenario:
#1. Projects, not companies: The Board of Investment does not promote companies, but projects. Therefore, the project has to be carefully defined taking into consideration the cross-border tax value chain. Profitable elements have to be included, loss-maker have to be carved out. The contractual arrangements have to assure that the benefits of a tax holiday are utilized at the best possible.
#2. Separation of projects: It has to be evaluated whether it is possible to split one project into pieces to optimize the structure. Not each BOI promoted project gets tax holidays, and it would be preferable to have successful projects with and the less profitable projects without tax holiday status.
#3. Loss utilization: The methods and modalities to offset losses between BOI promoted projects within the same legal entities had been subject to discussions during the last years. While the BOI traditionally had an investor-friendly “each tax exempted project is promoted separately” approach, under the 2017 amendment of the BOI Act, the “one entity taxation” concept has been introduced. This might require the separation of each BOI-projet in a separate corporate entity for an efficient tax structuring.
#4. Transfer pricing: During the lifetime of the tax holidays, the group structure has to support the profitability of the Thai company. Thailand’s new transfer pricing rules give a broad scope of flexibility to shift profits from abroad to Thailand.
#5. The end of the holiday period: Tax holidays will finally come to an end, and the change from 0% to the half or full tax rate has to be carefully prepared in advance. Surely the Revenue Department will not appreciate when the taxable profits crash in the ninth year of operation, just after the tax holidays elapsed. However, there are legitimate reasons and arguments to support the taxpayer’s viewpoint.
#6. Taxation in the home country: Tax planning has to include the tax legislation in the investor’s home country respectively the tax environment of the company’s headquarters. Is it assured that the tax exemption will not result in a tax burden on the profits at the level of the shareholders? What is the foreign tax legislation on profits made in a controlled foreign company with a no-tax regime?
#7. Worst case scenario: A misleading BOI application, a change of the business strategy, ignored reporting requirements, or unforeseen developments might result in a BOI audit and, in the worst case, with a revocation of the tax benefits. The direct and indirect tax effects and implications should be prematurely examined and implemented in the tax planning structure.
Needless to say that the BOI tax planning has to observe local tax legislation and policies carefully. Artificial structures might or might not be accepted by the tax authorities. Transfer pricing regulations, CFC (Controlled Foreign Company) rules, Thailand’s general anti-tax evasion legislation, and other complex tax legislation and practices require a structured and planned approach. The tightening of Thailand’s fight against tax fraud through the Revenue Code Amendment Act (No.45) 2017 is still widely underestimated.
Legal services on BOI investment promotions
PUGNATORIUS Ltd. is a Bangkok-headquartered specialist provider of bespoke transactional legal and tax advice in the corporate and property legal and taxation industry sectors. BOI-related professional services cover these seven aspects:
- BOI promotion advice
- BOI application support
- Ongoing reporting and compliance requirements
- BOI promotion management
- Restructuring and exit advice
- BOI tax advice
- Legal opinions and professional reports
The scope of professional services is described at “Legal and tax services on BOI investment promotions“.