The landscape of international taxation has undergone significant shifts in recent years, primarily driven by initiatives like the Base Erosion and Profit Shifting (BEPS) project by the Organization for Economic Cooperation and Development (OECD). One of the pivotal aspects of BEPS is the introduction of Pillar II, which aims to establish a global minimum tax rate to curb profit shifting by multinational enterprises (MNEs). In response to this, Thailand’s Revenue Department (RD) has proposed the Top-up Tax Bill, a significant legislative measure designed to align with the BEPS Pillar II framework. This analysis delves into the key components of the Top-up Tax Bill, its implications for MNEs, and its potential impact on Thailand’s tax regime.
Background of BEPS and Pillar II
The BEPS project by the OECD consists of several action plans aimed at addressing tax avoidance strategies that exploit gaps and mismatches in tax rules. The project has two main pillars:
1. Pillar I: Focuses on the reallocation of taxing rights to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.
2. Pillar II: Introduces a global minimum tax rate of 15% on profits of MNEs to ensure that companies pay a minimum level of tax regardless of where they are headquartered.
Pillar II aims to curb the practice of shifting profits to low-tax jurisdictions by setting a floor for tax rates, thus reducing the incentive for such practices.
Overview of Thailand’s Top-up Tax Bill
In March 2024, Thailand’s Revenue Department proposed the Top-up Tax Bill for public hearing. This bill is a legislative response to the implementation of Pillar II and aims to regulate the collection of the top-up tax. Key aspects of the bill include:
✓ Objective: To ensure MNEs operating in Thailand pay a minimum level of tax, thereby aligning with the global minimum tax initiative under Pillar II.
✓ Scope: Applies to constituent entities of MNE groups with an aggregate turnover of the ultimate parent entity equivalent to EUR 750,000,000.
✓ Exclusions: Certain entities such as government bodies, international organizations, non-profits, pension funds, real estate investment entities, and other specified juristic persons are excluded from the bill’s purview.
✓ Revenue Allocation: A significant portion of the collected top-up tax (50% to 70%) will be allocated to the National Competitiveness Enhancement Fund for targeted industries managed by the Board of Investment of Thailand (BOI).
Detailed Provisions of the Top-up Tax Bill
Calculation of Top-up Tax
The bill outlines comprehensive criteria for determining low-tax jurisdictions and calculating the jurisdictional top-up tax and payable amounts. The top-up tax is considered an assessment tax excluded from income tax according to the Global Anti-Base Erosion (GloBE) Rules.
Documentation Requirements
Entities falling under the scope of the bill are required to submit several documents, including:
1. Information Report: Declaring information about the constituent entities, the MNE group, and the countries where these entities are located.
2. GloBE Information Return: Detailing global income and tax paid by the MNE group.
3. Top-up Tax Return: Accompanied by the payment of the corresponding tax amount.
These documents must be submitted to the RD within 15 months following the end of the accounting period.
Penalties for Non-compliance
The bill imposes stringent penalties for non-compliance:
✓ Failure to Pay Top-up Tax: A fine equivalent to the amount of the unpaid tax.
✓ Failure to Submit Returns: A fine equivalent to twice the amount of the unpaid top-up tax.
✓ Partial Payment or Non-payment: An additional charge of 1.5% per month on the outstanding amount.
✓ Criminal Penalties: May be imposed for serious offenses, including making false statements or evidence that harm Thailand’s financial stability.
Implications for Multinational Enterprises
The Top-up Tax Bill will have significant implications for MNEs operating in Thailand:
1. Increased Compliance Costs: MNEs will need to enhance their reporting and compliance mechanisms to meet the documentation requirements of the bill.
2. Strategic Tax Planning: MNEs may need to reassess their tax planning strategies to accommodate the new top-up tax obligations and avoid penalties.
3. Impact on Profit Allocation: The bill may influence MNEs to reallocate profits more equitably across jurisdictions to mitigate the impact of the top-up tax.
Strategic Considerations for Businesses
To navigate the implications of the Top-up Tax Bill effectively, MNEs should consider the following strategic actions:
1. Review and Revise Tax Strategies: Conduct a thorough review of existing tax strategies to identify potential areas of exposure and revise plans to ensure compliance with the new requirements.
2. Enhance Reporting Systems: Invest in robust reporting systems capable of handling the detailed documentation and reporting requirements stipulated by the bill.
3. Engage with Tax Authorities: Proactively engage with the RD to clarify any ambiguities and ensure a smooth transition to the new tax regime.
4. Monitor Global Developments: Stay informed about global tax developments related to BEPS and Pillar II to anticipate and adapt to future changes.
The Road Ahead for Multinational Enterprises
Thailand’s Top-up Tax Bill represents a significant step towards aligning the country’s tax regime with international standards set by the OECD’s BEPS initiative. By implementing this bill, Thailand aims to ensure that MNEs contribute a fair share of taxes, thereby enhancing tax fairness and equity. However, the bill also introduces new challenges for MNEs in terms of compliance and strategic tax planning. Businesses must take proactive steps to understand and adapt to these changes to ensure continued compliance and optimize their tax positions. As the global tax landscape continues to evolve, staying informed and agile will be key to navigating these complex changes successfully.