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Overview of Thailand’s Implementation of the Global Minimum Tax (GMT) under Pillar II

As part of a global effort to curb tax avoidance and align with fair taxation standards, Thailand is preparing to implement the Global Minimum Tax (“GMT”) by 2025, complying with the Organization for Economic Co-operation and Development’s (“OECD”) framework. This initiative, spearheaded by the OECD and the G20 countries, introduces a minimum effective tax rate of 15% for large multinational enterprises (MNEs), ensuring that these corporations pay their fair share of taxes, regardless of their physical presence in a jurisdiction.

Thailand’s proactive stance on this issue is a significant development in its tax policy, which aims to address issues of tax avoidance by MNEs while preserving its competitive position in attracting foreign investment. In this comprehensive analysis, we will explore the background, key components, and anticipated impacts of Pillar II of the OECD’s two-pillar approach, with a particular focus on how Thailand is preparing to introduce the GMT in 2025.

Global Minimum Tax: An Overview

The GMT is a critical element of the two-pillar framework developed by the OECD and the G20. This framework was designed to address two primary challenges in the global tax system:

1.   Pillar I: The reallocation of taxing rights over MNEs, especially those operating in the digital economy, to ensure a fairer distribution of profits across countries, even in jurisdictions where MNEs may not have a physical presence.

2.   Pillar II: The focus of this analysis, Pillar II, introduces a Global Minimum Tax aimed at preventing a “race to the bottom” among countries competing for investment by offering extremely low or no tax rates to MNEs. The GMT sets a minimum effective tax rate (ETR) of 15% for large MNEs, ensuring they pay a baseline level of tax regardless of where they operate.

The objective of the GMT under Pillar II is to reduce tax competition between countries, ensuring that MNEs are subject to at least a 15% ETR in each jurisdiction where they operate. This effectively limits the ability of MNEs to shift profits to low or no-tax jurisdictions, a practice that has historically undermined tax revenues in higher-tax countries.

Thailand’s Adoption of the GMT under Pillar II

Thailand has signaled its commitment to adopting the GMT by introducing draft legislation through its Revenue Department. This new Tax Act proposes additional taxes on MNEs that fall below the 15% ETR, ensuring compliance with the OECD’s global tax standards. The legislation has already passed public hearings and is expected to be proposed to the Cabinet, with implementation planned for 2025.

This development will primarily affect around 1,200 multinational corporations operating in Thailand, many of which may currently benefit from the country’s tax incentives, including tax holidays, reduced rates, and exemptions. The Board of Investment (BOI) is actively preparing financial measures to ease the transition, ensuring that both existing and new investors are accommodated within the new tax landscape.

Key Elements of Thailand’s Approach to the GMT

1.   Minimum Effective Tax Rate (ETR):
Under the new legislation, MNEs with an ETR below 15% will be subject to additional taxes to meet this threshold. This ensures that large corporations contribute a minimum level of tax, even if their operations benefit from preferential tax regimes in Thailand or other jurisdictions.

2.   Board of Investment (BOI) Adjustments:
To mitigate the impact of the GMT on foreign investment, the BOI is revising its tax incentive policies. Historically, the BOI has offered significant tax incentives, including full exemptions on corporate income tax for a set number of years, as a means of attracting investment in key sectors such as electronics, automotive, and renewable energy. Under the new framework, the BOI will shift from offering complete tax exemptions to reduced corporate tax rates for an extended period, not exceeding 10 years.

This adjustment ensures that companies benefiting from BOI incentives remain competitive, even as they comply with the 15% GMT threshold. Meanwhile, companies that do not meet the GMT threshold will continue to enjoy the traditional tax incentives and exemptions without adjustment.

3.   Scope and Compliance:
The legislation targets large MNEs with a global turnover of more than €750 million, as outlined in the OECD framework. These companies must meet the 15% ETR on their operations in Thailand, and any shortfall will trigger additional tax liabilities. Smaller companies operating below this threshold are exempt from the GMT requirements and will continue to operate under existing tax laws.

Implications of the GMT for Multinational Enterprises in Thailand

The implementation of the GMT will have far-reaching implications for multinational corporations operating in Thailand. While the primary objective is to curb aggressive tax planning and profit shifting, the legislation also aims to align Thailand’s tax system with global standards while remaining an attractive destination for investment.

1.   Impact on Tax Incentives

One of the immediate impacts of the GMT will be the adjustment of BOI tax incentives. Thailand’s BOI has historically played a pivotal role in attracting foreign investment by offering generous tax holidays, reduced tax rates, and full exemptions for certain industries. The shift from tax exemptions to reduced tax rates will require companies to reassess their tax planning strategies.

MNEs that have relied on tax holidays or complete exemptions will need to calculate whether their ETR meets the 15% threshold, and if not, they will be required to pay additional taxes to meet the GMT. This could erode the financial benefits previously enjoyed by companies and necessitate restructuring their investments or operations in Thailand.

2.   Impact on Foreign Direct Investment (FDI)

Thailand has long been a popular destination for foreign direct investment, particularly in sectors such as automobiles, electronics, and more recently, electric vehicles (EVs). The introduction of the GMT could affect the attractiveness of Thailand’s tax regime, particularly for MNEs seeking to minimize their global tax burdens. However, Thailand’s strategic advantages, including its location, infrastructure, and close collaboration between public and private sectors, will likely mitigate any negative impact on FDI.

Additionally, Thailand’s adoption of the GMT will enhance its reputation as a country aligned with international tax standards, improving transparency and ensuring a level playing field for all businesses. This alignment could encourage responsible investment from MNEs seeking long-term stability and compliance with global regulations.

3.   Compliance and Administrative Burden

For MNEs, compliance with the GMT will require significant administrative adjustments. Companies will need to undertake complex tax calculations to determine their ETR in Thailand and across their global operations. If their ETR falls below the 15% threshold, they must report this to the Revenue Department and pay the necessary top-up tax.

This will also require businesses to engage in detailed tax planning, ensuring that they account for the tax liabilities arising under the GMT. Additionally, companies operating in multiple jurisdictions will need to track their tax obligations in each country, increasing the complexity of compliance.

Challenges and Opportunities for Thailand under the GMT

Thailand’s adoption of the GMT presents both challenges and opportunities for the country’s tax policy and economic landscape.

Challenges:

1.   Balancing Domestic and International Priorities:
Thailand must carefully balance its domestic policies designed to attract investment with the international objective of reducing tax avoidance. The country’s reliance on tax incentives to spur growth in strategic sectors could be undermined by the GMT if not managed carefully.

2.   Ensuring Compliance:
Enforcing the GMT will require significant resources and coordination between the Revenue Department, the BOI, and other government agencies. Ensuring that MNEs comply with the 15% ETR and report accurate tax information will be a complex undertaking, requiring investments in technology and personnel.

Opportunities:

1.   Enhanced International Reputation:
By aligning with the OECD’s framework, Thailand will enhance its standing as a country committed to global tax fairness and transparency. This could strengthen relationships with key trading partners and encourage investment from companies seeking jurisdictions that comply with international norms.

2.   Attracting Quality Investment:
While the GMT may reduce the attractiveness of Thailand’s tax regime for companies engaging in aggressive tax planning, it could also attract high-quality investment from businesses focused on long-term growth and compliance. With its strategic location, robust infrastructure, and skilled workforce, Thailand is well-positioned to benefit from responsible, sustainable investment in key industries like automotive manufacturing, electronics, and electric vehicles.

Key Takeaways

Thailand’s move to adopt the Global Minimum Tax under Pillar II of the OECD framework marks a significant shift in its tax policy. By setting a minimum effective tax rate of 15% for large MNEs, Thailand is taking a firm stance against tax avoidance while aligning with global standards for fairer taxation.

While the GMT will introduce new compliance challenges for businesses and require adjustments to the country’s tax incentive framework, it also offers opportunities for Thailand to strengthen its reputation as a transparent and responsible investment destination. The focus on maintaining a competitive environment through adjusted tax incentives ensures that Thailand remains an attractive destination for investment in strategic sectors.

As Thailand moves toward implementing the GMT in 2025, businesses operating in the country should prepare for the changes by reviewing their tax strategies and ensuring compliance with the new regulations. By doing so, they can continue to benefit from Thailand’s favorable business environment while adhering to international tax standards.

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