Singapore and Thailand share a long-standing diplomatic relationship, with a large volume of trade and investment between both nations. On 11 June 2015, the two countries signed a Convention for the avoidance of double taxation and the prevention of fiscal evasion. The new Double Taxation Agreement (DTA) took effect as of 11 January 2017.
Who does it apply to?
According to Article 1, the Treaty applies to all residents of Singapore and Thailand, including both natural and legal persons. In this regard, Article 4 states that a “resident of a Contracting State” refers to any individual or entity which is subject to taxation in that State pursuant to its laws.
If an individual can be deemed as a resident of both Singapore and Thailand, the relevant factors under Article 4 which determine the taxpayer’s residency status is as follows, in order of decreasing priority:
✓ Country in which the individual has a permanent home.
✓ Country in which the individual has his or her center of vital interests, in terms of his or her personal and economic relations.
✓ Country in which the individual has a habitual abode.
✓ Country of which the individual is a national.
If the above rules are unable to determine the individual’s residency status, the competent authorities of the two countries will do so through mutual agreement.
What type of taxes are covered?
Article 2 provides that the Treaty covers the following types of taxes:
✓ Singapore income tax;
✓ Thailand income tax;
✓ Thailand petroleum income tax; and
✓ Any other similar taxes which are imposed in place of, or in addition to, the above-mentioned taxes.
What types of income are covered?
Pursuant to the DTA provisions, the treaty covers various types of income, including income from immovable property (Article 6), business profits (Article 7), income derived from shipping and air transport (Article 8), dividends (Article 10), , interest (Article 11), royalties (Article 12), capital gains (Article 13), income derived from independent or dependent personal services (Articles 14 and 15), director’s fees (Article 16), artistes and sportspersons’ income (Article 17), pensions (Article 18), remuneration derived from government service (Article 19), and payments received by students (Article 20).
Main provisions of the DTA
In essence, the DTA provides relief to investors from double taxation where they derive taxable income from both jurisdictions. To this end, investors may benefit from tax exemption or taxation at a preferential rate if the treaty applies.
a. Dividends
Under Article 10, dividends are taxed in the country of the recipient’s residency. However, there are certain situations in which dividends may also be taxed in the seller’s country of residence. In this case, the dividend tax charged by the seller’s country of residence must not exceed 10% of the gross amount of the dividends.
However, Article 10 also provides that these provisions will not apply if the recipient has a permanent establishment in the country from which the dividends are paid. Such dividends are paid for shares of the permanent establishment or are otherwise effectively connected with that establishment.
In this regard, a permanent establishment is defined under Article 5 as a fixed place of business, and includes a place of management, a branch, an office, a factory, a workshop, a mine, a place of extraction of natural resources, a warehouse, a building site, or the furnishing of services by an enterprise of a country. Further, an individual may be deemed to have a permanent establishment in a country in which it is acting if it habitually exercises an authority to conclude contracts in that state, or habitually maintains a stock of goods or merchandise in that country despite having no such authority.
However, Article 5 provides that an enterprise will not be regarded as having a permanent establishment in a country by the mere fact that it carries on business in that country through an independent agent, if such persons are acting in the ordinary course of their business. Moreover, a company that is located in one of the countries will not be deemed as a permanent establishment of another company which is located in the other country merely because the former controls or is controlled by the latter.
b. Interest
Similarly, interest tends to be taxed in the recipient’s country of residence, as provided under Article 11. In certain situations where such interest is taxed in the seller’s country of residence, it will be subject to the following limits:
✓ 10% of the gross amount of the interest if the interest is beneficially owned by any financial institution or insurance company;
✓ 10% of the gross amount of the interest if the interest is paid in relation to indebtedness arising as a result of a sale on credit of any equipment, merchandise or services; or
✓ 15% of the gross amount of the interest in all other cases.
The government, central bank, or any other government institution of the recipient’s country of residency will be exempt from tax in the seller’s country of residency in respect of interest income received from the latter.
c. Royalties
Royalties are generally taxed in the recipient’s country of residence, pursuant to Article 12.
However, the DTA provides that royalties can also be taxed in the seller’s country of residency, in which case the tax shall not exceed:
✓ 5% of the gross amount of the royalties if they are paid for the use of any copyright of literary, artistic or scientific work;
✓ 8% for the use of any patent, trademark, design or model, plan, secret formula or process, or for the use of industrial, commercial, or scientific equipment; or
✓ 10% of the gross amount of the royalties in all other cases.
However, these provisions will not apply if the recipient has a permanent establishment in the country from which the royalties are paid and the royalty payment is attributable to that permanent establishment.
d. Capital Gains
Article 13 provides that capital gains derived from the sale of immovable property in a country are to be taxed in that country, and gains from selling movable property which is part of a permanent establishment in a country will be taxed in that country.
Capital gains received by a resident of a country from the sale of ships or aircraft operated in international traffic shall be taxable only in that country.
Capital gains received by a resident of a country from the sale of shares, apart from shares traded on a recognized stock exchange, deriving at least three-quarters of their value from immovable property in the other country may be taxed in the latter.
Capital gains resulting from the sale of any property other than those specified above shall be taxed in the seller’s country of residence.
e. Relief from double taxation
Article 22 provides that Singapore tax payable in respect of income derived from Singapore can be claimed as a credit against Thai tax payable in respect of the same income, vice versa. The credit provided in this regard shall not exceed the respective country’s tax as computed before the credit is given.
Comparison to the previous Double Taxation Agreement
The current DTA replaces the previous Double Taxation Agreement that was signed on 15 September 1975. In addition to amending a few outdated provisions regarding cross-border tax rates, the provisions of the Treaty have also been aligned with the Organization for Economic Cooperation and Development (OECD) model tax.
The current DTA lengthens the threshold period for determining the presence of a permanent establishment from 6 months to 12 months.
The withholding tax rates for dividends, interest and royalties have been lowered as follows:
a. Dividends
The withholding tax rate for dividends has been lowered from 20% to 10% of the gross amount of the dividends.
b. Interest payments
The withholding tax rate for interest payments has been reduced from 25% to 15% for all recipients, except for financial institutions.
c. Royalties
The withholding tax rate for royalties has been lowered from 15% to 5%, 8% or 10%, depending on the type of royalties.
Further, the provisions under the current DTA in relation to the taxation of dividends, interest and royalties provide that a recipient must be the beneficial owner of the income in order to benefit from the DTA provisions.
Concluding remarks
The more liberal provisions under the current DTA are expected to boost economic relations between Singapore and Thailand through allowing businesses and investors to enjoy more elaborate privileges. Ultimately, the amendments improve the business environment between the two countries and further encourage foreign investments.