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Important Supreme Court ruling on royalties tax interpretations
The Thai Supreme Court released its decision in early 2013 on the royalty tax dispute between Thai Tank Terminal (TTT) and the Thai Revenue Department (TRD) in which the TRD assessed withholding tax on management fees paid to Pac Tank International B.V., the Dutch parent company of TTT, (PTI). Taxand Thailand explains why this case is important for multinationals.
In this case, the TRD viewed that the management fees paid by TTT to its parent company in the Netherlands under the Offshore Services Agreement (OSA) were deemed to be royalties. In addition, TTT entered into the Intellectual Property License Agreement (LA) with PTI for the right to use their trademark, special expertise in pipeline transport, construction design, operating techniques, formula plan control, specific information and computer software including innovation of PTI. The license fee under the LA was charged at 0.5% of gross income.
The TRD in this case argued that the monthly flat fee was ‘disguised royalties’ hidden in the management fee and therefore assessed the tax and issued a surcharge of USD 500,000. TTT filed a case in contention with the tax assessment before the Central Tax Court (CTC), who ruled in favour of the TRD.
The Supreme Court in this case considered the relevant evidences (contracts and commercial papers) together with the individual witnesses and ruled that the Monthly Flat Fee during the first 6 years of OSA would not be regarded as payment of royalties on the following basis:
- No content of contract and actual services in relation to intellectual property nor specific information was provided to TTT
- In this case the fixed fee payment had no provision of service, it was a lump sum payment for the initial start up process of TTT which required a lot of support from PTI and the assistance was gradually reduced within 6 years
- The liquid chemical storage tanks of TTT were comparable to the similar tanks of NPC, which were of general standard in the marketplace, and no special requirements were needed to manage the tank in Thailand
Therefore, the Supreme Court ruled in favour of TTT and dismissed the tax assessment conducted by the TRD.
Also published in Thomson Reuters' Taxnet Pro, 26 September 2013
This is an important case to note for multinationals as it illustrates that proof in terms of contacts, supporting documents and individual witnesses (for actual services provided) are required when contending against a tax assessment. Therefore economic substance of any transactions will be the 'safety zone' to ensure compliance and to avoid any adverse tax interpretation from tax authorities.