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Supreme Court rules in cost allocation / royalties dispute
Earlier this year the Supreme Court of Thailand ruled in the case of Esso (Thailand) plc (ETP), which is a listed company in the Stock Exchange of Thailand, regarding a dispute about their withholding tax. Taxand Thailand discusses why ETP lost the case.
ETP entered into a Master Services Agreement with its affiliate Belgian company, Esso Coordination Center N.V. (ECC) in 1997 for cost allocation in relation to their global accounting system. In 1999, ETP paid ECC the fee of USD 5.18 million for the cost allocation and wrongly deducted withholding tax (15%) of USD 914,000.
Subsequently, the Thai Revenue Department (TRD) refunded the amount of wrongly deducted tax to ETP upon its request. After that the TRD ordered ETP to return the amount of USD 914,000 as it considered that the cost allocation was regarded as royalties and therefore subject to withholding tax.
Unsurprisingly, ETP returned the amount to the TRD but proceeded with a lawsuit to the Central Tax Court (CTC) to claim back the tax refund. The CTC dismissed ETP’s claim for the tax refund, so ETP argued the CTC’s decision in front of the high court.
The Supreme Court ruled in favour of the TRD on the basis that:
- Exxon Mobil Corporation which is parent company of ETP entered into the License Agreement with SAP America Limited to use the ‘computer software’ of SAP R/3 for the accounting system used by Esso Affiliates around the world
- ECC is a centralised company and has to gather accounting information from Esso Affiliates for the centralised service and maintenance on accounting services. ECC is not the owner of SAP R/3 and doesn’t hold a sub-license on the SAP software. As a result, the Supreme Court considered that ECC is not a service provider to ETP in relation to the computer software
- Consequently, the Supreme Court ruled that the payment of cost allocation to ECC shall be deemed a payment of royalties for the right to use SAP computer software passed through ECC
Also published in Thomson Reuters' Taxnet Pro, 3 October 2013
It is understood that ‘cost allocation’ should be traced back to its source of payment from the origin prior to recharge or reimbursement to the payer. For example the license fee for the right to use computer software. This is to identify the nature of payment, whether it is royalties or non-royalties, including the tax implications and consequences.
Unfortunately in this case, Esso Thailand returned the amount of tax withheld to the Thai Revenue Department rather than holding the amount until the Supreme Court clarified the position of the cost allocation.
If Esso Thailand had held back the tax amount, the Thai Revenue Department would have proceeded with the lawsuit to claim back the tax from Esso Thailand. Therefore the burden of proof and court fees would have been shifted to the tax authority. In addition, Esso Thailand would have enjoyed the cash flow of USD 914,000 during the court process, which could have lasted over 10 years.