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Supreme Court rules in marketing fee / royalties case
In 2001, the Thai Revenue Department (TRD) assessed withholding tax of THB 3.6 million (USD 120,000) against Philips Electronics (Thailand) (Philips) together with a surcharge of 100% of tax payable on a late tax payment for the marketing fee paid to the offshore Philips entity in the Netherlands. The final judgment in this case was ruled in 2013. Taxand Thailand investigates the case and the possible wider consequences the ruling may have for multinationals.
Philips appealed the tax assessment to the Board of Tax Appeal without success and subsequently to the Central Tax Court (CTC). In 2003, the CTC ruled in favour of Philips and the TRD appealed the case to the Supreme Court (SC). After 9 years of high court consideration, the SC ruled in early 2013 to support the tax position of the TRD on the basis that the marketing fee paid to Dutch Philips (under a Marketing Service Agreement [MSA]) was regarded as ‘royalties’ under the local (Thai) tax laws and the double tax agreement between Thailand and the Netherlands.
The SC relied on the MSA and interpreted that Dutch Philips was a veteran marketing service provider in the electronic industry and the ‘recital part’ of the MSA confirmed that Dutch Philips had experience in this area for a century.
In addition, the High Court viewed that Dutch Philips provided a marketing service and sales as required by Thai Philips in relation to a work method which can fall under the category of ‘standard order’, ‘manual’, as well as ‘risk control process’. As a result, the Court interpreted that the marketing services provided by Dutch Philips should be considered as a proprietary right with confidentiality, and therefore, it was viewed that the marketing service would be regarded as a provision of ‘Trade Secret’.
Furthermore, the Court analysed that the “fixed rate” of the marketing fee (0.5% of annual net sales on a lump sum basis) under the MSA did not match with the marketing activities provided by Dutch Philips during a period in which they provided no services. The Court also believed that the “fixed rate” was not a real marketing fee, but it was a nature of ‘license fee’ or ‘royalties’ for the use of ‘Trade Secret’ under the marketing experience of Dutch Philips which is not able to compute in terms of monetary value (fixed fee).
In the similar case of Pizza Hut in 2006, marketing cost for the benefit of franchisor (Pizza Hut) in Thailand but paid by franchisee to the 3rd party vendor (non-related to franchisor) was treated as ‘additional benefit’ and regarded as ‘assessable income of franchisor' for corporate tax purposes. Therefore, it was deemed a part of the franchise fee and subject to withholding tax and VAT.
In practice, tax planners tend to use the marketing fee to avoid a royalties tax audit raised by the tax authorities. Thai tax interpretation in the above 2 cases now confirms the recent tax treatment of marketing fee, and therefore multinationals should take care when a marketing service and a marketing fee have been used under a cross-border marketing service, especially for related parties.