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Tax Point of Profit Remittance: Halliburton
In late 2010, the Thai Central Tax Court publicly released its decision not to accept the tax assessment made by the Thai Revenue Department ("TRD") regarding the 'surcharge' on late payment of tax in relation to profit remittances by Halliburton's branch in Thailand to its head office in the US.
Halliburton and the TRD argued over when the tax on profit remittance must be paid to the TRD. Depending on when payment should be made, the difference in tax paid would total THB 9.1 million or USD 300,000.
The branch is required to deduct tax at the rate of 10% upon distribution of profits to head office. The branch is required to remit the tax payable to the TRD within 7 days in the following month (the month after the distribution is made). Late payment of tax is liable to a 1.5% surcharge per month but capped at the amount of tax payable.
The Facts of the Case
Halliburton's customers paid fees directly to the Halliburton head office in the US. In 2002, the branch generated a profit before corporate income tax to the tune of THB 600 million. The branch paid corporate tax (at a rate of 30%) on THB 180 million, and therefore, the balance or profit after tax was THB 420 million. The branch was required to file an annual corporate tax return 150 days from the end of the accounting period i.e. 30 May 2003.
However, the branch filed the return in the following year on 31 May 2004. In the return, the branch calculated that the corporate tax profit remittance tax and surcharge for late filing of profit remittance tax was THB 7.5 million for the delay from 31 May 2003 to the actual filing date on 31 May 2004.
The TRD disagreed with this calculation and recalculated a THB 16.6 million surcharge for the late filing of profit remittance tax. The TRD considered that the tax point for computation of the profit remittance tax should have been incurred in the period when the head office derived service fees from customers in Thailand during the first quarter of 2002. Accordingly, the TRD assessed a shortfall surcharge of THB 9.1 million on the late filing by Halliburton's Thai branch for the profit remitted to its head office in 2002.
The Central Tax Court held that the profit remittance tax was chargeable at 10%, i.e. a 'second-level tax' imposed on the profit after the company had already paid 30% 'first-level tax'. The second-level tax is a tax imposed on the balance of the profit, which is similar in nature to a 'dividend' distribution to the shareholder of a foreign company, if the foreign company set up a subsidiary in Thailand rather than a branch.
The Tax Court's ruling confirmed the position of Halliburton, namely, that 'profit' under Section 70 bis of the Thai Revenue Code ("TRC") is "net profit after tax" and not profit for normal accounting purposes. The Court also ruled that 'net profit after tax' can only be calculated at the end of the accounting year (31 December). Therefore, remitting a service fee and subsequent profit to the head office should be taxed under Section 70 bis only where such remitted profit can be definitely identified as 'profit after tax'.
Profit remittance tax: a Misunderstanding?
In the wake of the Supreme Court judgment in 2005 (in a landmark case against a Japanese company) this is the first attempt by the TRD to tax and impose a surcharge on "profit remittances" by the Thai branch of a foreign company. The TRD has appealed against the Central Tax Court's first-instance decision and we cannot predict what the Supreme Court's final decision will be. In practice, the Supreme Court can take 5 years or more to rule on a case.
The TRD's officer in Halliburton relied on the Supreme Court's interpretation of the tax point in the 2005 case involving Thai MC (a Thai-registered company) which was deemed to be an agent of a Japanese company (Mitsubishi Corporation) for corporate tax purposes under Section 76 bis of the TRC.
In the Thai MC case, the (deemed) branch or agent (PE) was a Thai subsidiary while Halliburton involves a Thai branch and the circumstances of both cases are different.
Threat or Opportunity?
When a taxpayer decides to contest a tax assessment at the tax courts, it has to pay the assessed tax up front. Therefore, bringing a tax lawsuit should not be seen as a way of deferring tax payments. In practice, evidence can be produced to the TRD to show that the tax has been paid, e.g. a mortgage deed, a letter of guarantee from a commercial bank, etc.
Where the taxpayer believe they has a strong case, it is interesting to note that a commercial view can be taken and opt to settle the assessed tax deficiency in cash. If the final court decision goes in favour of the taxpayer, the taxpayer is entitled to a refund of the tax paid, plus 1% interest per month. Interest on the refunded tax must be requested in the lawsuit, the amount will be capped at the amount of the refund and it cannot be compounded.
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