Worldwide: The World Tax Advisor - July/August 2005 (Recent Asia Pacific Developments)

Contents

The Court of First Instance issued a decision on 1 June 2005 on an appeal from the Board of Review regarding the issue of whether commission income arose in Hong Kong (Baring Securities (HK) Limited v. Commissioner of Inland Revenue). Specifically, the Court examined whether brokerage and marketing income derived by the taxpayer from trading in securities on behalf of Baring group clients on exchanges outside Hong Kong was sourced outside Hong Kong, even when the client was located in Hong Kong or instructions to execute such trades were given to the taxpayer in Hong Kong.

The taxpayer appealed its assessment to the Board of Review, which was dismissed on the grounds that the taxpayer failed to prove that the assessment was incorrect and that the income was not Hong Kong source. In appealing further to the Court of First Instance, the taxpayer argued that the Board erred in applying the source principle in determining the source of the income and in concluding that the profits were derived from activities carried out in Hong Kong.

Finding in the taxpayer’s favor, the Court noted that the relevant activities were the operations of the taxpayer and its overseas agents. For the brokerage or commission income, the taxpayer’s role was to act as an intermediary between the clients and the overseas agents who executed the trades on the overseas stock exchange. Although the taxpayer’s Hong Kong office conducted sales and research, these activities only developed relationships with clients – the actual operations that generated the brokerage income were the execution of the individual securities transactions by the agents outside Hong Kong. Consequently, the Court of First Instance concluded that the Board had erred in its decision and that the brokerage income was sourced outside Hong Kong.

The marketing income was generated based on sharing agreements entered into by the taxpayer with its overseas associates in the group. Under the agreements, the taxpayer received a share of the commission for introducing to the overseas associates a customer who traded securities on the overseas stock exchange. As the introduction was from the taxpayer to overseas associates for the purpose of executing trades of securities at overseas stock exchanges, the court concluded that the operation giving rise to the marketing income also should be regarded as having taken place overseas. Hence, the taxpayer was not subject to Hong Kong profits tax on the brokerage and marketing income.

Two recent decisions of the Indian Tax Appellate Tribunal have addressed the taxability of payments made by Indian companies to U.S. entities under the India-U.S. income tax treaty. Both cases illustrate the importance of carefully reading the language used in the relevant tax treaties and the wording of the agreements between the parties.

Article 7 of the treaty (Business Profits) provides for residence-based taxation unless the taxpayer has a permanent establishment in the source country. Article 12 (Royalties and Fees for Included Services) imposes a withholding tax of 15-20% depending on the type of payment and when, during the term of the contract, the payment is made. Article 15 (Independent Personal Services) provides for residence-based taxation absent a fixed base in the source country or presence in the country that exceeds certain thresholds.

In Gentex Merchants, an Indian company paid fees to a U.S. company for the provision of services, including schematic ideas, and developing and providing plans, drawings and designs. The U.S. company also gave advice to the Indian company for the construction of water systems in a building. At issue was whether the payments fell under articles 7 or 12 of the treaty, and, therefore, whether the payments were excluded from withholding tax.

The Indian tax authorities took the position that the payments by the Indian company represented fees for included services within the meaning of article 12(4)(b) of the treaty and, therefore, were subject to a 15% withholding tax. On first appeal, the Appellate Commissioner confirmed the decision of the tax authorities. The Indian company objected, claiming that the payment represented business income of the U.S. company under article 7 and, hence, was exempt from withholding tax. It also was argued that the payments were not otherwise in the nature of fees for included services within the meaning of article 12.

After examining the terms of the agreement, the Tribunal held that the payments were for fees for included services. The Tribunal observed that the U.S. company was not only required to provide schematic ideas, but also to provide technical designs, drawings and information on the basis of which the Indian company was to execute and install a water system. The Tribunal further held that the word "transfer" used in article 12(4)(b) does not contemplate a transfer of all rights, title and interests in such technical designs or plans, and that, even where the technical design or plan is transferred for the purpose of mere use of the design or plan by the other person for which payment is made, article 12(4)(b) will apply.

In Chadbourne & Parke, an Indian company paid fees for professional services to a U.S. law firm for legal services such as the drafting and review of documents and negotiating with financiers. At issue was whether articles 12 or 15 of the India-U.S. tax treaty applied to the payments.

The Indian tax authorities took the position that the payments represented fees for included services within the meaning of article 12(4) of the treaty and subjected the payment to tax. The Appellate Commissioner reversed the order of the tax authorities, agreeing with the Indian company that the payment was for professional services covered under article 15 and that the U.S. firm did not have any office in India. The Appellate Commissioner, accordingly, held that the payment was not taxable in India. The tax authorities appealed to the Appellate Tribunal. The Tribunal concluded that the payment was fees for professional services under article 15 and not fees for included services under article 12. Article 12 specifically excludes payments to a firm of individuals for professional services defined in the Independent Personal Services provision.

The Tribunal also observed that, article 15, which contains specific provisions for professional services, would override the relatively general provisions of article 12, which applies to a broader category of "managerial, technical or consultancy services." The Tribunal further observed that the U.S. firm had rendered predominantly legal services to the Indian company and such services fell within the ambit of article 15. In view of the decision, the World Tax Advisor 4 of 17 July/August 2005 payments would not be subject to withholding tax, and, as the law firm did not have a fixed based in India, the fees would not be taxable by India. Accordingly, the law firm would be entitled to a refund of taxes paid.

The applicability of the India-U.A.E. tax treaty to individuals resident in the United Arab Emirates (U.A.E.) has been subject to conflicting rulings and considerable controversy. A recent ruling issued by the Indian Authority for Advance Rulings (AAR) provides some guidance as to whether such individuals should be entitled to treaty benefits. In particular, the ruling addresses whether these individuals can claim reduced withholding tax rates under the dividends and interest articles and whether they can benefit from an exemption from capital gains taxation under the capital gains article in the treaty.

Difficulties in applying the treaty to such individuals arise because of the definition of "resident" in article 4 of the India-U.A.E. tax treaty. Article 1 of the treaty provides that it applies to an individual, being a "person" within the meaning of the treaty who is a "resident" of either of the states. Article 4, however, defines a "resident of a contracting state" to mean a person who, under the laws of that state, is liable to taxation therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature. Since the U.A.E. does not tax individuals, individuals are not "liable to taxation" in the U.A.E. and, hence, there is no double taxation.

Although the treaty was negotiated with the understanding that the U.A.E. was in the process of codifying tax laws for individuals residing in the U.A.E., a later decree ("U.A.E. Decree") issued by the U.A.E. government did not impose tax liability on individuals.

Under the reasoning of the ruling, the nature and relevancy of "residency" (i.e. merely resident versus subject to taxation) depends upon which article of the treaty the taxpayer is invoking.

With respect to the applicability of the reduced withholding tax rates on dividend and interest income, the AAR held that the reduced rates for dividends under article 10(2) and for interest under article 11(2) can be applied to individuals residing in the U.A.E. because they "reside in" the U.A.E. The AAR relied on a 1996 circular issued by the CBDT, providing clarification on the applicability of lower withholding tax rates under the India-U.A.E. treaty. According to that circular, when a remittance is made to a treaty partner country, tax must be deducted at the rates provided under the treaty – in other words, the treaty rates must be adhered to. In this context, the AAR observed that, for the purpose of articles 10(2) and 11(2), it is immaterial whether the U.A.E. is actually levying any tax on dividends or interest because that is not a prerequisite for obtaining benefits under these provisions. With respect to application of the capital gains article of the India-U.A.E. treaty, as it applies to gains from the alienation of property other than immovable property and property connected with a permanent establishment (i.e. article 13(3)), the AAR held that U.A.E. individuals cannot benefit from this article because they are not "tax resident" (i.e. subject to tax) in the U.A.E.

The Japanese legislature has finalized the 2005 tax reform and issued accompanying regulations. Some of the key measures that will affect inbound investment in Japan include:

• Introduction of a 20% withholding tax on a nonresident partner’s share of the income of certain partnerships;
• Revision of the taxation of capital gains of partnerships;
• Introduction of taxation on gains from the transfer of shares in "real estate rich" Japanese companies; and
• Expansion of the definition of "foreign related corporation" under Japan’s transfer pricing rules.

The reform includes a provision that imposes a 20% withholding tax on partnership income attributable to nonresident partners of a partnership that conducts business in Japan. Nonresident partners that have a permanent establishment (PE) through means other than a partnership interest should be exempt from the withholding tax because they are required to file Japanese income tax returns. The new withholding tax rule applies for partnership accounting periods beginning on or after 1 April 2005.

This change in the law would apply to a civil code association (NK) or any partnership similar to an NK, including a limited liability investment partnership, limited liability partnership and foreign vehicles similar to an NK or Japanese LLP.

Withholding will be required every year on the nonresident partner’s share of the partnership’s income, whether or not a distribution is made. The withholding tax is due two months after the end of the accounting period, or earlier if the date of distribution is earlier.

In general, when a foreign investor, together with specially related persons:

• Owns 25% or more of a Japanese company at any time during the year of disposal or the preceding two fiscal years; and
• Sells 5% or more of the outstanding shares of the Japanese company in a tax year;

any gain is subject to Japanese national corporation tax rate (currently 30%). Under the tax reform, for shareholdings held through a partnership, the shareholding test is effectively determined at the partnership level rather than at the partner level. The revised rules are effective for fiscal years beginning on or after 1 April 2005 for foreign companies and 1 January 2006 for nonresident individuals.

This change would apply to the same entities as the partnership withholding tax provision. For foreign vehicles similar to an NK, the law would apply where they dispose of shareholdings in Japanese companies.

Under the reform, where a nonresident owns shares in a Japanese company through a partnership as defined above, all of the partners are considered "specially related persons." As a result, their shareholdings are aggregated for purposes of the shareholding test.

The changes primarily affect residents of jurisdictions whose income tax treaties with Japan preserve Japan’s right to tax gains arising from the disposition of shares in Japanese companies. This includes Japan’s treaty with the U.K., but U.S. resident investors should be protected under the Japan-U.S. treaty.

Under the reform, gains from the transfer of "stock of a corporation related to real estate" or a "beneficial interest of specific trust related to real estate" (collectively "real estate rich companies") will be subject to Japanese tax. Even if nonresident individuals or foreign corporations do not have a PE in Japan, such income will be taxable where:

The test is based on the fair market value of the real estate.

Real estate assets for real estate rich companies include (1) land, rights over land, buildings and annexed facilities and structures; and (2) shares or beneficial interests of real-estate rich companies.

In the case of a gain on the transfer of shares of a real estate rich company, a nonresident investor with no PE in Japan must file a Japanese tax return and settle the tax payment obligation. For foreign corporations with no PE, the gain is taxed at the national corporation tax rate of 30%. Transfers of less than 2% of shares in listed real estate rich companies and transfers of less than 5% of shares in non-listed real estate rich companies are not subject to the rules.

These changes primarily affect residents of jurisdictions whose income tax treaties with Japan do not have a capital gains exemption. This includes Japan’s treaty with the U.S., which has a specific provision allowing Japan to tax gains on disposition of real estate rich companies, and the U.K.

The provisions on real estate rich companies are effective for fiscal years beginning on or after 1 April 2005 for foreign companies and 1 January 2006 for nonresident individuals.

The reform expands the definition of a "foreign related corporation" for Japanese transfer pricing purposes.

Before the reform, the Japanese transfer pricing regulations applied where a chain of stock ownership of at least 50% (directly or indirectly) existed between a Japanese and foreign corporation (parent-subsidiary), or where both the Japanese and foreign corporations were at least 50% owned (directly or indirectly) by the same corporation or person (brother-sister). The rules also applied where one corporation had a "control-in-substance" relationship with the other corporation (i.e. where one corporation makes all or a portion of the business decisions for the other corporation due to common management or other form of interdependence).

The reform expands these rules to include situations where: (1) at least one control-in-substance relationship exists between a domestic and foreign corporation, when both companies are controlled in substance by the same corporation or person; and (2) when one corporation is controlled-insubstance (directly or indirectly) and the other is owned 50% or more by the same corporation. Japanese taxpayers should re-evaluate any crossborder transactions that may be affected by the expanded definition.

The recently enacted Company Law, which is scheduled for implementation during 2006, has created an uncertain tax environment for foreign companies conducting business in Japan through branch offices. The new law may have wider commercial implications than simply tax, as companies consider whether they should restructure their operations in Japan, which likely will have a variety of audit, tax, human resource and capital consequences.

Broadly, article 821 of Japan’s Corporation Law seeks to prohibit foreign companies that have their principal office in Japan, or have as their primary purpose the conduct of business in Japan, from engaging in transactions on a regular basis in Japan. These quasi-foreign companies, or "QFCs" as they also are known, are typically structured as a Japan branch of a foreign special purpose company that has little or no activity outside of Japan.

Although application of the new rule is still the subject of considerable debate, determination of whether a foreign company’s primary purpose is the conduct of business in Japan likely will be made by comparing the business activities, infrastructure and human resources in Japan to those of the foreign company as a whole.

If a foreign company is deemed to be a QFC, continuation of business in Japan will violate article 821. Employees, directors and officers of a QFC in violation of article 821 will be held jointly and severally liable with the foreign company (considered necessary, for example, to protect the rights of customers and suppliers) for such transactions. Administrative fines also may be imposed.

Various foreign business groups have lobbied the Japanese authorities to seek a variety of concessions as well as overall clarification of the rule itself. The Upper House did pass a supplementary resolution (futai-ketugi) to the law that notes that "Article 821 will not cause any negative effect on existing foreign companies or future investment in Japan by foreign companies [and] does not restrict or require a foreign legal entity to any specific types." (Unofficial translation.)

The rider, it has been suggested, was passed to indicate that the intent behind the article is to target deliberately abusive structures whereby the foreign company enters the Japanese market through a branch office to avoid the Japanese regulations of corporations. However, since the resolution is simply an addendum to the law and not a change to the law itself, it does not provide conclusive comfort for existing foreign companies in Japan that their operations fall outside of the provisions of the article.

Further comments and guidelines are expected to be released by the authorities in the near future.

Faced with this legal uncertainty, some companies are choosing to wait for further clarification, while others already have begun taking steps to reorganize their branch operations in Japan to comply with the new rule. To avoid the possible adverse results of the new law, various reorganization options are available to QFCs, principally:

• Incorporating as a Japanese stock corporation (Kabushiki Kaisha (KK));
• Transferring the business to an existing KK; or
• Transferring the business to a foreign entity that has substantive business outside of Japan (a "non-quasi-foreign company").

Issues to be considered before converting a QFC may include the administrative burden, organizational expense, human resource issues and Japanese, as well as foreign, tax consequences.

The Macau SAR government passed a new law on 13 June 2005 that will have a significant impact on the Macau offshore company (MOC) regime, and likely will have far-reaching implications for Hong Kong taxpayers that are planning to set up MOCs in Macau. The law provides that the scope of allowable business activities that may be conducted by a MOC is to be severely restricted, from 20 allowable activities down to only eight. The eight allowable activities are: information equipment consultant; information and programming consultant; data processing; data bank services; administration and filing support services; R&D activities; technical research and analytical activities; and sailing vessels and aviation equipment administration services.

Conspicuously missing from the list are trading, commercial and service agents, management and business consultants, which have hitherto been the primary purposes for non-Macau residents to set up MOCs. Hong Kong taxpayers who are considering using MOCs for these activities may now have to look for other alternatives.

Introduced in 1999, the MOC regime provides a number of incentives to qualifying companies, including an exemption from income tax, business tax and stamp duty.

The new law does not affect existing MOCs or applications for establishing new MOCs that were lodged with the Macau Trade and Investment Institute on or before 13 June 2005.

Under recently passed legislation, the corporate tax rate will increase from 32% to 35%. However, the rate will be reduced to 30% as from 1 January 2009. A final withholding tax at the rate of 15% will be imposed on dividends received from domestic corporations. Nonresident companies receiving such intercorporate dividends will be granted a deemed tax credit of 20% (previously 17%). The allowable deduction for interest expenses is to be limited to 58% (previously 62%) of the interest income subjected to final tax.

The VAT rate will remain unchanged at 10% in 2005 but the Philippine president has been granted authority to increase the rate to 12% from 1 January 2006 if revenue targets are not met.

The changes are effective as from 1 July 2005.

A Circular issued 8 June 2005 by the Inland Revenue Authority of Singapore (IRAS) provides guidance on the advance ruling system that will take effect from 1 January 2006 subject to the enactment of the legislation by Parliament. The Circular clarifies what will be considered an advance ruling and sets out administrative procedures for requests.

Although Singapore currently does not have a formal advance ruling system, the IRAS does provide non-binding rulings to taxpayers for proposed business arrangements upon written request. The new system will make such rulings binding.

According to the Circular, a ruling request must have the following key features:

• Involves an interpretation of Singapore tax law and how the law applies to a specific taxpayer and a proposed arrangement that is being contemplated by the taxpayer;
• Establishes the facts for the proposed arrangement and is not dependent on assumptions about a future event or other matter;
• Does not cover tax (excluding estimated tax) already due and payable or assessed;
• Does not cover an interpretation of Singapore tax law the Comptroller is auditing or investigating in regards to the applicant, during any period for which the proposed ruling would apply;
• Does not require the Comptroller to form an opinion regarding a generally accepted accounting principle or commercially acceptable practice.

To obtain a ruling, the applicant will be required to complete a prescribed application form and submit it, together with a written ruling request and the required fee. The written ruling request will need to include the following information:

• Full particulars of the applicant and the arrangement in question, including all documents relating to the proposed arrangement;
• Issues to be considered;
• The section of the Act for which the ruling is sought;
• Proposition of the law relevant to the issues raised, including appropriate case law (if any);
• Whether a previous application has been made on the same or similar arrangement, and, if so, the outcome of the previous application; and
• A draft ruling.

The Comptroller has discretion to waive certain of the above requirements. The IRAS commits in the Circular to provide a ruling within eight weeks, although it may take longer if the request is complex.

The ruling will be binding on the tax authorities unless the arrangement is materially different from that identified in the ruling, there was a material omission or misrepresentation in the application or conditions stipulated by the Comptroller are not satisfied. The IRAS may, at any time, withdraw an advance ruling by notifying the applicant in writing and furnishing the reasons for the withdrawal, and if a provision of the Income Tax Act is repealed or amended such that it changes the way the provision would apply to the ruling, the advance ruling will cease to apply from the date the relevant provision is repealed or amended.

An advance ruling is final and will not be subject to the appeal process in the Income Tax Act. If a taxpayer disagrees with the ruling, the taxpayer is not required to follow the ruling (subject to certain conditions).

The advance ruling system is applicable only to income tax matters and does not apply to any other tax such as goods and services tax or stamp duty.

Taiwan’s Ministry of Finance (MOF) issued two rulings on 17 May 2005 on the tax treatment of stock options granted by foreign companies to expatriates and/or local employees in Taiwan. Rulings issued in April 2004 addressed the treatment of stock options granted by Taiwanese companies. Hearings were held on the 2004 rulings to discuss the potential tax treatment of stock options granted by foreign companies. While the May 2005 rulings were anticipated, it was thought they would apply to stock options exercised on or after 1 January 2005. As noted below, the rulings distinguished between exercise dates as of rather than before 17 May 2005.

If an individual exercises stock options on or after 17 May 2005, the spread at exercise (i.e. the difference between the fair market value (FMV) of the stock at the date of exercise and the exercise price paid or payable by the individual) will be treated as "other income" and subject to Taiwan individual income tax. The employer will have no income tax withholding responsibilities but does have reporting responsibilities regardless of whether the costs of the spread are charged back to the local Taiwan entity. The local Taiwan entity must file a non-withholding tax statement with the tax authorities by January of the following year. It is the individual’s responsibility to report the income at exercise when filing an annual tax return.

An expatriate assigned to Taiwan by the foreign company may pro rate the full amount of "other income" into Taiwan-source and non-Taiwan-source income, based on the number of days the individual spent in Taiwan between the grant and vesting dates. The amount of "other income," subject to tax in Taiwan at a flat rate of 20% for nonresidents or at progressive income tax rates for residents, can be calculated as follows:

For all exercises on or after 17 May 2005, the employee must report the spread at exercise in his annual tax return in the following year.

If an individual exercised stock options before 17 May 2005, Taiwan tax liability will depend on whether the foreign company charged back either all or part of the spread to its Taiwan entity or whether it did not charge back any of the spread.

Spread Charged Back to Taiwan – If the foreign company allocated all or part of the spread to its Taiwan entity in previous tax assessment periods and the Taiwan entity did not report such stock option income at exercise to the tax authorities:

• The Taiwan entity is required to file a non-withholding tax statement with the tax authorities on or before 16 August 2005 (within three months of 17 May 2005); and
• Both foreign and local employees who exercised their stock options before 17 May 2005 must amend their prior years’ tax returns to include such income and pay taxes on or before 16 September 2005 (within four months from 17 May 2005). A copy of the nonwithholding tax statement issued by the Taiwan entity should be attached to the individual tax return.

As the MOF rulings are not clear as to how the tax assessment period for retroactive application of the new rulings apply, the definition of tax assessment period may fall under the definitions in the Tax Collection and Administration Law (TCAL). The tax assessment period for individual income tax purposes under TCAL is five years from the date the income tax return was filed. If the individual did not file a tax return in the year in which he exercised the stock options, the tax assessment period will be seven years from the day following the next filing deadline.

Spread Not Charged Back to Taiwan – If the costs of the spread are borne by the foreign company and not charged back to the Taiwan entity:

• The Taiwan entity does not have any additional reporting responsibilities (i.e. there is no requirement to file any nonwithholding tax statement); and
• Individuals who exercised their stock options before 17 May 2005 do not have any additional tax reporting and payment responsibilities (i.e. they do not have to amend their prior years’ tax returns).

The penalty for the employer for not filing a non-withholding tax statement by 16 August 2005 is a fine of NTD 1,500 (approximately USD 48). In addition, if the non-withholding tax statement is still not filed after notification by the Taiwanese tax authorities, there is an additional fine of 5% of the taxable income or NTD 3,000 (approximately USD 95), whichever is higher. For individuals, the penalty for not filing an amended return by 16 September 2005 is a fine of up to three times the amount of the unpaid taxes.

The Taiwan Ministry of Finance (MOF) recently clarified the tax treatment of online services provided by foreign entities in Taiwan. Online services comprise the provision of domain names, IP addresses, online shops, web hosting, and online games or music downloads. The sale of merchandise via the Internet will be treated as a sale of goods.

The tax treatment will depend on whether the foreign entity providing the online services has a fixed place of business (as defined) in Taiwan.

For income tax purposes, the consideration received by a foreign entity for the provision of services will be deemed to be Taiwan-source income and subject to withholding tax (generally at a rate of 20%). The payor must act as withholding agent, but if the payor is not a tax withholder under Taiwan Income Tax Law (e.g. an individual), the foreign entity must report and pay the tax, either directly or through a tax agent appointed on its behalf. The sale of merchandise via the Internet will be deemed to comprise international trading and, therefore, will not be subject to Taiwan withholding tax.

For VAT purposes, the importer (e.g. the buyer) of online services must compute the amount of VAT and make the tax payment to the national treasury within 15 days of the following period. Generally, the VAT return is filed bi-monthly. For example, if the online services were procured in June 2005, the VAT will be due on 15 July 2005. However, where the buyer is a VAT taxpayer and the online services are used solely for the conduct of a vatable business involving taxable goods or services, the online service will be exempt from import VAT. An importer of goods purchased over the Internet will be required to pay import VAT unless the importer is located in the bonded area.

For income tax purposes, the consideration received by the foreign entity through its fixed place of business in Taiwan will be subject to income tax. Hence, an income tax return must be submitted.

For VAT purposes, the consideration received by the foreign entity will be subject to VAT, generally at a rate of 5%, although the services may be exempt in certain circumstances. The fixed place of business of the foreign entity will be required to fulfill relevant VAT obligations in respect of the imported goods.

The Supreme Court of Thailand recently had an opportunity to rule on the royalty provision in the tax treaty between Thailand and Denmark.

The case involved a services agreement between a Thai company (Company A) and a Danish company (Company G). Company G was engaged in the business of providing marketing services, including assisting in general management, contract negotiations, marketing and promotion, procurement, distribution and advertising. Company G carried out all of its services outside Thailand by using documents transmitted via fax and mail. The Thai tax authorities concluded that Company A’s payments to Company G for the services were royalty payments and assessed withholding tax accordingly.

The Supreme Court disagreed, holding that the marketing services agreement, according to which Company G agreed to provide management, financial and marketing advisory services to Company A, was a "work for hire" agreement under the Thai Civil and Commercial Code. Further, the Court concluded that Company G had not granted Company A any rights to use secret formula or processes that would bring the payments within the definition of royalties in the Thailand-Denmark tax treaty. Although the consideration to be paid was determined as a percentage of the sales of goods for which distribution rights were granted by Company G to Company A, Company A was not the sole distributor of Company G’s products. Consequently, the service fees were not consideration for the right to use any trademark. In addition, the provisions in the agreement did not indicate a transfer of industrial, commercial or scientific knowledge and experience. Thus, the payments made under the agreement could not be deemed to be royalties under the Thailand-Denmark treaty and, therefore, were exempt from withholding tax in Thailand.

This article is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This bulletin should not be relied on as a substitute for such advice. While all reasonable attempts have been made to ensure that the information contained in this bulletin is accurate, Deloitte Touche Tohmatsu accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.

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