New tax incentives for international headquarters and global trading centres

At first glance, the new IHQ/ITC regime appears to inherit a lot of the features of the existing Regional Operating Headquarters (ROH) and International Procurement Centre (IPC) schemes, with modifications and improvements to bring together a so-called all-in-one package where an IHQ can serve as a headquarters, trading hub, treasury centre and holding company, whereas an ITC focuses purely on trading functions. 
This is obviously a good start for the current government to revamp the existing incentives and make them more attractive and on par with neighbouring countries such as Singapore or Malaysia. However, many people are still doubtful whether this is just old wine in a new bottle. It is still to be seen whether the government will achieve what it wants to achieve when the laws pass and all the details and criteria are clear. Here is a bit of background on old and existing tax incentives.
The government introduced the ROH regime in 2002, but because of its limited scope and lack of attractive benefits in the eyes of potential investors compared with the incentives available in neighbouring countries, the ROH was revised in 2010 to relax certain criteria and enhance the incentives.
The IPC scheme was introduced in 2011 (and had already expired by 2013) as a supplement feature to ROH to provide incentives for trading activities (15-per-cent corporate income tax for a period of five years). However, the incentives and conditions were not attractive enough and failed to address the specific needs of investors.
Below are some similarities between the old ROH/IPC and new IHQ/ITC incentives.
lQualifying service, interest and royalty income received from affiliates outside of Thailand would be exempt from corporate income tax, whereas those received from affiliates within Thailand would be subject to 10-per-cent corporate income tax.
lDividend income received from sources outside of Thailand would be exempt from corporate income tax and dividend payments made to overseas shareholders would be exempt from 10-per-cent withholding tax, but only to the extent it is paid out of income that is subject to corporate-income-tax exemption.
lScope of qualifying trading income remains the same. First, in-out transactions where raw materials or semi-finished goods are manufactured domestically and sold to overseas affiliates for further production – trading income in this case is subject to corporate income tax at 10 per cent (instead of 15 per cent under IPC). Second, out-out transactions where the goods are purchased and sold from/to overseas companies without being physically imported into Thailand – trading income in this case would be subject to corporate-income-tax exemption (instead of 15 per cent under IPC).
lLast but not least, expatriates working for IHQ would still qualify for a reduced personal income tax rate of 15 per cent, instead of the normal progressive rates of 5-35 per cent.

The improvements of the new regime include the following:
lScope of qualifying trading income for out-out transactions has been expanded to include related trading services, such as procurement-services income.
lIncome derived from the IHQ’s overseas branch offices would be exempt from corporate income tax.
lCapital gains from transfer of shares in affiliates outside of Thailand are exempt from corporate income tax  – this is to promote an IHQ as a holding-company location.
lInterest income from providing a loan would be exempt from specific business tax (normally imposed at 3.3 per cent) – this is to promote an IHQ as a treasury centre.
lPeriod of incentives is 15 years as compared with 10 plus five years under the ROH regime and five years under the IPC regime.

Among the most interesting features of the new IHQ regime are a corporate-income-tax exemption for capital gains from transfer of shares in overseas affiliates, and withholding-tax exemption for dividends paid to an IHQ’s overseas shareholders from income that is subject to income-tax exemption (for example, dividends that the IHQ received from overseas affiliates). With this flow-through feature, an IHQs’ ability to serve as a group holding company is vastly enhanced.
There is no exemption, however, to capital gains when an IHQ transfers its shares in Thai affiliates or withholding-tax exemption for dividends paid to the IHQ’s overseas shareholders from dividend income received from Thai affiliates.
On one hand, the all-in-one package reflects Thailand’s real effort to catch up with other countries. However, it does not appear to provide more than what is already on offer in neighbouring countries or with a simpler set of criteria. Therefore, tax incentives alone may not be sufficient to attract headquar?ters in the neighbouring countries to relocate to Thailand, taking into account restructuring and relocation costs.
However, the IHQ regime would serve as a much more competitive candidate than Singapore, Malaysia, or even Hong Kong for future greenfield investments, especially for new projects with plans to use Thailand as a base to expand into CLMV (Cambodia, Laos, Myanmar or Vietnam) or other Asean markets. An example is the Thailand-plus-one model of Japanese investors or Thai multinational companies that want to expand to the new AEC markets.
With the regimes currently under deliberation by the Council of State before enactment by Royal Decrees, whether they will actually make Thailand shine as a real alternative as a regional headquarter and trading hub, or just old regimes in new packages, it may be too early to tell.

Korneeka Koonachoak is partner, tax and legal services, at Deloitte Thailand.