Treasury hubs under the new international HQ scheme

The arrangement aims to optimise the use of surplus funds of all the companies in the group, in order to improve the group’s liquidity and reduce external debt. 

There are two common cash-pooling arrangements: physical cash pooling and notional cash pooling. 

With physical cash pooling, a single account is used as a pooling account from which cash movements are made, resulting in intra-group loans.

With notional cash pooling, no cash movement takes place and instead cash remains with the companies’ own accounts, but interest receivable and payable is netted. This arrangement triggers tax exposures if interest income is under-recognised and results in underpaid corporate income tax (CIT) and specific business tax (SBT) when principal or interest is netted. 

Early this year, the Board of Investment introduced the treasury centre (TC) scheme concurrently with the new international headquarters (IHQ) scheme. 

A TC may undertake financial management services, which includes cash pooling along with other liquidity-management activities.

In May, Royal Decree No 586 was issued to provide tax incentives for IHQs, and includes particular tax incentives for TCs. 

These include the exemption of CIT for a TC on income derived from the provision of financial-management services to foreign associates. 

Meanwhile, income from such services provided to associates in Thailand for the amount not exceeding foreign tax-exemption income, which is defined as service fees and royalties received from foreign associates, is subject to a reduced CIT rate of 10 per cent. 

An IHQ is exempt from SBT on interest income from loans to associates for the purposes of financial management.

In addition, there is no withholding-tax liability on interest paid by an IHQ to a foreign entity not carrying on business in Thailand, provided such interest relates to a loan borrowed by an IHQ and is lent to associates in Thailand for the purposes of financial management.

It should be noted that this is the first time that tax incentives have been mentioned for TC-like activities. 

The tax incentives for TCs under this scheme may help eliminate tax exposure that arises from a cash-pooling arrangement, provided that an IHQ can enjoy the CIT and SBT exemptions.

In this regard, setting up a TC under the IHQ scheme to operate a cash-pooling arrangement is a good alternative that can reduce the risk of being assessed CIT and SBT on possible deemed interest income. 

Three different authorities are involved in setting up a TC under the IHQ scheme. First, for the non-tax incentives, such as allowing the IHQ a majority of foreign shareholders and relaxing the requirement for expatriate employment, a company needs to apply for an investment promotion with the Board of Investment. 

Second, the company must apply for the approval of the finance minister through the Bank of Thailand to operate as a TC for its group of companies. 

Lastly, in order to receive tax incentives, a company must apply with the Revenue Department. 

In addition to liquidity-management services, a TC is allowed to undertake other services, such as payment and collection services, whereby it acts as payment and/or re-invoicing agent, netting payments and collection amongst group companies, and foreign-exchange management services, whereby a TC acts as a forex dealer for companies in the group. 

The current SBT exemption under Royal Decree No 586 only covers interest income from intra-company loans. However, the Cabinet has recently approved an SBT exemption to all of a TC’s income derived from financial-management services, which will retroactively apply from May 2. 

This is a good direction, as an additional SBT exemption should encourage businesses to set up their own TCs in Thailand. 

 

Benjamas Kullakattimas is Partner, Head of Tax, KPMG in Thailand