Regional headquarters offer lifeline for Japan investment in Thailand

Yet Thailand’s largest foreign investor, the Japanese, are struggling to find a way to ensure that this rate reduction works in their favour and not to their detriment given Japan’s recently updated tax haven rules. These rules work to penalise Japanese companies that invest in “tax haven” jurisdictions and while one would hardly consider Thailand to be a tax haven next year’s 20 per cent tax rate pushes Thailand directly into this category.

After adoption of the Japanese foreign dividend exclusion system in 2009, the Japanese government modified its tax haven rules, often referred to as Controlled Foreign Corporation (CFC) rules, in 2010, to ensure that Japanese companies would not migrate passive investments to jurisdictions that have significantly lower corporate income tax rates, such as Singapore and Hong Kong. These reforms lowered the threshold tax rate for haven designation from 25 to 20 per cent. Thus, while the current tax rate of 23 per cent keeps Thailand out of haven territory, next year’s 20 per cent puts it squarely within the Japanese tax haven rules. 

Investing in a tax haven can be extremely costly for Japanese companies. The impact of the CFC rules for a Thai subsidiary are two-fold: acceleration of taxation in Japan, and an escalation of the Japanese tax rate. Passive income, eg, dividends, interest and royalties, earned by a CFC could be immediately taxable in Japan – even before a dividend is paid to the Japanese shareholder. This is referred to as a “deemed dividend”. A deemed dividend from a CFC would also be subject to Japanese tax at the rate of 38 per cent instead of the normal 2.5 per cent. Some Japanese investors were worried by the recent floods, and this tax difference could provide additional motivation for some Japanese businesses to move their investment from Thailand to other emerging Asean member states like Vietnam and Indonesia where the statutory tax rates are 25 per cent.

There may be hope, however, in the form of the Regional Operating Headquarters (ROH) incentive.

Under Thailand’s ROH scheme, special reductions are granted to entities that operate an ROH in Thailand. Such entities can be the parent company of at least three affiliated entities or branches located in other countries outside Thailand. The benefits to be derived from having an ROH in Thailand are numerous and include exemptions from Thai corporate income taxes for related party services, dividends and reductions in the tax rate for interest and royalties. In addition, the Thai Board of Investment (BOI) has enhanced the ROH scheme with additional potential benefits for those companies applying for such incentives. The Thai scheme does have potential pitfalls and the status as an ROH can be lost if the scheme is not closely monitored for compliance with the specific income requirements set out in the ROH scheme.

For Japanese investors, one additional significant potential benefit is that the 2010 revisions to the Japanese tax haven rules, a Regional Headquarter Company (RHQ) concept was introduced whereby entities acting as a regional headquarters in a particular jurisdiction can be exempted from the Japanese tax haven rules. Under these provisions, where an RHQ’s main business is holding shares of other companies, the RHQ will be considered to satisfy the active business exception to the tax haven rules as long as it provides management services to at least two companies controlled by the RHQ. These benefits under the Japanese rules are independent of the benefits received under the ROH scheme and thus, even if the ROH does not receive benefits under the Thai rules, the exemption from Japanese tax haven rules may still apply.

For those Japanese manufacturers considering moving out of Thailand altogether, an ROH structure may be an attractive alternative. By utilising the ROH structure Japanese investors into Thailand may be able to diversify their supply chains and manufacturing bases into other neighbouring Asean countries while leveraging the investment they have already made in Thailand. At the same time they can also address potential issues that could arise from any tax haven taint brought on by the new 20 per cent rate in Thailand. Thus, the Thai ROH structure may serve as a triple “win” for Japanese investors who see Thailand as the cornerstone of their manufacturing strategy in Southeast Asia.

  This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided. 

 

Jonathan Blaine is associate principal at KPMG Thailand.