Tax avoidance, Thailand to work with the OECD
In 2017, Thailand became the 98th signatory to the Base Erosion and Profit Shifting (“BEPS”) project initiated by the Organisation for Economic Cooperation and Development (“OECD”). The focus of this project is to tackle international tax avoidance around the world.
Earlier this year, as part of its compliance requirements for the BEPS project, Thailand notified the OECD of its decision to ratify the Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (also known as the MLI).
This MLI is now due to come into effect on July 1, 2022, and could have substantial implications for Multinational Enterprises (MNEs) who have inbound and outbound investments with Thailand.
What is the MLI?
The MLI will amend various articles from Thailand’s existing tax treaties in order to prevent:
- Treaty Abuse
- Tax treaty shopping
- Mutual Agreement Procedures (“MAP“)
- Artificial Avoidance of a Permanent Establishment
The MLI will also modify Thailand’s bilateral Double Taxation Agreements (“DTAs“) with other countries (who are also signatories to the Convention). By ratifying the MLI, Thailand will avoid the need to renegotiate their DTA treaties separately.
How will the MLI affect companies in Thailand?
The MLI will have the following implications for MNEs:
- Stricter rules regarding the definition of Permanent Establishment;
- Implementation of a Principal Purpose Test which will permit tax authorities to deny tax treaty benefits in certain cases; and
- Modification of the tax dispute resolution processes under Mutual Agreement Procedures (MAP).
These implications could have a profound effect on a businesses cross-border arrangements and transactions, and even their existing business operations. The enforcement of the MLI means that MNEs should ensure that the purpose of any cross-border transaction is not tax driven by avoidance of tax.
The introduction of the MLI will have the effect of introducing new, stricter tax rules which fall in line with international standards.
What else do I need to know?
The MLI will officially be enacted from July 1, however, most of the provisions and modifications will not take effect until January 1, 2023. This delay will allow the Thai government to make the necessary modifications to Thai domestic tax rules in order to ensure compliance with the MLI.
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