Double Tax Agreement between the United States of America and Thailand (including examples)
4 October 2020The Double Tax Agreement entered into force on 15 December 1997 when instruments of ratification were exchanged between the United States of America and Thailand. This is the first income tax convention between the two countries and it represents a significant development in the promotion of closer economic co-operation.
The Double Tax Agreement has effect in respect of taxes withheld at source for payments or credits beginning on or after 1 June 1998. In respect of other taxes, the Double Tax Agreement has effect for taxable periods beginning on or after 1 January 1998.
The Double Tax Agreement has been drawn from a number of sources, including the U.S. model, O.E.C.D. model and U.N. model conventions and in many respects the Double Tax Agreement is similar to other U.S. income tax treaties. The Double Tax Agreement also contains provisions which differ significantly from other treaties. Some of these differences arise in recognition of the difference in economic standing of the two countries. For example, the definition of a permanent establishment has been broadened to grant the host country greater taxing rights and most gains on the alienation of property are allowed to be taxed by both countries under the provisions of their respective internal laws. In addition, students and teachers attract special tax benefits under the Double Tax Agreement.
Limited rates of tax apply in respect of dividends, interest and royalties. The rates are generally lower than those contained in recent Thai treaties preceding this one. Relief from double taxation is provided either by granting sole taxing rights to one country or by the resident country allowing a credit for tax paid to the source country.
The United States generally retains the right to tax its citizens and residents on their worldwide income, as if the Double Tax Agreement had not come into effect. The Double Tax Agreement also contains significant limitation of benefits provisions, a common feature of U.S. income tax treaties.
Articles of the Double Tax Agreement
The Double Tax Agreement comprises of 31 Articles, as follows:
A summary of each Article follows. Commentary on the tax laws of Thailand and how they are affected by the provisions of the Double Tax Agreement are included, as well as examples to illustrate the Double Tax Agreement’s practical application.
Article 1 Personal Scope
The Double Tax Agreement applies to persons who are residents of Thailand or the United States or both, except where a provision of the Double Tax Agreement provides otherwise. For example, Article 26 deals with non discrimination in respect of taxation based on the grounds of nationality. Whether a person is a resident of Thailand or the United States is determined by Article 4 (Residence).
Each country’s domestic laws and any other agreements between the two countries, are not restricted by the Double Tax Agreement in respect of any benefit they have accorded. For example, if Thailand is granted the right to tax income under the Double Tax Agreement but such income is exempt from tax under Thai law, the Double Tax Agreement shall not increase the tax burden on such income.
The United States and Thailand reserve the right to tax its residents and by reason of citizenship, to tax its citizens as if the Double Tax Agreement had not come into effect. The right of each country to tax its former citizens and long-term lawful residents, whose loss of citizenship or long-term residence, respectfully, had as one of its principal purposes the avoidance of tax, is also reserved. This saving clause is common to U.S. tax treaties, as U.S. law contains provisions to impose taxation on its citizens and on its former citizens and long- term residents in the circumstances described above. Thai law does not currently contain such provisions.
The right of the United States to tax its residents under the saving clause only extends to persons who are residents of the United States for the purposes of the Double Tax Agreement. Residence is determined under Article 4.
Example : A person is a resident of the United States and of Thailand under each respective country’s tax laws. The person has a permanent home available to him only in Thailand. Under Article 4, the person is a resident of Thailand for the purposes of the Double Tax Agreement. The right of the United States to tax the person as a resident as if the Double Tax Agreement had not come into affect shall not apply. The person shall be subject to U.S. tax only to the extent permitted by the Double Tax Agreement.
The saving clause shall have affect so that the United States may tax its citizens who are residents of Thailand for the purposes of the Double Tax Agreement. There are specific exceptions to the saving clause so that the benefits of the Double Tax Agreement are retained. These exceptions are:
– allowance of adjustments of profits under Article 9 (Associated Enterprises).
– exemption from residence country tax for recipients of social security payments and child support payments under Article 20 (Pensions and Social Security Payments).
– retention of the benefits conferred by Articles 25 (Relief from Double Taxation), 26 (Non-Discrimination) and 27 (Mutual Agreement Procedure).
– retention of the benefits conferred under Article 21 (Government Service), Article 22 (Students and Trainees), Article 23 (Teachers) and Article 29 (Diplomatic Agents and Consular Officers) by a country upon individuals who are neither citizens of, nor have immigration status in that country.
Example : A Thai citizen visits the United States to take up a position teaching Thai history at a U.S. college. The teacher satisfies the conditions under Article 22 of the Double Tax Agreement so that the remuneration received for teaching shall be exempt from tax in the United States. The teacher will also spend enough time in the United States to be taxed as a resident under U.S. law. The exception to the saving clause in respect of Article 22 will prevent the United States from imposing tax on the teaching income, assuming the teacher does not become a citizen of, nor gain immigration status in the United States.
National treatment or most-favoured-nation obligations as may apply to trade in goods under the General Agreement on Tariff and Trade is permitted in respect of a tax measure, otherwise the non-discrimination obligations of this Double Tax Agreement shall apply with respect to such measures.
Article 2 Taxes Covered
The Double Tax Agreement applies to the following existing taxes.
United States – the Federal income taxes imposed by the Internal Revenue Code but excluding the social security taxes.
Thailand – the income tax and the petroleum income tax.
The Double Tax Agreement shall also apply to any identical or substantially similar taxes which are introduced.
Income tax in Thailand is imposed under the Thai Revenue Code. Personal income tax is imposed on individuals and company income tax is imposed on juristic companies and partnerships, including joint-ventures. The Thai Revenue Code also contains provisions that impose a tax on goods and services (value added tax (VAT) and specific business tax) and stamp duty on certain instruments. The Double Tax Agreement does not apply to these other taxes.
The Petroleum Income Tax Act governs Thailand’s petroleum income tax, which is imposed on companies granted the concession to explore for and produce petroleum.
Article 3 General Definitions
This Article contains the definitions of a number of basic terms used throughout the Double Tax Agreement. Some of the basic terms are:
Persons – includes an individual, an estate, a trust, a partnership, a company, any other body of persons.
Company – any body corporate or any entity which is treated as a body corporate for tax purposes.
Competent authority – in the case of the United States, the Secretary of the Treasury or his delegate and in the case of Thailand, the Minister of Finance or his authorised representative.
The term “United States” does not include any U.S. possession or territory, for example Puerto Rico, the Virgin Islands and Guam.
The terms a “Contracting State” and “the other Contracting State” means the United States or Thailand, as the context requires.
Article 4 Residence
The rules for the determination of a person’s residence for the purposes of the Double Tax Agreement is set forth in this Article. Determining a person’s residence is important because many of the benefits provided by the Double Tax Agreement are only available to residents of Thailand or the United States.
The starting point for determining the residence of a person for the purposes of the Double Tax Agreement is the domestic tax laws of each Contracting State. A person is a resident of a Contracting State if under that State’s law he is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature. For example, if a person is a resident of Thailand under Thai tax law and is not liable to tax under U.S. law, that person shall be a resident of Thailand for the purposes of the Double Tax Agreement.
A person will not be a resident of a Contracting State for the purposes of the Double Tax Agreement, if they are liable to tax in that State only on income from sources in that State.
Example : A U.S. company carries on business through a permanent establishment situated in Thailand. The U.S. company is liable to tax in Thailand on the profits attributable to the permanent establishment in accordance with Article 7 (Business Profits). The U.S. company is not, by virtue of the permanent establishment, a resident of Thailand for the purposes of the Double Tax Agreement.
The tax laws of both Thailand and the United States recognise a company as a resident of the country in which it is created or organised.
An individual residing in Thailand for a period or periods aggregating 180 days or more in a tax year, shall be deemed a resident of Thailand for Thai tax purposes. There are no other tests of residence for individuals for Thai tax purposes.
Citizens and green card holders of the United States are subject to U.S. tax by reason of their status. If an individual is a U.S. citizen or a green card holder, he is a resident of the United States for the purposes of this Article only if he has a substantial presence, permanent home or habitual abode in the United States.
If an individual is a resident of both Thailand and the United States, this Article contains tie-breaker rules to determine his status. These tests will attempt to determine his residency based on the availability of a permanent home in a State; his centre of vital interests; his place of habitual abode; and his nationality, in that order. If these tests cannot determine a single state of residence for an individual, the competent authorities of Thailand and the United States shall settle the question by mutual agreement.
For a person other than an individual that is a resident of both Thailand and the United States, the mode of application of the Double Tax Agreement to such person shall be settled by the competent authorities of Thailand and the United States by mutual agreement.
Article 5 Permanent Establishment
This Article defines the meaning of the term “permanent establishment” which is relevant to several Articles of the Double Tax Agreement, including the taxation of business profits under Article 7. The Article closely follows the standard definition found in most tax treaties. In some respects, the business activities that may constitute a permanent establishment have been broadened.
The term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The Article lists a number of fixed places of business that prima facie constitute a permanent establishment, including a place of management, a branch, an office, a factory, a workshop, a warehouse (if used to perform storage facilities for other persons), a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.
A building site, a construction, assembly or installation project or supervisory activities in connection therewith or an installation or drilling rig or ship used for the exploration or exploitation of natural resources, may constitute a permanent establishment if such site, project or activities continue for a period or periods aggregating more than 120 days within any 12 month period. The period required to constitute a permanent establishment in this case is relatively shorter than the corresponding period in the U.S. and O.E.C.D. model Double Tax Agreements.
The furnishing of services, including consultancy services, by an enterprise of a Contracting State through employees or other personnel engaged by the enterprise for such purpose, may constitute a permanent establishment if activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 90 days within any 12 month period. A permanent establishment shall not exist in any taxable year in which such services are rendered in that other State for a period or periods aggregating less than 30 days in that taxable year. The period required to constitute a permanent establishment in this case is much shorter than that in the U.N. model convention upon which this provision is mirrored. This provision is not contained in the U.S. and O.E.C.D. model conventions.
The furnishing of services within the other Contracting State for a related enterprise within the meaning of Article 9 (Associated Enterprises), shall constitute a permanent establishment within the other Contracting State regardless of the length of the period in which such services are performed. This latter provision is not contained in the U.S. and O.E.C.D. model conventions and is a significant broadening of the business activities that normally constitute a permanent establishment.
Example : A U.S. company provides management consultancy services to a related company incorporated in Thailand. The services are performed in Thailand. The U.S. company has a permanent establishment in Thailand for the purpose of furnishing the services.
There are a number of activities that may constitute a fixed place of business but which are not deemed to be a permanent establishment. These activities are:
- The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;
- The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, of the enterprise;
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
- The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;
- The maintenance of a fixed place of business solely for any combination of the activities mentioned above, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character; and
- The use of facilities or the maintenance of a stock of goods or merchandise belonging to the enterprise for the purpose of occasional delivery of such goods or merchandise.
Example: A licensed regional or representative office of a US company in Thailand, which by their very nature are not permitted to derive income from their activities, would not ordinarily be a permanent establishment.
Notwithstanding the foregoing, an enterprise may be deemed to have a permanent establishment in a Contracting State if it engages in business in that State through an agent who:
- Has an authority to conclude contracts in the name of that enterprise and regularly exercises that authority in that State unless the activities of that person are limited to those that, if exercised through a fixed place of business, would not make the fixed place of business a permanent establishment in the cases specifically described above;
- Regularly secures orders in that State for that enterprise; or
- Maintains in that State a stock of goods or merchandise belonging to that enterprise from which he makes deliveries on behalf of the enterprise.
The Article distinguishes between a dependent and independent agent. An enterprise will not be deemed to have a permanent establishment in a State if it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
Article 6 Income from Immovable (Real) Property
The general rule that income from immovable property may be taxed in the Contracting State in which the property is situated is adopted in this Double Tax Agreement. A resident of a Contracting State that derives income from immovable property situated in the other Contracting State may be taxed on such income in the other State and no limit is set on the rate of tax that may be imposed.
The terms “immovable property” and “real property” are meant to be synonymous and shall have the meanings which they have under the law of the Contracting State in which the property is situated.
Under the law of Thailand, immovable property denotes land and property fixed permanently to land or forming a body therewith. It includes real rights connected with land or property fixed to or forming a body with land.
In any case, the term “immovable property” for the purposes of the Double Tax Agreement shall also include usufruct of immovable property and livestock and equipment used in agriculture and foresting.
Income derived from the direct use, letting, or use in any other form of immovable property, including income from agriculture or foresting, is taxed under this Article. A gain from the alienation of immovable property is taxed under Article 13 (Gains).
Example : A U.S. resident individual owns a unit in a condominium block situated in Bangkok which he rents out to tenants. The rental income may be taxed in Thailand.
Article 7 Business Profits
An enterprise of a Contracting State may not be taxed on business profits in the other Contracting State unless it carries on business in the other Contracting State through a permanent establishment. The term “permanent establishment” is defined in Article 5.
The profits of the enterprise that may be taxed in the other State are those that are attributable to:
i) the permanent establishment;
ii) sales in that other State of goods of the same or similar kind as those sold through the permanent establishment; or
iii) other business activities carried on in that other State of the same or similar kind as those affected through that permanent establishment.
The Article adopts the “force of attraction principle”, whereby the scope of profits that may ordinarily be taxed is broadened by sub-paragraphs ii) and iii) above.
The profits stated in sub-paragraphs ii) and iii) will only be taxed in the other Contracting State however if it can be shown that the sales or business activities were carried out in order to avoid tax in that other State.
Example : A U.S. company which provides consulting engineering services has a small branch office in Thailand. The company’s U.S. head office has entered into a two month contract to provide specialist engineering services in Thailand to an unrelated Thai company. The contract involves services which are not provided by the branch office and the U.S. head office sends engineers to Thailand to specifically perform the services under the contract. If it can be shown that the services performed in Thailand by the US head office were not done with a view to avoiding tax in Thailand, the profits arising from the contract will not be attributed to the Thai branch office.
In principle, the business profits to be attributed to a permanent establishment shall be that which a distinct and independent enterprise in the same or similar activities and under the same or similar conditions might be expected to make. A deduction is specifically allowed for a reasonable allocation of executive and general administration expenses incurred for the purposes of the permanent establishment.
No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
Where income or profits of an enterprise includes items of income dealt with separately in other Articles of the Double Tax Agreement, such as dividends, interest and royalties, those Articles shall take precedence over this Article, unless those Articles specifically provide to the contrary.
Example : A U.S. manufacturing company derives business profits from Thailand but does not have a permanent establishment situated therein. If the income from such business falls under Article 7, it will not be taxable in Thailand. If, for example, the income is in the nature of royalties, Article 12 (Royalties) may apply instead to determine the taxation of the income.
If the payment of income attributable to a permanent establishment is deferred until the permanent establishment ceases to exist, that deferred income will be taxed under this Article as if the permanent establishment continued to exist. This rule applies to business profits as well as to interest, dividends, royalties, and other income.
Under Thai law, net profits derived by a foreign corporation arising from or in consequence of carrying on business in Thailand are subject to Thai corporate tax. The general rate of corporate tax in Thailand is 20%. A foreign corporation will be deemed to be carrying on business in Thailand if it has an employee, representative or a go-between in Thailand for the purpose of carrying on their business and thereby derives income or gains in Thailand. This Article effectively narrows the instances when a US company carrying on business in Thailand will be subject to Thai corporate tax.
Under Thai law, certain assessable income paid from or within Thailand to foreign corporations not carrying on business in Thailand is subject to Thai withholding tax. Such income includes income from provision of services. This Article may have affect to eliminate the withholding tax imposed under Thai law on certain assessable income paid to U.S. corporations not carrying on business in Thailand.
The benefits of this Article are subject to Article 18 (Limitation on Benefits). For example, a US enterprise that carries on business in Thailand must satisfy the conditions of Article 18 to qualify for the benefits of this Article.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Double Tax Agreement had not come into effect, applies to this Article.
Article 8 Shipping and air transport
This Article governs the taxation of profits from the operation of ships and aircraft in international traffic. The term “international traffic” means any transport by a ship or aircraft except when such transport is solely between places in a Contracting State. The Article treats income from the operation of ships differently from income from the operation of aircraft.
Under the Thai Revenue Code, a foreign company that carries on a business of international transport shall pay tax on such business as follows:
i) In the case of the carriage of passengers, tax shall be paid at the rate of 3% of the fares, fees and other benefits collectible in Thailand in respect of such carriage before deduction of expenses.
ii) In the case of the carriage of goods, tax shall be paid at the rate of 3% of the freight fees and any other benefits collectible whether in Thailand or elsewhere in respect of the transport of goods from Thailand before deduction of any expenses.
The Double Tax Agreement provides that income or profits derived from the operation of aircraft in international traffic by a resident of a Contracting State shall be taxable only in that State. A U.S. resident will therefore not be liable to pay tax on such profits in Thailand.
The amount of tax imposed by a Contracting State on income or profits derived by a resident of the other Contracting State from the operation of ships in international traffic is reduced to 50 percent of the amount that would have been imposed in the absence of the Double Tax Agreement. The rate of tax payable in Thailand on such business is effectively reduced to 1½% in the case of the carriage of goods and in the case of the carriage of passengers.
Example : A U.S. company operates ships in international traffic and is taxable in Thailand on such operations. In the absence of the Double Tax Agreement, the amount of Thai tax payable under the Thai Revenue Code is Baht 1 million. This amount is reduced to Baht 500,000 (50%) by the operation of Article 8 of the Double Tax Agreement.
Thailand has agreed that, in the event of entering an agreement with any other country to tax the profits from the operations of ships at a rate lower than that specified in this Article, it will enter into negotiations with the United States with a view to extending such lower rate to U.S. residents.
Gains from the alienation of ships and aircraft are dealt with in Article 13 (Gains).
For the purposes of this Article, income or profits from the operation of ships or aircraft in international traffic includes income or profits derived from the rental of ships or aircraft if such rental profits are incidental to other income or profits from the operations of ships or aircraft in international traffic.
Income or profits of an enterprise of a Contracting State from the use, maintenance or rental of containers that are incidental to income from the operation of ships or aircraft in international traffic, shall be treated as income from the operations of ships or aircraft in international traffic for the purposes of this Article.
Profits derived from the rental of ships, aircraft and containers are treated as business profits under Article 7 if such profits are not incidental to income or profits from the operations of ships or aircraft in international traffic.
The benefits of this Article are subject to Article 18 (Limitation on Benefits). For example, a US resident that carries on business of operation of aircraft in international traffic must satisfy the conditions of Article 18 to qualify for the benefits of this Article.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Double Tax Agreement had not come into effect, applies to this Article.
Article 9 Associated Enterprises
This Article addresses the situation where an enterprise of a Contracting State effectively controls an enterprise of the other Contracting State, or the same persons effectively control an enterprise in each State and transactions between the two related enterprises are not conducted on an arm’s length basis.
Where such transactions are conducted, the Contracting States may make adjustments to the profits of each enterprise in accordance with the provisions of this Article, so that the profits of each enterprise reflect what they would have been had there been an arm’s-length relationship between the two enterprises.
This Article is contained in most tax treaties. It is understood that this Article may be used to address thin capitalisation issues of related enterprises. The Thai Revenue Code does not contain specific provisions dealing with thin capitalisation.
Article 10 Dividends
This Article provides rules for the taxation of dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State. The general rule is that the State of the recipient may impose tax under its own law without restriction whilst the State of which the company is a resident may impose a restricted tax.
If a dividend is paid by a company resident in a Contracting State to a resident of the other Contracting State that is the beneficial owner of the dividends, the tax charged by the State in which the company is a resident shall not exceed:
i) 10% of the gross amount of the dividends if the beneficial owner is a company that controls at least 10% of the voting power of the company paying the dividends; or
ii) 15% of the gross amount of the dividends in all other cases.
Under the Thai Revenue Code, a Thai company is generally required to deduct tax at source at the rate of 10% from dividends paid to foreign companies and non-resident individuals. A Thai company promoted by the Board of Investment may receive income tax privileges that permit it to pay dividends exempt from Thai tax.
For U.S. companies not carrying on business in Thailand, the tax withheld at source is a final tax.
U.S. resident individuals shall pay Thai personal tax on Thai dividend income, which is limited to 15% in the circumstances described above. In many cases, the tax withheld at source of 10% is effectively a final tax.
Example : A U.S. company that does not carry on business in Thailand, owns shares in a Thai company. The Thai company pays a dividend to the U.S. shareholder and deducts tax at source at the rate of 10%, as required by the Thai Revenue Code. The United States retains the right to tax the dividend under its own law.
The limited rates of tax will not apply if the dividends which arise in a Contracting State are effectively connected with a permanent establishment or fixed base which the beneficial owner has in that State. In such case, the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services) will, as the case may be, apply.
Example : A U.S. manufacturer carries on business in Thailand through a branch office and Article 7 (Business Profits) applies so as to tax the profits attributable to the branch in Thailand. The U.S. manufacturer holds a strategic holding of shares in an important Thai corporate customer and receives an annual dividend on those shares. The dividend is effectively connected with the Thai branch office. The limited tax rates contained in Article 10 shall not apply to the dividend received. The dividend shall be included in the business profits of the branch and taxed at the applicable rate in the Thai Revenue Code.
The limits on the rates of tax at source are modified in respect of dividends paid to U.S. residents which are Regulated Investment Companies and Real Estate Investment Trusts. The modifications made are intended to prevent the use of these entities to gain unjustifiable source benefits.
The term “dividends” is defined broadly and apart from its usual meaning it also includes “debt dividends”, to the extent so characterised under the law of the Contracting State in which the income arises.
The benefits of this Article are subject to Article 18 (Limitation on Benefits). For example, a US resident that receives a dividend from a Thai company must satisfy the conditions of Article 18 to qualify for the benefits of this Article.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Double Tax Agreement had not come into effect, applies to this Article.
Article 14 Branch Tax
Under this Article, a Contracting State may impose a tax on the income of a permanent establishment of a corporation resident in the other State, in addition to other taxes allowable under this Convention. This tax is commonly known as a branch profits tax.
In the case of a company that is a resident of the United States and that has a permanent establishment in Thailand, it shall remain subject to the branch profits tax on the disposal of profits out of Thailand in accordance with the provisions of the Thai Revenue Code. The rate imposed shall not exceed 10%. The current rate of tax imposed under the Thai Revenue Code is 10%.
In the case of the United States, a branch profits tax may be imposed at a rate not exceeding either 10% or 15%, as the case may be, on amounts specified in the Convention.
Article 15 Independent Personal Services
The general rule is that an individual who derives income in respect of professional services or others activities of an independent character, shall be taxable only in the State of which they are a resident.
The income may however be taxed in the other Contracting State in one of the following circumstances:
i) the individual has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income attributable to the fixed base may be taxed in that other Contracting State; or
ii) his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the fiscal year concerned. In that case, the income derived from the activities performed in the other Contracting State may be taxed in that State; or
iii) his remuneration for activities performed in the other Contracting State is paid by a resident of that Contracting State or is borne by a permanent establishment or fixed base situated in that Contracting State and exceeds in the fiscal year US$10,000 or its equivalent in Thai currency, not including expenses reimbursed to him or borne on his behalf.
This Article applies to income from professional services derived by individuals including partners in a partnership providing such services. Income derived by employees of such persons generally would be taxable in accordance with Article 16 (Dependent Personal Services).
The term “professional services” is defined to include:
- independent scientific, literary, artistic, educational, or teaching activities.
- independent activities of lawyers, engineers, architects, dentists, and accountants.
As is common in most tax treaties, the term “fixed base” is not defined but its meaning is understood to be similar to that of the term “permanent establishment”. It is not necessary that the individual uses the fixed base, only that it is regularly available to him whilst working in the other Contracting State.
Example : A U.S. resident legal practitioner visits Thailand to perform work in Songkhla on behalf of a client. The lawyer has an office in Bangkok. The remuneration received for work performed in Songkhla will be taxable in Thailand.
If the payment of income is deferred until such a fixed base ceases to exist, the income attributable to the fixed base shall be taxed as if the fixed base continued to exist.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect, applies to this Article.
Article 16 Dependent Personal Services
The general rule that salaries, wages and other similar remuneration derived by an employee shall be taxable only in the Contracting State of which he is a resident unless the employment is exercised in the other Contracting State, in which case the remuneration derived therefrom may be taxed in that other State. This is subject however to the provisions of Articles 17 (Directors’ Fees), 20 (Pensions and Social Security Payments), 21 (Government Service), 22 (Students and Trainees) and 23 (Teachers).
Notwithstanding the above, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the employee’s State of residence, if the following three conditions are satisfied:
a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the taxable year concerned:
b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
The terms “permanent establishment” and “fixed base” have the same meanings which these terms have in Article 5 (Permanent Establishment) and Article 15 (Independent Personal Services), respectively.
Examples : i) A U.S. resident individual is assigned to work in Thailand on behalf of his employer, a U.S. company, for two months. The U.S. company does not have a permanent establishment in Thailand. The remuneration derived by the U.S. employee for such work is taxable in the United States only.
ii) A Thai resident individual is seconded to work in the United States at the branch office of his employer, a Thai company. The Thai employee’s remuneration is borne by the S. branch, which is a permanent establishment of his employer. The employee’s remuneration in respect of such employment is taxable in the United States.
Remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State, may be taxed in the Contracting State in which the enterprise is resident.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect, applies to this Article.
Article 17 Directors’ Fees
Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the Board of Directors of a company that is a resident of the other Contracting State, may be taxed in that other Contracting State, unless the services are performed in the Director’s State of residence.
Example : A U.S. resident is a director of a Thai company and performs services wholly in the United States on behalf of the company, except for two months of every year which are spent at the company’s headquarters in Bangkok. The director may be taxed in Thailand only on the directors’ fees received in connection with the services performed in Thailand. The right of the United States to tax the fees received by the director is not affected by this Article.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect, applies to this Article.
Article 18 Limitation on Benefits
This Article contains tests designed to curtail “treaty shopping”. Treaty shopping involves residents of third States using a corporation or other legal entity established in a Contracting State to obtain the benefits of the Convention. The legal entity established effectively acts as a conduit for the residents of third States.
The United States holds strong views on the prevention of tax treaties being misused by residents of third countries and as a result, comprehensive Limitation on Benefits provisions are a feature of all recent U.S. income tax treaties.
If a resident of a third country has substantial reasons for using a legal entity established in a Contracting State that is not related to obtaining the benefits of the treaty, then this Article should not apply. To determine the intention of a taxpayer, the Article sets forth a series of objective rules. Generally speaking, the following persons will be entitled to all the benefits of the Convention:
– an individual.
– a Contracting State or a political subdivision or local authority thereof.
– a corporation listed on a recognised stock exchange in the United States or in Thailand, whose principal class of shares is substantially and regularly traded.
– a wholly owned subsidiary of a listed corporation described above, provided that each intermediate owner is a resident of a Contracting State.
– a tax exempt not-for-profit organisation, if more than half its members are entitled to benefits under this Convention.
– persons, including companies, who meet certain ownership and income tests.
Broadly, these tests are:
i) more than 50% of the beneficial interest in the person is owned by persons that are mentioned above; and
ii) more than 50% of the gross income of the person is not used to meet liabilities to persons who are not mentioned above or who are not citizens of the United States.
Notwithstanding the above a person may be entitled to the benefits of the Convention if they satisfy an “active-business” test. For the purposes of this test, the business of making or managing investments is not an active trade or business, unless these activities are banking or insurance activities carried on by a bank or insurance company.
To satisfy the test:
i) the income derived by a resident of a Contracting State from the other Contracting State, must be derived in connection with an active trade or business carried on in the first mentioned Contracting State; and
ii) the trade or business carried on in the first-mentioned Contracting State is substantial in relation to the business or activity giving rise to the income in the other Contracting State.
The terms “active trade or business”, “in connection with” and “substantial” are not defined by the Convention, so unless the competent authorities agree to a common meaning, they have the meaning which they have under the laws of that State concerning the taxes to which the Convention applies.
If the income derived from the other Contracting State is incidental to an active trade or business carried on in the recipient’s State of residence, the recipient will be entitled to the benefits of the Convention in respect of that income.
Example: Interest income of a US based manufacturer arising from the deposit of trading income with a bank in Thailand, would be considered incidental income.
This Article specifically provides that a resident of Thailand that operates an international banking facility (IBF) is not entitled to any U.S. benefits under the Convention in respect of any income that such facility receives from the United States.
Example: Interest arising in the United States and paid to an IBF operated by a resident of Thailand, shall not be entitled to have U.S. tax thereon limited to 10% as provided under Article 11 (Interest).
If the above rules are not satisfied so that there is a limitation of benefits, the benefits of the Convention may be granted nevertheless if the competent authority of the State in which the income arises so determines. This provision recognises that there may be cases whereby a failure to satisfy the above rules does not necessarily indicate an intention to obtain the benefits of the treaty.
As common in most tax treaties, there is a limitation on the tax relief granted by a Contracting State, if the other Contracting State taxes income arising in the first mentioned State on a remittance basis. The relief allowed under the Convention shall apply to only so much of the income as is remitted or received in the other Contracting State during the calendar year such income accrues or the next succeeding year.
Example: Interest arising in the United States is paid to a Thai resident. The interest is of a type that is subject to a maximum rate of tax of 15% under Article 11 of the Convention. Under the Thai Revenue Code, the Thai resident shall pay Thai tax on such income only if it is remitted into Thailand in the same tax year that it is derived. The relief from U.S. taxation, in the form of a limited rate of tax that may otherwise have been higher in the absence of the Convention, shall apply only to so much of the interest that is remitted to or received in Thailand during the calendar year such income accrues or the next succeeding year.
Article 19 Artistes and Sportsmen
The income derived by a resident of a Contracting State from his personal activities as an entertainer or sportsman exercised in the other Contracting State, may be taxed in that other State. If the gross receipts derived from such activities does not exceed the lesser of US$100 per day (or its Thai currency equivalent) or US$3,000 (or its Thai currency equivalent) in the aggregate for the taxable year concerned, it may not be taxed in the other Contracting State.
Example: An entertainer, resident in the U.S., conducts a tour of Asia and visits Thailand to perform for two nights. He earns the equivalent of US$900 per night from ticket sales, a total of US$1,800. He conducts no other performances in Thailand in the taxable year concerned and accordingly his total earnings from such performances are less than the annual taxable limit of US$3,000. Each night however that he performed in Thailand he earned more than the daily taxable limit of US$100. His earnings in Thailand of US$1,800 may be taxed in Thailand.
If such income accrues to another person and not the entertainer or sportsman, the income may be taxed in the Contracting State in which the activities are exercised notwithstanding the provisions of Articles 7 (Business Profits), 15 (Independent Personal Services) and 16 (Dependent Personal Services), unless it can be shown that the entertainer or sportsman or related persons thereof do not participate in the profits of the other person. The object of this provision is to prevent the use of an interposed entity between the performer and the payer to avoid tax in the country in which the activities are performed.
This Article will not apply to public entertainers who perform activities in a Contracting State, if their visit to that Contracting State is substantially supported by public funds of the other Contracting State.
Example: An entertainer, resident in the U.S., visits Thailand to conduct performances for the public. His visit is funded by the U.S. government. This Article does not apply to the income derived from such activities.
This Article applies to artistes and sportsmen notwithstanding the provisions of Article 15 (Independent Personal Services) and Article 16 (Dependent Personal Services).
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect, applies to this Article.
Article 20 Pensions and Social Security Payments
Subject to the pension provisions of Article 21 (Government Service), pensions and similar remuneration paid to a resident of a contracting State in consideration of past employment shall be taxable only in that State. The term “pensions and other similar remuneration” is understood to include both periodic and single sum payments.
Example : A Thai resident receives a pension from a U.S. pension fund in connection with his past employment with a U.S. company. The pension is taxable only in Thailand.
Notwithstanding the above, social security benefits and other similar public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.
Example : An individual resident in Thailand receives a social security pension from the U.S. Government. The pension is taxable only in the United States.
The reference to U.S. citizens is necessary to insure that a social security payment by the Thai government to a U.S. citizen who is not resident in the United States, will not be taxed by the United States.
Annuities, as defined in the Convention, derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.
Alimony, as defined in the Convention, paid to a resident of a Contracting State shall be taxable only in that State.
Periodic payments, not being alimony, for the support of a child made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be taxable only in the first-mentioned State.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect, applies to this Article but shall not affect the benefits conferred by a Contracting State in respect of social security payments and child support payments.
Article 21 Government Service
Remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State. An individual in this case may be a resident of neither Contracting State and may provide such services either as a government employee or an independent contractor.
Such remuneration, however, shall be taxable only in the other Contracting State if the services are rendered in that other State and the individual is a resident of that State who:
i) is a national of that State; or
ii) did not become a resident of that State solely for the purpose of rendering the services.
Examples: i) An individual renders services as an employee to the Thai government in the United States. The individual is a resident and a national of the United States. The remuneration derived by the individual in respect of such services is taxable only in the United States.
ii) An individual renders services as an employee to the U.S. government in Thailand. The individual is a U.S. national and a Thai resident. He became a resident of Thailand solely for the purpose of rendering the aforementioned services. The remuneration derived by the individual in respect of such services is taxable only in the United States.
Any pension paid from the funds of a Contracting State or political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority, shall be taxable only in that State.
Such pension, however, shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that other State.
Example : An individual receives a U.S. government pension in respect of services rendered to the U.S. government. The individual is a resident and a national of Thailand. The pension shall be taxable only in Thailand.
The provisions of Articles 16 (Dependent Personal Services), 17 (Directors’ Fees), and 20 (Pension and Social Security Payments) shall apply to remuneration and pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof.
This Article does not affect the fiscal privileges of diplomatic agents or consular officers under the general rules of international law or under the provisions of special agreements (refer Article 29).
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect applies to this Article but shall not affect the benefits conferred by a Contracting State upon individuals who are neither citizens of nor have immigrant status in that State.
Article 22 Students and Trainees
This Article provides rules for the taxation of income of students and trainees. The provisions of this Article differ significantly from the provisions in the U.S. and O.E.C.D. model conventions. The benefits provided to students and trainees recognises the important links between the two countries in respect of higher education. The provisions should especially benefit Thai students studying in the United States.
An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State for the primary purpose of studying, securing training or doing research shall be exempt from tax in that other Contracting State on amounts described below, for a period not exceeding five taxable years from the date of his arrival in that other Contracting State.
Study must be conducted at a university or other recognised educational institution unless the individual is studying or doing research as a recipient of a grant, allowance or award from a government, religious, charitable, scientific, literary, or educational organization. An individual securing training must be required to undertake the training to qualify him to practice a profession or professional specialty.
The amounts specified for exemption are gifts from abroad for the purpose of the individual’s maintenance, education, study, research or training; the grant, allowance, or award; and income from personal services performed in that other Contracting State in an amount not in excess of 3,000 United States dollars or its equivalent in Thai currency for any taxable year.
Example: A Thai student travels to the United States for the primary purpose of studying at a U.S. university. The course is for three years. Amounts received by the Thai student which are specified for exemption from tax under Article 22 shall be exempt from U.S. tax.
Limited exemptions from tax on income from personal services are also provided in certain cases for individuals who are residents of a Contracting State and who are temporality present in the other Contracting Sate as a student or trainee:-
i) as an employee of, or under contract with a resident of the first-mentioned Contracting State; or
ii) as a participant in a program sponsored by the Government of that other Contracting State.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect applies to this Article but shall not affect the benefits conferred by a Contracting State upon individuals who are neither citizens of nor have immigrant status in that State.
Article 23 Teachers
This Article provides special rules for the taxation of income earned by teachers.
Remuneration received by an individual, who is a resident of a Contracting State, for teaching or engaging in research at a university, college, or other recognized educational institution in the other Contracting State, shall be exempted from tax by the other Contracting State on such remuneration for a period not exceeding two years.
To qualify for this exemption, the individual must have been a resident of the other Contracting State immediately before visiting the other Contracting State. As well, the visit must be for a period not exceeding two years and must have been made for the purpose of teaching or engaging in research. The exemption period shall begin from the date the individual first visits that State for such purpose.
The exemption from tax provided by this Article shall apply to a researcher only if such research is undertake by the individual in the public interest and not primarily for the benefit of some other private person or persons.
Example: A Thai teacher visits the United States to take up a position teaching Thai history at a U.S. college. The tenure of the position is 18 months. The remuneration received for teaching shall be exempt from tax in the United States.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect applies to this Article but shall not affect the benefits conferred by a Contracting State upon individuals who are neither citizens of nor have immigrant status in that State.
Article 24 Other Income
Items of income of a resident of a Contracting State wherever arising, not dealt with in the foregoing articles of the Convention, shall be taxable only in that State.
Such income however which arises in the other Contracting State may also be taxed in that other State and the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services) shall apply if such income, other than income from immovable property, is effectively connected with a permanent establishment or fixed base, as the case may be. Income from immovable property is excluded to be consistent with the general rule that only the situs and residence states may tax immovable property and immovable property income.
Items of income covered by Article 24 include for example, income from certain financial instruments and income from gambling.
The benefits of this Article are subject to Article 18 (Limitation on Benefits). For example, a US resident that derives other income must satisfy the conditions of Article 18 to qualify for the benefits of this Article.
The saving clause contained in Article 1 (Personal Scope), that reserves the right of Thailand and United States to impose tax in certain cases as if the Convention had not come into effect applies to this Article but shall not affect the benefits conferred by a Contracting State upon individuals who are neither citizens of nor have immigrant status in that State.
Article 25 Relief from Double Taxation
One of the principal purposes for entering into the Convention is to avoid the double taxation of income by Thailand and the United States. This Article provides relief from double taxation by allowing a taxpayer a credit for the tax payable on income arising in the other country.
In the case of the United States, a credit for the tax payable to Thailand on income shall be allowed to a resident or a citizen of the United States.
In the case of Thailand, a credit for the U.S. tax payable in respect of income arising in the United States shall be allowed, not exceeding the Thai tax payable on that income.
The credit allowed shall be in accordance with the provisions and subject to the limitations of each respective Contracting States’ laws.
Example : A Thai trading company receives interest of US$100, from a bank deposit in the United States. The interest is taxed in the United States at the rate of 15% ie. US$15. The U.S. tax paid of US$15 is allowed as a credit against the Thai tax payable on the US$100, in accordance with the provisions and subject to the limitations of the Thai Revenue Code.
In the case of a U.S. company owning at least 10 per cent of the voting stock of a company resident in Thailand and from which the U.S. company receives dividends, the tax paid to Thailand by or on behalf of the distributing company with respect to the profits out of which the dividends are paid, is allowed as a credit against U.S. tax in accordance with U.S. law.
The United States opposes “tax sparing” and has not granted it in this tax treaty. Tax sparing refers to a credit granted by the resident country for foreign taxes that have not been paid for some reason to the source country but that would have been paid under that country’s normal tax rules. Other countries that have entered into tax treaties with Thailand have on occasion allowed a credit for the Thai tax foregone which would have been payable but for an exemption from, or a reduction of, tax on income resulting from tax incentives granted under the Investment Promotion Act B.E. 2520. Such incentives are granted to Board of Investment (BOI) promoted businesses.
If the United States reaches an agreement on the provision of a tax sparing credit with any other country, the United States will agree to re-open negotiations with Thailand with a view to the conclusion of a protocol which would provide a similar tax sparing credit to Thailand.
Article 26 Non-Discrimination
This Article provides assurances to nationals and residents of the Contracting States that they will not be subject, directly or indirectly, to discrimination in respect of taxation based on nationality or residence. These assurances include:
- Nationals of a Contracting State shall not be subject to taxation or connected requirements in the other Contracting State that are more burdensome than that imposed upon a national of that other State.
- A permanent establishment of an enterprise of a Contracting State shall not be taxed less favorably than an enterprise of the other Contracting State carrying on the same activities.
- Interest, royalties and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State, other than those not deductible under the Convention if paid to related parties in certain circumstances, shall be deductible as if they had been paid under the same conditions to a resident of the first mentioned State.
- Non-discrimination in respect of taxation or connected requirements imposed on an enterprise by a Contracting State, if the enterprise is wholly or partly owned, or controlled directly or indirectly by one or more residents of the other Contracting State.
Article 27 Mutual Agreement Procedure
Where a person considers that the actions of one or both of the Contracting States result, or will result for him in taxation not in accordance with the provisions of this Convention he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or, in the case of discrimination on grounds of nationality, to that of the Contracting State of which he is a national.
Example : A U.S. company carries on business in Thailand through a permanent establishment situated therein and pays Thai tax on business profits attributable to the permanent establishment under Article 7 (Business Profits). The company believes that a provision of the Thai Revenue Code unintentionally results in the permanent establishment being subject to a greater liability of tax compared to a Thai company carrying on the same activities. The company considers that Article 26 (Non-Discrimination) should apply so that it may present its case to the secretary of the U.S. Treasury Department.
The dollar amounts specified in the Convention, as in the case of artistes and sportsmen, may be adjusted to reflect economic or monetary developments.
The Article also establishes a mechanism to deal with difficulties or doubts arising from the interpretation or application of the Convention.
Article 28 Exchange of Information
The competent authorities of the Contracting States shall exchange such information as is necessary, for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention, subject to certain limitations.
Article 29 Diplomatic Agents and Consular Officers
No provisions of this Convention shall affect the fiscal privileges of diplomatic agents or consular officers under the general rule of international law or under the provisions of special agreements.
Article 30 Entry into Force
This Article provides when the Convention and its provisions shall have effect, as explained in the Introduction.
Article 31 Termination
Either Contracting State may terminate the Convention after giving at least 6 months prior notice.
