Results of public hearing on draft legislation related to Pillar 2 of the OECD’s framework on base erosion and profit shifting.

On 1 March 2024, the Thai Revenue Department (“RD”) held a public hearing on draft legislation (the Top-Up Tax Act) related to Pillar 2 of the OECD’s framework on base erosion and profit shifting.

The draft legislation covers the following key points:

It will be applied to constituent entities in Thailand of a multinational enterprise (“MNE”) with consolidated revenue of at least EUR 750 million.

• It introduces a top-up tax measure, where top-up tax will be assessed on excess profit. The Effective Tax Rate shall be calculated as set out in the draft legislation.

• The draft legislation proposes three tax collection mechanisms: i) a Domestic Minimum Top-up Tax; ii) an Income Inclusion Rule; and iii) an Undertaxed Payments Rule. Each mechanism will be considered separately, based on the company’s group structure.

• It requires taxpayers within its scope to submit detailed information on the MNE and relevant returns together with the top-up tax payment to the RD within 15 months of the end of the fiscal year.

• It states that companies eligible for tax privileges and benefits from the BOI under the Investment Promotion Act remain unchanged.

This month, the RD disclosed the opinions given at the public hearing on the Top-Up Tax Act and its response to those opinions. We note that the RD did not provide clear responses to multiple comments from the hearing, but merely said that it accepted the comments for further consideration. An example is the question of whether the top-up tax paid by MNEs abroad can be claimed as a tax credit in Thailand under Royal Decree No. 442.

Below is a summary of key points from the hearing which the RD addressed:

Topics

Observations

Responses from the Revenue Department

The relationship between the draft Act and the Thai Revenue Code (“RC”)

Can the additional tax (i.e., top-up tax) under this draft Act be treated as a deductible expense when calculating net profit for corporate income tax according to the RC?

The top-up tax is considered a non-deductible expense for income tax calculation purposes.

Being subject to the law

Regarding the total revenue threshold of EUR 750 million, which exchange rate should the taxpayer use to calculate this?

Will the period in which it will be considered whether top-up tax is due or not based on the accounting period? The exchange rate used for calculating various criteria under this draft Act will be specified in subordinate legislation.

How can the evidence for considering income criteria be assessed, given that Thailand has two accounting standards: one for publicly accountable entities and one for non-publicly accountable entities? The highest-ranking legal entities that prepare financial statements according to the accounting standards for non-publicly accountable entities are not required to prepare consolidated financial statements.

The exchange rate used for calculating various criteria under this draft Act will be specified in subordinate legislation.

This will be considered on a periodic basis for each accounting period.

Does this draft Act apply to companies that operate exclusively in Thailand?

This draft law applies only to multinational corporations. A corporate group will not be subject to this law if it operates solely in one country.

Liable entity

Which legal entities in Thailand of a multinational entity must pay the additional tax (i.e., topup tax)?

This draft Act divides the additional tax into two main parts, namely:

(1) The additional tax incurred abroad, which, if it is an additional tax that Thailand has the right to collect under the Income Inclusion Rules, the parent company of the group located in Thailand and the group entities that are taxed at locations abroad are required to pay the additional tax. However, if it is an additional tax that Thailand receives as an allocation according to the Undertaxed Payment Rules, this draft legislation grants rights to the multinational entity to negotiate among its constituent entities. The RD has revised the principles to match taxpayers’ suggestions that allow multinational entities to choose which affiliated entity will bear the tax burden without restriction to one or more entities. However, if there is no agreement in such a case, determining which taxpayer will be subject to the remaining additional tax collection rules will be based on the proportion of profits, primarily in accordance with the measures to prevent base erosion and profit shifting internationally.

(2) For the additional tax incurred in Thailand, the RD has revised the principles to match the recommendations provided by the taxpayers, allowing multinational entities the right to choose which affiliated entity will bear such a tax burden without restriction to one or more entities. However, if no agreement is reached, determining which taxpayer will be subject to the remaining additional tax collection rules will be based on the proportion of profits, primarily in accordance with measures to prevent base erosion and profit shifting. The above agreement is periodic and can be modified

Calculation of the Effective Tax Rate (“ETR”) and top-up tax

Will the criteria, methods, and conditions for calculating the ETR and top-up tax under this draft Act be aligned with the measures to prevent international tax base erosion as stipulated by the Inclusive Framework on BEPS?

The criteria for various calculations that will be established in subordinate legislation under this draft Act will be aligned with the framework outlined in the cooperation agreement, including various exemptions, such as the rates used to calculate the portion of total net income allowed for deduction (Substance Base Income Exclusion).

Since Thailand's accounting standards are not yet aligned with the accounting standards used in relation to international tax base erosion prevention measures, the RD should consult with the relevant authorities to clarify this matter.

The RD accepts observations for consideration. It has discussed and will continue to discuss the issues with relevant authorities to clarify them.

Can tax losses carried forward be utilized to calculate top-up tax under this draft Act?

The criteria for utilizing tax losses carried forward will be stipulated in subordinate legislation on calculating the ETR and the top-up tax.

The accounting figures and the figures used for tax calculations according to the RC differ, such as the amount of income tax expenses recorded in the financial statements and the amount paid according to the annual CIT return (PND.50). In this case, under the draft Act, which figures should be used?

According to this draft Act, the financial information used for various calculations is the financial data presented in each legal entity's financial statements. However, making adjustments for differences in the accounting standards used in preparing those financial statements and the accounting standards specified in this draft Act may be necessary.

The financial information mentioned above must serve as a basis for adjustments according to the criteria, methods, and conditions set forth in the subsequent subordinate legislation. This subordinate legislation will be aligned with the criteria established in the measures to prevent international tax base erosion.

Suppose the net total income generated in a country for a specific accounting period is zero or less than zero. Will there be a top-up tax for that accounting period in the country where the net total income is calculated?

The calculation of the top-up tax according to this draft Act is divided into three parts, namely:

(1) The top-up tax arising from the calculation based on the net total income for that accounting period.

(2) The top-up tax arising from adjustments in the calculation of the top-up tax for the past accounting period, which should be considered part of the current accounting period.

(3) The top-up tax arising due to the tax within the scope of the rule for determining the top-up tax set out in the Top-Up Tax Act after adjustment in that country of the multinational entity is less than zero, and less than “the amount of tax expected within the scope of the rule for determining the top-up tax set out in the Top-Up Tax Act after adjustment,” shall be considered top-up tax for that accounting period, calculated as the difference between the expected amount and the tax within the scope of the rule for determining the top-up tax set out in the Top-Up Tax Act after adjustment.

Therefore, even if there is no additional tax under (1), if there is an additional tax under (2) or (3), the corporate entities within the multinational entity located in that country still have the obligation to pay the corresponding top-up tax.

Reporting, returns, payment of the top-up tax, refund of the top-up tax

The deadline for requesting a tax refund should be longer than three years.

Three years is an appropriate timeframe, in line with the Revenue Code. However, the Minister of Finance can extend this deadline further.

Taxpayers should be granted the right to request that they be allowed to pay the top-up tax in instalments.

The RD has revised its principles to match the recommendations. The request for paying in instalments must comply with the criteria, methods, and conditions specified in the relevant laws.

The deadline for submitting various forms under this draft Act for the first accounting period, during which multinational entities are subject to measures to prevent base erosion and profit shifting, should be set at 18 months instead of 15 months, to match what has been stipulated in the measures to prevent base erosion and profit shifting.

The RD has revised its principles to match taxpayers' suggestions.

The submission of reports that adhere to international standards should allow taxpayers to opt to file such reports in English.

Taxpayers can prepare and submit the GloBE Information Return (“GIR”) regarding international tax base erosion prevention measures in English.

Can the top-up tax payment under this draft Act be made in foreign currency?

No, it has to be in Thai baht.

Penalty, surcharge, and criminal punishment

Penalties should be reduced or waived during the initial phase of implementing this draft legislation, as collecting the top-up tax is a new measure with complex criteria. Taxpayers may miscalculate the top-up tax or disclose information incorrectly without the intention to evade tax.

The RD accepts suggestions for further consideration. However, according to this draft Act, authority is granted to extend deadlines for various operations and to reduce or waive additional taxes, including penalties in certain cases.

According to this draft Act, the surcharge calculation is capped at the amount of topup tax payable.

This is correct. The surcharge will be capped at the amount of top-up tax payable.

The allocation of top-up tax revenue

The objectives for managing the tax funds allocated to the competitiveness enhancement fund should be clearly defined to maximize the benefit to the country.

The objective of financial management is in accordance with the law on enhancing the country's competitiveness for targeted industries.

Reference (in Thai):

• Results of public hearing on draft legislation related to Pillar 2 of the OECD’s framework on base erosion and profit shifting (BEPS). Retrieved from Revenue Department of Thailand.