Tax Treaty Between the United States and Thailand:
An Overview and Analysis
Chaninat & Leeds Co., Ltd., Thailand
to the rapid increase in international commerce, and the growth in economic
interdependence between nations in the post-World war II era, there has
been an associated increase in the number of bilateral income tax treaties.
Currently, Thailand has in effect bilateral income tax treaties with 27
nations. The United States has over forty such treaties in force. The
signing of the treaty between the United States and Thailand marked an
historic event, and it is expected that the treaty will usher in a new
era of trade and investment between the two countries.
November 26, 1996 William H. Itoh, Ambassador of the United States of
America, and Amnuay Virawan, Deputy Prime Minister and Minister of Foreign
Affairs for the Kingdom of Thailand signed a convention for the avoidance
of double taxation and the prevention of fiscal evasion with respect to
taxes on income.(1) The Convention between
the United States and Thailand (hereinafter the “Convention”) will become
effective upon ratification by the legislative bodies of each nation.(2) The treaty may come into force as early as 1998, assuming US Senate ratification.(3)
Convention between the United States and Thailand has been under negotiation
for almost twenty years. The main source of disagreement had been Thailand’s
proposal for a tax-sparing credit by the US government to waive taxes
for US-based investors in Board of Investment promoted projects in Thailand.(4)Tax
sparing is a form of incentive to investment that usually takes the form
of a reduction of tax rates or tax holidays.(5) The US Congress has retained a policy of being consistently opposed to
tax-sparing credits.(6) The final version
of the Convention does not include a tax-sparing provision.
Rationale of the Convention
taxation treaties have a dual legal nature. The treaty is both an international
agreement on behalf of two nations, and also becomes part of the domestic
tax law of each contracting state.(7) As
an international treaty, interpretation of the treaty is governed by public
international law, and specifically by the Vienna Convention on the Law
of Treaties of 1969.(8) In the United States,
the rules of construction used in interpreting treaties are essentially
the same as those used by the court in interpreting statutory law.(9)
governments involved consider the tax treaty as an agreement to limit
the taxing jurisdiction of each state, with a primary aim being the encouragement
of foreign investment or labor or to assist the state’s residents in overseas
investments or work-related projects.(10) As is apparent from the title of the convention, there is an additional
purpose, that of preventing fiscal evasion. A taxpayer can no longer be
certain that the information he supplies to the revenue authorities to
one state will be confidential from the authorities of the other state.(11)
Personal and Subject
Jurisdiction of the Convention
Convention will apply to citizens and residents of either or both states,
including former citizens and residents who have deliberately lost their
citizenship or residency in an attempt to evade taxes.(12)
second paragraph of article 1 states that notwithstanding any provision
of the convention except for paragraph 3 of this Article, a state may
tax its citizens and residents as if the Convention had not come into
3 provides a number of exceptions to the broad reservation of rights stated
in paragraph 2. Thus the exceptions in paragraph 3 delineate those taxpayer
activities which would create a complete tax exemption in one or the other
state. Those taxpayer activities that fall outside the activities specified
in paragraph 3 are those activities where the tax debt would be apportioned
between the two states; and according to paragraph 2, each state could
mandate its own procedure for the reporting, assessment, and collection
of their portion of these apportioned taxes.
Convention will apply only to income taxes.(13) Applicable United States taxes will exclude the social security tax. In
Thailand, however, the Convention will apply to both the general income
tax and the petroleum income tax.(14)
under the convention will be determined by criteria set by the laws of
each state, but will not be decided by the “source” of income.(15) In cases where a person has ties to both states , the Convention provides
for a balancing of the various factors in order to determine legal residency.(16)
5 of the Convention sets forth the basic principle that a “permanent establishment”
means a fixed place of business through which the business is wholly or
partly carried on. Paragraph 2 illustrates this principle with the following
examples: a place of management, a branch, an office, a factory, a workshop,
a warehouse, and a place of extraction of natural resources. In the absence
of a treaty the United States taxes income connected with trade or business
on the basis of relatively minimal contact with the United States.(17) Therefore, the “permanent establishment provision” has the effect of limiting
and generally elevating the minimum level of “nexus” with a state that
must be present before an enterprise can be subject to taxation. Furthermore,
the concept of “permanent establishment” is relevant to those provisions
of the Convention which grant tax reductions on dividends, interest, royalties,
and business profits, because these tax reductions are only available
if the foreign person has no ”permanent establishment” to the country
to which the income is connected.(18)
Income from Immovable
5 provides that income derived by a resident of a contracting state from
real property (including income from agriculture and forestry) situated
in the other state may be taxed in that other state.
7 of the treaty provides that the income of an enterprise shall be taxable
in that enterprise’s state. However, the other state or the “source” may
also tax business profits but only if those profits are attributable to
a “permanent establishment” in that state.
(19) In the absence of a treaty, if a foreign person is engaged
in trade or business in the United States such person is subject to tax
in the United States on all his business profits derived from sources
within the United States(20), and on certain
foreign source business profits related to any office or fixed place of
business in the United States.(21)
profits attributable to a permanent residence in a source state are profits
attributable to sales of goods or merchandise, or other business activities.
As with other provisions of the Convention, there is a general exception
that said activities cannot have been engaged in for the purpose of evading
2 through 9 of Article 7 provide the guidelines for an enterprise to determine
which profits are attributable to a permanent establishment in a “source”
state. The profits must be similar to profits the enterprise could be
expected to make if it were a distinct and independent enterprise.(23) Deductions will be allowed for executive and administrative expenses,
whether those expenses occurred in the permanent establishment state or
elsewhere.(24) Profits will nor be attributable
to business activities that involve the mere purchase of goods or merchandise
for the enterprise.(25)
Shipping and Air
8 of the Convention provides that income which a resident derives from
the operation of an aircraft in international air traffic will be taxable
only in the resident’s state.(26) The amount
of tax on income which a resident receives from the operation of ships
in international traffic will be reduced by 50 percent by the other state.
9 and 25 both seek to alleviate international double taxation arising
from the actions of either or both of the contracting states. Article
9 permits one contracting state to increase the assessed tax of one of
its enterprises in regard to that enterprises dealings with a related
enterprise of the other contracting state, thereby causing the other contracting
state to make what would normally be a downward adjustment in its assessed
tax. Thus article 9 has the dual objectives of alleviating double taxation,
and the proper allocation of tax jurisdiction between the states.
Royalties, and Gains
income is covered in Article 10 of the Convention. Dividends paid by a
company which is a resident of one state to a resident of the other state
may be taxed in either or both states. If the beneficial owner of the
dividends is a resident of the other state the rate of tax imposed by
the state of the resident company may not exceed either 10 percent or
15 percent of the gross amount of the dividends.(27)
income is covered by Article 11 of the Convention. Interest arising in
one state and paid to a resident of the other State may be taxed in the
other state. The income may, however, also be taxed in the state in which
it arises. However the state in which the income arises may not tax an
amount which exceeds either 10 percent or 15 percent of the gross amount
of the interest.(28)
arising in one state and paid to a resident of the other state may be
taxed in the other state. However the royalties may also be taxed in the
state in which the royalties arise, but the tax rate may not exceed certain
specified rates. The rate may not exceed 5 percent of the gross amount
of royalties for the use of copyright of literary, artistic, and scientific
work. The tax may not exceed 8 percent of the gross amount of the royalties
for the use of industrial, commercial or scientific equipment. The rate
may not exceed 15 percent for royalties from the use of any patent, trademark,
design or related information.(29)
the above-noted tax reduction provisions will not apply if the beneficial
owner of the dividends, royalties, or interest income carries on business
in the other contracting state through either a permanent establishment
or fixed base in that other state, and the holding, debt claim, or property
right which is the source of the income is “effectively connected” to
that permanent establishment, fixed base, or business activities.(30) The use of the term “effectively connected” is somewhat broader than the
“attributable” concept that has been suggested by some commentators.(31)
15 explains taxation of independent personal services, which includes
services, such as scientific, literary, artistic, and educational activities,
as well as the work of professionals such as lawyers, engineers and physicians.(32) The general rule states that income from these activities shall be taxable
only in the state where the individual is a resident.(33) However if the individual has a fixed permanent base in the other state,
or if he stays in the other state for more than 90 days in a tax year,
he may be taxed by the other state for the proportional share of his income
that is attributable to either his fixed base or his extended stay.(34) The individual will also be liable for taxation if he has performed activities
in the other state, the remuneration for which was paid by a resident
of the other state, or a fixed or permanent base in the other state, and
exceeds 10,000 United State dollars or its equivalent in Thai baht.(35)
16 sets forth the treatment of taxes on dependent personal services. In
general the wages of a resident shall be taxable in the state that the
individual resides. However if the individual has been employed in the
other state he may also be taxed by that other state to the extent that
his income is attributable to work performed in the other state. An individual
employed in a state other than the one which he resides may also be taxed
by the state of his residence if the following conditions are met: 1)
The recipient was present in the other state for a period not exceeding
an aggregate of 183 days of any 12 month period. 2) the remuneration is
paid by a person who is not a resident of the other state; and 3) the
remuneration is not borne by a permanent establishment or a fixed base
which the employer has in the other state.(36)
16 of the Convention is directed to the avoidance of treaty shopping by
third state nationals. The first paragraph specifies the requirements
for a company, or juridicial person to be entitled to the benefits of
the Convention. Thus at least 50 percent of the beneficial interest or
stock ownership must be by persons entitled to benefits under the other
provisions of the treaty, and at no more than 50 percent of the gross
income may be used to meet liabilities to persons not entitled to benefit
under the Convention. A corporation would also be entitled to the benefits
of the convention if it could be shown that its stock was publicly traded
on a recognized stock exchange.
3 and 4 of Article 18 provide that residents of Thailand that are defined
under the domestic law of Thailand as “international banking facilities”
will generally be excluded from the benefits of the Convention unless
a special exception is made for them by the competent authorities.
Artistes and Sportsmen
19 of the Convention makes articles 14 and 15, relating to independent
and dependent services inapplicable, in the case of artistes and sportsmen.
The article provides that the income of artistes or sportsmen residing
in one state may be taxed on his income attributed to activities in the
other state only if that income exceeds either 100 United States dollars
per day, or an aggregate amount of 3,000 United States dollars per year
(or the equivalent in Thai currency).(37) The provision of the section does not apply to entertainers who are wage
earners supported by public funds, or in government service.(38)
Security Payments, Annuities, Alimony and Child Support
20 covers four types of payments which share the trait that they are typically
paid or received by individuals as “personal” items. Pensions, social
security payments, annuities, alimony and child support payments paid
to the resident of a contracting state shall be taxable only in the state
where they arise.(39)
paid by a contracting state or a political subdivision of that contracting
state shall be taxable in that state. The remuneration will also be taxable
in the other state if the individual is a national of that state or he
is a resident of that state who did not gain residency solely for the
purpose of rendering those services.(40) Pensions paid for service to a contracting state in another resident state
are taxable in the first state, except if the individual is a national
resident of the other state, in which case the pension shall be taxable
only in the other state.(41)
Students and Trainees
allowances or awards for students and trainees residing in the other contracting
states shall be taxable only in the state in which they arise, and will
be exempt from taxation in the other contracting state.(42) This exemption applies to students studying at recognized universities
or educational institutions, or receiving training to qualify the individual
for a profession, or an individual studying or doing research as a recipient
of a special grant, allowance, or award. The exemption will include remuneration
for income received in the other contracting state so long as the income
does not exceed 3,000 United States dollars (or the equivalent in Thai
baht) for any tax year.(43) This exemption
will have a duration of 5 years.(44)
a person is a resident of one state, and is already an employee of a resident
of that state goes to the other state to receive either technical, professional,
or business training, or to engage in study at a recognized university,
he shall also be exempt from taxation in the other state for a period
not exceeding 12 consecutive months and for an aggregate amount of 7,500
United States dollars(or its equivalent in Thai currency).(45)
Teachers and Researchers
23 provides that an individual visiting a contracting state for a period
not exceeding two years for the purpose of teaching or engaging in research
at a recognized educational institution shall be exempt from taxation
in the state he is visiting.(46)
24 provides that other income shall be taxable in the state where the
recipient resides.(47) An example of other
income is gambling winnings.(48) Paragraph
2 however provides an exception, where the other income derives from property
or right effectively connected with a permanent establishment or fixed
base in the other contracting state; in such cases Article 7(Business
Profits) or Article 15 (Independent Personal Services ) shall apply, and
the other contracting state may tax so much of the other income as is
attributable to the permanent establishment or fixed base.
Relief from Double
25 provides for the relief from double taxation in the following manner.
The United States shall allow a tax credit to a resident or citizen of
the United States for the income tax paid to Thailand by either individuals
or United States companies.(49) The Thai
government will also give a credit for United States tax payable in respect
to income that is subject to taxation by both contracting states.(50)
and Mutual Agreement Procedure
27 provides that nationals and enterprises of a contracting state shall
not be subjected in the other Contracting state to any taxation measure
which is more burdensome than nationals of the other state are subjected
to in the same circumstances.(51)
27 provides a mutual agreement procedure by which an individual that believes
that tax is being assessed not in compliance with the treaty may present
his case to the competent authority of the state where he resides.(52) If the individual believes that the tax is being assessed in violation
of the Non-Discrimination Article, he may present his case to the state
of which he is a national. There is a three year statute of limitation
on grievances. Further, an individual does not waive any other remedies
he may have under domestic law by exercising his rights under the Convention.
The competent authorities shall attempt to resolve any difficulties by
mutual agreement. However paragraph 2 provides that the taxpayer’s objection
must be “justified” for the competent authorities to endeavor to resolve
Exchange of Information
28 provides that the competent authorities of each state agree to exchange
information for the purpose of carrying out the provisions of this Convention.(54) All information shall be secret, and shall be disclosed only to authorized
government agencies. The Convention omits the provision in the Model Treaty
that expands this article to include assistance in the collection of taxes.(55)
article 28 purports to mandate an exchange of information, the obligation
to provide information does not go beyond what is “necessary” for carrying
out the convention and the domestic laws of the contracting states.(56)
3 of Article 28 further qualifies the obligation by stating that a state
that is requested to supply information to the other state has a duty
to obtain information in the same manner and to the same extent as if
it were obtaining information in order to collect its own taxes. Paragraph
3 provides that the application of paragraph 2 shall be suspended until
such time as the government of Thailand sends a diplomatic note stating
that it is prepared to comply with this provision.
Convention between the United States and Thailand is a tax treaty that
is intended to prevent double taxation and fiscal evasion. The Convention
will become effective upon ratification by the United States legislature,
possibly as soon as 1998. The Convention should stimulate trade and investment
between the two states. The treaty will also make it easier for individuals
engaged in occupations, students, and researchers to travel between the
Attorney at Law, State of Hawaii, U.S.A. Federal District for the State
of Hawaii; Doctor of Jurisprudence, University of Houston, U.S.A. (1986);
Foreign Expert, Sukhothai Thammathirat Open University
1) Convention between the Government of the United States
of America and the Government of the Kingdom of Thailand for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income of November 26, 1996 (hereinafter cited as Convention).
2) Convention, at art. 30. ,
3) “Tax treaty promises ‘new era of trade’”. Bangkok Post,
November 27, 1996.
4) “Clinton Expected to Sign Tax Treaty”, Bangkok Post,
September 18, 1996.
5) M. Dominic, Income Taxation and Foreign Investment
in Developing Countries (Amsterdam, 1980) and C. Irish, International
Double Taxation Agreements and Income Taxation at Source (1973) 23
6) Philip Baker. Double Taxation and International
Tax Law . London: Sweet and Maxwell, 1991, at 280
7) Ibid., p. 5-6.
8) The Vienna Convention entered into force on January
17, 1980. See Sir Ian Sinclair, in International Fiscal Association; Interpretation
of Tax Treaties (1986) Bull I.B.F.D. 75.
9) David Brockway, Interpretation of Tax Treaties and
their Relationship to Statutory Law--A U.S. Perspective, 35 Tax Conference
of the Canadian Tax Foundation 619 (1983) at 627. See Lewenhaupt V.
Commissioner 20 T.C.(U.S.) 151(1953).
10) Discussing the purpose of double taxation agreements,
the United States Supreme Court has stated the following: “...the general
purpose of the treaty was not to assure complete and strict quality of
treatment--a virtually impossible task in light of the different tax structures
of the two nations--but rather, as appears from the preamble of the convention
itself, to facilitate commercial exchange through the elimination of double
taxation resulting from both countries levying on the same transaction
or profit; an additional purpose was the prevention of fiscal evasion.” Maximov v U.S. 373 U.S. 49; 10 L.Ed. 2d 184 at 188.
11) Convention at art 28. See also Philip Baker. Double
Taxation and International Tax Law, London: Sweet and Maxwell, 1991.
12) Convention, at art. 1.
13) Ibid., at art. 2; see also D. Brockway, Interpretation
of Tax Treaties and their Relationship to Statutory Law--A U.S. Perspective,
35 Tax Conference of the Canadian Tax Foundation 619 (1983) at 621
14) Additionally all subsequent tax laws enacted that
are deemed to be identical or substantially similar to the taxes already
mentioned will also be covered by the Convention. Convention, at Art 2(2).
The Convention, in keeping with the general practice of Double Taxation
Treaties, also will not apply to local taxes, indirect taxes, and other
taxes. See Philip Baker. Double Taxation and International Tax Law,
London: Sweet and Maxwell, 1991, at 67-70.
15) Convention, at art 4(1). The test for residency will
include domicile, residence, citizenship, place of management, and place
16) Convention, at art. 4,(2).
17) See, e.g., Rev. Rul. 70-424, 1970-2 C.B. 150
(agent in U.S. constitutes engaging in trade or business in the U.S.);
Rev. Rul. 55-617, 1955-2 C.B. 774 (sales through commission agent in the
U.S. treated as engaging in trade or business in the U.S.)
18) Convention, at arts. 10(5),11(5),12(4),7(1).
19) Ibid., at art. 7.
20) I.R.C. Sec. 871(b),882(a), 864(c)(3)
21) Wm. L. Burke. Report on Proposed United States
Model Income Tax Treaty, 23 Harvard International Law Journal 219
at 250 (1982).
22) Convention, at art 7(1).
23) Ibid., at art. 7(2).
24) Ibid., at art. 7(3).
25) Ibid., at art. 7(5).
26) Ibid., at art. 8(1).
27) Ibid., at art 10(1)(2). 10 percent of the
gross amount of the dividends will be taxable if the beneficial owner
is a company which controls at least 10 percent of the voting power of
the dividend paying company. 10 percent is the figure in all other cases.
28) Convention, at article 11(1)(2). 10 percent of the
gross amount if the interest is beneficially owned by a financial institution,
or the interest is paid based on a debt from a sale on credit by a resident
of the other state. In all other cases the tax charged shall not exceed
29) Ibid., at art. 12(2).
30) Ibid., at arts. 10(5), 11(5), 12(4)
31) Wm. Burke, Report on Proposed Model Tax Treaty, 23 Harvard International Law Journal 219 (1982)at 259.
32) Convention, at art. 15.
33) Ibid., at art. 15(1).
34) Ibid., at art. 15 (a)(b).
35) Ibid., at art. 15 (1)(c).
36) Ibid., at art. 16.
37) This is a much lower level of contact with the situs
state than has been proposed by Model treaties. See e.g. Wm. Burke,
Report on the Proposed United States Model Treaty, 23 Harvard International
Convention 219 (1982) at 295. The official commentary to the OCED Model
Treaty expressly justifies special tax treatment for artists and athletes
on the basis of “practical difficulties which often arise in taxing entertainers
and athletes performing abroad.” See Organization for Economic Cooperation
and Development, Report of the Fiscal Committee, MODEL DOUBLE TAXATION
CONVENTION ON INCOME AND CAPITAL 70 (1977) at 134; art. 17, comment 2)(hereinafter
cited as 1977 ICED MODEL TREATY REPORT)
38) Convention, at art 19(3).
39) Since the United States domestic law does not treat
child support benefits as income, the recipient of these benefits is allowed
a deduction for the amount of this benefit. Therefore, this article provides
the other state with what may be a non-reciprocal benefit. See Wm. Burke, Report on the Proposed United States Model Treaty, 23 Harvard International
Convention 219(1982)at 298, at art. 19(1). Convention, at art. 20.
40) Ibid, at art. 21.
41) Ibid, at art. 31.
42) Ibid, at art. 22(1).
43) Ibid, at art. 22(1)(a).
44) Ibid, at art. 22(b).
45) Ibid, at art. 22.
46) Ibid, at art. 23.
47) On this Article see D. Ward et al., “The Other
Income Article of Income Tax Treaties” (1991) B.T.R. 352
48) U.S. Letter Ruling 87-14-055.
49) Subject to certain limits, United States domestic
law allows a foreign tax credit for income taxes paid to a foreign state.
See generally E. Owens, THE FOREIGN TAX CREDIT(Harvard Law School International
Program in Taxation:1961); E. Owens & G. Ball, THE INDIRECT CREDIT(Harvard
law School International Program in Taxation: vol. 1, 1975, vol. 2 1979)
50) Convention, at art. 25.
51) Ibid. at art. 26.
52) Ibid. at art. 27.
53) As a practical matter such a person should present
his or her case to the contracting authority as early as possible. Problems
may arise if the aggrieved party notifies the competent authority while
the case is pending litigation under the domestic law procedure as there
may be a determination that review is not “justified”. Burke, Report
on the Proposed United States Model Treaty, 23 Harvard International
Convention 219 (1982) at 312. However, a United States taxpayer presenting
a case has a right to judicial review if the competent authority determines
that his case is unsuitable for review. Rev Proc. 77-12, 1977-1 C.B.573.
54) Convention, at art. 28.
55) The United States has had difficulty in implementing
provisions for assistance in collecting taxes included in treaties. Japan:
Convention for the Avoidance of Double Taxation and the Avoidance of Fiscal
evasion with Respect to Taxes on Income, March 8, 1971, United States-Japan
at art @6; United Kingdom: Convention for the Avoidance of Double Taxation
and the Avoidance of Fiscal evasion with Respect to Taxes on Income and
Capital Gains, April 13, 1976, at art. 26
56) Convention, at art. 28(1)