A total of 130 countries around the world have reached a historic deal on global tax reform with the aim of addressing tax avoidance problems caused by multinational companies (MNCs). The reform will focus on two matters: 1) Establishing a global minimum tax rate, and 2) Adopting a new and fairer allocation of corporate income tax from MNCs that provide digital services.
Thailand, which is one of the 130 countries that is participating in the current global tax reform, may inevitably be affected by the new regulations in two ways: 1) The global minimum tax rate, once established, will likely affect Thailand’s competitiveness in attracting FDI, and 2) The allocation of corporate income tax from MNCs will have an impact on Thailand’s tax revenue.
Regarding the impact of the global minimum tax rate on Thailand’s competitiveness in attracting FDI, although Thailand’s corporate tax rate is at 20 percent, the Thailand Board of Investment (BOI) offers tax privileges to projects that are eligible for investment promotions such as a corporate tax exemption for 3-13 years. Therefore, such corporate tax waivers will no longer be effective once the global minimum tax rate is enforced. Presently, approximately 100 MNCs are on the list of being subject to the minimum global tax rate, including those currently investing in Thailand’s automotive industry. However, the decision of MNCs in selecting Thailand as their investment destination does not rest with the corporate tax waiver alone, but other factors, for instance integrated supply chains, infrastructure, trade privileges and production costs. Therefore, Thailand’s FDI may not decline significantly even if the global minimum tax rate comes into effect.
In spite of this, the competition approach in attracting FDI is bound to change. Instead of corporate tax exemptions, countries may place emphasis on other factors: 1) The development of utility infrastructure such as roads, electric trains and 5G networks, 2) Entering trade agreements with other nations so that companies in their countries are eligible for export-related privileges, and 3) Other incentives such as land ownership rights and various fee waivers to attract FDI. Thailand, therefore, has other options to attract investment from MNCs.
For the impact of the allocation of corporate income tax from MNCs in digital businesses on Thailand’s tax revenue, Thailand has reported a certain portion of income tax earned from MNCs, providing digital services here, as income of the MNCs in tax havens. In 2020, the market value of digital services in Thailand amounted to roughly THB200 billion . As Thailand will be allocated income tax from MNCs at 10 percent higher than the 20-30 percent of their profit before tax under the new regulations, Thailand’s future tax revenue will likely increase over the current level, and it is set to grow further in line with the thriving digital business market.
Additionally, the new regulations require participating countries to remove current “digital services taxes” in order to be qualified for the allocation of corporate income tax from MNCs in digital businesses. Currently, many European countries such as France, Italy, Austria and Spain have a special form of digital services tax, based on the principles of corporate tax. In Thailand, the Revenue Department will begin to collect value added tax (VAT) from non-resident providers of digital services, effective September 1, 2021. Such VAT differs from the digital service taxes, based on the principles of corporate income tax, meaning that Thailand will not be required to terminate the VAT on digital services. Moreover, once the new regulations come into force, Thailand will still be able to collect VAT on non-resident providers of digital services and enjoy the allocation of corporate income tax from MNCs.
In summary, the global tax reform may benefit Thailand in terms of increased income tax that will be collected from digital businesses. Preliminarily, concern over the fact Thailand will lose its competitiveness in attracting FDI as a result of the global minimum tax rate will be limited because Thailand’s rivals, namely Vietnam, Malaysia, Indonesia and Singapore, are among the 130 countries participating in the current global tax reform, as well. Moreover, MNCs do not consider investing in Thailand because of the benefits from corporate income tax alone, but other factors, such as infrastructure, privileges under Thailand’s trade agreements with other countries, and other incentives. The global minimum tax rate, once enforced, may induce participating countries to lure FDI based on their infrastructure and trade agreements rather than benefits offered under corporate income taxes.