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Recent Supreme Court decisions on royalties

Over the course of 2013, the Supreme Court of Thailand (SC) issued three decisions that dealt with the definition of royalties. These decisions are seen as key in differentiating between a payment for general services and a royalty payment.
Where there is an applicable tax treaty (and there is no permanent establishment), Thai withholding tax usually is not imposed on payments for general services. Conversely, a royalty payment will always be subject to a withholding tax (albeit at a more beneficial treaty rate). Thus, it is important to be able to differentiate between the two.

Section 40(3) of the Revenue Code defines royalty payments as "value received for goodwill, copyright or any other rights, annuity or income in the nature of yearly payments derived from a will, any other juristic act, or judgment of the court". Logically, it follows that payment for the "right to use" (including the provision of know-how) would be considered a royalty payment but that the sharing of knowledge/experience may not. This, coupled with the lack of further guidance, has resulted in some differences of opinion between the Thai Revenue Department (TRD) and taxpayers.
It is hoped that the decisions in the following cases would provide some much needed guidance.

Thai Tank Terminal

(a) Facts. Thai Tank Terminal (TTT) had two agreements with its Dutch Parent – an Intellectual Property License Agreement (IPLA) and an Offshore Services Agreement (OSA).
The IPLA provided TTT with the right to use its parent's expertise and know-how regarding the design, construction, operation and maintenance of a petrochemical and petroleum terminal. The fee for this was 0.5% of TTT's gross income on which TTT deducted and remitted 15% withholding tax.
Under the Offshore Services Agreement (OSA), TTT was required to pay its Dutch parent a monthly fixed fee for the first 6 years of the contract and a variable fee (1% of gross income) for the entire agreement period. Pursuant to the agreement, the fees were payment for the administrative and managerial assistance provided by the parent for matters such as budgetary control, recruitment and training, procurement, safety and security, etc. TTT did not withhold tax on these payments.
The TRD claimed that the monthly fixed fee was a "hidden royalty", especially since it was payable even where no service is provided. Additionally (in the TRD's testimony) the 0.5% fee under the IPLA was considered by the TRD to be relatively low and this lent weight to the TRD's suspicion that a "hidden royalty" was being paid.

(b) Decision. The SC held that the monthly fixed fee payment was not a royalty payment. The SC held that the taxpayer was able to provide sufficient evidence to counter TRD's argument that a fixed percentage fee which was payable regardless of the level of service provided was a "hidden royalty". In arriving at its decision, the SC carefully considered the terms of the signed agreements; this highlights the importance of proper supporting documentation, especially where there is a possibility that the payments may be construed as royalty payments.

Esso (Thailand) Plc.

(a) Facts. Esso (Thailand) Plc. (ETP), a company listed on the Thai Stock Exchange, entered into a Master Services Agreement with its affiliate Esso Coordination Center N.V. (ECC), a Belgian entity), for cost allocation in respect of its global accounting system.
ECC was a centralized company which gathered accounting information from Esso Affiliates. ECC used "SAP R/3" a computer software that was licensed by Exxon Mobil Corporation for the use of Esso affiliates worldwide, consequently ECC was not the owner of the software nor was it a sub-licensee. However, ETP paid ECC a fee of USD 5.18 million as part of its allocated costs.

(b) Decision. The SC held that ECC was not a service provider. Thus, the payment for cost allocation ought to be deemed a royalty payment for the right to use the SAP R/3 software which was passed through ECC.

Philips Electronics (Thailand)

(a) Facts. Under a Marketing Service Agreement (MSA), Philips Electronics (Thailand) (PT) paid a fixed rate marketing fee of 0.5% of annual net sales to a Dutch Philips entity.

(b) Decision. The SC held that the marketing fee paid was a royalty payment. The SC relied on the MSA and concluded that the Dutch entity was required to provide marketing services and sales in respect of "standard orders", "manuals" and "risk control processes". The SC was of the opinion that services provided contained elements of proprietary right and confidentiality and that they amounted to the provision of "trade secrets". In this instance, the SC held that the lack of correlation between the fee and the provision of services lent to the argument that the payment was a royalty payment.

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