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The Income Tax Treaty Between the United States and Thailand: An Overview and Analysis

Attorney J. W. Leeds*


Due 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.


On 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)

The 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.

Authority and Rationale of the Convention

Double 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)

The 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

The 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)

The 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 effect.

Paragraph 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.

Taxes Covered

The 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)

Residency Defined

Residency 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)

Permanent Establishment Defined

Article 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 (Real) Property

Article 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.

Business Profits

Article 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.
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)

Business 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 taxes. (22)

Paragraphs 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 Transport

Article 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.

Associated Enterprises

Articles 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.

Dividends, Interest, Royalties, and Gains

Dividend 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)

Interest 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)

Royalties 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)

However, 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)

Independent Personal Services

Article 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)

Dependent Personal Services

Article 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)

Limitation on Benefits

Article 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.

Paragraphs 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

Article 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)

Pensions, Social Security Payments, Annuities, Alimony and Child Support

Article 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)

Government Service

Remuneration 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

Grants, 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)

If 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

Article 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)

Other Income

Article 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 Taxation

Article 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)

Non-Discrimination and Mutual Agreement Procedure

Article 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)

Article 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 the case. (53)

Exchange of Information

Article 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)

Although 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)

Paragraph 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.


The 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 two states.


* 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 I.C.L.Q. 292.
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 of incorporation.
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 15 percent.
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)