Jonathan 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
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.
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
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
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 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)
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)
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.
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. (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)
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.
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.
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.
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.
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)
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)
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.
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)
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)
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)
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).
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)
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.
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)
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.
* 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
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).
Convention, at art. 30.
, "Tax treaty promises 'new era of trade'". Bangkok Post, November 27, 1996.
"Clinton Expected to Sign Tax Treaty", Bangkok Post, September 18, 1996.
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.
Philip Baker. Double Taxation and International Tax Law . London: Sweet and Maxwell, 1991, at 280
Ibid., p. 5-6.
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.
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).
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.
Convention at art 28. See also Philip Baker. Double Taxation and International Tax Law, London: Sweet and Maxwell, 1991.
Convention, at art. 1.
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
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.
Convention, at art 4(1). The test for residency will include domicile, residence, citizenship, place of management, and place of incorporation.
Convention, at art. 4,(2).
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.)
Convention, at arts. 10(5),11(5),12(4),7(1).
Ibid., at art. 7.
I.R.C. Sec. 871(b),882(a), 864(c)(3)
Wm. L. Burke. Report on Proposed United States Model Income Tax Treaty, 23 Harvard International Law Journal 219 at 250 (1982).
Convention, at art 7(1).
Ibid., at art. 7(2).
Ibid., at art. 7(3).
Ibid., at art. 7(5).
Ibid., at art. 8(1).
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.
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.
Ibid., at art. 12(2).
Ibid., at arts. 10(5), 11(5), 12(4)
Wm. Burke, Report on Proposed Model Tax Treaty, 23 Harvard International Law Journal 219 (1982)at 259.
Convention, at art. 15.
Ibid., at art. 15(1).
Ibid., at art. 15 (a)(b).
Ibid., at art. 15 (1)(c).
Ibid., at art. 16.
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)
Convention, at art 19(3).
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, Rep