What New Foreign Tax Conventions Mean for US Business Owners

This is the first income tax convention between the United States and Thailand and is an important achievement in the Administration's broad strategy of expanding the U.S. tax treaty network with major trading partners in Southeast Asia. The Convention will enter into force after the countries have exchanged the instruments of ratification.

"Today's signing reminds us that governments do not create wealth, but governments can create the climate in which our workers, our entrepreneurs, our investors and business people can have a free and unfettered opportunity to thrive," said President Clinton.

The proposed Convention generally follows the pattern of the U.S. Model treaty, provisions of which have been included in many recent U.S. treaties with other developing countries. There are, however, variations that reflect particular aspects of Thai treaty policy, additional accommodations for U.S. and Thai law, and U.S.-Thai economic relations.

Although the withholding rates under the proposed Convention are generally higher than those in the U.S. Model and in many recent U.S. treaties with OECD countries, the proposed rates are generally lower than those in many recent Thai treaties.

Under the proposed Convention, direct investment dividends are subject to taxation at source at a 10-percent rate, and portfolio dividends are taxable at a 15-percent rate. The proposed Convention requires a 10-percent ownership threshold for application of the 10-percent tax rate.

The proposed Convention provides for a maximum 15-percent rate of tax at source on most interest payments. However, interest paid by any financial institution, including an insurance company, and interest earned on trade credits is limited to a 10-percent rate of tax at source. In addition, interest earned on government debt, including debt guaranteed by government agencies (e.g., the U.S. Export-Import Bank) is exempt from tax at source.

Copyright royalties (including software) are subject to a 5-percent tax at source. Royalties for the right to use equipment are subject to an 8-percent tax at source. Royalties for patents and trademarks are subject to a 15-percent tax at source.

Standard U.S. anti-abuse rules are provided for certain classes of investment income. Dividends paid by non-taxable conduit entities, such as U.S. Regulated Investment Companies and Real Estate Investment Trusts, are subject to special rules to prevent the use of these entities to transform what is otherwise high-taxed income into lower-taxed income. Excess inclusions with respect to residual interests in Real Estate Mortgage Investment Conduits are denied the benefits of the reduced rate of tax at source on interest.

Allowances similar to those under some U.S. treaties with developing countries are made for taxation of income from the performance of personal services. But the proposed Convention grants a taxing right to the host country that is broader than that in the OECD or U.S. Models.