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ResourcesCorporate and Tax AdvisoryUS Tax LawCould Amity Treaty Companies Be Considered Exempt from US Tax Liability?

Could Amity Treaty Companies Be Considered Exempt from US Tax Liability?

For Americans doing business abroad “Trump Tax” (formally referred to as the Tax Cuts and Jobs Act of 2017) has been a hot topic of conversation, especially once the ramifications of the Act became more apparent during the preparation of 2018 corporate and personal tax returns. Acronyms such as GILTI (an abbreviation for Global Intangible Low Tax Income) and FDII (an abbreviation for Foreign Derived Intangible Income) became a cause of concern and sometimes consternation for large and small American enterprises abroad. These coupled with “deemed repatriation” or the so-called “transition tax” acted as examples of how the new tax bill had created a paradigm shift in the way taxes would be assessed on Americans and American businesses abroad.

Trump Tax is a quasi-territorial tax system insofar as it differentiates tax obligations between foreign and domestic operations. In fact, entities deemed to be “controlled foreign corporations” must deal with a differing array of tax burdens and formulae for assessing their tax liabilities compared to domestic corporations. GILTI, FDII, and the “transition tax” in the form of deemed repatriation, to name a few. Expat American business owners in Thailand are well aware of these new tax mechanisms, but what if these burdens did not fall upon American companies operating in Thailand?

The forthcoming information should be viewed as the interpretations of an American attorney and member of the U.S. Court of International Trade, the U.S. Tax Court, and the U.S. Supreme Court whose perspective on American business in Thailand, most notably in light of the Treaty of Amity, became altered while studying the ramifications of Trump Tax. In this author’s mind the following analysis is as commonsensical based upon a plain language interpretation of relevant statutory, regulatory, and bi-lateral Treaty law as it is paradoxical in terms of the real world practical applications. In short, Amity Treaty Companies, notwithstanding their physical location, are not foreign corporations, but are in fact domestic corporations pursuant to U.S. law.

In order to more fully understand an apparent conundrum it is necessary to analyze the root of American law on the subject. The most logical place to start is the U.S. Thai Treaty of Amity and Economic relations. To quote directly from Export.gov (https://2016.export.gov/thailand/treaty/index.asp):

The U.S.-Thai Treaty of Amity and Economic Relations of 1833, commonly referred to as the Treaty of Amity, is a special economic relationship between the United States of America and the Kingdom of Thailand that give special rights and benefits to U.S. citizens who wish to establish their businesses in Thailand. The Treaty of Amity treaty was amended in 1966 and provides two major benefits:

  • American companies are permitted to maintain a majority shareholding or to wholly own its company, branch office or representative office located in Thailand.
  • American companies receive national treatment, meaning U.S. firms may engage in business on the same basis as Thai companies, and are exempt from most of the restrictions on foreign investment imposed by the Alien Business Law of 1972.

 

Most notably, the Treaty provides “national treatment” to American firms doing business in Thailand. This has proven very beneficial to American companies in Thailand as Amity Companies operate notwithstanding many of the restrictions on foreign businesses operating in the Kingdom. It should be noted that this article is not concerned with the impact of the Treaty upon Thai law, but instead this article is concerned with how the Treaty and the implications associated therewith otherwise impact United States law, most notably U.S. tax and trade law.

Understanding that the Treaty provides certain benefits to Americans and American companies doing business in Thailand it is time for the reader to turn attention to American tax law. As noted previously, “controlled foreign corporations”, unlike their domestic counterparts, must deal with the onus of GILTI, FDII, etc. But what is the definition of “foreign” pursuant to relevant American law? According to 26 U.S. Code § 7701 (a) (5), the term “foreign” is defined as:

“The term “foreign” when applied to a corporation or partnership means a corporation or partnership which is not domestic.”         

Clearly, the term “foreign” is defined in the negative. Therefore, in order to fully understand the definition of this term, we must understand the definition of “Domestic”. According to 26 U.S. Code § 7701 (a) (4), the term “Domestic” is defined as:

“The term “domestic” when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations.”

It is within this definition of “Domestic”, where the proverbial “rubber meets the road” with respect to interpreting the legal posture of American Amity Treaty Companies within the framework of Trump Tax. Let’s distill the relevant language:

“The term “domestic” when applied to a corporation… means created or organized… under the law of the United States.” [as a  relevant side note, the website of the IRS defines domestic corporation as follows: “A corporation created or organized in the United States or under the law of the United States or of any State, or the District of Columbia,” https://www.irs.gov/individuals/international-taxpayers/foreign-persons]

So, we can discern from this definition that a corporation created or organized under the law of the United States is a domestic corporation, and therefore NOT a foreign corporation. As such, the language contained within the Trump Tax legislation with respect to controlled foreign corporations would not pertain to corporations created or organized under U.S. law. This brings us back to the US-Thai Treaty of Amity.

The Treaty of Amity was signed by President Lyndon Johnson and ratified by the United States Senate by a vote of 69 to 31. Article 2 of the U.S. Constitution states that the President:

“… shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur;”

Furthermore, the second clause of Article 6 of the United States Constitution (often referred to as The Supremacy Clause) states:

“This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”

As the US-Thai Treaty of Amity was a duly ratified Treaty between the United States and the Kingdom of Thailand it and the provisions associated therewith became incorporated into United States law pursuant to the Supremacy Clause.

Companies in Thailand which are certified pursuant to the Treaty of Amity must undertake a process of certification in order to be considered Amity Companies. In fact, from the inception of an Amity company the arrangement of the shareholders and Directors are fundamentally different from other corporations in Thailand which must adhere to the provisions of the Foreign Business Act. To quote directly from export.gov (https://2016.export.gov/thailand/treaty/index.asp):

Application Process for Companies Seeking Protection under the Treaty of Amity

  • Certification Letter Issuance Service by U.S. Commercial Service, U.S. Embassy in Bangkok:
    The U.S. Commercial Service is responsible for issuing a certification letter to confirm that the applicant is qualified to apply for protection under the Treaty of Amity. The applicant must first obtain documents verifying that the company has been registered in compliance with Thai Law. Upon receipt of the required documents, the U.S. Commercial Service office then will certify to the Thai Department of Commercial Registration in the Ministry of Commerce that the applicant is an American owned and managed company or is an American citizen and is therefore entitled to national treatment under the provisions of the Treaty.
  • Application to Ministry of Commerce: After obtaining a certification letter from U.S. Commercial Service, the applying business organization must submit required documents, along with a completed application form, to the Bureau of Foreign Business Administration, Department of Business Development, Ministry of Commerce, in order to fully register under the Treaty.

 

Clearly, in order to completely organize and thereby conclude the creation of an Amity Company American and Thai officials must undertake certain tasks as noted above. Until said tasks are completed, an Amity Company does not yet exist. In a sense, American and Thai law, regulation, and official action are blended during the process of Amity Certification and both nations’ legal, regulatory, and governmental systems are operating simultaneously and in tandem in order to promulgate an Amity Company. As such, it is clear from a plain language interpretation of relevant American law and from the process of organizing and creating an Amity Treaty company that said company, notwithstanding her physical location of incorporation, is a domestic corporation by dint of the fact that she was created and organized under United States law pursuant to the Treaty’s incorporation into U.S. law via the provisions of the Supremacy Clause.

Therefore, companies created/organized in Thailand in order to enjoy the benefits of the Amity Treaty are domestic corporations for purposes of United States law and are not subject to the provisions pertaining to “controlled foreign corporations” noted under the Tax Cuts and Jobs Act of 2017. 

So where does this leave Amity Companies with respect to their American tax liabilities? Another Treaty between the USA and Thailand is controlling. Namely, the US-Thai Double Tax Treaty (formally referred to as “CONVENTION BETWEEN THE GOVERNMENT OF THE KINGDOM OF THAILAND AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME”).

As noted above, the importance of Trump Tax with respect to the provisions of the Amity Treaty pertains to the difference between “domestic” and “foreign” corporations. A standard domestic company in the United States would be subject to U.S. Federal income tax. The Double Tax Treaty (DTA) explains that pursuant to its provisions the application of the following taxes can be restricted:

“ in the United States: the Federal income taxes imposed by the Internal Revenue Code…” [Article 2 paragraph 1]

While the double tax treaty can restrict federal income tax, the mechanism to restrict said tax is triggered based upon the residence of a Thai and/or American corporation. Article 3 (1) (C) of the DTA states:

“[T]he terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;”

Article 4 paragraph 1 of the Double Tax Treaty has the following to say: 

“For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. The term also includes that State and any political subdivision or local authority thereof. The term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.”

Notwithstanding the domestic nature of an Amity company pursuant to its creation/organization pursuant to the law of the United States, such a company would not be considered resident of the United States as such a company would not be liable for U.S. taxes by reason of domicile, residence, citizenship, place of management, place of incorporation nor any other reason as the company does not physically exist in the United States and is neither incorporated nor managed in the United States. Although such a company is organized and created under United States law (i.e the Treaty of Amity) it is not resident in the United States nor does it have American citizenship. Therefore, an Amity corporation certified and doing business exclusively in Thailand would be considered resident only in Thailand pursuant to the provisions of Double Tax Treaty. The Double Tax Treaty goes further:

Article 7 paragraph 1:

“The income or profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.”   

Therefore, an Amity Treaty Company, which does not have a permanent establishment in the United States, for example a business operating exclusively in Thailand (or even globally, but not conducting business within the territory of the USA), would not be liable to pay any United States federal income taxes pursuant to article 7 paragraph 1 of the DTA despite the fact that the company is a domestic company by dint of creation/organization under U.S. law.

American Amity Treaty corporations are unique. More specifically, they are domestic corporations resident in Thailand and when not engaged in permanently established business in the United States pursuant to the provisions of the Double Tax Treaty they are not subject to federal income tax in the same manner as other domestic corporations. Concurrently, for purposes of United States law and pursuant to the provisions of 26 U.S. Code § 7701 and the US-Thai Treaty of Amity such entities cannot be considered “controlled foreign corporations” because they are not foreign, but are, in fact, domestic. Therefore, neither U.S. federal income tax nor the new tax mechanisms created under Trump Tax can be levied against an Amity Treaty company not operating in the USA.

Obviously the tax ramifications of this interpretation of the law are substantial. Meanwhile, the domestic nature of Amity Companies could have positive implications for trade between such entities and the United States as well, but that issue is not within the scope of this article. Suffice it to state that through an inadvertent, if fortuitous, interaction between Thai-American bilateral law and the American tax code a special benefit for American businesses in Thailand has been conceived. This will likely prove beneficial to American enterprises large and small in the Kingdom. This comes on the heels of recent news that officials in Thailand are seeking to provide substantial concessions to businesses looking to setup shop in Thailand. In some cases, domestic tax holidays may be possible pursuant to the powers set forth by the Board of Investment as well as other industry-promoting bodies in Thailand. An American operation which receives tax abatement domestically in Thailand while also shielded from global American tax liability would likely have a considerable trade advantage when compared to competitors doing business in other jurisdictions. That stated, a detailed analysis of such hypothetical scenarios is beyond the scope of this article. Therefore in conclusion: Thailand’s unique posture with respect to American tax liability pursuant to the Amity Treaty makes it a destination that should not be overlooked by American businesses, both large and small, outside of the USA.

TO COMPLY WITH U.S. TREASURY REGULATIONS, WE ADVISE YOU THAT ANY U.S. FEDERAL TAX ADVICE INCLUDED IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, TO AVOID ANY U.S. FEDERAL TAX PENALTIES OR TO PROMOTE, MARKET, OR RECOMMEND TO ANOTHER PARTY ANY TRANSACTION OR MATTER.

THE ABOVE INFORMATION SHOULD NOT BE CONSTRUED AS SPECIFIC LEGAL ADVICE NOR RELIED UPON AS SUCH. THOSE INTERESTED IN THIS TOPIC SHOULD OBTAIN PROFESSIONAL ADVICE REGARDING THEIR SPECIFIC SITUATION.