In September 2023, the Organization for Economic Co-operation and Development (“OECD“) concluded a Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule (“STTR MLI“). This convention aims to help Inclusive Framework members swiftly implement the Subject to Tax Rule (“STTR“). The STTR MLI enables the implementation of STTR in existing bilateral tax treaties without the need for bilateral negotiations. Most members of the Inclusive Framework, including Thailand, have shown interest in the STTR MLI.

On August 27, 2024, Thailand signaled its intent to join the STTR MLI through a letter of intent. However, recognizing the profound implications of STTR for Thailand, the Thai Cabinet authorized the Thai Revenue Department to conduct research on its effects, including drafting and revising the letter of intent. The purpose of this research and draft is to maximize the benefits for Thailand when implementing STTR into its tax ecosystem.

STTR is an integral part of Pillar Two, which is designed to prevent tax erosion by Multinational Enterprises (“MNEs“) and ensure a global minimum tax rate. Within Pillar Two, the Global Anti-Base Erosion Rules (“GloBE Rules“) were implemented as a foundation for states to adopt the practice of taxing back to the agreed minimum rate.

STTR complements the GloBE Rules by covering specific scenarios. It addresses certain cross-border transactions (e.g., interest, royalties and payments for services) that can be taxed at exceptionally low rates in some jurisdictions. These cross-border transactions are known as “Covered Incomes” under STTR. The rule applies when Covered Incomes are generated within connected entities (“Intra-Group“), where both entities are linked by a controlling interest of more than 50%, either directly or indirectly. STTR allows the source jurisdiction to tax back on Covered Incomes when the recipient jurisdiction imposes a nominal corporate income tax of less than 9%. The source jurisdiction can apply an additional tax of up to 9% on the gross amount of Covered Incomes. However, this additional tax must be reduced by the existing taxing rights of the source jurisdiction (such as withholding tax) and the nominal tax rate of the recipient jurisdiction. Thus, STTR protects the tax base of the source jurisdiction by allowing it to gain additional tax from cross-border Covered Incomes generated by Intra-Group transactions.

The letter of intent executed by Thailand is expected to be finalized before the scheduled date for signing the STTR MLI, which is 19 September 2024.