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Foreign Software Tax Part Two: When International Principles Conflict with On-Ground Practice, What Should Entrepreneurs Do?

Continuing from the previous article, where we discussed the issue of paying for software abroad, which according to international principles (OECD/UN Commentary), if used as an End-User, should be considered “Business Profits” (Article 12) rather than “Royalties” (Article 12), which may result in not having to withhold tax in Thailand.

However, in practice, entrepreneurs often find that Revenue officers may have a conflicting opinion and assess tax. Today, we will delve deep into “Legal Principles and Interpretation” that entrepreneurs should know, to use as a shield and confirm correctness according to principles.

The first thing to understand is that the Double Taxation Agreement (DTA) is considered a treaty between states, where interpretation must follow the Vienna Convention on the Law of Treaties 1969 (VCLT).

Especially Article 31, which lays down the important principle that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. Interpretation must consider other relevant documents, including subsequent agreements and practice between the parties. Therefore, legal interpretation cannot rely solely on the opinion of officers but must always consider the context and international principles.

Besides the OECD/UN Commentary which is an international guideline, evidence carrying weight in consideration is the Technical Explanation of the contracting states.

For example, in the Double Taxation Agreement between Thailand and the United States, the US Internal Revenue Service (IRS) clearly stated in the Technical Explanation regarding Article 12 that receiving money from the transfer of off-the-shelf computer software is considered Business Profits. Software here includes off-the-shelf software granting usage rights to the buyer without contract negotiation (e.g., clicking to accept Terms & Conditions to download for use). This text clearly confirms that this type of income is not Royalties.

The existence of these documents confirms that interpretation according to international principles carries high weight and credibility, consistent with opinions in many legal journals and tax court guidelines abroad.

If you are confident that your transaction falls under “Business Profits” and have clear reference evidence but cannot find a conclusion with Revenue officers, entrepreneurs can appeal the assessment of the assessment officer and fight the case up to the Central Tax Court. There is also a legal channel called the “Mutual Agreement Procedure (MAP)” under Article 25 of the DTA.

This involves filing a request to the Director-General of the Thai Revenue Department first, for Thai officers to coordinate with the competent authority of the other country to eliminate taxation that is not in accordance with the Convention. Currently, Thailand, as a member of the Inclusive Framework on BEPS, has clear guidelines supporting this, making international-level negotiations highly likely to adhere to international standards (OECD Model) rather than personal discretion. However, entrepreneurs must be careful of a key limitation: the request must be filed before the court renders a final judgment; otherwise, the right to this channel is lost immediately.

In summary, good tax planning must be based on an understanding of the “Letter of the Law” and correct “Principles.” Even if practice presents challenges, if you have complete information on both interpretation principles under the Vienna Convention and international supporting documents, you have options to manage the problem rather than just accepting the assessment. Whether appealing or using the Mutual Agreement Procedure, these are legitimate rights of taxpayers to ensure fairness and correctness according to international standards.

See you in the next article.

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