Intercompany invoice _ between the US and Thai entities

 Tax Risk Assessment for Thai Entity Invoicing US Entity for Services in Germany

Potential tax risks for a Thai entity ("Thai Co") that will be invoicing a US entity ("US Co") for services rendered by field people (FPs) in Germany.

The FPs will support a New Equipment project test, "marrying" a turbine package (provided by the project owner, likely affiliated with US Co) with driven equipment (provided by MAN, a German company) and testing them in Germany.

The engagement is expected to last 2-3 months, with two FPs mobilized sequentially for approximately 30 days each. These costs are part of the New Equipment project scope (USA) and will not be directly invoiced to the customer or MAN.

Key Jurisdictions and Activities:

 * Thailand: Location of the entity employing and dispatching the FPs and issuing the intercompany invoice.

 * USA: Location of the entity receiving the intercompany invoice and managing the New Equipment project.

 * Germany: Location where the FPs will perform the testing and marrying activities.

 * South Korea & Qatar: Subsequent locations for the equipment, not directly impacting the Thai entity's immediate tax risks for the German activities but providing context on the international nature of the project.

Potential Tax Risks for the Thai Entity:

1. Corporate Income Tax (CIT) in Thailand:

 * Taxation of Foreign-Source Income: Thai Co, as a company incorporated in Thailand, is generally subject to Thai CIT on its worldwide income. The income received from US Co for services performed in Germany will likely be considered taxable income in Thailand.

   * Risk: Failure to report this income could lead to penalties and back taxes in Thailand.

 * Foreign Tax Credits: If any part of this income is taxed in Germany (see Permanent Establishment and Economic Employer risks below), Thai Co may be able to claim a foreign tax credit in Thailand under the provisions of the Thailand-Germany Double Taxation Agreement (DTA). However, the availability and calculation of such credits can be complex and depend on specific DTA provisions and Thai domestic law.

   * Risk: Inability to fully utilize foreign tax credits could lead to double taxation.

2. Permanent Establishment (PE) Risk in Germany:

 * Nature of Activities & Duration: The activities of the FPs in Germany ("marry the engine and driven equipment together and test them") for 2-3 months could potentially create a PE for Thai Co in Germany.

   * Fixed Place of Business PE: While the FPs are rotating, if the activities are conducted at a specific location available to Thai Co for its business (e.g., a dedicated area at MAN's facility), it could constitute a fixed place of business. German domestic law and the Germany-Thailand DTA will define this. The relatively short duration (2-3 months) might argue against a PE, but this is fact-dependent.

   * Service PE: Some DTAs include provisions for a Service PE if services are rendered within a country for a specified cumulative period (often 6 or 12 months within a 24-month period). The Germany-Thailand DTA's specific wording on service PE (if any) and its thresholds would be critical. The planned 2-3 months might be below typical thresholds, but this needs verification against the DTA.

   * Agency PE: Unlikely in this scenario, as FPs are employees, not agents concluding contracts on behalf of Thai Co.

 * Consequences of a PE: If a PE is deemed to exist in Germany, the profits attributable to that PE would be subject to German corporate income tax and potentially trade tax. This would necessitate German tax registration, filing, and compliance for Thai Co.

   * Risk: Unrecognized PE can lead to significant back taxes, interest, and penalties in Germany.

3. Transfer Pricing:

 * Arm's Length Principle: The intercompany charge from Thai Co to US Co for the FPs' services must be at arm's length, as if transacted between unrelated parties. Both Thailand and the US have transfer pricing regulations aligned with OECD guidelines.

   * Risk: If the pricing is not at arm's length, tax authorities in either Thailand or the US could adjust the taxable income of the respective entities, leading to potential double taxation, interest, and penalties.

 * Documentation: Thai Co (and US Co) will need to prepare and maintain contemporaneous transfer pricing documentation supporting the arm's length nature of the intercompany charge. This typically includes a functional analysis (functions performed, assets used, risks assumed by Thai Co), a benchmarking study, and intercompany agreements.

   * Risk: Failure to maintain adequate documentation can lead to penalties and a weaker defense in case of a tax audit. The fact that the costs are "included in the New Equipment project scope" does not negate the need for arm's length pricing for the intercompany transaction.

4. Value Added Tax (VAT) / Goods and Services Tax (GST):

 * German VAT:

   * Place of Supply: For B2B (Business-to-Business) services, the general EU VAT rule (which Germany follows) is that the place of supply is where the customer (US Co) is established. Since US Co is not in Germany, Thai Co would generally not charge German VAT on its invoice to US Co.

   * Reverse Charge: If US Co were registered for VAT in Germany, it might have to account for German VAT under the reverse charge mechanism. However, based on the information, US Co is the recipient but MAN is the German entity involved with the driven equipment. The service is from Thai Co to US Co.

   * Services Connected to Immovable Property/Specific Events: Certain services can have special place of supply rules (e.g., services related to immovable property are taxed where the property is located). While testing equipment, it's less likely to fall into this category unless the nature of the "marrying and testing" is intrinsically linked to a specific German site in a way that shifts the place of supply. This is generally unlikely for these types of technical services to a non-German client.

   * Risk: Incorrect VAT treatment (e.g., unnecessarily charging German VAT or failing to identify a scenario where German VAT might apply) could lead to complications.

 * Thai VAT:

   * Export of Services: Services performed by a Thai entity for a customer outside Thailand, where the services are consumed outside Thailand, are typically zero-rated for Thai VAT purposes. As the FPs are performing work in Germany for a US entity, and the ultimate equipment is destined for Qatar, these services should qualify for the 0% Thai VAT rate.

   * Risk: Incorrectly applying the standard VAT rate instead of the zero rate would overcharge US Co and create administrative burdens. Proper documentation is required to support the zero-rating. Some interpretations suggest services performed and consumed entirely outside Thailand may be outside the scope of Thai VAT altogether, rather than zero-rated. This distinction should be clarified with a Thai tax advisor.

5. Withholding Taxes (WHT):

 * US WHT on Payments from US Co to Thai Co: Payments made by a US entity to a foreign corporation for services performed outside the United States are generally considered foreign-source income and not subject to US federal income tax withholding. The US-Thailand DTA would typically affirm this.

   * Risk: Low, but confirmation based on the DTA and nature of services is advisable.

 * German WHT on Payments Deemed Made by a German Entity: If a PE for Thai Co is established in Germany, or if payments for the FPs' services were deemed to be from a German source (e.g., if MAN were to pay Thai Co, which is not the described arrangement), German WHT could apply, subject to the Germany-Thailand DTA. This is less likely given the current structure where US Co pays Thai Co.

 * Thai WHT on Income Received: No Thai WHT would typically apply on the receipt of service income by Thai Co from US Co.

6. Personnel Related Taxes in Germany (Risk for Thai Co as Employer):

 * Income Tax & Social Security for FPs:

   * Economic Employer Concept: Even if the FPs remain formally employed and paid by Thai Co, German tax authorities might argue that the "economic employer" of the FSRs is MAN or the US Co's project in Germany. This is particularly a risk if the FSRs' work is highly integrated into MAN's operations or under the direct control and supervision of MAN or the US Co's personnel in Germany.

   * If German authorities successfully assert an economic employer status linked to a German entity or a PE of US Co/Thai Co, German payroll taxes (income tax withholding and social security contributions) could become due on the portion of the FSRs' salaries attributable to their German workdays.

   * The short duration of each FSR's stay (30 days) and the overall project duration (2-3 months) might mitigate this risk, but it's highly fact-specific. The Germany-Thailand DTA (Article on Dependent Personal Services) would provide rules on which country has taxing rights, often exempting short-term presence if remuneration isn't borne by a German PE or resident employer.

   * Risk: Thai Co (or potentially US Co/MAN) could be held liable for unpaid German payroll taxes, social security, and associated penalties if the FSRs are deemed to have a German tax liability that was not handled correctly.

Recommendations:

 * Review Germany-Thailand DTA: Critically examine the Permanent Establishment article (especially definitions of fixed place and any service PE clause including time thresholds) and the Dependent Personal Services article to assess PE risk and FSR taxation.

 * Clarify Operational Details in Germany: Understand the level of control and supervision MAN or US Co will have over the FSRs, the exact nature of their work location, and any facilities provided. This will help assess PE and economic employer risks.

 * Transfer Pricing Documentation: Prepare robust transfer pricing documentation to support the arm's length nature of the intercompany charge from Thai Co to US Co. This should clearly define the functions, assets, and risks of Thai Co.

 * VAT Treatment Confirmation:

   * Confirm with a German VAT specialist that the services to US Co are outside the scope of German VAT or if any specific registration/reporting is needed (unlikely for Thai Co if US Co is the direct client and has no German VAT presence for this).

   * Ensure Thai Co correctly applies the zero rate (or confirms out-of-scope treatment) for Thai VAT on the export of services and maintains necessary supporting documents.

 * Intercompany Agreement: Have a clear written agreement between Thai Co and US Co detailing the scope of services, responsibilities, and the arm's length remuneration.

 * FSR Deployment Documentation: Maintain clear records of the FSRs' deployment dates, activities performed, and payment arrangements to support tax positions in all relevant countries.

 * Consult Local Tax Advisors:

   * German Tax Advisor: Crucial for a definitive opinion on PE risk, economic employer status, and any potential German payroll or corporate tax obligations.

   * Thai Tax Advisor: To confirm the treatment of foreign-source income, application of foreign tax credits, and Thai VAT obligations.

 * Monitor Time in Germany: Keep strict track of the days FSRs spend in Germany. While the current plan is short, any extensions could significantly increase PE or income tax risks for the FSRs.

Conclusion:

The primary tax risks for the Thai entity involve potential Permanent Establishment and economic employer/payroll tax liabilities in Germany, and the universal requirement for arm's length transfer pricing on the intercompany invoice to the US entity. While Thai CIT will be due on the income, the main complexities arise from the cross-border activities in Germany. VAT implications seem manageable but require correct application of place of supply and export rules. Proactive assessment and consultation with tax advisors in Germany and Thailand are essential to mitigate these risks.