Timing for zero-rated VAT comes under challenge

One of the key rationales for Thailand in abolishing the business tax in 1992 was that zero-rated value-added tax (VAT) granted to exporters of goods under the VAT regime is commonly accepted by developed countries. It is applied in compliance with international standards and cannot be deemed an unfair subsidy – hence reducing the chance that Thai exporters could face countervailing duties in retaliation. For this reason, Section 80/1(1) of the applicable law simply states:

“The zero rate shall be used in value-added tax calculation for the following businesses: (1) export of goods … (2) … ”

However, questions often arise about when the zero-rated VAT can be applied to an exporter of goods. The simple and straightforward wording of the provision quoted above may not concern most people, but from a technical point of view, you need to ensure that when the points at which tax is incurred (tax points) actually occur, you have not breached any limitations.

As the table shows, there could be an overlap between tax points for the zero and 7% rates, creating a question as to whether a Thai exporter can apply zero-rated VAT. For example, an overseas buyer may make payment to the Thai exporter before the goods are shipped, or require ownership to be transferred to the overseas buyer immediately upon payment while the export shipment will occur subsequently.

Some people believe that once a sale by export to an overseas buyer occurs, you do not have to look at the tax points for 7% anymore, and it does not matter if the transfer of ownership and/or payment occurs before the date of the actual export shipment. As long as you can prove that it is a sale by export and that customs procedures have been carried out in your name, you would maintain the right to the zero rate.

To prevent confusion and to encourage the export business, Revenue Department Regulation No. Paw. 97/2543 states in Clause 2 that insofar as a seller can show its name as an exporter in the customs entry, it is treated as an export sale for zero-rate purposes. Hence it does not matter if payment or ownership transfer occurs before or after the date of the customs entry. Of course, the exporter must produce and keep certain documents as a proof. Note also that for the sale to an export processing zone in Thailand, Clause 6 requires a buyer to be in the EPZ.

The regulation does not specify a timeframe for when goods have to be shipped or when the customs entry has to be made after the date of the sale. The only exception is a case in which goods are temporarily delivered and kept at a local agent of the overseas buyer; then the customs entry must be made within 180 days after the date of delivery to the agent. The date of the sale is not involved.

A dispute arose between a Thai exporter and the Revenue Department after 7% VAT was assessed on the grounds that the sale constituted a local sales transaction – not an export of the goods under Section 80/1(1). The case involved the sale to an overseas buyer in Hong Kong in December 2001 but the contract required (i) ownership to be transferred immediately; and (ii) the goods to be delivered to an agent of the buyer in an EPZ in September 2002. The tax auditor said the sale in December 2001 did not qualify for zero-rated VAT, as the exporter failed to proceed with customs entry upon subsequent export under its own name.

The Supreme Court issued its judgement in 2012 by stating: “[I]t cannot be deemed that the Plaintiff sold the goods by way of exportation that would otherwise be entitled to zero-rated VAT pursuant to Section 80/1(1), and the VAT liability, therefore, occurred in December 2001 upon the ownership transfer under Section 78(1)(a) in which the Plaintiff was required to pay 7% VAT. Even when the Plaintiff subsequently delivered the sold goods into the export processing zone in September 2002, it could not cause the Plaintiff to be entitled to zero VAT under Section 80/1(6), as the VAT tax point did not occur on that date but had already occurred earlier upon the transfer of ownership in the goods …”

In fact, the ultimate outcome of the judgment looks perfectly sound and there is nothing wrong with justice in this case. The fact is, the Plaintiff really had failed to comply with the terms of Regulation No. Paw. 97/2543. What is a bit stunning is the way the Court described the rationale for not granting zero-rated VAT, by noting that ownership was transferred to the overseas buyer in December 2001, causing 7% VAT liability to occur and the Plaintiff to forfeit its zero rate on that very day.

Is this simply a poorly worded explanation, or did the Supreme Court intend to set out an interpretation for the zero-rated VAT? This explanation could easily mislead a reader to conclude that to qualify for the zero rate, one needs to arrange the sales contract in such a way that there must be no ownership transfer before export date or before delivery to the EPZ.

We do not think this explanation reflects the intention of the tax law, as it could hinder export transactions. Let’s keep an eye on this matter and see how it develops.