Businesses could regularly face tax difficulties if a tax regulator ignores what has been the core purpose, or the so-called “spirit of law”, and adhere too much to the physical wording of legislation.
One example last week that provided false joy as well as unnecessary concern to business operators in Thailand was the announcement from the National Council for Peace and Order (NCPO) last week it would reduce the value-added tax (VAT) rate to 6.3% for a year and then increase it to 9% in October 2015. But the reality is the VAT was kept at 7% for another year, and the new government will decide if it wants to raise the rate (the 10% rate has never been used since the VAT was initiated in 1992). The 6.3% and 9% rates are the VAT before the local development tax is included. It took two days for people to realise nothing had changed.
Trading firms are familiar with the so-called “drop-ship” transaction, which describes where a seller does not maintain goods in stock but will order offshore suppliers to deliver the goods to its end-customers directly. One common reason for this type of the transaction is end-customers are often granted an exemption from customs duty for imports by the Board of Investment (BoI). As an additional privilege, these end-customers will also be entitled to the waiver of VAT upon importation of the goods by placing a bank guarantee or a letter from the BoI. (See Table 1.)
As the VAT waiver cannot be extended to imports by the trader itself, shipments brought to Thailand under the name of the end-customer could save substantial cost and administrative burden. Nonetheless, can such a VAT waiver be applied to payments for imported goods from the end-customer to the trader in Thailand? (See Table 2.)
At the beginning of VAT enforcement, the end-customer in a drop-ship transaction had to pay VAT twice, first on the import of the goods from the offshore supplier (unless otherwise waived), and second on the purchase between the trader and the end-customer in Thailand. This double charge is caused by the wording in the Revenue Code, which stipulates VAT is applicable to sales within Thailand as well as the importation of goods.
This tax treatment triggered a number of disputes and disturbances to trade. The Revenue Department then issued the Notification of the Director-General Re: VAT (No.80) in 1998 to exempt VAT from the resale of goods by the trader to the end-customer, provided the end-customer has evidence to prove it already submitted the import entry and paid VAT at the customs border under its own name. In short, where such an exemption applies, the trader will neither have to collect VAT from nor issue a tax invoice to the end-customer.
All went well until recently, when the spirit of the notification seemed to be ignored by tax officers. In a recent revenue ruling, a supplier of electric motors (Seller A) was entitled to a customs duty privilege in importing and selling electric motors to its end-customers, as it was a member of the Electrical and Electronics Institute. However, in one specific shipment, Seller A did not import electric motors from the offshore supplier by itself but instead purchased them from another supplier in Thailand (Seller B) and resold them to its end-customer. The arrangement was Seller B ordered the electric motors from the offshore supplier directly, and the end-customer would carry out the customs formalities for importing the electric motors under its own name. Since the end-customer already paid VAT upon the customs clearance, Seller A expected it should be entitled to the VAT exemption upon the resale of the electric motors to the end-customer pursuant to Notification No.80. (See Table 3.)
The Revenue Department once again adhered to the wording of Notification No.80 in stating that since Seller A purchased the electric motors from Seller B in Thailand, not from the offshore supplier directly, the exemption did not apply. Thus, even if the end-customer already paid for the VAT at customs clearance, Seller A was still liable to collect VAT from the end-customer and issue a tax invoice. Again the end-customer was being doubly taxed, similar to what happened 20 years ago.
Of course, if the end-customer is a VAT registrant, it will be entitled to recover the double VAT by crediting it against the output VAT — i.e., VAT that the end-customer collects from the sale of its products. However, if the double VAT exceeds the output amount, the end-customer will have to bear the loss on the time value of money until it can fully recover the input tax credit. If the end-customer chooses to claim for a cash refund, it will face a tax audit from the Revenue Department.
This double-VAT issue is different from the trader purchasing and importing goods by itself, then reselling them to an end-customer in Thailand, in which case the trader will pay VAT upon customs clearance and collect VAT from the end-customer upon the resale. The end-customer does not pay VAT twice on the same transaction here.
At any rate, imposing double VAT on one transaction is wrong. This rarely happens in OECD countries, as no VAT will be imposed on a local sales transaction while the goods are outside the country. On the contrary, Thai VAT law chooses to tax the transaction merely because a sales contract between Seller A and Seller B occurred in Thailand.
This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. Email them at admin@lawalliance.co.th