Last week we talked about the theory behind the value added tax (VAT) and how it works from the point of view of the average consumer. This week we'll discuss it in a little more depth for those operating businesses who might have to withhold the tax and pay it to the government.

First, who must collect VAT and pay it to the government?

Anyone who provides goods or services in Thailand with sales of more than 1.8 million baht a year. Obviously, a service provided and used in Thailand would be included in this.

A service is also considered to be provided in Thailand if it is:

- performed outside of the country but used here or

- performed in Thailand but used elsewhere.

Let's look at an example. Suppose a big consulting firm is providing management consulting services from Singapore to companies around the world.

Last year it provided consultancy services to 10 Thai companies. Although in each case it sent one or two people to the companies in Thailand for a day or two, most of the work was done in Singapore by large teams of analysts.

The Thai companies use the results of the consulting for marketing and corporate strategies.

For each of these consulting studies the Singapore firm charged more than 500,000 baht. The client companies send the fees from Thailand to Singapore. The consulting firm doesn't even have a bank account here.

Does it have to withhold and pay VAT in Thailand?

Yes, because it has performed a service outside of Thailand but one that is used in the Kingdom.

What about the sale of goods? This would include physical items such as cosmetics, cars, groceries and hardware and also intangible goods, such as copyrights, software, commercial paper and insurance policies. VAT would be withheld on all of these items.

There are many exemptions from the VAT, which mean that the provider doesn't have to collect or pay VAT. Here are some important ones:

- Educational services

- Rent of land or houses

- Healthcare services by hospitals and clinics

- Certain services, such as academic research and that of public entertainers.

- Professional services such as medicine, auditing and courtroom legal work.

- Goods imported and kept in Thailand under the supervision of the Customs Department that will be re-exported and entitled to a refund, called a drawback, of import duties,

- Domestic and international land transportation

- Cultural services such as tickets to amateur sports, libraries and museums

- Unprocessed agricultural products such as fertilisers and animal feeds

- Goods exempted from import duties to be used in export processing zones

- Religious and charitable services, and those of government organisations.

Providers of these goods and services do not have to charge VAT.

What are some examples of this? If you receive medical care at one of Thailand's hospitals, you'll see that VAT isn't added to your bill.

Likewise, if you rent an apartment, the landlord doesn't withhold VAT.

Next time we'll talk about the mechanics of how and when VAT is collected and paid.

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James Finch of Chavalit Finch and Partners (finch@chavalitfinchlaw.com)
and Nilobon Tangprasit of Siam City Law Offices Ltd (nilobon@siamcitylaw.com).
Researchers: Arnon Rungthanakarn and Sitra Horsinchai.
For more information visit www.chavalitfinchlaw.com.
Questions? Contact us at the email addresses above.