Flip-flop on treatment of exports of services
Trying to prove an export of services is quite elusive in respect of time and place, and different parties have different views on what should be considered as exportation for tax purposes. For this reason, the number of problems encountered in applying zero-rated value-added tax (VAT) to services has reached epic levels.
VAT applies to both services performed in Thailand and services performed offshore that are utilised in Thailand. While a 7% rate applies in normal cases, zero-rated VAT applies when the service is considered as exported. Unlike tangible goods where the export is self-evident as a matter of fact, the law considers a service to be exported only when the result of work is "being utilised offshore".
The director-general of the Revenue Department, using the authority given under Section 80/1(2), issued a notification that, in a situation where a service is partially utilised in Thailand, zero-rated VAT could also apply to the part of the service that is utilised outside Thailand. This amended the original position that considered a service to be exported only if it was entirely utilised outside Thailand. This favourable interpretation was announced to reassure service providers after a court ruling on the following services:
Investigation of goods to be exported by sellers in Thailand: reports or certificates of investigation were sent to offshore customers for their consideration to purchase and for price negotiations.
Investigation of goods to be imported by foreign governments: evaluations of goods prices were sent to foreign governments for their determination of tariff and customs formalities that would apply to their import.
Examining the quality of the potential Thai manufacturers: reports were sent to offshore customers so that they could decide whether to hire such Thai manufacturers to produce goods.
Laboratory tests of goods samples: reports were sent to the offshore customers.
At the original trial, everyone expected the company to win its argument for zero VAT, since the services outlined above differed from quality-control services on the export of goods. The Revenue Department has always contended that the results of quality-control services are utilised in Thailand by either requiring the sellers in Thailand to amend defects found, or authorising them to export the goods if acceptable. In such a case, 7% VAT would apply.
Also, the department itself has acknowledged on occasion that, if a research, investigation or analysis report was sent directly to an offshore customer without being used by a Thai seller, the services qualified as having been exported.
To the taxpayers' horror, the Supreme Court ruled that none of the above services qualified for the zero rate. "The services for investigation, testing of goods, including the examination regarding the qualification of Thai manufacturers, were performed in Thailand. Thus, the services were deemed supplied in Thailand," it said.
The court treated the utilisation of the reports by customers outside Thailand as a separate event that took place after the completion of the services. "The result of the investigation might eventually be utilised for purchases, price negotiations, hiring of manufacturers, export and analysis of samples of the goods in Thailand," it said. "These could not be qualified as 'the result of services entirely utilised outside Thailand' as required under the D-G Notification [at the time]."
In an attempt to correct its mistake and achieve fairness, the Revenue Department voluntarily modified the Notification soon after the court decision, to allow zero-rated VAT to apply at least to the portion of work that was utilised outside Thailand.
Nevertheless, doubts persist as to how service providers can make use of the modified Notification. If the same situation arose again, how could a service be treated as partially utilised outside Thailand, if such utilisation would be considered a separate event taking place after the completion of the services as the Supreme Court has ruled? Isn't the new version of the Notification useless?
The recent revenue ruling is an indication that this concern is real. It arose from a case in which a company rendered three types of services to a hirer in the Netherlands.
Material development: the company procured samples of raw materials used by shortlisted manufacturers in Thailand, and sent them to the hirer so that it could decide whether to enter into business with such manufacturers.
Product development: the company asked manufacturers in Thailand to produce prototypes and sent them to the hirer to decide if it should engage them.
Costing: the company researched and analysed the manufacturing costs and sent the report to the hirer.
The company claimed it was not involved in the hirer's decision-making process. However, the Revenue Department advised that all of the above activities were not qualified as an export of services, and thus were subject to 7% VAT.
This revenue ruling is an indication that the department has never made a real attempt to analyse whether any portion of work should be considered as utilised outside Thailand and qualified for zero-rated VAT.
It seems most tax officials assume that the Supreme Court judgement overrules the Notification where it applies to the portion of services that could otherwise have been treated as exported. The utilisation offshore of raw materials or prototypes was ignored, as was the report, because they constituted separate events from the moment the services were performed.
This flip-flop by tax officials, relying too much on the Notification and apportioning a part of the services utilised outside Thailand for zero-rated VAT, could expose a service provider to a tax dispute. For now, talk of Thailand becoming a leading export market for services should be put on hold. Perhaps there is a need for another court case to resolve the confusion.
By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at email@example.com