By Nu To Van, Sukanok Suthinan
Special to The Nation
First, a short recap: the e-services tax will be in the form of VAT imposed on online activities. Companies that are covered by the e-services tax need to register for VAT (either as service provider or electronic platform) and pay VAT electronically through a new simplified monthly return.
Due to the broad definition of digital services and its expected broad coverage, in this article we will focus on practical questions companies may have once the e-services tax is implemented. For example, what type of services will be covered, does it make any difference to whom the services are provided, etc.
To illustrate the different tax treatment and implications, we will use a fictitious case study and examples of transactions to highlight whether or not these transactions would be covered under the e-services tax.
Case study – ‘In The Cloud Services’
Our fictitious company “In The Cloud Services” (“ITCS”) is based in the US and is trying to increase its online business footprint in Thailand. The company’s physical servers are all located in the US and the company does not have any office or staff in Thailand.
The company has a variety of online businesses and provides them to customers in Thailand – both to businesses (B2B) and consumers (B2C), including the following:
1. Online cloud storage services and providing digital content streaming services
2. Selling products through their US-based platform
3. Platform services to online sellers
So, does ITCS have to be worried about the new e-services tax?
Let’s go through the company’s online services one by one.
1. Provision of online cloud storage and digital content:
The company provides online cloud storage and digital content streaming services to its customers in Thailand who are both Thai consumer (B2C) and Thai VAT-registered entities (B2B). Customers in Thailand simply subscribe for these online services through ITCS’ website and pay online for these services by monthly subscription.
Although the services and the fees charged to its customers are the same, the tax implications and treatment of both transactions are different, as illustrated by the pictures below.
a. B2C as a service recipient
b. B2B as a service recipient
2. Online sale of products:
ITCS operates an online platform selling a wide range of products to both Thai consumers and Thai entities.
Once products are ordered online, ITCS arranges the shipments, clearance in Thailand, and delivery to its customers (both consumers and companies) in Thailand. The customs clearance and delivery of products is carried out by a local Thai company.
Selling of goods online is currently not covered by the proposed e-services tax. However, there may be other considerations relevant to ITCS, such as whether or not the Thai local company might be considered an agent from a VAT perspective, which could lead to a taxable presence in Thailand.
3. Use of its platform:
ITCS also allows other online retailers to sell their products online to both Thai consumers and Thai entities through its platform. In return for using its platform, ITCS charges these online retailers a service/commission fee. The tax implications and treatments are illustrated below.
What should companies do to prepare themselves prior to the enforcement of e-services tax?
Based on the above simplified scenarios, it is clear that different transactions may lead to different tax treatments. For our fictitious company, it would mean that for the B2C services that they provide to their customers in Thailand, they need to register for VAT purposes in Thailand once the e-services tax is implemented. This could mean that going forward, ITCS may need to make a commercial decision and choose whether or not to potentially upset its customers (by increasing its selling prices) or accept lower profits due to higher tax costs.
There is still time for companies to prepare as the supplemental regulations have not yet been published. Facilities such as simplified registration and monthly VAT return submission are expected to be available at the Thai Revenue Department (TRD)’s website in order to encourage more registration from foreign digital service providers.
However, foreign digital service providers may be more or less likely to comply with the requirements depending on how strongly the TRD enforces the new e-services tax.
The current penalty for non-compliance is two times the VAT shortfall plus a 1.5 per cent monthly surcharge and imprisonment not exceeding one month or a fine not exceeding Bt5,000, or both. The question is whether or not companies will be allowed a certain transition/grace period (similar to what has happened in Malaysia) or whether the TRD will start enforcing the new tax very strictly as it searches for more revenue sources.
Adding to the complexity are other potential tax implications and considerations, such as whether or not the registration of the company for VAT purposes will trigger risk from a corporate tax perspective or whether the company has to obtain a (online) business licence in Thailand.
Although there is still time before the e-services tax is implemented, it would be prudent for foreign service providers/platforms to already start mapping out their online service activities and determine which ones are affected by the new e-services tax, since it is very likely that some (if not all!) of their activities will be caught by the e-services tax net.
Nu To Van and Sukanok Suthinan are, respectively, partner and senior manager for Tax & Legal Services at Deloitte Thailand.