Thai Supreme Court ruling drives service providers VAT-y

For several years now Thailand-based service companies have attempted to navigate the murky waters of Value Added Tax by operating on the generally accepted premise that services provided by Thai companies to customers located outside of Thailand were subject to zero VAT. This general rule appeared reasonable because the consumers of such services were located outside Thailand. But in April the Supreme Court of Thailand in a closely watched case handed down a ruling that has service providers, academics and the tax community scratching their heads. The Court, in case No 6710/2554, held that services provided by a Thai company to customers located outside Thailand can be subject to VAT if any part of the information obtained as a consequence of the service is used in Thailand. This decision has left the business community asking “Did they get it right?”

VAT is normally considered a type of consumption tax, whereby each entity along the value chain pays VAT on items or services they consume and charges the next person along the value chain for the consumption of the goods or services they provide. The net result is a tax on the value added by each contributor in the value chain process. Because the value added by each link in the chain is being taxed, it is generally understood that sales or services provided to offshore customers are subject to zero VAT as the customers are not consuming the product or service inside Thailand. This results in the government losing the final tax on the value added by the exporter. The recent Supreme Court inspection services case serves as perfect example of this.

The case involved a Thai company that provided services related to gathering information about goods and manufactures of such goods in Thailand and reporting that information to customers located outside Thailand. The specific services the company performed were the inspection of goods, price assessments, manufacturer quality assessments and quality assurance testing of products. The results of all these tests and inspections were compiled into reports that were sent directly to the company’s customers located in foreign countries. The customers used the information contained in the reports to decide whether to buy or not to buy the goods, which was the objective of the customers hiring the Thai company. Given that the reports appeared not to be “consumed” in Thailand, the company asserted that they did not have to charge VAT for the services being provided to offshore clients. This appears wholly consistent with the general understanding of what it means to provide an export service.

The Thai Revenue Department asserted, however, that because the information contained in such reports could be used by the overseas-based customers when placing orders for products from Thai companies, that the service of collecting and providing such information was being used by foreigners in Thailand, even though they were never in Thailand. This turns the consumption aspect of VAT analysis on its head and raises the almost quasi-philosophical questions, “When and, more importantly, where does one consume a service?”

The Supreme Court of Thailand, in finding for the Revenue Department, based their position on the idea that when an overseas-based customer places an order for Thai products and “uses” any of the information included in the reports, that customer is “using the service” in Thailand. In reaching its decision the Court broke the service delivery process into two steps. Step one related to the activities of the service provider in conducting inspections and the like, while step two focused on the reporting of the results or findings to the foreign customers. The Court then concluded that the reporting of the findings to customers was irrelevant, as the actual services of collecting information were completed inside Thailand. This logic seems to demonstrate a misunderstanding of the nature of the services contracted. The purpose of the services in this case was to gather information and report such information to offshore customers for their use in making a decision to buy or not to buy, from whom and in what quantities. The information delivery was part and parcel of the service being provided, whereas any subsequent purchase was merely a consequence of the decision, which was again made by persons outside of Thailand. 

What the Court appears to ignore in this case is that the services provided by the Thai company are completed once the information is delivered and received by the foreign customer. At that point the service has been completed and that should be the end of the analysis. The service does not continue for as long as the information provided as part of the service continues to exist, even where the information obtained may continue to be “used” by the recipient. The recipient’s use of information garnered form the service does not mean that the service provider is continuing to provide a service.

The decision in this case places an unworkable burden on the service provider to either overcharge VAT to its foreign customers or continuously monitor its foreign customers’ activities to ensure that none of the information provided pursuant to the service contract is ever “used” inside Thailand, even arguably, after the service contract has been terminated. This can’t be what the Court meant to achieve. Hopefully, they will have a chance to reconsider this position in a future case.

This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.

 

Jonathan Blaine is an associate principal at KPMG Thailand.