Twitter Logo Youtube Circle Icon LinkedIn Icon

Publishing firms

Legal Developments worldwide

Zero-Rated Vat: A snag in expert reports

February 2013 - Tax & Private Client. Legal Developments by LawAlliance Limited.

More articles by this firm.

Published: 12 Feb 2013 at 00.00

Newspaper section: Business

Zero-Rated Vat: A snag in expert reports

Zero-rated value-added tax (VAT) is applicable to the export of both services and goods, but they are different in several ways.

Where the zero-rated VAT applies, the system offers to a business a VAT credit paid to another VAT registrant (input VAT) even though it is not required to charge VAT from its customers (output VAT). Therefore, the business normally prefers the zero-rated VAT to the normal VAT, in which it has to charge output VAT from the customers and deal with administrative and marketing burdens.

The zero-rated VAT also offers advantages over the VAT exemption, which does not allow the business to credit any input VAT. Unfortunately, a tax issue always arises wherever privileges lie. The key concern for the zero-rated VAT involves the definition of export of services and relevant conditions, because it is harder to pin down than the straightforward export of tangible goods.

In applying the zero-rated VAT, the Revenue Department announced that the export of a service means the service is performed in Thailand but used offshore. When services are performed and used outside of Thailand, they fall outside the scope of the VAT regime and the business loses the ability to credit its input VAT. Issues regarding whether a service is used offshore have constantly arisen, especially for research and investigation.

It has long been understood, though not quite agreed upon, by industries that the quality-control service for exported goods is not qualified as an export of service and subject to the normal 7% VAT, even though the report is sent to customers offshore. This may be understandable, as such quality control involves an investigation of the exported goods in Thailand, with the requirement that the suppliers in Thailand use the report to improve the quality of the goods and the manufacturing process if they fail to meet global standards. Hence, it is always arguable as to where the use of services took place.

Though the transaction looks similar, the treatment is much clearer for the performance of research, investigation or analysis of goods with a report sent directly to offshore customers (that is, without use by Thai suppliers). The Revenue Department has occasionally noted _ see its rulings in 2008 and 2009 _ that since such a report is used entirely offshore, it qualifies for the zero-rated VAT. Nevertheless, judging from a case brought to the court recently, businesses can no longer rely on such interpretation.

In the 2011 court case, the plaintiff provided services for investigating the quality of suppliers' goods in Thailand and issued a report for offshore customers, relying on such a report in considering whether to order the goods from the Thai suppliers.

In one particular instance, the plaintiff issued a report with the appraised value of the goods to foreign governments, which used the report in determining their customs formality. Also, the plaintiff was hired to perform lab tests to examine chemical and scientific traits of the samples for offshore customers. The plaintiff applied the zero-rated VAT but was assessed by the Revenue Department on grounds that the use took place in Thailand.

Although the Tax Court agreed with the plaintiff, the Supreme Court upheld the Revenue Department's view, underscoring that the services were performed in Thailand but that the use of the reports by the offshore customers took place after the completion of services performed in Thailand, thus the plaintiff was not qualified for the zero-rated VAT.

The case took place under the old regulation, which said the zero-rated VAT would not apply unless the service was used "entirely" offshore. The rule was repealed in 2011 by an announcement of the Revenue Department's director-general, who said the zero-rated VAT could be applied only to the portion of the service that is used offshore in case it is not used entirely outside of Thailand.

With all due respect to the court, if the above rationale that treats the completion of service in Thailand as the cutting point in ruling that the service is not used offshore (and thus ineligible for the zero-rated VAT) should apply to the case, even under the new regulation, then it will be difficult or nearly impossible for a business to apply the zero-rated VAT. The court's position, if widely adopted by tax authorities, could handicap the service industry of Thailand, especially in light of the AEC in 2016.

This is also a concern for businesses whose expert opinion is the main product provided to overseas customers. For instance, financial institutions that perform research and analysis on securities and financial products in Thailand often send reports to overseas customers to identify and determine potential investments in Thailand. Even advisory firms, which send the reports with analysis and information on the Thai legal, accounting or financial system to offshore customers, may have to think twice before applying zero-rated VAT.

Since there has been no revenue ruling regarding this issue since the judgement of the above court case, it will be interesting to see what position the Revenue Department takes.


Prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at