Flip-flop on treatment of exports of services

17
Oct 2017 at 04:00 / NEWSPAPER SECTION: BUSINESS 

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 admin@lawalliance.co.th