LawAlliance Limited | View firm profile
15 Nov 2016 at 04:00 / NEWSPAPER SECTION:BUSINESS
It is amazing how ubiquitous
software has become in the past few decades, becoming an essential part of
everything from washing machines to mobile phones. Few people are aware,
however, that there can be tax implications for some software that comes with
the hardware they are paying for.
Software frequently forms an
inseparable component built into an electronic product. Given the Revenue
Department's tendency to treat payment for the use of software as a royalty,
should a value be assigned to the use of embedded software and classified as a
royalty for tax purposes? When a royalty is paid in or from Thailand to an
overseas entity, the tax is usually higher than what is imposed on the sale of
the goods, even if the overseas entity claims protection under a
double-taxation treaty.
withholding tax at the source (before reduction
under any applicable tax treaty) as well as 7% value-added tax (VAT),
unless the consumption will take place outside Thailand. Since enforcing tax
collection from the foreign entity is difficult, the customer in Thailand is
required to file and pay the tax at the source (Form PND 54) and VAT (Form PP
36). This must be done within seven days from the end of the month in which the
royalty is paid. Failure to comply will result in surcharges of 1.5% per month
for taxes in arrears.
Whenever software usage is granted
on a stand-alone basis, the Revenue Department tends to rely on provisions in
the Copyright Act BE 2537 (1994) that treat software as a kind of literary
work. As a result, consideration for such use is treated as a royalty even if
the software has the characteristics of an off-the-shelf product, such as
Microsoft Office or antivirus software that anyone can purchase.
The latter position is not in line
with internationally accepted commentaries to the OECD Model Tax Convention on
Income and on Capital, which hold that payment essentially made for a
customer's own use of such off-the-shelf programs is classified as "business
profits".
Given the extreme position of Thai
authorities, if you purchase finished goods in which software forms an integral
part, how should you treat such built-in software for tax purposes? Would your
position be weakened if the seller forces you to agree to a royalty-free
licence when you activate the software?
It seems that the Supreme Court
agrees with the taxpayer, if a built-in program has the characteristics of
"operating software" essential for the functioning of the purchased
product. The ruling stemmed from a case involving a company that imported a
private automatic branch exchange (PABX) telephone switching system. The import
entry declaration listed specifications and prices of the software (contained
on a floppy disk) separately from other parts of the PABX.
The court said: "Since the
software formed the operating software that was necessary in operating the
PABX, and could be used with the purchased PABX only, it was treated as an
integral part of the PABX system. Further, the facts appeared that there was no
purchase of the software separately from the PABX that would otherwise be
treated as a stand-alone licensing agreement. The transaction formed the
purchase of goods composed of the operating software necessary for such
particular goods, and was not separable. This case could not be construed that
there was a separation of the prices for the operating software from the PABX;
thus no royalty fee for the copyright had been paid.
As a result, the court concluded
that the company was not liable to pay withholding tax or VAT.
Based on this precedent, whether
the value of software should be treated as a taxable royalty depends on the
nature of the software. Nonetheless, not all software bundled with purchased
goods is always treated as part of the finished product. If the software in the
package is not "operating software", such as iOS in an iPhone, but is
"application software", such as Photoshop, the payment attributable
to such software will be treated as a royalty. In fact, the Revenue Department
has advised consistently for more than 15 years that fees paid for application
software are always royalties for tax purposes.
Second, while the company in the
Supreme Court case specified the price breakdown for the operating software and
the floppy disk in its import entry, it seems no actual licensing agreement was
concluded with the PABX supplier. This tends to run counter to real-life
situations in which purchasers are often asked to agree with the terms of a
royalty-free licence agreement, either on paper or online, which is considered
necessary to protect the right of the licensor.
Meanwhile, the Revenue Department
often considers operating software as part of a product where there is no price
breakdown. Thus, how the relevant agreements and customs entries are arranged
is another important factor the purchaser needs to consider in order to reduce
tax risk.
By
Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th