By Varapa Aurat (Consultant, Tilleke & Gibbins, Thailand) & Natthanit Mallikamal (Consultant, Tilleke & Gibbins, Thailand)
The rise of global digital economies has introduced uncertainties and exposed many loopholes in our existing tax system, with the most significant issues being the difficulties in collecting tax from those conducting digital activities without a physical presence in a jurisdiction. Thailand has long considered reforming its traditional tax system to better cover the digital economy and digital transactions, believing that foreign companies engaged in the same transactions in Thailand as local companies should also pay tax to the country. This includes value added tax (VAT) on the provision of digital services.
At present, consumers in Thailand are already required to pay VAT when purchasing digital services from abroad. However, the mechanism to impose the VAT requires consumers to file a self-assessment VAT form, regardless of whether the consumer is a Thai VAT registrant or not. This results in a loophole in VAT collection since most consumers are individuals who are not aware of these VAT requirements. The Revenue Department (RD) of Thailand therefore plans to shift the VAT compliance duty to offshore service providers providing those digital services.
On June 10, 2020, the cabinet approved a proposed draft amendment to the Revenue Code, which is the main law governing VAT taxation. The draft bill revises VAT collection on foreign digital services by requiring foreign electronic service providers to register for VAT if they earn income from providing more than 1.8 million baht (approximately USD 57,900) worth of digital services to users in Thailand each year. The VAT registration and subsequent payments will be done online through the RD website. According to the draft bill, this will be a “pay-only” system, meaning that a foreign supplier will have to pay VAT (at the current rate of 7%) on digital services provided to non-VAT registrant consumers without offsetting an input tax. The foreign supplier will also be prohibited from issuing tax invoices to consumers. There is also a requirement for electronic platform operators to pay VAT on behalf of the service providers that provide digital services through the platform.
The proposed act applies to digital transactions including social media, hotel booking, and streaming media, while payment-processing systems appear to be outside the scope. This is expected to have significant impact on tech giants like Amazon, Apple, Google, Facebook, Netflix, and other large businesses that provide online goods or services, such as e-books, movies, music, and gaming.
The proposed draft still awaits parliamentary approval, after which it will have to be published in the Government Gazette and will finally take effect when the prescribed grace period (probably 180 days after publication) has lapsed.
In a related move, on June 3, 2020, Thailand signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This will assist Thailand in collecting data on Thai-sourced revenue derived by foreign suppliers that do not have a presence in Thailand. It will also assist Thailand with VAT collection from non-compliant foreign suppliers by requiring countries that have adopted the convention to cooperate (upon request) in tax collection matters. Before entering into force for the country, Thailand must ratify the convention and will have to enact several necessary domestic laws, including a law on automatic exchange of information (now being drafted).
Foreign suppliers have raised concerns about the increased cost and complexity of compliance. For example, foreign suppliers will need to decide whether to absorb the additional 7% VAT as an operating cost or pass the charge on to consumers. Foreign suppliers may also need to revise their business models to involve more local VAT registrant distributors instead of interacting directly with non-VAT registrant consumers in order to avoid having to comply with the new VAT requirements.
The United States has recently announced investigations into foreign digital service taxes in the view that such tax regimes are burdensome and discriminatory against US-based tech firms and businesses. France, for example, which was one of the first countries to tax digital services, was threatened by the United States with higher tariffs, until France capitulated by deciding to postpone payment collection until 2021.
However, the planned VAT on digital services in Thailand has a significant difference from the digital services tax regimes adopted by some EU countries, which have aimed to impose “income tax” on digital service providers despite the fact that they had no clearly defined permanent establishment (PE) in the taxing country. These digital tax regimes negated the benefits of double taxation conventions on income tax by allowing source countries to impose income tax on foreign businesses without considering their PE. The VAT on digital services in Thailand, on the other hand, imposes a tax on consumption that is theoretically payable by consumers. It does not tax the income of foreign suppliers that do not have a PE in Thailand.
The new law, rather, will require foreign suppliers to assist the RD in VAT collection by requiring them to register for and pay VAT on digital service consumption. The foreign suppliers that are subject to the law will be able to design their own system for complying with the VAT collection, whether that entails charging VAT to consumers, absorbing the costs, or changing business models in some other way.