Bangkok Post, Thailand, Tax Column.

Bangkok Post, Thailand Knight Ridder/Tribune Business News

Aug. 19--When your transaction is not subject to value-added tax, it does not mean that you are free from tax issues. It is true that you will not have any output VAT liability on the sale of goods or services insofar as your business is subject to the zero-rate VAT or falls outside the VAT jurisdiction. But it may have an impact on your ability to claim input VAT credit. And if you decide to claim it while you are not entitled to it, it could result in a penalty and/or surcharges or even a criminal punishment in some cases.

It is commonly known that an operator subject to VAT (either at a normal rate or a zero rate), is entitled to claim an input VAT credit.

If you incur input VAT credit (upon the purchase of goods/services), and you export the services of 20 percent while the other 80 percent is provided to customers locally, then you are entitled to claim the entire amount. There is no need to apportion the amount of the input tax credit between the local sale of services and the export sale.

The conse...uence is completely different if the 20 percent of your services happens to fall outside the scope of the VAT regime, for some reason, other than the zero-rate treatment. For example, the sale of services outside Thailand perhaps falls within the exemption rule or falls outside the Thai tax jurisdiction.

In both cases, you could easily lose the right to credit the input VAT in relation to such activities.

Due to the above problem, it is crucial that you know what you are doing in a cross-border transaction. After all, there are only four situations that you could come across and no more.

First, it is possible that your transaction is not ...ualified as an export of goods or services and you are simply subject to 7 percent VAT -- making sales to the foreign customers more expensive and less competitive. Second, if you are lucky enough to get the zero-rate treatment, not only do you not have to collect VAT from the foreign customers but you are also entitled to claim input VAT in full. Third, your transaction may fall outside the scope of VAT jurisdiction. Fourth, you may fall within the exemption rule of the Revenue Code and no VAT is re...uired to be collected. The last one is not much of a problem as you should be able to determine clearly if the exemption rule is applied. The first three scenarios could be a bit tricky.

Keep in mind that the fact that the buyer of services is foreign does not lead to the conclusion that consumption takes place outside Thailand from the VAT perspective. You will never get the zero-rate treatment merely because it is a cross-border transaction. For example, ...uality control services (for goods purchased by foreign buyers in Thailand) have been attacked by the Revenue Department as subject to 7 percent VAT. The consumption is viewed as taking place in Thailand, as the foreign customers do not seem to use the services in any way outside the country (outside of using the ...uality control report to make the decision to purchase or not purchase the Thai goods).

Another example is Internet services. A Thai service provider receives consideration from overseas web site owners when Internet users visit their web sites through the Thai e provider's site. The Revenue Department ruled that the consideration paid by the overseas web site owners did not ...ualify them for the zero-rate VAT, as there was no export of services and the Internet users visiting their web sites could be Thai as well as non-Thai. As a result, the Thai service provider was re...uired to collect VAT from the overseas web site owners.

A classic example of services deemed as falling outside of the VAT regime is when a goods exhibition is staged in a foreign country. A Thai company organised a goods exhibition and sold booth space to foreign suppliers. The administrative work was conducted at the head office in Thailand while the field work was done in the country where the exhibition was held. The Thai company claimed the relevant input VAT on the ground that payments from sales of booth space ...ualified for the zero-rate VAT, as it constituted services performed in Thailand and sent to the overseas customers for use outside Thailand.

The Revenue Department had a different view and ignored the administrative work in Thailand. Instead, it was ruled that the exhibition business constituted the services performed and used outside Thailand that was not subject to Thai VAT at all. The Thai company was not only disallowed to claim the input VAT relevant to its offshore business but it was also re...uired to allocate the input VAT in relation to the overhead expenses to the non-VAT income. The latter was not creditable.

In summary, the zero-rate treatment is not given simply because your customers are foreigners. The impact of non-VAT could be as serious as being subject to VAT. The only difference is that the former affects your ability to claim input tax credit while the latter affects your output tax credit liability.

Written by Piphob Veraphong, Thanasak Chanyapoon and Prangtip Anantavipat. They can be reached at admin@lawalliance.co.th or 02-651-5490.

To see more of the Bangkok Post, or to subscribe to the newspaper, go to http://www.bangkokpost.com

(c) 2003, Bangkok Post, Thailand. Distributed by Knight Ridder/Tribune Business News.