Paying dues: Understanding classifications of various business transactions

The main body of tax law in Thailand is the Revenue Code. Taxes under the Revenue Code are collected under a self-assessment system of taxation, whereby taxpayers assume responsibility for correctly filing their tax returns and paying taxes annually.

The Revenue Department administers the Revenue Code and enforces compliance with the law through regular tax audits. Taxpayers can ask the Revenue Department for a ruling to clarify the Department’s viewpoint in advance of a tax audit.

In recent years, the Revenue Department has invested heavily in information technology (IT) and now provides a number of electronic services, including electronic tax filings. IT systems have played a critical part in the Revenue Department's ability to improve its collection of tax revenues.

Alongside regular tax administration, Thailand is implementing a number of new tax incentives that will make the country a more attractive location for businesses when the new ASEAN Economic Community (AEC) is formed by 2015.

CORPORATE INCOME TAX: Companies or juristic partnerships established under Thai law are subject to corporate income tax on their worldwide income, while those established under a foreign law and carrying on business in Thailand are subject to corporate income tax only on the net profits arising from their business activities in the country. The term “company or juristic partnership” is defined to include entities such as limited partnerships, registered partnerships, as well as unincorporated joint ventures.

The net profit for tax purposes is calculated by taking all revenue that arises from or in consequence of the business that is carried out in one tax year and then deducting all of the allowable expenses. Revenue and expenses are computed on an accruals basis.

Dividends that are received by Thailand-based companies, either from another Thai company or from a foreign company, may qualify for an exemption from corporate income tax if certain prescribed conditions are met.

In general, expenses incurred for the purpose of acquiring profits or for conducting business in Thailand are deductible. Accordingly, usual business expenses, qualifying bad debts and depreciation are deductible for tax purposes. Deductible expenses must be claimed in the tax year in which they are incurred.

A number of incentives are contained in the tax law that allow for accelerated depreciation and capital write offs in respect of certain types of assets. If an asset is acquired during a tax year, the depreciation allowance must be pro-rated.

Tax losses may be carried forward for a maximum of five years and set off against net profits of any nature. Companies promoted by the Board of Investment (BOI) that receive exemption from corporate income taxes can carry forward tax losses and deduct them as expenses for up to five years after the end of the income tax holiday period.

TRANSFER PRICING: The Revenue Department has the power to deem a taxpayer to have received market value consideration for the sale of goods, provision of services, or the lending of money, where it determines that the actual consideration received was less than market value without justifiable grounds. The Revenue Department also has the power to deny firms a deduction for any expenditure that is not exclusively expended for the purpose of acquiring profits or for the purpose of the business.

Transfer pricing guidelines have been introduced for determining the market price of cross-border and Thai domestic transactions between related parties. The guideline’s definition of market price is consistent with the “arm’s length” principle used in the OECD’s transfer pricing guidelines. In addition to this, the Revenue Department sets out a list of documents that officers from the Revenue Department may request from taxpayers when conducting a transfer pricing audit.

As of late, the Revenue Department is increasingly focusing on transfer pricing issues when reviewing the tax affairs of companies.

FILING OF RETURNS & PAYMENT OF TAX: A company may choose any 12-month period to be its accounting period. Any subsequent changes in the accounting period must be approved by the director-general of revenue.

An annual corporate income tax return accompanied by audited accounts must be filed within 150 days of the end of the accounting year. A mid-year tax return must also be filed and tax paid on half of either the actual or estimated profit for the year, depending on the business of the taxpayer.

The tax paid on the mid-year return, as well as domestic withholding tax deducted from income during the year, is allowed as a tax credit against the tax payable on the annual tax return. Thai companies are also entitled to claim a foreign tax credit for tax paid in a foreign country on income that is subject to corporate income tax. The foreign tax credit cannot exceed the amount of corporate income tax payable on the income.

Taxes due should accompany the submission of the return. A refund of tax overpaid may be requested within three years, and a request will generally be subject to tax audit before the refund is made.

Branches of foreign incorporated companies that are operating in Thailand are subject to the same filing requirements as Thai incorporated companies.

The Revenue Department has the power to issue a summons to conduct a tax audit within two years from the date the return is filed. The two-year prescription period can be extended by up to five years where there is documentary evidence or reason to suspect the taxpayer had an intention to evade tax. If tax deficiencies are found, the Revenue Department can assess additional taxes, provided that the assessment is made within 10 years of the date upon which the tax was required to be paid.

CORPORATE TAX RATES: Thailand’s headline corporate income tax rate was reduced from 30% to 23% for 2012 and will then be further lowered to 20% by January 1, 2013 for a total of two consecutive accounting periods.

For small and medium-sized enterprises (SMEs), the first BT150,000 ($4785) of net profit is exempt from income tax while the next BT850,000 ($27,115) is subject to a 15% tax. The new tax rate of 23% will apply to profits exceeding BT1m ($31,900) for the accounting period commencing on or after January 1, 2012 and will then decrease to 20% for accounting periods commencing on or after January 1, 2013.

To be eligible for the SME rates, the following conditions must be met:

• The company’s paid-up share capital must not exceed BT5m ($159,000) on the last day of its accounting period; and

• The income derived from the sale of goods or provision of services during the accounting period must not exceed BT30m ($957,000). A regional operating headquarters in Thailand may obtain a tax exemption on income derived from foreign operations and a concessionary tax rate of 10% on other qualifying net profits. A qualifying international procurement centre is subject to corporate income tax of 15% on qualifying income for five consecutive accounting periods.

Furthermore, a tax rate of 10% applies to qualifying net profits derived by companies that have been approved by the Ministry of Energy to conduct oil trading activities in Thailand.

Foreign companies engaged in international transportation are subject to 3% tax on gross receipts.

A foreign company carrying on business in Thailand is also subject to 10% tax on the disposal of profits out of the country. This tax may be exempted under an applicable double tax agreement, such as the one made with Hong Kong.

Petroleum income tax rather than corporate income tax is levied on the net profits and the disposal of profits out of Thailand by businesses engaged in petroleum exploration and production.

PERSONAL INCOME TAX: The tax year for individuals is the calendar year. Tax residents are subject to tax on assessable income from sources in Thailand and on assessable income derived from sources outside Thailand if remitted into Thailand in the same year. A person who resides in Thailand for one or more periods totalling 180 days or more in a tax year is deemed to be a tax resident for that year.

Non-residents in Thailand are subject to tax only on the income they earn from sources in the country, regardless of whether such income is paid in or outside the country.

Expatriate employees working outside Thailand for a regional operating headquarters or a qualifying international procurement centre may be able to claim exemption from Thai personal income tax.

For some classes of income, standard deductions will apply, whereas for others, actual expenses incurred in connection with the derivation of the income may be deductible.

For employment income, a standard deduction of 40% of an individual’s gross income, up to a maximum of BT60,000 ($1194) per annum, may be claimed as an expense.

In addition to the itemised or standard expense deductions, individuals are also entitled to deduct a number of allowances.

TAX RATES: Personal income tax will be calculated on a person’s net income after deduction of expenses and allowances. The tax rates for both resident and non-resident tax individuals are set out in the table below.

Expatriate employees working for a regional operating headquarters or qualifying international procurement centre may elect to be taxed at a flat rate of 15% on their remuneration.

FILING OF RETURNS & PAYMENT OF TAX: Personal income tax returns must be filed on or before 31 March in respect of the preceding calendar year. Any outstanding tax on this income must also be paid on or before this date.

Employment income and certain other categories of income are subject to withholding tax. The taxpayer can claim a credit for the tax withheld in their personal tax return.

For married couples, the husband is normally responsible for filing a joint return and paying any tax due. However, if desired a separate return may be filed by the spouse in respect of employment income only. The tax liability will be lower if separate returns are filed. Mid-year returns must be filed for certain types of income, such as rents and income from certain professions and businesses.

Under certain conditions, assessable income may be excluded from the personal tax return, including certain types of interest that has been subject to 15% withholding tax; gains from the sale of immovable property acquired by way of bequest or as a gift, which would have been subject to a withholding tax at the time of transfer; and dividends or mutual fund distributions subject to 10% withholding tax.

WITHHOLDING TAX: Thailand has a comprehensive withholding tax system that applies to both domestic and international payments.

Withholding tax applies to a number of domestic payments that are not for the sale of goods, including service fees, royalties, commissions, transport fees, interest, dividends, rents and the sale of immovable property. Rates generally range from 1% to 5%. Withholding tax must be deducted at the time of payment, as well as a certificate issued by the payer as evidence of the tax deducted. The withholding tax deducted can be used by the income recipient as a tax credit in their income tax return.

Certain payments made to foreign companies that are not carrying on business in Thailand, including interest, capital gains, rents, royalties and service fees are subject to 15% final withholding tax. Dividends are subject to 10% final withholding tax, however exemptions apply in some cases, such as for dividends paid out of profits subject to tax holidays.

An exemption or reduction of withholding tax may be obtained under an applicable double tax agreement. Service fees are usually exempted and the rate on interest is generally reduced to 10% if paid to a financial institution.

INVESTMENT PROMOTION: Companies that receive BOI promotion may obtain special taxation incentives. Foreign investors will typically establish a local firm if they wish to seek BOI promotion for their business. Depending on a project’s characteristics, eligible initiatives may obtain tax incentives that include:

• Exemption or reduction of import duties on imported machinery, raw materials and components.

• Exemption from corporate income tax for three to eight years.

• Exclusion from taxable income of dividends received from promoted enterprises during the corporate income tax holiday.

• 50% reduction of corporate income tax for five years.

• Double deduction of transportation, electricity and water supply costs.

• 25% deduction from net profit for facility installation and construction costs in addition to normal depreciation. The criteria for granting tax and duty privileges for promoted projects are based on the location of the project. The provinces in Thailand are divided into three investment zones according to economic factors such as the level of income and the availability of infrastructure in each province. Different tax and duty privileges are also specified for particular types of activities. It is therefore important to consider not only the location of the project but also the classification of the promoted activity.

VALUE-ADDED TAX: Most persons that sell goods or provide commercial or professional services in Thailand will have to register with the Revenue Department to pay VAT. Suppliers with a sales turnover not exceeding BT1.8m ($57,420) per annum are exempt from VAT. Foreign businesses may also be exempt from VAT registration if they only carry out business in Thailand temporarily.

The law provides that certain sales, services and imports are exempt from VAT, such as the sale or import of unprocessed agricultural products, the sale or import of books, transport services and rental of real estate. A trader engaged in exempt transactions does not need to collect VAT, but at the same time cannot claim a refund of VAT paid to suppliers. However, the trader can get a corporate income tax deduction for the VAT paid.

Taxable supplies attract VAT at either the standard rate of 7% or 0%. Imports are subject to 7% VAT, which is collected at the time of import by the Customs Department.

Transactions that are 0%-rated include exported goods, services performed in Thailand and used entirely in a foreign country and services of international transportation by air and sea. Under the 0% rate, a supplier may obtain an input credit for VAT incurred on purchases.

VAT registrants shall add VAT to the price of their goods and services and collect the VAT from customers or clients. A VAT registrant must prepare and issue a tax invoice in the prescribed format for every sale or service the business provides subject to VAT. Businesses that sell goods or provide services to a large number of customers shall have the right to issue an abbreviated tax invoice instead. VAT registrants that wish to claim a credit for the VAT on their purchases are required to receive a full tax invoice to support their claim.

Each month the VAT liability is calculated by taking the difference between the VAT on sales and the VAT on purchases that are allowed as a credit under the tax law. In the case where a credit balance arises, the taxpayer may carry forward the VAT credit to the following month or request a refund from the Revenue Department, which will most likely result in an audit.

A person that pays for services from a foreign supplier to use in Thailand shall be liable to remit the VAT on the services to the Revenue Department.

SPECIFIC BUSINESS TAX: Businesses not subject to VAT may be subject to specific business tax (SBT) instead. SBT is levied on the gross receipts of the business. A 10% municipal tax is imposed on top of the SBT rate. SBT is paid to the Revenue Department on a monthly basis, and SBT on the sale of immovable property is paid to the land department when the sale is registered.

CUSTOMS DUTY: Thailand imposes a customs duty on certain imports and exports brought in or out of the country. Export duties are generally imposed on only two groups of commodities, rawhide and wood.

Import duties are imposed on a specific, ad valorem, or compound basis. The compound basis is a combination of the specific and ad valorem basis (whichever is higher). Such duty rates generally range between 5% and 20% and may be reduced or eliminated under Thailand’s free trade agreements, such as those it holds with Australia, China, India, New Zealand and the member countries of ASEAN.

Generally, the import value for the calculation of import duty is based on cost, insurance and freight (CIF) and free on board (FOB) for exports. The Customs valuation is made under General Agreement on Trade and Tariff, which primarily uses the transaction value on prices actually paid or payable.

EXCISE TAX: Excise tax is imposed at ad valorem or specific rates on certain commodities and services, including liquor, tobacco, motor vehicles and certain kinds of electrical appliances. The tax liability arises on locally manufactured goods when the products are shipped from the factory or on importation. In addition to excise duty, interior tax at the rate of 10% may be imposed.

EXPORT INCENTIVES: Industrial operators in export processing zones under the Industrial Estate Authority of Thailand are granted numerous tax incentives and privileges, including exemptions from import duty and VAT.

A bonded warehouse can be established with approval from the Thai Customs Department. Under a bonded warehouse scheme, the imported goods stored in a bonded warehouse for the purpose of re-export shall be exempted from payment of import/export taxes and duties, regardless of being exported in the same nature as imported or in the nature of having been produced, mixed or assembled as other goods. Various types of bonded warehouse can be established under the Customs Act.

STAMP DUTY: Stamp duty is imposed under the Revenue Code on certain documents including real estate leases, share transfers, loan agreements and hire of work contracts.

The rate of stamp duty applicable depends on the type of document. In general rates are between 0.05% and 1%, although for certain instruments the stamp duty is capped, such as for loan agreements for which stamp duty is capped at BT10,000 ($319). Flat rate duties range from BT1 ($0.03) to BT200 ($6.38) per instrument.

A number of exemptions from stamp duty are provided under the law. Documents subject to stamp duty that have not been stamped cannot be used as evidence in a civil case.

OTHER TAXES: Fees are imposed under the Land Code for the registration of certain rights and acts. The transfer of land, buildings or condominium units are subject to a 2% fee based on the official appraised value of the property as set by the government. These prices are currently reviewed every four years. The registration of real estate leases longer than three years are subject to a 1% fee.

A House and Land Tax is collected on a yearly basis on the annual rental value of all commercial buildings at a rate of 12.5%. If land is not subject to the house and land tax, it may be subject to a local development tax. Reforms have been proposed that involve scrapping both of these taxes and introducing a new property tax instead that would be imposed on the official appraised price of each property.