In cases where a foreign company wishes to bring goods on
the Thai market, there are several possibilities for him to consider to achieve
this, involving different degrees of integration in the Thai legal and economic
order. In increasing measure of integration, the following could be considered:
1. Sell goods directly to Thailand without any representation in Thailand. In
this case, the foreign company may find Thai customers by phone or Internet,
mailings or trade fairs abroad.
2. Send a sales-agent of the company to Thailand for one or more short visits in the
hope of later generating orders or arrange for representation at trade fairs
held in Thailand.
3. Find an independent company that is willing to
buy the goods from the foreign company and resell them to customers in Thailand (=
distributor).
4. Find an independent agent or broker in Thailand that
will try to sell the goods locally on commission.
5. Appoint a sales-agent in Thailand that
will be there for considerable periods of time, with or without disposal over
office/shop and other business facilities.
6. Formally open a branch in Thailand;
7. Establish a subsidiary company in Thailand.
To layman’s eyes, step 3 (distributor) and step 4 (agent)
may be hard to distinguish from each other. In both cases, the sale is
concluded with the help of the Thai company. In both cases, it is likely that
the Thai company will make an income based on the sales price of the goods.
Often, in both cases, the goods are shipped directly to the final customer.
Sometimes the price is in both cases paid to the foreign company by the final
customer.
Nevertheless, the tax and legal treatment of these two
comparable situations is quite different. Much of this discussion relates to
the operation of sec. 76 bis RC. This provision reads as follows:
"If
a juristic company or partnership organized under a foreign law has an employee*, a representative or a
go-between to carrying on business in Thailand and thereby derives income of
gains in Thailand, such a juristic company and partnerships shall be deemed
carrying on business in Thailand, and such employees, representatives or
go-betweens, whether a natural or juristic persons, shall, in so far as the
said income or gains are concerned, be deemed to be the agent of the said
juristic company or partnership and shall have the duty and liability to file a
return and pay tax under the provisions of this Division.
In all cases under the provisions of the foregoing paragraph, if the person
having the duty and liability to file a return and pay tax is unable to
ascertain the profits chargeable with tax under the provisions of this
Division, the provisions of Section 71 (1) on the method of assessment shall
apply mutatis mutandis.
An appeal is allowed against the assessment made under this Section."
In essence, sec.76 bis RC establishes two main legal rules
for tax liability determination, calculation and collection. In our view, these
are the following:
1. Deriving income in Thailand
through an employee, representative or intermediary may be considered carrying
on business in Thailand
in the sense of sec.66 par 2 RC and thus establishes Thai tax liability on that
income;
2. Such agent is liable for filing an income tax
return and pay the tax due.
In other words, when a foreign company disposes in Thailand over an agent or a broker, as in step 4
depicted above, that foreign company is liable to tax in Thailand on the
sales made to Thai customers. Moreover, the agent is jointly liable with the
taxpayer himself (the foreign company) to file a return and pay the tax. This
is the effect of sec.76 bis RC. However, when a foreign company sells goods to
a distributor in Thailand,
who will then sell them on to his customers, there is only a direct sale
between the foreign company and the Thai company. There does not appear to be
an “employee, representative or intermediary” as the text of sec.76 bis RC
requires. The provision does thus not apply and the foreign company is not
subject to tax in Thailand
on the income from the sales to the distributor. Of course, the distributor
itself is as a normal Thai company subject to 30% tax on its net-profit, namely
the difference between its buying prices and its sales prices.
* See B.T.R. no. 2/2526, D.I. No. Paw. 13/2527, D.N. 30 June 2529
Example:
As far as the income of the Thai company is concerned,
actually the result from the perspective of tax revenue for the government
should be the same. Either
the income of 20
is taxable as difference between buying price and selling price (distribution)
or the same amount is taxable as commission received from the foreign principal
(agency).
That is where the similarity ends, however. The profit the
foreign company has generated in or from Thailand (30 in the example above)
is normally NOT subject to Thai tax in the distribution scenario, but TAXABLE
in case of the agency-scenario. This is the effect of sec. 76 bis RC. In case
the Thai profit was derived through an employee, representative or intermediary
(in Thailand-is at least the
implication), the foreign company may be deemed to “carry on business in Thailand” rather than with Thailand. The
profit on the sale of the goods is subject to Thai tax, and the agent is
jointly liable for the payment of this tax. Note however that abstraction has
been made of the implications of double taxation agreements.
Avoidance
Clearly, many foreign sellers of goods will seek to avoid
having to pay tax in Thailand.
Tax avoidance will be even higher on the agenda when the Thai company in the
scenario above is actually a related party to the foreign company. In that
case, the taxpayer may be tempted to try and reduce all tax in Thailand,
including the tax that would otherwise be due on the (related) Thai
distributor’s profit or the Thai agent’s commission.
Example:
From the above it is clear that selling to Thailand by
means of a distribution-agreement may be more advantageous for foreign
companies than through agents. Especially between related parties, taxpayers
are thus more likely to characterize their agreements as “distribution
agreements” and not as agency-agreements. But just because parties (especially
related parties) give this name to a contract does not mean that it corresponds
to the legal reality. How can the RD be sure that the arrangement chosen is not
in reality that of an agency, thus triggering the application of sec. 76 bis
RC?
General Principles
Under Thai revenue law, the characterization by the parties
of their actual legal agreement is not determinative of the tax consequences.
It does not necessarily matter that parties call their contract a “sale
agreement” or “service contract”. What matters more is the actual legal rights
and obligations of the parties under the written or oral agreement, which may
be proven by all forms of evidence or concluded from the facts and
circumstances.
This is well illustrated by the Bell-Telephone case before
the Supreme Court of Thailand[1].
This decision is noteworthy because it clearly confirms that taxation in Thailand must
be based on the correct legal qualification of the legal acts and agreements of
the taxpayer. The denomination of a contract by the taxpayer is not in itself
determinative. The agreements must be assessed on their actual legal rights and
obligations, and taxation must be based on that qualification. This principle
can obviously work both to the benefit and to the disadvantage of the taxpayer.
If a taxpayer denominates his agreement a “service”, for example, but an
examination of the language of the contract, the intention of the parties and
the circumstances surrounding the conclusion of the contract shows that
actually the agreement should legally be characterized as a license, tax should
be levied on the latter qualification[2].
This approach could be called the principle of juristic interpretation, and is
familiar to many civil law jurisdictions.
Another important principle is that of
restrictive interpretation. It was recalled in another landmark decision of the
Supreme Court, the Walai case (No.1908/2538). The dispute concerned the
collection of a tax debt upon the property of the wife of a taxpayer. The tax
arrear concerned exclusively the income of the husband. The couple had, as sec.
57 quinque RC allows, submitted separate income tax returns. Sec. 57 quinque RC
provides that “the wife and the husband shall file tax returns and pay tax
separately” and regulates the treatment of personal allowances in that case. It
is not expressly mentioned that husband and wife are in that case not liable
for each others tax debts, as would be the case when they file a joint tax
return (sec. 57 ter RC). The RD based itself on the general rule of sec. 57 ter
RC to collect tax from the wife, arguing that sec. 57 quinque RC only
“addressed the method of tax assessment, and does not affect the collection of
tax as provided by sec. 57 ter RC”. The Court did not follow the RD’s view:
“The Court does not agree with the view of the Revenue Department because
revenue law is public law, providing in the duties of taxpayers towards the
state. It affects the rights and the property of the people. Consequently,
revenue law must be interpreted strictly, namely in a manner that results in
the least amount of duty upon the taxpayer”.
The Court’s dictum is a clear endorsement of a generally
restrictive approach to the interpretation of tax statutes. According to this
decision, tax statutes should as a principle be interpreted strictly, which
incidentally does not equate to “literally”. If the statute does not clearly
establish an obligation upon the taxpayer, no such obligation may be deemed to
exist. This fundamental principle, which can be associated with the postulate
of legality formulated in the constitution of Thailand[3],
has far-reaching consequences. One of its implications is that in case of
doubt, the statute should be interpreted to the benefit of the taxpayer (“in dubio contra fiscum”). It also has implications for cases of tax avoidance.
When an event or a transaction does not fall under the scope of the tax
statute, it is not taxable, the reasoning goes. A strict interpretation of tax
statutes increases the opposability to the RD of tax avoidance-schemes. But,
this does not mean that a literal interpretation of tax statutes will always be
supported by the Court. Some provisions, particularly those seeking to curb
abuses, may be drafted so that would have a wide scope of operation, and the
Court has shown no hesitation to give such measures their full effect[4].
Bangkok Motorworks case[5]
Turning our attention to distribution-agreements, the
Bangkok Motorworks case is certainly a decision that merits further attention.
Bangkok Motorworks Ltd. is a company established under Thai law which sells
goods in Thailand
that it bought from a foreign company. The RD took the position that sec. 76
bis RC nevertheless applied in this situation mainly because the Thai final
customers paid directly to the foreign company, and not to the Thai
distributor. The foreign company would then remit a “price difference” to the
distributor. Furthermore, the RD argues that the distributor does not incur any
business risk in the transaction, as would normally be the case when
buying/selling. The goods are ordered only when they are already sold, and
there is thus no possibility of a loss for Bangkok Motorworks Ltd. The RD
therefore considers that the role of Bangkok Motorworks is limited to that of a
representative in the sense of sec. 76 bis RC. As a consequence, the profit on
the sale of the goods by the foreign seller is taxable in Thailand and
Bangkok Motorworks is held liable to pay this tax.
The taxpayer obviously sees the matter entirely different.
Bangkok Motorworks argues simply that there is only a sale and resale of goods.
It also points out that the agreement explicitly states that the Thai company
shall not be regarded as a representative of the foreign seller in any way.
The Court notes that it is clear from the facts that
Bangkok Motorworks had the freedom to conclude sales with customers in Thailand, with
who to do so, or not to do so. When a sale was concluded, Bangkok Motorworks
was free to set the price as well. In addition, from the contract it appears
that in case of defected goods, it is the distributor which is responsible
towards the final customer, not the foreign company. The income of the
distributor is a profit, not a commission, the Court also holds. The mere fact
that the payment was made to the foreign company is not sufficient to warrant
the conclusion that there is no real distribution agreement, as such was the
result of a special arrangement between the customer and a financial
institution.
The Court therefore decides that the foreign company may
not be deemed to carry on business in Thailand by means of a
representative. In a case with essentially the same set of facts, the Court
came to a similar conclusion (Bornaew Tech Ltd 1971/2537).
Diethelm Case[6]
An earlier case before the Supreme Court illustrates
however that not all contracts which are called distribution agreements by the
parties, will be treated as such for tax purposes.
Diethelm is a Thai company that distributes products in Thailand bought
from a foreign company. The companies treat their arrangement as buying/selling
but the RD argues that the reality is different.
The Court therefore decides that it is
not credible that the taxpayer is a person who purchases goods and resells
them. From taxpayer's behavior, it can be concluded that the taxpayer is a
representative of the foreign seller in the sense of sec.76 bis RC.
Clearly, in this case the fact that the final customers
paid directly to the foreign company and not to the “distributor” weighed
heavily for the Court to decide in favor of the RD.
Conclusions
Based on the above it can be said that in order to
distinguish between a distribution-arrangement (seller normally not subject to
Thai income tax) and an agency agreement (seller and agent liable to Thai
income tax) a legal analysis of the contract and situation must be made.
Obviously, the name the parties gave to their contract is an important point,
but it is not determinative. Even the text of the contract itself is not
determinative if the actual behavior[7] of
the parties indicates clearly that the real rights and duties are different.
The following questions can be asked:
1. Is the Thai party free to sell, not to sell or
to choose its customers? If so, likely
to be distribution, not agency.
2. May the Thai party set its own price? If so,
almost certainly distribution, not agency.
3. Does the Thai party has the ownership right of
the goods once they leave the property of the foreign seller? If so, almost
certainly distribution, not agency.
4. In case there is something wrong with the goods
or the shipment (defects, late delivery, etc.) must the final customer present
his claim to the Thai party (and not the foreign seller)? If so, almost
certainly distribution, not agency.
[1] Supreme Court Decision No.124/2540
[2] See also Siam Tin
Case (Supreme Court Decision No.4483/2533)
[3] The Thai Constitution
provides in sec 69 that Thai people have the duty to pay tax. Sec 48 notes,
however, that the right to property may only be infringed upon if a legal act
so provides. Put another way, the government is not entitled to take the
property of the people unless there is an act of parliament which explicitly
enables it to do so. This principle, which is most often associated with
expropriation, applies to taxation as well, as is illustrated by Art. 1 Prot 1
European Convention on Human Rights. Essentially the same observation can be
made with respect to the right to establish and carry on a business, which is
guaranteed by sec 50 in the Thai constitution.
[4] See for example the
Siam Tin Case 4483-4484/2533
[5] Supreme
Court Decision No.1009/2539
[6] Supreme
Court Decision No.6056/2534
