Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the January 9, 2007 issue of the Bangkok Post.
By Thavorn Rujivanarom, Seetha Gopalakrishnan and Paul Sumner
This is the first of two articles that will take a close look at issues that affected businesses in Thailand last year, and what we can expect from these issues in 2007. In this article, we will take a look at tax, and customs and duties regulations.In Thailand, the last year has been one of change.
From the political arena to the corporate sphere, changing regulations and policies have had an impact, of varying degrees, on businesses throughout the country. We saw trade talks put on hold due to the political crisis, and we watched the drama of the telecoms industry unfold, with the unclear implementation of the interconnection charge and excise tax rates affecting both the operators and the government.
This rapid pace of change is not expected to slow in 2007, and tax and customs will be two areas to watch over the coming year.
How did the issue of VAT registration affect businesses in 2006?
In the past, it was common for non-residents not carrying out business in Thailand to engage local logistic agents to deliver their goods to Thai customers. Even though it was theoretically viewed that the agents had to register for VAT on behalf of their non-resident clients, this was rarely enforced by the Revenue Department until 2006.
The memorandum documenting the discussions between the Customs and Revenue departments, indicating that VAT registration by local agents on behalf of their non-resident clients was mandatory, caused a lot of hardship on both the agent and the non-resident. It made the tax implications of ''just in time'' inventory management much more complex.
The VAT registration of the non-resident opened up a number of other tax issues, such as whether the export of goods on behalf of the non-resident to another non-resident would fall within the scope of Thai VAT regulations. Would the VAT registration cause Thai corporate income-tax liabilities for the non-resident, for which both the agent and the non-resident principal would be jointly liable?
Because of this uncertainty, a number of manufacturing entities who relied on ''just in time'' inventory management had to re-think their needs and evaluate if alternative methods of inventory management would be more tax efficient.
A private ruling was issued to one logistics agent stating that VAT registration was required by mid-2006. However, a VAT notification issued on Dec 1 appears to provide some relief. If certain conditions are met, temporary registration may be sought by those who wish to register for VAT.
What can we expect from this issue in 2007?
Expect a lot of confusion among local agents (acting on behalf of non-residents in storing and/or delivering goods) as to their tax compliance obligation with respect to the activities of non-residents.
Nevertheless, despite the added complexity, if properly planned this could be turned into a good opportunity to optimise tax costs, or create tax savings for a company. In 2007, the Revenue Department will need to be approached again on its rationale for the change in its position from mid-2006 to its current position. This will help determine how best to deal with the issue from a tax compliance and planning perspective.
In terms of customs and trade, what did we see in 2006?
In 2006, customs and trade issues continued to affect all businesses involved in the cross-border movement of goods. It was expected to be the year that at least two major free trade agreements would be signed, namely the Thai-US and the Thai-Japan. However, political events delayed the ratifications and left interested parties unsure of future direction. Combined with the failure of the Doha round of multi-lateral negotiations, there was little positive news of tariff reductions.
Last year also saw developments within the Customs Department. One notable event was the redrafting of customs legislation, and the very welcome consultations with the trading community on the new wording. Not all the concerns raised were taken into account, but the process of consultation was well received and appreciated. The draft law continues to go through the formal processes and may be enacted in 2008.
Customs enforcement continued to be robust, with audits and investigations generating significant issues for importers and technical areas of law proving to be difficult to interpret. There was also a trend for audits and investigations to cover longer periods, which seems to be a change in the previous policy.
Can we expect much change in 2007?
In the year ahead, most companies involved in trade will watch for FTA developments, particularly whether the caretaker government will continue the process or wait until after the elections in October. The strengthening baht is affecting export competitiveness, and trade agreements may provide a welcome boost to Thai exports, although it would also make imports cheaper. Thai consumers may benefit, but domestic industries will need to adapt to remain competitive.
This year will also see the continuation of underpaid duty (and penalties) being collected after importation. Customs is becoming more proficient at risk profiling and the technical aspects of customs valuation law, and companies which believe they don't have a problem because they have never been challenged before may be in for an unpleasant shock.
