WHT and VAT compliance in Thailand
Thailand Franchisees Beware!
The Thailand franchisee disagreed with the Revenue officers’ argument and referred the matter to the Tax Court, which ruled in favor of the Thailand franchisee, saying that the advertising and promotion spending by the franchisee in Thailand cannot be considered as being paid to or received by the foreign company franchisor.
But the Revenue Department officers appealed the Tax Court’s ruling to the Supreme Court, which has just very recently handed down its decision in favor of the Thailand Revenue Department.
Summary of Supreme Court Case No 4440 / 2552 (2009)
A Thailand franchisee entered into an agreement with a foreign company franchisor for the right to use the franchisor’s system, trade name, trademarks etc for the purposes of operating the franchised business in Thailand. According to the franchise agreement, the franchisee is required to incur advertising and sales promotion expenses in an amount not less than 3.5% of annual gross sales.
The franchisee is required, under the agreement, to hire a local advertising company in Thailand to carry out the advertising and sales promotion activities and to pay the amount of not less than 3.5% of annual gross sales to the local advertising company. The Revenue Department officers formed the opinion that the payments to the local advertising company for the advertising and sales promotion activities in Thailand should be treated, for tax purposes, in the same way as the franchise royalty fee payment under the franchise agreement.
The Revenue Department assessed the franchisee 15% withholding tax and penalties on the advertising and sales promotion expenses on the basis that they are royalty payments under Section 70 of the Thai Revenue Code, plus 7% VAT and penalties thereon according to the reverse-charge rule under Section 83/6 of the Revenue Code.
The Supreme Court concurred with the assessment of the Revenue Department. It ruled that because the requirement for the Thailand franchisee to spend on advertising and sales promotion in Thailand is a condition under the agreement, the local advertising and sales promotion spending is therefore part of the consideration payable to the foreign franchisor for the right to operate the franchised business.