Facing up to tax challenges in the age of digital economy
THE WORLDWIDE increase in digital commerce has alerted many countries to the unique tax challenges it presents.
Facing up to tax challenges in the age of digital economy
THE WORLDWIDE increase in digital commerce has alerted many countries to the unique tax challenges it presents.
There is now a common understanding that companies can reap substantial digital sales from a country without establishing a taxable presence there.
Many governments are concerned that traditional rules defining the level of presence a corporation may have within a country before a taxable presence is established are outdated.
Existing rules in both domestic laws and tax treaties require some type of physical presence before a permanent establishment (PE) is established in another country.
Digital commerce companies have structured their operations to realise sizeable returns from their targeted markets without having to establish a physical presence in those markets.
Business models in the digital economy include online retail of tangible products and the sale of digital products, technical content or software.
For Thai tax purposes, under Section 76bis of the Revenue Code, a foreign company is deemed to carry on a business in Thailand and will be taxed in Thailand if it derives income in or from Thailand through the activities of its employee, agent or go-between in Thailand.
If a foreign company carries on a digital commerce business without entering Thailand or without authorising any representative and/or server in Thailand, it should not be regarded as doing business in Thailand and should not be subject to income tax in Thailand.
However, that does not mean that the foreign company is free from Thai taxation. Thai withholding tax may be imposed on digital transactions.
If a digital transaction is in the nature of a royalty or service subject to withholding tax under Section 70 of the Revenue Code, a foreign company is liable for Thai income tax by method of the income tax payer in Thailand deducting the tax from the total payment and passing it to Thai tax authorities, unless tax relief under a double-taxation treaty can be claimed.
Indirect tax will also be imposed where it can be collected upon the delivery of tangible products in Thailand, but the difficult part is the movement of digital products, which is boundless.
A digital product is subject to VAT in Thailand if it is utilised in Thailand. Since a foreign digital commerce operator does not have a taxable presence in Thailand, it is not required to become a VAT registrant in Thailand.
It is the responsibility of the payer of income tax in Thailand to self-assess VAT and remit it to the Revenue Department.
In practice, VAT may be missing if the buyer is an individual. Anyway, VAT is not a cost to a digital commerce operator with no presence in Thailand, as the obligation to pay VAT lies with the buyer in Thailand.
In summary, a key concern about the digital economy is the collection of withholding tax on digital transactions. If a tax treaty is applicable, Thailand cannot collect any tax on digital transactions from a foreign company with no presence in Thailand.
Looking at global trends, the Organisation for Economic Cooperation and Development (OECD) has proposed a plan to address tax-base erosion and profit-shifting.
The action plan calls for the study of the main challenges that the digital economy poses for the application of existing international tax rules and the development of options to address those challenges, taking a holistic approach and considering both direct and indirect taxation.
In September, the OECD released a discussion draft that raises questions regarding the nexus, character of income and the potential for broader reallocation of taxing rights.
Modifying the PE threshold is one option. The discussion includes modifying the model of tax treaties in respect of PE terms, a new nexus based on a “significant digital presence”, where a PE can be created based on contracts, payments and functions, and virtual permanent establishment, which can be created through a website or a technologically-based agency – as opposed to a human being – giving rise to a taxable presence.
It should be noted that any change in the definition of PE at the international level would likely create a significant local impact, even though Thailand is not an OECD country.
This information is intended as a general guide. Tax law is complex and professional advice should be sought before acting on the information provided.
Benjamas Kullakattimas is tax partner in charge, KPMG Phoomchai Tax Ltd.
