Why this topic matters for businesses in Thailand
Export transactions often involve complex supply chain arrangements, especially when goods are invoiced to one entity in Thailand but shipped directly to another entity overseas. Many Thai companies act as intermediaries purchasing goods locally before exporting them to foreign customers. This common “Bill to Thailand, Ship to overseas” model raises an important tax question: Can the Thai supplier issue an invoice with VAT 0%?
Understanding the correct VAT treatment in this scenario is crucial for maintaining compliance and avoiding disputes with the Thai Revenue Department. Incorrect application of VAT can lead to additional tax assessments, penalties, and cash flow inefficiencies.
Key VAT rules and interpretations
Under Section 77/2 of the Thai Revenue Code, a sale of goods that occurs in Thailand is considered a domestic sale, regardless of where the goods are ultimately shipped. Therefore, if a factory or supplier in Thailand sells goods to another Thai VAT registered company even if the goods are shipped abroad the transaction between the supplier and the Thai company is still subject to VAT at 7%.
This interpretation is further clarified in Revenue Department Ruling No. Por.97/2542, which sets out the following:
- The supplier (factory or trader in Thailand) must treat the sale to the Thai customer as a local sale, issue a tax invoice, and charge 7% VAT.
- The Thai company (the “Bill to” party) may then act as the actual exporter, as long as it exports the goods out of Thailand and complies with export documentation requirements.
- The export sale from the Thai company to the overseas buyer may qualify for VAT 0%, provided it meets all the conditions for an export sale under Section 80/1(1) of the Revenue Code.
In short, the 0% VAT rate applies to the exporter of record, not to the initial Thai supplier.
Common challenges and misconceptions
Many businesses mistakenly believe that if the goods are shipped directly to a foreign country, the initial sale automatically qualifies for 0% VAT. However, the exporter status depends on who arranges and controls the export not merely on where the goods are shipped.
Typical challenges include:
- Incorrect invoicing: Suppliers may issue invoices with VAT 0% without realizing they are not the exporter of record.
- Missing export evidence: The Thai buyer (who is the actual exporter) may fail to keep proper export documents such as customs export declarations, shipping documents, or payment records.
- Cash flow issues: When VAT 7% is charged on the local purchase, the Thai buyer must pay VAT upfront and later claim it as input VAT, which may impact working capital.
Best practices for compliance
To ensure correct VAT treatment and maintain compliance, companies should consider the following steps:
- Identify the exporter of record: Clearly determine which party is responsible for the export process and customs declaration.
- Issue correct tax invoices: The Thai supplier must issue a VAT 7% invoice to the Thai company, even if the goods are shipped overseas.
- Maintain supporting documentation: The Thai buyer/exporter should keep export-related evidence, including the export declaration (Customs Form), Bill of Lading or Air Waybill, and proof of payment from the foreign customer.
- Review contract and Incoterms: Clearly specify the shipping and invoicing terms to align with VAT obligations and responsibilities.
- Regular VAT review: Conduct periodic internal VAT reviews to ensure proper documentation and claim accuracy.
Risks and compliance considerations
Non-compliance with VAT rules can result in significant risks:
- Tax assessments and penalties: If the Revenue Department finds that a supplier incorrectly applied VAT 0%, additional VAT, surcharges, and penalties may apply.
- Rejection of input VAT claims: If the Thai buyer/exporter fails to keep proper export documentation, the input VAT credit on the domestic purchase may be disallowed.
- Reputational and audit risks: Improper VAT treatment can raise red flags during audits or tax refund applications, delaying cash flow and creating reputational concerns.
To manage these risks, businesses should establish a clear internal process for handling “Bill to/Ship to” transactions and ensure that accounting, logistics, and tax teams are aligned on export documentation requirements.
Conclusion
In Thailand, the rule is clear when goods are sold from a Thai supplier to a Thai company, the transaction is a domestic sale subject to VAT 7%, even if the goods are shipped abroad. The Thai company, as the exporter of record, may then apply 0% VAT when selling to its foreign customer, provided that export evidence is properly maintained.
By understanding these principles and keeping accurate documentation, businesses can manage VAT efficiently and stay fully compliant with Thai tax regulations.
Need support? Contact our Tax Advisory team today.