Transport vs. service
From the past until today there is no tax law interpretation that clearly differentiates “transport” from “temporary employment” or “service”. Technically, another word for transportation service is transportation. However, when it comes to withholding tax and sales tax under the Thai Income Law (“TRC”), transportation is not related to and does not levy the same taxes as “Service”.
The difference between transportation and service is only explained today by the decisions of the Thai Revenue Department (“TRD”). If you’ve ever gone through TRD-regulated tax rulings in the past 20 years, you’ll find that the tax implications for transportation are pretty tricky. Your understanding of the type of transportation and service could be wrong. One thing we can assure you is that paying your tax law can remove you from the cash flow problem and from a scary tax audit.
Before we start with the tax liability, we should go over what transportation and service are as per the TRD decisions.
What is “transport”?
Based on the tax rulings, the TRD took the view that transport denotes the delivery of products or people from one place to another without additional services.
Example of factors that lead to “transportation”:
1. Providing services that focus on moving products from one point to another.
2. Provision of transport services excluding services other than loading and unloading of products.
3. Separation of the transport from other services such as packing and unpacking service, barcode service and warehouse management service.
4. Separation of transport from additional services such as logistics, cleaning or inspection service.
5. Separation of invoice and receipt for the transport service from other related services.
6. Transport of products from the factory where the customer buys products directly to the customer’s own warehouse without going through the carrier’s warehouse.
What counts as “job placement” or “service”?
Under the Thai Commercial Code, an “employment contract” is defined as a contract in which one person, called a contractor, agrees to perform a specific job for another person, called an employer, who agrees to receive compensation from the result their work to pay the work. The provision of services is therefore considered an employment contract.
In addition to transportation, job placement can be any service.
Example of factors that justify “service”:
1. Provision of a transport service with additional services such as:
(A) pre-cooling the containers as required by the customer prior to product collection;
(B) providing temperature controlled containers as required by the customer to maintain the appropriate temperature for a particular product;
(C) installing equipment for the customer to monitor delivery status with goods condition such as (i) temperature tracking equipment; (ii) device for preventing product damage; and (iii) real-time tracking GPS;
(D) reporting the results of product delivery to customers;
(E) unloading and storage of products; and
(F) Provision of services such as organizing, labeling, repackaging of products from the warehouse, which are to be distributed to the destination specified by the customer using temperature-controlled containers.
2. According to the contract, the service provider must provide additional services such as:
(A) Forklift service to lift the customer’s product from the warehouse and load it into the truck;
(B) providing personnel to sort the product into the bins; or
(C) Providing at least one auxiliary person to load the product onto the customer’s stock pile or to the destination where the product is to be received.
3. Provides “warehouse management services” together with its “transport service” either in the customer’s warehouse or in the warehouse that the customer rents from a third party.
4. Providing a “truck” suitable for transporting the Bank’s valuable assets, including:
(A) security armored vehicles in good working condition, compliant with satellite tracking systems, oil demolition system, walkie talkies and well experienced and armored personnel.
(B) Personnel and vehicle work exclusively for the order.
(C) an agent who is stationed at a location designated by the Commercial Bank during normal business hours to monitor the transport during delivery and to coordinate it with the bank
Transport vs. service
Now that we understand the differences between transportation and service, why is it important to distinguish between the two? Let’s go in depth on the tax implications of transportation and the provision of services.
If your company pays for someone to supply a product for you, you may want to review the withholding tax rate you have deducted. Incorrect tax withholding not only leads to surcharges for tax misstatements, but also reduces the cash flow in your company.
VAT is also key.
The sale of goods and the provision of services are subject to VAT in Thailand. Domestic transport transactions, whether by land, air or sea, are exempt from VAT. There is a big difference, that is, domestic land transport cannot register as a VAT payer while transport by air and sea can.
Provided that you are subject to sales tax, you can claim the input tax paid to suppliers. Let’s say if the input tax is higher than the output sales tax levied by the customers, the taxpayer could request a tax refund or creditable sales tax. On the other hand, if a business is NOT in the VAT system, the input tax it paid to suppliers could potentially be a deductible expense or cost of calculating corporate tax. It’s safe to say that most sales tax businesses have better cash flow than non-sales taxes.
Over the decades, taxpayers have learned from the TRD decisions and decided to “nip them in the bud” by separating their transportation business from other services such as (i) TNT Express and TNT Logistics (ii) Linfox Transport and Linfox Logistics, in to plan the VAT and non-VAT expense handling.
We have seen that tax planning for VAT and non-VAT businesses is done by separating transportation from other services based on the following facts:
(1) The service is subject to sales tax, but the transport is not. In the case of a VAT-exempt company, its “input tax” becomes a cost and its “output tax” cannot be collected from customers. In the case of a sales tax company, however, its output tax can be collected from the customer and offset against the input tax paid to the supplier. However, since inland transport by land is absolutely exempt from VAT and cannot enter the VAT system, this is a disadvantage compared to inland transport by air and sea. Domestic transportation by air and sea could choose to enter the VAT system to take advantage of the VAT credit.
(2) The cash flow management of the transportation is inferior to the service. Although the transport withholding tax is 1%, while the service is 3%, VAT has a larger share of the cash flow in and out at 7%.
(3) Human resource management between transport and service is inevitable in a centralized service or shared service as there is an “intertransaction” between related parties and is subject to “transfer pricing” tax compliance. Transportation focuses on the driver which is different from the services which focus on the people and the team with different skills and knowledge.
(4) To become a VAT registrar, numerous official documents such as input / output tax invoices, input / output tax and inventory reports and tax returns must be complied with. Documents must be kept for at least 5 or 10 years, and company employees must understand VAT systems to balance corporate tax compliance.
The above pros and cons are things that taxpayers consider before starting a business.
Yet the world revolts every day and new ideas arise. What worked in the past may not work in the present. This also applies to the functioning of the law. Transfer pricing, a new related party tracking idea created to end tax evasion and avoidance, was enforced in Thailand in 2019. The introduction of the Transfer Pricing Act will have a major impact on the tax planning of a group company.
Although companies have separated their legal unit for tax planning, the service between related parties through the sale or provision of services is monitored by the Transfer Pricing Act. Is the market price reasonable? Is the transaction considered tax evasion or tax avoidance? By separating legal entities, transportation, services, invoices and contracts can help with VAT or non-VAT planning, but it cannot help companies “escape” the new tax pitfalls known as “transfer pricing”.