The digital economy has increased opportunities for digital commerce companies to reap substantial sales from a country without establishing a taxable presence in said country. Existing permanent establishment (‘PE”) rules in both domestic laws and tax treaties require some type of physical presence before a PE is established in another country. Under Section 76 bis of Thai Revenue Code (“TRC”), a foreign company is deemed to carry on business in Thailand and will be taxed here if it derives income in or from Thailand through the activities of its employee, agent, or go-between in Thailand. In this regard, if a foreign company which carries on digital commerce business does not enter Thailand or does not have any representative and/or server in Thailand, such foreign company should not be regarded as carrying on business in Thailand and thus shall not be subject to income tax in Thailand. In recent tax ruling No. Kor Khor 0702/2097, dated 28 December 2015, the Thai Revenue Department (“TRD”) ruled that a foreign company which sells its products to a Thai company  through electronic media is not deemed to be carrying on its business in Thailand and so does not fall under Section 76 bis of the TRC.  However, this does not mean that such a foreign company shall always be free from Thai taxation. Thai withholding tax may be imposed on digital transactions depending on the type of product sold. Current business models in the digital economy include online retail of tangible products, as well as the sale of digital products, technical content, and software. The sale of a tangible product imported into Thailand by the Thai buyer is regarded as income which is not subject to Thai withholding tax under Section 40(8) of the TRC. The issue is whether digital sales transactions where a customer can download a product, whether it may be music, games, or software, from an application should be subject to withholding tax.

Under Section 70 of the TRC, a foreign company is liable for Thai income tax whereby the income payer in Thailand must deduct said tax from the total payment and submit it to the Thai tax authorities, unless tax relief under a double taxation treaty can be claimed. Generally tax relief is not available if the payment falls under the definition of a royalty under the TRC and the tax treaty. In this regard, it is necessary to determine whether the sale of digital products is classified as royalty income for in either the TRC or the applicable tax treaty.  For example, the TRD has ruled in several tax rulings that software for industrial or commercial use, which is classed as a type of literary copyright under the Thai Copyright Act, is a royalty subject to withholding tax. In another case, the TRD ruled that a payment for use of or the right to use musical work is regarded as a royalty subject to withholding tax (Ruling no. Kor Khor 0706/3863). Based on the above cases, it is likely that the TRD would regard a payment for a product which has a license or copyright as a royalty payment. Further analysis on each case is required to determine the exact withholding tax obligation.