The VAT treatment of supplies of digital goods and services continues to be an area of focus and rapid changes in many countries, affecting businesses around the world. In keeping with this trend, the Thai government is working on developing amendments to the current VAT law that will capture digital services.

The second draft of the legislative amendments released in January proposes that a foreign company providing services through electronic media to a non-VAT registered person, where such services are used in Thailand, must register for, and will be subject to, VAT. The registration requirement kicks in when annual VAT-able income exceeds 1.8 million Baht.

This draft raised a number of valid concerns, mainly in connection with the lack of clarity on its practical application and imposed compliance obligations. Many interested stakeholders submitted their comments during the second public hearing held in early February. The Revenue Department has now published its responses to these comments providing important clarifications.

A non-exhaustive list of businesses captured by the proposed law includes hotel booking services; e-books, movies, music, advertising, online gaming services; services related to downloadable music, stickers, programs; and use of programs and information via the internet. Payment processing systems were kept outside the scope.

These services must be consumed in Thailand, without regard to the tax residency of the consumer. Foreign operators can rely on certain proxy indicators such as addresses, credit card details and IP addresses to identify the location of the service consumption.

It will be important to ascertain whether customers are VAT-registered or not, since VAT-registered customers will continue to be subject to the standard self-assessment rules.

Whilst the government proposes to introduce a simplified VAT registration system for foreign operators, which is a welcome move, there are significant limitations in the way the rules are proposed to operate. Foreign e-commerce operators will not be allowed to explicitly charge VAT to customers, hence they will have to bear this additional tax cost unless they are able to pass it on to their customers though a price increase. This seems to contradict the underlying policy of VAT, which is a tax on consumption borne, ultimately, by customers. Further, the foreign operators will be unable to recover VAT incurred on expenses in Thailand, unless they choose to be full VAT registrants with the undesired consequences of creating a taxable presence in Thailand.

Although clarifications released by the Revenue Department undoubtedly provide some clarity, further work is required to ensure that the law is designed to reflect the policy intent. The government may need to take a step back, hold further consultations with impacted businesses and other stakeholders, and observe how other countries have implemented their e-commerce levies to fully understand the challenges that may arise from enacting a tax on e-commerce.