Thailand Franchisee Advertising Withholding Tax
Tax Insight | February 2010
Pursuant to the provisions of Section 70 of Thailand’s tax code and Article 12 of Thailand’s double tax treaties, just about all amounts paid (other than for purchases of physical goods) by a Thailand franchisee to a foreign franchisor are subject to 15% withholding tax.
A Thailand franchisee is also required to make a 7% "reverse-charge" VAT payment to the Revenue Department on behalf of the foreign franchisor, as prescribed in Section 83/6 of the tax code.
For both the withholding tax and the VAT, the tax code prescribes the liabilities arise when the payer in Thailand pays the foreign company, and most Thailand franchisees would be complying with these liabilities when they pay their franchise fees to the foreign franchisor.
But they would not generally be doing that for their local advertising and sales promotion spending paid to a Thailand-based advertising agency/service provider, because for such payments the tax code prescribes the payer having the duty to withhold 2% or 3% WHT as the case may be, and the advertising agency/services provider having the duty to remit the 7% VAT.
For one particular Thailand franchisee the Thailand Revenue Department officers claimed that, because the local advertising and sale promotion spending is a condition under the franchise agreement, then the payments of the local advertising and sales promotion were part of the right to operate the franchise, and therefore, the payments of local advertising and sales promotion were subject to 15% withholding tax and 7% VAT, the same as what applies for the franchise fee.
The Thailand franchisee disagreed with the Revenue Department and appealed the matter to the Tax Court, which ruled in favor of the Thailand franchisee on the basis the advertising and promotion payments were not "paid" to the foreign company franchisor.
But the Revenue Department appealed to the Supreme Court, which decided in favor of the Revenue Department.
The ruling of the Supreme Court for Case No 4440/2552 was that because the requirement for the Thailand franchisee to incur payments on local advertising and sales promotion in Thailand is a condition under the agreement, then the local advertising and sales promotion payments are therefore part of the consideration that the Thailand franchisee is required to pay for the right to operate the franchised business.
The Supreme Court’s reasoning was as follows:
This is a general information Tax Insight Article only. It should not be used to determine any matter without consulting with an experienced Thailand tax advisor.