Businesses in Thailand that contract to provide materials and labour to perform a job often need to consider and, if possible, manage the withholding tax that will be imposed on their revenues.
Withholding tax will often be imposed on business-to-business payments that are not for the sale of goods; e.g., payments for hire of work, service fees, royalties, commissions, transport fees, and rental fees.
Withholding tax rates generally range from 1% to 5%, with hire of work and service fees normally taxed at 3%. The withholding tax serves as a way for the Revenue Department to collect income tax in advance from service providers.
With Thailand having a relatively low headline corporate tax rate of 20%, contractors that face a 3% withholding tax on their gross income will wish to avoid paying withholding tax that exceeds their income tax liability at year end. Excess withholding tax credits in a year cannot be carried forward to the next year; the contractor must request a refund from the Revenue Department, otherwise the credits will end up being an additional business cost.
The Revenue Department will conduct a tax audit before refunding any tax credits, so a contractor may look at other ways to prevent the withholding tax being an additional tax burden.
A popular way considered by contractors that use materials and labour to perform a job is to separate the supply of materials from the supply of labour and treat the materials component as a sale of goods that is not liable to withholding tax.
Sale of goods v hire of work
In simple terms, a sale of goods will focus on transferring the ownership of goods to the customer, while a hire of work arrangement focuses on the result of the work performed.
It can be seen from private tax rulings published by the Revenue Department that it will adopt a substance-over-form approach when ruling on the liability to withhold tax when a contractor supplies both goods and services to a customer.
For example, in the case of repair or maintenance work, although the materials and labour may be invoiced or priced separately, the Revenue Department has ruled that the total price of the materials and labour would be subject to withholding tax.
In the case of a sale of goods with an installation service, the Revenue Department has ruled that if the invoice for goods and the installation service is issued as a single total amount, it would be considered as a sale of goods and not subject to withholding tax. If, however, the price of the installation service is shown separately by the supplier, the installation service fee would be subject to withholding tax.
A key Thai Revenue Department ruling
The Revenue Department has published ruling No. GorKor 0702/7379, dated December 23 2024, on the liability to withhold tax in the case of a contractor supplying materials and labour to a customer under separate contracts.
The contractor made a contract for the sale of materials for making concrete bridge joints and another contract with the customer to install the bridge joints. The contractor procured the concrete bridge joint materials from another party.
The contractor also entered into a memorandum of understanding with the customer to confirm that the contractor was aware of the intention and purpose of entering into the sales contract and the installation contract. The contractor agreed to perform the work correctly and completely according to both contracts.
The Revenue Department ruled that even though the contractor made separate sales and installation contracts, the parties were focused on successfully completing the installation of the bridge joints, rather than the acceptance of the materials purchased. The business of the contractor was still hire of work, as the success of the work to be undertaken was the main factor.
Therefore, regardless of whether the contractor issues a tax invoice that includes a single price for the goods and installation services or separates the price of the goods from the service fee, the total value of the goods sold and the installation service fee would be considered a fee for hire of work that is subject to withholding tax.
Split contract risks for customers
The facts given in the ruling would appear to be a clear case where the contractor was trying to split the contracts to avoid withholding tax on the supply of the materials, and the customer wanted the contractor to still be legally responsible for the outcome of the work.
Customers need to ‘buy’ into a contractor’s split contract arrangements and agree to withhold tax only from the service fees charged by the contractor, if the contractor is to gain any benefit for tax planning purposes.
If the customer is audited by the Revenue Department and found to have under-withheld tax, it will also be liable to surcharges of 1.5% per month on the tax that was not deducted. The ruling published by the Revenue Department is strong support for a customer trying to counter a contractor’s argument for splitting a contract to save withholding tax.
