Tax Requirement Question

[Tippaporn]

I'm a tool designer in metal stamping manufacturing and my business includes customers in both Taiwan and the U.S. For some general understanding of what my business involves it is as follows:

When a customer wants to manufacture a metal part for a product, be it for automotive, a computer, an appliance or whatever, a tool must be designed and built that will produce the part per a customer's specifications.

Since design work is done electonically using CAD software, with the completed design set via email, there is absolutely nothing physical that I am dealing with.

For foreign customers that I invoice I exclude VAT. I am told that the Thai government is requesting proof of VAT exemption. My accountant is instructing me to send a package to my foreign customer by a means which will produce an air way bill. This way bill would then be submitted to the Thai auditor as proof.

But I have nothing to send. I can understand that proof is required. Is there another way to provide this proof?

Is anyone else involved in a business similar to mine and can answer this question.

Thanks,

Pete

[Richard Hall]

I'm a tool designer in metal stamping manufacturing and my business includes customers in both Taiwan and the U.S.  For some general understanding of what my business involves it is as follows:

When a customer wants to manufacture a metal part for a product, be it for automotive, a computer, an appliance or whatever, a tool must be designed and built that will produce the part per a customer's specifications.

Since design work is done electonically using CAD software, with the completed design set via email, there is absolutely nothing physical that I am dealing with.

For foreign customers that I invoice I exclude VAT.  I am told that the Thai government is requesting proof of VAT exemption.  My accountant is instructing me to send a package to my foreign customer by a means which will produce an air way bill.  This way bill would then be submitted to the Thai auditor as proof.

But I have nothing to send.  I can understand that proof is required.  Is there another way to provide this proof?

Is anyone else involved in a business similar to mine and can answer this question.

Thanks,

Pete

Hi Pete,

it is surely essential that you have the relevant paperwork when providing (export) your services to a foreign country.

Proper procedure should be that an official order on your customer's letterhead is being sent to you spelling out all the details. On base of this a proforma invoice could be issued particularly if it comes to advance payments from abroad. Needless to say that the payment should be made to your companies account and reflect that the funds actually come from a foreign country.

Upon completing the job issue an official invoice on your companies invoice form featuring the companies name, address, tax number and certainly the kind of services provided and the cost for them. The request by your accountant for an AWB is simply said BS. Also for the Revenue Department not the AWB or B/L is evidence of an actual export but rather the document issued in Thai language by the Customs Department.

Generally the rule of thumb is that export (physical goods or services) are VAT exempted except if the deal eventually serves to do business within Thailand and hence is not exclusively for abroad useonly. For example if you carry out a market survey in terms of the Thai market because the foreign customers plans to set up a business here on base of these information this deal would be subject to VAT and service charges because the benefit is eventually not for making money abroad but rather in Thailand.

A few years ago we were engaged as coordinators in a film shooting project here in Bangkok for German TV. No VAT or service charge was quoted although the service was provided within Thailand. Since the movie was only intended for the German audience the services were tax exempted. If the finished film were also to be shown in Thailand we would have had to charge VAT for our coordination work.

Anyway, in your particular case of an outsourcing designer job it is surely crucial to have an official order on hand and upon completion a proper matching invoice. Most important will be, however, that the funds actually came from abroad and that this is reflected in your bank book. To be absolutely on the safe side you may ask your customer to make an appropriate indication when making the remittance and possibly ask you bank to provide a statement that the payment was made to cover for your services.

Keep in mind that the money MUST come from abroad to have tax exemption. If your customer comes here to pick up the results of your work and hands payment to you on Thai soil this would be subject to VAT.

Hope this was not too confusing but rather helps a little bit to establish what way to go in your particualar case.

Best regards,

Richard

[Tippaporn]

Thanks, Richard. Very informative.

Still a few questions, and also I want to make sure I kow jai fully (sorry if I'm overly detailed!):

Proper procedure should be that an official order on your customer's letterhead is being sent to you spelling out all the details.

I translate that to be the equivalent of a purchase order (PO). Yes, the PO would be on the customer's company stationery and should include a PO number, a description of the work you are to perform or provide (whether a service or product), the quantity, and the price.

Any other relevant terms should also be noted somewhere on the PO, e.g. method of shipping, shipping address (if different than the listed company address), etc.

On base of this a proforma invoice could be issued, particularly if it comes to advance payments from abroad.

Now, this is always the case with me, and it's a question that I've never been able to have answered satisfactorily by my accountant. My payments are always in thirds.

How, exactly, does this performa invoice differ from a regular invoice for a one-time transaction? Should this invoice be titled differently? And should it append the description of work/services with payment no. (1 of 3, 2 of 3, 3 of 3) to clarify the fact that the work is not fully complete? Is the remaining balance shown on this invoice? What information is to be duplicated?

And since funds are being transfer into your account on multiple occasions I would assume that the same procedure and paperwork required for a one-time invoice is then trebled, correct?

Needless to say that the payment should be made to your company's account and reflect that the funds actually come from a foreign country. 

I think you covered this at the end.

Upon completing the job issue an official invoice on your company's invoice form featuring the companies name, address, tax number and certainly the kind of services provided and the cost for them.

Though the customer is a foreign entity their tax number still needs to be listed? Since I'm issuing performa invoices should the final, official invoice serve as the invoice for the final payment?

The request by your accountant for an AWB is simply said BS.

So the terms are interchangeable, but BS is what is in common use here, correct? What does BS stand for? Here again, what am I sending to the customer if there is nothing physical that I'm dealing with? Should it simply be the hard copy of the performa invoice/official invoice?

Also for the Revenue Department not the AWB or B/L is evidence of an actual export but rather the document issued in Thai language by the Customs Department. 

B/L = Bill of Laden, correct? (Don't mean to sound like a dunce, but I just don't want to assume anything right now.)

I'm not dealing with the Customs Dept. at all, so if the AWB or B/L (which there is not one) is not the proper document for the Revenue Dept. then what would I use in my case to prove that services I provide qualify for VAT exempt status?

Which brings me back to my original question; if I have nothing physical to send, and therefore do not have a B/L, and the Revenue Dept. doesn't accept an AWB, then it seems that FedEx-ing anything to produce an AWB would be a wasted exercise (and expense).

Generally the rule of thumb is that export (physical goods or services) are VAT exempted except if the deal eventually serves to do business within Thailand and hence is not exclusively for abroad use only.

This would be the case that applies to me. As long as I provide design services only.

For example if you carry out a market survey in terms of the Thai market because the foreign customers plans to set up a business here on base of these information this deal would be subject to VAT and service charges because the benefit is eventually not for making money abroad but rather in Thailand. 

If I were to design tooling which is then built in Thailand then my design services would also be subject to VAT, correct?

Anyway, in your particular case of an outsourcing designer job it is surely crucial to have an official order on hand, and upon completion a proper matching invoice.

I've been told by my accountant that it's not required to submit an official order (PO) to any branch of the gov't. Is he wrong?

Most important will be, however, that the funds actually came from abroad and that this is reflected in your bank book.

Well, if the money is transferred from abroad wouldn't this be self-evident? I'm sure the bank would be well aware of the origin of the transfer and have record of it. How would this fact be notated directly in my bank book (would there be a bank code corresponding to the deposit that references a foreign transaction)?

To be absolutely on the safe side you may ask your customer to make an appropriate indication when making the remittance and possibly ask you bank to provide a statement that the payment was made to cover for your services.

Rather than trouble the customer I think I would go the route of requesting a statement from the bank. They should be able to indicate the fact that the deposit was of foreign origin on this statement, also, correct?

Now, this leads me to questions on currency conversion. My customers issue POs with amounts listed in USD. My accountant tells me that I need to issue invoices in BHT. At what point do I make the conversion? If I issue performa invoices then I would need to have the conversion match the date of the invoice, correct? In which case I would end up with a number of differing conversion rates. The final invoice (for the final payment) would then need to tally up. So far, not a problem, right? My customer is only concerned with the USD amount.

What I have been doing is noting the difference between the Baht invoiced amount and the actual Baht deposit. This difference is then reported separately to the Revenue Dept. as profit/loss due to currency conversion. This would be aboveboard, right?

I was going to email this to you, Richard, but I felt it might be worthwhile to air it on this board so that others can benefit. Your input is tremendously appreciated, though.

Thanks,

Pete

[yuyi]

The request by your accountant for an AWB is simply said BS.

So the terms are interchangeable, but BS is what is in common use here, correct? What does BS stand for?

BS = Bullshit

that's what he means, I assume

[Richard Hall]

Hi Pete,

okay, let's go through the subject step by step:

I translate that to be the equivalent of a purchase order (PO).  Yes, the PO would be on the customer's company stationery and should include a PO number, a description of the work you are to perform or provide (whether a service or product), the quantity, and the price.

Any other relevant terms should also be noted somewhere on the PO, e.g. method of shipping, shipping address (if different than the listed company address), etc.

Well, that's correct the order or PO (= Purchase Order) should basically contain all the parameters and generally be as detailed as possible, mainly to avoid misunderstandings. It should feature

- PO number

- Date

- Billing/shipping address

- Incoterms (FOB, CIF) (if appropriate)

- Means of transportation (if appropriate)

- Delivery date

- Payment terms

- Description of merchandise and/or service

- Price per unit

- FOB and/or C&F charges (if appropriate)

- Total order value before tax

- Total order value after tax (if appropriate)

Now, this is always the case with me, and it's a question that I've never been able to have answered satisfactorily by my accountant.  My payments are always in thirds.

How, exactly, does this performa invoice differ from a regular invoice for a one-time transaction?  Should this invoice be titled differently?  And should it append the description of work/services with payment no. (1 of 3, 2 of 3, 3 of 3) to clarify the fact that the work is not fully complete?  Is the remaining balance shown on this invoice?  What information is to be duplicated?

And since funds are being transfer into your account on multiple occasions I would assume that the same procedure and paperwork required for a one-time invoice is then trebled, correct?

Basically, the proforma invoice follows the PO means shows all the details provided in the PO and mainly has the purpose that the paying party has documentation for the abroad payment. In certain countries (also here in Thailand) there must paperwork be presented to the bank so that they release the funds. A proforma invoice features the same details as the real invoice but is entitled proforma invoice. It must show the word PROFORMA to avoid that it is confused with a real invoice. In invoices whether proforma or real reference should be made to the PO number. Now the question is whether the proforma invoice asked for partial advance payment or requests advance payment by T/T (= telegraphic transfer) or L/C (= letter of credit) in full. In the latter case the proforma invoice will be identical with the real invoice except it features the word PROFORMA in addition.

If partial payments are required (payment step by step with work progressing) there could be various proforma invoices issued and provided to initiate the separate payments. Eventually, when the real and final invoice is issued the previous payments are indicated (advance payment by proforma invoice no..., date, amount) and brought into deduction. At the end there might be the request for a remainder payment but when all amounts are added up the total invoice value sums up to the value featured in the PO.

Though the customer is a foreign entity their tax number still needs to be listed?  Since I'm issuing performa invoices should the final, official invoice serve as the invoice for the final payment?

Nope, it will be not be necessary to list the customer's tax number but just your tax number (the issuing party of the invoice) needs to be shown. Yes, if there were partial payments the final and real invoice may ask for a final (remainder) payment.

So the terms are interchangeable, but BS is what is in common use here, correct?  What does BS stand for?  Here again, what am I sending to the customer if there is nothing physical that I'm dealing with?  Should it simply be the hard copy of the performa invoice/official invoice?

BS stands actually for cow droppings. You just send the customer what has been ordered according to the PO and nothing else. Send it by the means specified in the PO which could also be by letter, e-mail or whatever.

The name of the game is that all must be transparent to eventually get along with the Revenue Department. How does it fit that airfreight or seafreight is employed when the deal is about blueprints and/or a CD? That's why I thought the suggestion of your accountant was a no brainer. Making up things is what makes the tax guys eventually suspicious and making business for everyone more difficult.

B/L = Bill of Laden, correct?  (Don't mean to sound like a dunce, but I just don't want to assume anything right now.)

I'm not dealing with the Customs Dept. at all, so if the AWB or B/L (which there is not one) is not the proper document for the Revenue Dept. then what would I use in my case to prove that services I provide qualify for VAT exempt status?

Which brings me back to my original question; if I have nothing physical to send, and therefore do not have a B/L, and the Revenue Dept. doesn't accept an AWB, then it seems that FedEx-ing anything to produce an AWB would be a wasted exercise (and expense).

B/L = Bill of Lading is for seafreight shipments what AWB (= Airway Bill) is for airfreight dispatch. Well, since there is no physical dispatch Customs Department will not get involved. Therefore, your alternative paperwork will be the official PO, your proforma invoice and real invoice respectively, an EMS or registered airmail slip (e.g. a CD has been sent), a print-out of the e-mail used to tranfer your work to the client and eventually your bank book featuring the payment(s) coming from abroad. Actually, just use what makes the entire process understandable and transparent and reflects what and how the goods/service has been forwarded. Fooling attempts will not do no one good, be a waste of money and time and most likely be counter-productive.

If I were to design tooling which is then built in Thailand then my design services would also be subject to VAT, correct?

Principally yes, when it is already clear that your designs will actually employed for construction work in Thailand and the end products will be used in Thailand. However, when VAT has been paid for your designs, the tools are constructed here in Thailand but then will be eventually exported you may be entitled to ask for a VAT refund.

I've been told by my accountant that it's not required to submit an official order (PO) to any branch of the gov't.  Is he wrong?

No, this time he is not wrong. Government or better say the Revenue Department is not interested in your order they are interested in money transactions only. Money flowing is just what accounting is all about. There are expenditures and earnings in a company and this is what needs to be shown in the books. If, however, the tax people get the smell of money and trying to get their hands on the bucks THAN you need the proper paperwork to show that they are not entitled for a share. Now it is the very moment to have all documents handy (including the PO, proforma invoice, real invoice, bank book etc.). It is the old game. The Revenue Department wants taxes and your company rather keeps the money for itself. All a matter of negotiation and knowing the tax laws. A capable and honest accountant is therefore worth his/her weight in gold. The smarter your accountant the less taxes you have eventually to pay. Needless to say that everything needs to be in absolute line with the tax laws but knowing the rules and applying them smartly can make a huge difference.

Well, if the money is transferred from abroad wouldn't this be self-evident?  I'm sure the bank would be well aware of the origin of the transfer and have record of it.  How would this fact be notated directly in my bank book (would there be a bank code corresponding to the deposit that references a foreign transaction)?

Actually, your bank book uses codes (usually shown and explained on the last page of your bank book) to differentiate between transactions. Each line of money pay in or withdrawal bears a code and therefore it can be seen from the bank book whether the payment has been made nationally or came from abroad. Going for an additional statement by the bank is only to have an additional piece of paper for the tax guys just in case they trying to squeeze hard to get taxes out. Principally, however, it is not necessary because the code in the bank book already identifies a money transfer from abroad already as such.

Now, this leads me to questions on currency conversion.  My customers issue POs with amounts listed in USD.  My accountant tells me that I need to issue invoices in BHT.  At what point do I make the conversion?  If I issue performa invoices then I would need to have the conversion match the date of the invoice, correct?  In which case I would end up with a number of differing conversion rates.  The final invoice (for the final payment) would then need to tally up.  So far, not a problem, right?  My customer is only concerned with the USD amount.

What I have been doing is noting the difference between the Baht invoiced amount and the actual Baht deposit.  This difference is then reported separately to the Revenue Dept. as profit/loss due to currency conversion.  This would be aboveboard, right?

Well, for accounting purposes here in Thailand all must be in Baht while the customer surely needs to get the info in USD or Euro. To take care of both aspects all documents referring to moeny should generally show an exchange rate. Therefore if you invoice in Baht at the end of your invoice there should be the information 1 USD = ... Baht. To ease the job for your customer your documents should convert the total amount to be paid and feature the additional information "Total amount due for remittance: US$...".

Since the exchange rate is steadily fluctuating and there are also always bank fees involved the money eventually credited to your account will never match the amount indicated in your invoice to the Baht. Certainly the differences must be more or less be in line and realistic to be credited to exchange fluctuations. Nevertheless, if necessary (either if the tax guys start to give a hard time or the amount received is clearly below you expectations) there is always the chance to cross check with the bank what actual amount in foreign currency has been received by them.

Well Pete, last but not least, don't wast too much time with tax issues at this stage but rather foccus your energy to get some business going. Get customers, get orders, get money into the country and with progressing in this respect you automatically strengthen you position for the day when the tax guys and gals knock on your door. Make sure your documents are handy and all your working procedures are understandable and transparent. If this is the case and you have a reliable and capable accountant there is nothing to fear. Trying to cope with everything in advance and make everything calcuable and predictable (German style) is not possible here and just makes your hair grey and gives you sleepless nights. Too much is just subject to interpretation and negotiation. Just keep your rabbits (= proper paperwork) handy to pull them out of the hat when the audience shows up.

How did one of the great philosophers of our times (the big fat cat Garfield) once said: "If you cannot convince them confuse them".

Heaps of luck,

Richard

[Tippaporn]

The request by your accountant for an AWB is simply said BS.

So the terms are interchangeable, but BS is what is in common use here, correct? What does BS stand for?

BS = Bullshit

that's what he means, I assume

Boy, I must look stupid . . .