Recent public tax ruling on VAT implications of domestic transportation by trucks with temperature-controlled containers

This ruling indicates a change of interpretation by the Revenue Department. In the past, the Revenue Department had issued multiple tax rulings stating that transporting goods using trucks with temperature-controlled containers was considered a “hire-of-work service” and was subject to 7% VAT, even though the provider’s duties were limited to transport activities only.

Characteristics of transportation services

In line with past tax rulings, the Revenue Department considers transportation to involve the delivery of goods or people from one location to another without additional services. Examples of factors that define “transport” include:

• Providing a service that emphasizes the movement of products from one location to another.
• Offering transport services without additional services other than loading and unloading products.
• Distinguishing transportation from other services such as packing, unpacking, barcoding, and warehouse management.
• Separating transportation from additional services like logistics, cleaning, or inspection.
• Issuing separate invoices and receipts for transport services from other related services.
• Directly transporting products from the factory where the customer purchases them to the customer’s warehouse without involving the transporter’s warehouse.

Characteristics of hire of work

According to the Thai Civil Commercial Code, a “hire of work” contract is defined as an agreement in which a person, known as the contractor, undertakes a specific task for another person, known as the employer, who agrees to compensate based on the outcome of the work. The provision of services is thus considered a hire-of-work contract. Besides transportation, the hire of work can encompass various services, for example, providing temperature-controlled containers (based on past tax rulings), installing monitoring devices, reporting delivery results, unloading and storing products, arranging and labelling products for distribution, and reporting the results of product delivery to customers. Further, the service provider must typically commit to offering additional services, such as packing, loading, and unloading products, warehouse management, armoured vehicles with satellite tracking, etc.

Tax implications of “transportation” and “hire of work”

It is important to differentiate between businesses that fall under transportation and those categorized as hire of work, since these two have different tax implications. Domestic transportation is exempt from VAT, while the hire of work is subject to VAT. Transportation fees are subject to 1% withholding tax, whereas fees from the hire of work are subject to 3% withholding tax.

The management of cash flow in transport is less efficient than that for the hire of work. Despite the withholding tax on transportation fees being 1% as opposed to 3% for the hire of work, the 7% VAT has a greater effect on cash flow.

For a business not registered for VAT, input VAT is treated as a cost, and output VAT cannot be collected from customers. On the other hand, a business registered for VAT can collect output VAT from customers, which can then be used to offset input VAT paid to suppliers. However, domestic land transportation, being completely exempt from VAT, faces a disadvantage compared to domestic transportation by air and sea, which is both subject to VAT and able to benefit from claiming a VAT credit.

If a business is registered for VAT, it can claim input VAT paid to suppliers. If the input VAT exceeds the output VAT collected from customers, the taxpayer can request a tax refund or claim a VAT credit. If a business is not part of the VAT system, the input VAT paid to suppliers may be considered deductible expenses for corporate income tax purposes. Thus, we can see that VAT-registered companies generally have better cash flow than non-VAT businesses.

Over the years, many logistical and transportation operators have learned from past tax rulings and have chosen to separate their transportation business from other services. For example, they operate logistics services under a separate entity from the transportation company to plan the treatment of VAT and non-VAT expenses effectively.

Tax ruling no. Gor.Kor. 0702/88 stated that the transport service provider in this ruling also had other duties, e.g., bringing empty boxes to the logistic centre, reporting the delivery results, and being liable for the damages or losses of the goods, which the Revenue Department considered to be a VAT-able business. To increase VAT efficiency, the provider may consider operating transportation services and other logistic services as separate legal entities.

In conclusion, it is important for businesses in the transportation industry to understand the VAT and withholding tax implications for their businesses. Domestic land transportation using trucks with temperature-controlled containers should only rely on this newly issued tax ruling on exemption from VAT after revisiting all of the duties set out in the contract with the customer. Complying with these tax regulations related to the industry requires a comprehensive understanding of Thai tax law, relevant tax rulings, and advice from tax professionals.