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Thailand - December 2007
When does VAT apply?
by Robert Carry - Property Report Thailand
It is a common practice in Thailand for landlords to
propose several contracts when they engage a new tenant.
It is a common practice in Thailand for landlords to
propose several contracts when they engage a new tenant.
Apart from the rental contract for the space, contracts
may be proposed for the rental of any furnishings and for
services relating to the use of the property e.g. the
common area services in the case of a building.
The reason behind the split is taxation, often driven
primarily by the 12.5% house and land tax that applies to
the rental of buildings for commercial purposes.
VAT and leases
VAT may also be a prime reason to split the contracts, as
the rental of space is one of the businesses under the
Revenue Code that is specifically exempted from VAT.
Landlords therefore do not have to add 7% VAT to space
rentals.
The rental of furniture and the provision of property
related services on the other hand fall outside the
exemption. From a VAT perspective, a landlord may
invariably end up carrying on two businesses, one that is
exempted and another that is not. This normally makes
record keeping and compliance with the laws more
complicated, especially on the expenses side.
A VAT registrant is entitled to claim a credit for the VAT
paid (referred to as "input VAT") on most types of
expenditure relating to the VAT business. VAT paid on
certain expenditure cannot be claimed, including the
expenditure that relates to the use of the office space,
because it is a VAT exempt business.
To be entitled to claim input VAT as a deduction, the
registrant must posses a tax invoice prepared in
accordance with the format prescribed by the Revenue Code.
The landlord will therefore have to keep track of his
expenses, make sure he receives proper tax invoices so he
can have a chance of claiming a credit for the VAT and
then consider whether the VAT is actually creditable. The
chance of making errors - and hence liability to tax
penalties - normally increases once you enter the VAT
system and are running VAT and non-VAT businesses.
Concessions for small landlords
It is advisable to stay out of the VAT system if you can
do so legally - once you apply to become a VAT registrant
it is not a simple matter to de-register, so it is not a
decision to be taken lightly.
Landlords operating a few properties only may be able to
avail themselves of the small business exemption. Where
the annual turnover from services chargeable to VAT does
not exceed Baht 1.8 million, a landlord does not have to
register for VAT.
This means a landlord could legally stay out of the VAT
system and not add 7% VAT to any of the amounts charged to
the tenant, including any furniture rental and service
fees. However, It is still prudent to consider splitting
the contracts for house and land tax purposes.
VAT planning
Where a landlord has a number of tenants, for example a
landlord operating a multi storey office or residential
block, then VAT registration is probably inevitable.
A recent supreme court case offers a reminder as to why
landlords need to consider their liability to VAT
carefully when identifying and separating out the services
offered to tenants. The case involved the lease of space
in an office block. The landlord was also responsible for
the provision of services, such as water, air
conditioning, security, lifts and maintenance.
In some cases, the landlord had entered into a single
rental contract with the tenant. The landlord did not
charge VAT on the basis that the rental of the office
space was VAT exempt.
In other cases, the landlord had entered into two
contracts with the tenant: one for the rental of space and
another for the provision of the aforementioned services.
The landlord did add 7% VAT in this case to the service
fee component.
The landlord was audited by the Revenue Department, which
led to a tax assessment being raised for VAT in the cases
where the landlord had entered into a single rental
contract and did not collect any VAT from the tenant. The
landlord argued that the form of the single contract did
not allow him to charge VAT to tenants.
The court did not accept this argument but instead adopted
a substance over form approach, because the same services
were being provided to all tenants regardless of how the
contracts were written. The landlord was not able to avoid
his liability to charge VAT simply by writing a single
rental contract.
This court case highlights the importance to landlords of
identifying the rental services that are subject to VAT
and charging their tenants accordingly, regardless of the
form of the contractual arrangements made with the tenant.
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