Tax Planning for Contracts in Information Technology (IT) Business

Abstract

ABSTRACT

            This article reported a descriptive research to study principles and descriptions of laws, Supreme Court Decision and Revenue Department's tax rulings related to IT business contracts. The aim of this work was to provide guideline for IT business entrepreneurs to accurately pay tax and legally reduce tax payment. The result of this research showed that tax burden of IT business contracts included withholding tax, income tax, value-added tax (VAT) and revenue stamp. The IT business entrepreneurs can set up approaches for tax planning to reduce tax payment by using contract type selection, contract separation, price separation or price combination strategies depending on the types of contracts. In case that IT business entrepreneurs pay  software licensing fee to foreign companies located outside Thailand, they usually need to withhold income tax by 15% according to the Section 70 of the Revenue Code except the foreign companies in countries having double-taxation agreement with Thailand. For the payees in those countries, they may receive discount on withholding tax. Nevertheless, all Thai entrepreneurs who pay to any foreign companies need to submit the Form VAT 36 according to the Section 83/6 of Revenue Code.

             Furthermore, in case that Thai entrepreneurs invests in computer sale business in foreign countries with lower tax rate or without double-taxation agreement with Thailand, they should establish and register a new company in those foreign countries. Then, they can benefit tax exemption from dividend according to the Decree described in the Section 5 Veesti of Revenue Code (10th edition) B.E. 2510. In contrast, if any Thai entrepreneurs invest in IT business in the countries with higher tax rate and having double-taxation agreement with Thailand, the payees should be a Thai localized company in order to benefit from the agreement. In this case, the Thai entrepreneurs must have no permanent establishment (PE) companies in the foreign countries so they do not need to pay tax to the foreign countries. Likewise, if Thai entrepreneurs receive software licensing fee from foreign companies having double-taxation agreement with Thailand, they can receive discount rate on income tax at 5-15% depending on the agreement of each country. Regarding the income from computer program writing, justification for the type of assemble income depends on whose copyright/royalty of the software belongs to. If the hirer owns the copyright, the payment will be considered an income from hire of work. In contrast, if the copyright belongs to the hired company, the payment is considered an income from licensing agreement. Furthermore, the tax consideration for distributorship agreement differs from that of agency agreement with manufacturers in foreign countries.