Paying an overseas service provider: withholding tax and VAT

01One payment, two separate obligations

Plenty of Chinese-invested companies in Thailand come across this: a consulting fee, an introduction fee or a commission payable to a company or an individual in China. If the Thai-side tax steps are not done correctly before the money is remitted, the exposure sits with the payer first, not with the party being paid.

• Income tax withholding. Under section 70 of the Revenue Code, income paid abroad must be withheld at the moment of payment and reported on PND.54 — the same form whether the recipient is a company or an individual. (PND.3 is the domestic form for payments to a Thai individual, not a cross-border form. The dividing line is the recipient's tax residence, not their nationality or where they sit; residence turns on days present in Thailand and on the source of the income, and has to be settled case by case against the rules in force.) For service fees and introduction fees paid to an overseas company, 15% is a common default rate, but the rate that actually applies varies with the nature of the income and the treaty in force; go by the official rules current at the time of payment.
• Reverse-charge VAT. Under section 83/6, where the service is used in Thailand, the payer must self-assess 7% VAT and report it on PP.36.

Both returns are filed and paid by the 7th of the month following the month of payment. The position therefore has to be settled before the payment goes out, not reconstructed afterwards.

02What you withhold depends on who is paid and how the contract reads

Two things have to be confirmed before payment. First, whether the recipient is a company or an individual. That decides which return is filed, which treaty article applies, and in whose name the residence certificate has to be issued — the two paths separate from the very first step.

Second, what the contract actually describes. A plain introduction or intermediary service normally sits under business profits in the treaty; where the substance involves the transfer of know-how or proprietary knowledge, it can be recharacterised as royalties, with a completely different rate. How the contract is drafted feeds straight into the final tax cost.

03Treaty relief is a procedure, not a default

Thailand and China have a tax treaty, and a genuine intermediary service with no permanent establishment in Thailand can be argued for relief from withholding. But filing at zero requires three documents to be in hand before payment: the recipient's certificate of residence (CoR) for the current year, a declaration that there is no permanent establishment, and the written service agreement — all retained on file. This is where it most often goes wrong: without a CoR you withhold at the default rate first and pursue a refund afterwards; you cannot simply file at zero. Where tax should have been withheld and was not, the payer — as the party legally obliged to withhold — carries primary liability, plus a surcharge of 1.5% per month.

The item most often missed: a treaty covers income tax, not VAT. Even where withholding is brought to zero under the treaty, the 7% reverse-charge VAT still has to be reported on PP.36 and paid. A VAT-registered business can then claim it as input tax on the following month's PP.30 (due by the 15th of the following month), so the cash effect is broadly neutral — but failing to file it is still a breach. For the other side of Thai VAT, see export VAT refunds.

04Whether the expense is deductible is the second question

Commissions and introduction fees have long been a focus area in Revenue Department audits. To take the deduction against corporate income tax you need the written agreement, an invoice or receipt, an evidence trail showing the transaction was actually brought about, a bank payment record, and an amount that is reasonable in proportion. If the withholding tax and VAT procedures were not compliant, the deduction for the whole expense can be denied.

One further detail: an agreement drafted as an introduction or intermediary arrangement is generally not a stamp duty instrument, while the same arrangement written as a hire-of-work contract may fall into 0.1% stamp duty — one word apart, one more tax.

The final tax cost of any cross-border service fee comes out of cross-checking three things against each other: the contract text, the status of the counterparty, and the treaty articles. For a specific case, have our advisers work through your contract, your payment arrangement and the treaty text line by line before the filing position is fixed. See also tax compliance.