12 May 2008 (Revenue Department Ruling Reference)
A common question in practice is whether a set‑off of debt (netting arrangement) can be treated as valid evidence of payment for tax purposes—particularly in cases involving cross‑border transactions and VAT entitlement.
This article summarises a Revenue Department ruling and its implications for taxpayers.
Background of the Case
Company A, a subsidiary of a Japanese parent company, operates a business involving the development and export of application software.
- Company A received loan funding from its parent company to conduct research and development.
- Once development was successfully completed, Company A delivered the software to the parent company in Japan and issued an invoice for the software.
- The transaction was treated as a sale of intangible goods, subject to 0% VAT under Section 80/1(1) of the Revenue Code.
However, instead of paying cash, the parent company settled the amount by offsetting (set‑off) the software fee against the outstanding loan balance. Company A recorded the transaction by reducing the loan payable account.
Tax Issue Raised
During a tax audit, the Revenue Department took the position that:
- The transaction should be considered a service performed in Thailand and used abroad, rather than a sale of goods.
- Therefore, Company A would only qualify for 0% VAT under Section 80/1(2) if it could provide evidence of payment, such as:
- Letter of Credit (L/C)
- Bank remittance or payment evidence in the name of the registered operator
Revenue Department’s Ruling
The Revenue Department ruled as follows:
1. Nature of the Transaction
If Company A develops software specifically for the Japanese parent company, and:
- Does not develop software for general sale, and
- The intellectual property rights belong to the parent company
→ The transaction is classified as a service (hire of work).
If the service is entirely used abroad and the company has proper evidence of payment, it may qualify for 0% VAT
2. Recognition of Set-Off as Payment
If the loan arrangement is genuine and made in good faith, and not intended to disguise advance payment:
- Company A is legally entitled to set off the loan against the service fee under Section 341 of the Civil and Commercial Code.
- The Revenue Department accepts that set‑off can constitute a valid form of payment in such circumstances.
3. Market Price Consideration
If the service fee is lower than market value, Company A must:
- Include the difference between:
- Market interest rate, and
- Interest rate under the loan agreement
as part of income, in accordance with Section 65 bis (4) of the Revenue Code.
Conclusion
This ruling confirms that the Revenue Department recognises set‑off as a valid method of payment, provided the underlying transactions are genuine and comply with legal requirements.
At the same time, it highlights the importance of:
- Proper documentation
- Clear commercial rationale
- Compliance with market pricing principles
The ruling also reflects that the Revenue Department applies not only the Revenue Code, but also the Civil and Commercial Code in determining tax treatment—particularly in complex cross‑border transactions.
