Differences in the Withholding Tax Obligation between a Sales and Purchase Agreement and Hire of Work Agreement

Typically, when a  need for particular goods arises, a business operator has the choice between purchasing such goods or engaging in a hire of work agreement for the production thereof, both of which result in the acquisition of goods. However, it is important to correctly differentiate between said two methods and distinguish the nature of the two agreements in terms of tax treatment and obligations, because an incorrect differentiation may lead to inaccurate tax treatment, which may result in tax assessments as well as penalties and surcharges, if applicable. Furthermore, according to Thai tax law and practice, revenue officers prioritise substance over form, meaning that they consider the agreement’s content in terms of the “true intention of the parties” and the “actions” that the parties are obligated to undertake towards each other, rather than solely relying on the name or designation provided by the parties.

In this regard, the Civil and Commercial Code (“CCC”) defines and characterises a sales and purchase agreement and a hire of work agreement as follows:

Sales and Purchase agreement:

According to Section 453 of the CCC, a sale is a contract whereby one party, called the seller, transfers ownership of property to the other party, called the buyer, for which the buyer agrees to pay a  price for it to the seller.

Therefore, the main characteristic of a sales and purchase agreement is the transfer of ownership of designated goods and the settlement of payment. If a manufacturer produces goods for sale and follows standard goods sales practices, there will be no issue in distinguishing such as a sales and purchase agreement. However, if the manufacturer is hired to produce different types of goods that are not its standard products, the nature and characteristics of a hire of work agreement must also be considered in accordance with the relevant provisions of the CCC in order to determine between these two agreements.

Hire of work agreement:

According to Section 587 of the CCC, a hire of work is a contract by which one party, called the contractor, agrees to complete a definite piece of work for another person, called the employer, and the employer agrees to pay the contractor remuneration for the outcome of the work.

The principal characteristic of the hire of work agreement is the focus on the outcome of the completed work in exchange for remuneration. This work may involve either “providing a service” until successful completion or “creating or producing any piece of work” until the successful completion and delivery thereof to the employer.

As aforementioned, in some cases, there may be an overlap between the successful delivery of goods and the transfer of ownership of said goods.

The Supreme Court's Tax Division ruled in Judgment No. 258/2530 that an essential element in distinguishing between a sales and purchase agreement and a hire of work agreement is to consider which is more important between “raw materials” and “work to be accomplished”. If the focus is on the work and the successful outcome of the work, it is considered a hire of work agreement. However, if raw materials is more important, it is considered a regular sale and purchase transaction under a general sales and purchase agreement. 

In said case, there was a dispute between a brick manufacturer and the Revenue Department. Initially, the brick manufacturer produced fire-resistant bricks according to the standard specifications for regular sale. 

However, a customer requested to purchase fire-resistant bricks with added specialty to the material. The court's judgement was based on the following findings: “The production of fire-resistant bricks, whether standard or customised, involves raw materials. However, the fire-resistant bricks produced have more significance than raw materials or raw materials used in their production. Therefore, it is not considered as a hire of work but rather the production and sale of fire-resistant bricks similar to standard bricks.”

Based on the guidelines provided by the Supreme Court’s Judgement as mentioned above, the distinctions between the sale and purchase of products, and hire of work are as follows:

As aforementioned, if a business operator engages in regular production of standardised products and receives orders for the same type of products with additional special features, it is still considered a normal sales transaction. For example, regarding a bakery that accepts orders for custom-designed decorated cakes based on customer specifications, even though such cakes are made only temporarily according to customer orders, it is still considered as a normal sales transaction. Another important factor is that the cake producer must use their own raw materials and not those provided by the customer for it to be considered as a sale.

Having distinguished the differences between a sales and purchase agreement and a hire of work agreement as mentioned above, we will now consider the withholding tax implications of the aforementioned transaction, as follows:

Withholding Tax obligation:

• In the case of selling products, the payer is not obligated to withhold tax on the payment for the goods. 
• In the case of hire of work, the payer is required to withhold tax at a rate of 3% according to Section 3 tredecim of the Revenue Code, together with Clause 8 of the Revenue Departmental Order No. Tor Por 4/2528.

If there are any discrepancies in distinguishing between the sales and purchase and hire of work agreement, this will result in incorrect tax treatment. In considering the classification of the agreement and determining the correct tax implications, the tax authorities will examine the true intentions and actions of the contracting parties, as whether they aim to transfer ownership of the goods sold or achieve the successful outcome of the work being undertaken. Additionally, the tax authorities will assess the weight and significance of raw materials and tasks undertaken until completion. These differing tax burdens also involve several other specific considerations that need to be thoroughly examined in various aspects and detail.

This is intended merely to provide a regulatory overview and not to be comprehensive, nor to provide legal advice. Should you have any questions regarding this or other areas of taxation law, please do not hesitate to contact our tax team.

Budhima Kerdsiri
Counsel (Attorney-at-Law)
Hatairat Sukpraser
Associate
Pairaya Yangpaksi
Associate

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