Over the past years, I have been working with a number of companies that use manufacturers in Asia. Typically, these manufacturers would be so-called “OEMs” which stands for Original Equipment Manufacturers. These companies would produce parts or even finished goods that would be branded with my clients’ brands.
The bulk of these OEM goods would be exported from the country of manufacturing. However, recently the trend seems to be to aggregate parts into the country of manufacturing, and then either assemble into finish product, use parts for repairs, or sell parts or finished goods outright to a distributor who picks up locally (“ex-works”).
The “ex-works” incoterm is the poison pill for cross-border trade. For the sale of goods, VAT looks at the ship-from and ship-to addresses. If they are in the same country, VAT is due – even if the bill-to party is in another country.
See https://en.wikipedia.org/wiki/Incoterms for more info on incoterms.
In my example, this leads to a VAT liability of the OEM. He will have to charge VAT to the buyer, simply because the OEM drop-ships within the same country.
The buyer, in his turn, needs to understand his tax position in the OEM country. If the local laws allows for a non-resident to register for VAT, then the buyer can attempt to charge VAT to the next party in the supply chain. That way, he can offset the VAT incurred on the OEM purchase. However, in a number of countries outside the EU, a VAT registration may create an income tax liability as well, and thus create further tax headaches.
Buyers from OEMs often strong-arm OEMs into zero-rating their local deliveries, and with tough competition and limited margins OEMs often were forced to oblige. And ever so often the OEMs got away with charging the zero-rate on local deliveries.
As Taxand reports, this practice has now come to an end in Thailand. The Supreme Court has ruled that on these local deliveries local VAT is due, even if the buyer is outside the country. Taxand provided a clear and concise report, that is copied below in pdf.
The Thai experience is not unique. The same rules apply in virtually all VAT countries, and I would not be surprised if authorities in countries like Philippines, Vietnam and Taiwan would follow suit and put more VAT pressure on their local OEMs.