A company has a plant inside a free zone. Its suppliers outside the zone invoice it. Its customers in Thailand buy from it. Its landlord bills it for water and power. It hires carriers to move all of this. Each of those bills can carry a different VAT treatment, and the same box can be exempt on one side of the fence and taxable on the other.
The pattern is simple once you see it. Thai VAT follows the direction the goods cross the free zone line, and the customs paperwork is what proves the direction. This article walks through each direction, then the two places where a transport buyer is most likely to be wrong.
What counts as a free zone
The Revenue Code does not use a narrow meaning. Under Section 77/1(21), a free zone is a customs free zone, an export processing zone under the Industrial Estate Authority law, or any area where the law exempts goods from import duty. So the rules below apply to a customs free zone and to an industrial estate export processing zone alike.
Goods crossing the line, in each direction
| Movement | VAT treatment | Why |
|---|---|---|
| Goods from inside Thailand into the zone | Treated as an export, so 0% | Section 77/1(14)(a), only for goods that bear export duty or are exempt from it |
| Foreign goods into the zone | Import VAT exempt | Section 81(2)(b), only if the goods are exempt from import duty |
| Between zone operators, or between operators and bonded warehouses | 0% | Section 80/1(6), with conditions in Notification 123 |
| Goods out of the zone for use in Thailand | Treated as an import, VAT due | Section 77/1(12) |
| Goods out of the zone for export | Not an import | Section 77/1(12) excludes goods leaving for export |
Three details sit under that table.
- Into the zone from Thailand is an export on paper. The goods have not left the country, but the Code treats them as if they had. The seller's liability arises on the day the goods go into the zone (Section 78(4)(b)). Notification 125 says the move must follow the forms, rules and conditions of customs law, so the customs entry is what proves it.
- Foreign goods get an exemption only when the duty is waived. Import VAT inside the zone is exempt only for goods that are themselves exempt from import duty. The Customs Department lists which goods those are: machinery, equipment and tools the business needs, goods for the licensed business, and goods released from another free zone.
- Out for local use is an import, and the date is the day the goods leave. For goods that were taken in from Thailand and later come out for local use, the liability arises on the day they leave (Section 78/2(2)). A buyer planning cash should expect VAT at that moment, not when the goods went in.
Between zone operators: 0%, with a catch for services
Under Section 80/1(6), sales and services between two zone operators, or between an operator and a bonded warehouse, are zero-rated. Notification 123 limits this to three things: selling goods, a service that produces physical goods, or a service that does not produce goods but makes them work better or worth more.
The catch is in the last one. A service that produces no physical goods qualifies only if it is performed on goods that are then exported, and only with written evidence. Notification 123 also sends the whole arrangement to the forms and conditions of customs law, or of the Industrial Estate Authority law where that applies. If the paperwork is missing, the 0% is not safe.
Services to a zone operator mostly carry 7%
This surprises people. A 2007 Revenue Department ruling dealt with a zone developer that billed operators for water, telephone, utilities and other services. The Department said the services were taxed at 7%, because they were not performed on goods that are then exported or used to make goods for export. The water was a sale of goods at 7%, because selling water into the zone is not an export.
The Code does give a zero rate to some services. Section 80/1(2) reaches services performed in the kingdom to make goods for export inside a free zone, and services performed inside a zone to make goods for export. That is a narrow category of work on the export product, not the ordinary running costs of a site.
Check every service line a zone operator receives against that test. If it is not work on the goods, expect 7%.
Where a transport buyer goes wrong
First, the freight is not zero-rated just because the goods are. Section 81(1) lists carriage within the kingdom as exempt, and the zero-rate list in Section 80/1 does not name road carriage. The 0% applies to the goods crossing the line. The text read for this article does not move the road leg to the zone gate. A domestic road freight bill therefore stays an exempt line whether the load is bound for a free zone or a warehouse in Rayong. Reading a Thai freight invoice covers what happens to that line if the invoice bundles in other services.
Second, the proof of the zero rate is the customs entry, not the delivery note. A signed delivery at the gate does not show that the goods were entered into the zone. Agree in the contract who files the entry and who passes a copy to whom. Bonded, free zone or normal explains what each status does to the delivery itself.
Before the next shipment
- Write down which direction each movement goes, and whether the goods bear export or import duty or are exempt from it.
- Ask for the customs entry that proves goods entered the zone before accepting a 0% invoice.
- Treat a bill for water, power, telephone or site services as 7% unless the service is work on goods that are exported.
- Plan the VAT cash for goods that leave the zone for local sale on the day they leave.
- Keep the freight line separate and exempt, and do not let it be rolled into a service line.
This covers the Revenue Code and two notifications as published on the Revenue Department site. Customs duty rules, the detailed customs forms, and later rulings were not read for this article. Ask your tax adviser before relying on a zero rate for a specific shipment.