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Tax Implication on Revenue Sharing and Pay As You Grow Business Model

15 Mar 2010

The Revenue Sharing (RS) Model and Pay As You Grow (PAYG) Model were well known many years ago. Both models are proving interesting now for the reason that they could be important for supporting investors for commercial and financial purposes such as cash flow and risk management, etc. However, even though they were created for a similar business purpose, there are some difference between RS and PAYG Models. Taxand Thailand investigates the tax implications of RS and the PAYG business model using examples.

In general, RS Model refers to the sharing of profit and losses among the difference group which is known as cost per sale based on a certain percentage of sale or service revenue. Whereas, the PAYG Model is based on the amount of subscription multiplied by a specified rate for each subscription range and normally, the customer is required to pay the upfront fee for the base equipment first. The appropriate business model to use depends on the nature of the business and its transaction, both of which are key factors for tax implication analysis.

In order to understand the tax implication analysis on the RS and PAYG Model, it is necessary to consider the type of master agreement and assessable income received from RS and PAYG method. For example:

Example 1: Foreign supplier provides the telecommunication equipment to the local telecommunication network operator for the purpose of operating the new value added mobile service. The condition is the operator has a right to use such equipment during its business investigation period (before deciding to buy). The remuneration for using the equipment will be calculated on the RS basis.

During the investigation period, the nature of contract may be deemed as Using of Equipment Service Contract or Leasing of Equipment Contract, this depends on whether the customer has possession of the assets and is entitled to utilise the assets. There is then a different tax implication as follows:

  • RS payment under Using of Equipment Service Contract shall be treated as a service income which may not be subject to withholding income tax in Thailand.
  • RS payment under Leasing of Equipment Contract shall be treated rental income which is subject to corporate income tax in Thailand but may be reduced under the Double Tax Agreement if it is regarded as 'royalties' under the certain Double Tax Agreement.

Example 2: The foreign supplier sells the telecommunication equipment to the local operator for the purpose of mobile network expansion with the instalment payment condition on PAYG basis. For this case, PAYG payment made to the foreign supplier shall be treated as a value of goods which is not liable to pay the corporate income tax in Thailand.


Taxand's Take


The RS and PAYG business models concept is based on sharing profit and losses in business. They normally refer to the value of goods or service fee payment calculation methods. This is not deemed as sharing the risks and rewards in an enterprise or project from a legal point of view. Therefore, they are not subject to treat the supply or service contract under both models as a joint venture contract for Thai corporate tax purposes and the tax implication of the supplier and customer is considered separately.

Your Taxand contacts for further queries are:
Hatasakdi Na Pombejra
T. +66 (0) 2632-1800 ext. 111, 112 (secretary)
E. hatasakdi.np@hnpcounsel.com

Chatchawan Wattanasittichok
T: +66 (0) 2632 1800 ext. 143,129 (secretary)
E: chatchawan.w@hnpcounsel.com

Taxand's Take Author