Tax Newsletter JANUARY 2018

DLO’S Tax Newsletter

Issue 85 January 2018

Inside this Issue

Tax Laws Update

1. Personal income tax exemption for expenses related to health insurance premiums of taxpayers.
2. Value added tax (VAT) exemption related to the import and sale of commemorative coins by the Department of Treasury.

Tax News

1. Tax measures to achieve neutrality of tax in relation to income received from a deposit into an account that is operated according to the principles of Islam
2. Update concerning the progress of the amended draft of the Land and Buildings Tax Bill.

Interesting Deka (Supreme Court Judgment)

Dika                       (Supreme Court Judgment) No. 8745/2559, in re:

Between                 Company B.                                                                   Plaintiff

Revenue Department                                                    Defendant

Issue:                     Whether the sale of shares for increasing the capital is deemed to be a prohibited expense in accordance with Section 65 Ter (9), (13) of the Revenue Code.

Tax Laws Update

1. Personal income tax exemption for expenses related to a health Insurance premiums of taxpayers

Ministerial Regulation No. 334 (B.E.2560) has amended Clause 2 (97) of Ministerial Regulation No. 126 (B.E.2509) by providing a personal income tax deduction on personal income for premiums that the taxpayer actually paid for health insurance in the tax year (up to a maximum of 15,000 Baht) to an approved health insurance company or casualty insurance company that operates in Thailand. Such insurance premiums must be paid from 1 January 2017.

For more details, please see: https://goo.gl/H964Zu

2. Value added tax (VAT) exemption related to an import and a sale of commemorative coins by the Department of Treasury

Royal Decree (No.648) B.E. 2560 exempts value added tax (VAT) for the import & sale of commemorative coins by the Department of Treasury provided that such coins have been approved by the Finance Minister.

Moreover, Royal Decree (No.649) B.E. 2560 has amended Section 3 (5) of Royal Decree (No.239) B.E. 2534 by providing an exemption for VAT with respect to the sale of official commemorative coins relating to important official occasions where such income (after deducting expenses) is offered to His Majesty the King, Her Majesty the Queen or members of the Royal Family.

For more details, please see: https://goo.gl/FgRBjR and https://goo.gl/uNWzd7

Tax News

1.  Tax measures to achieve neutrality of tax in relation to income received from a deposit into an account that is operated in accordance with the principles of Islam.

On December 12, 2017, the Cabinet approved in principle the following legal amendments to achieve tax neutrality for tax payers who generate income from certain accounts operated in accordance with the principles of Islam:

–          Royal Decree (No.301) B.E. 2539 prescribes a tax exemption for personal income tax on returns from deposit accounts which are operated in accordance with to the principles of Islam with banks in Thailand. The conditions attaching to this exemption are that the deposits must be made on a monthly basis, for at least 24 months from the first date of deposit and the amount of the monthly deposits must be consistent but must not exceed 25,000 Baht per month and 600,000 Baht per year in total.

–          Ministerial Regulation No. 200 (B.E.2538) prescribes a tax exemption for personal income tax on returns arising from deposit accounts operated in accordance with the principles of Islam with banks in Thailand, which must be similar in nature to a saving deposit account. This exemption is subject to the condition that it shall only apply to received returns and interest, together, which must not exceed 20,000 Baht per tax year.

–          Ministerial Regulation No. 250 (B.E.2538) prescribes a tax exemption for personal income tax on returns from deposit accounts operated in accordance with the principles of Islam with banks in Thailand, which must be similar in nature to a fixed term deposit. This tax exemption is subject to a number of conditions, including: the deposit must be for a period at least 1 year, moreover the total amount of all returns and interests of all such fixed term deposits must not exceed 30,000 Baht per tax year; finally, the taxpayer must be at least 55 years of age when they receive such returns and interests.

For more details, please see: https://goo.gl/LsCnaF

2. Update concerning the progress of the amended draft of the Land and Buildings Tax Bill

On December 19, 2017, the Ad Hoc Committee considered the draft Building and Land Tax Act (the “New Tax”) for submitting to the board of committees of the National Legislature Assembly (NLA). The Ad Hoc Committee proposed to minimize the tax burden on taxpayers by allowing them to pay such tax by adding the payable tax from last year with the new payable tax from the new tax year, then subtracting the old payable tax as follows:

   1. First year – Old tax plus 25% of the balance of the New Tax;

2. Second year – Old tax plus 50% of the balance of the New Tax;

3. Third year – Old tax plus 75% of the balance of the New Tax;

4. From the 4^th year onwards the New Tax will be collected at the rate of 100%.

5. Reduce 40% of the tax rate ceiling as follows:

5.1 Agricultural building and land – old rate 0.2%, new tax rate 0.15%

5.2 House – old rate 0.5%, new tax rate 0.3%

5.3 Land and building apart from agricultural building and land – old rate 2%, new tax rate 1.2%

5.4 Undeveloped land – old rate was 2% percent subject to increases of 0.5% every 3 years capped at 5%, new rate 1.2% subject to increases of 0.3% every 3 years capped at 3%.

For the actual collected tax, the Ad Hoc Committee proposed a tax rates schedule to be annexed to the Act to make it clear regarding the applicable tax rates. From the third year onwards, the government will enact the Royal Decree, which shall prescribe the actual tax rate and exempt the tax for agricultural buildings and land and houses utilized for living in accordance with the following conditions:

1. Where the land or building has been used for agriculture

         1.1 If an owner is a natural person, the tax shall be exempted for that portion of the asset value which does not exceed 50 million Baht. However, in relation to the portion exceeding 50 million Baht but not exceeding 75 million Baht it shall be subject to the new tax which shall be fixed at the rate of 0.01%. In contrast, the old tax rate was fixed at the rate of 0.05% for the portion exceeding 50 million Baht but not exceeding 100 million Baht.

         1.2 If an owner is a juristic person, the tax shall be 0.01% of the value of the land or buildings for that portion which does not exceed 75 million Baht. Under the previous system the tax exempted the portion that did not exceeding 50 million Baht but for the portion which exceeded 50 million Baht but did not exceed 100 million Baht, it was subject to a tax rate of 0.05%

2. If the owner of the house is a natural person or a juristic person that is duly registered in the house registration as of 1 January of the tax year, then the tax shall be exempted for the portion of the value of such asset that does not exceed 20 million Baht. This contrasts with the old rate which exempted the tax for the portion that did not exceed 50 million Baht.

         For other houses that have an asset value not exceeding 50 million Baht they shall be subject to the new tax which shall be fixed at the rate of 0.02% percent of the asset value. In contrast the old rate provided that the applicable tax would be subject to the rate of 0.03 – 0.20% of the asset value which does not exceed 50 million Baht.

1. In relation to undeveloped land or neglected buildings under the new law they shall be subject to tax which shall be calculated at the rate of 0.03% of the asset value provided that it does not exceed 50 million Baht. Under the old system the tax was collected at the rate of 1-3% percent based upon the period which such asset has been neglected.
2. If the owner of the house is a natural person but such owner is not the same person as the owner of the land and the house owner has registered themselves in the house registration as of 1 January of the tax year, then the new tax shall be exempted for that portion of the value of such asset which does not exceed 10 million Baht.

The above mentioned laws are proposed to be submitted to the NLA for the process of consideration by the Cabinet such that they may be legally enforceable by 1 January 2019.

For more details, please see: https://goo.gl/qUB7DN

Interesting Deka (Supreme Court Judgment)

Dika                       (Supreme Court Judgment) No. 8745/2559, in re:

Between                Company B.                                                                   Plaintiff

Revenue Department                                                    Defendant

Issue:                     Whether the sale of shares for increasing the capital is deemed to be a prohibited expense in accordance with Section 65 Ter (9), (13) of the Revenue Code

In 1993, the Plaintiff purchased 99.98% of the shares in Company G. for 39,993,000 Baht, the Plaintiff also purchased 99.98% of the shares of Company N. for 29,999,300 Baht. Thereafter in 2003, the Plaintiff purchased an additional 800,000 shares in Company G. for 100 Baht per share (for a total price of 80,000,000 Baht) and an additional 900,000 shares in Company N. for 100 Baht per share (for a total price of 90,000,000 Baht) when that companies increased their registered capital ( “Increased Share Capital”).

Approximately 7 months after the Plaintiff purchased the Increased Share Capital, the Plaintiff agreed to sell all of the shares it held in Company G and Company N to Company F., (which was a company associated with the Plaintiff) for a net price of 31, 715,814.99 Baht and 32,522,902.72 Baht, respectively. This sale of the shares by the Plaintiff resulted in the Plaintiff sustaining losses that totaled 175,753,582.92 Baht.

From when the Plaintiff purchased the shares in both companies until they were sold to Company F, the financial status of Company G. and Company N. was quite poor given that they didn’t generate any profits. The investment actions of the Plaintiff were found by the Supreme Court to be quite unusual given that ordinarily investors seek profit rather than loss, moreover, when the Plaintiff sold its shares in Companies G and N to Company F., the Plaintiff owed Company F. about 61 million Baht. Furthermore, on the same day that the Plaintiff transferred the funds to pay the 61 million Baht debt to Company F. Company F. transferred these funds back to the Plaintiff as part of the share purchase monies. Therefore, in light of the above facts the Supreme Court was not convinced that the Plaintiff had legitimately invested in the two companies for the purpose of generate profit rather it determined that the Plaintiff had entered into these transactions in order to avoid its tax liability. The Court held that the expenses arising from the loss were not used for the purpose of making profits or for the business and moreover, the Court further determined that they were not actually incurred. Given the above, the Supreme Court decided that these expenses being claimed by the Plaintiff were prohibited expenses (in accordance with Section 65 Ter (9) (13) of the Revenue Code) and as such there were not able to be used by the Plaintiff in the calculation of net profits.

Legal Opinion

The key issue arising from the above Supreme Court Judgment relates the calculation of net profits, the Revenue Code sets out the conditions under Section 65, 65 Bis and 65 Ter. Some of the most important conditions are that the expenses must be incurred for the purpose of making profits or for the business. These conditions are specified in the Revenue Code to prevent corporate income tax avoidance.

Expenses arising for the purpose of making profits or for the business are deemed as being expenses that are paid or should have been paid in such accounting period for legitimately carrying on the business as per the purpose of such company or juristic partnerships, provided that such expenses are necessary and reasonable for the purpose of making a profit. However, the law provides that for expenses which are not related to the business they shall not be permitted to be used in the calculation of net profits; examples of prohibited expenses include expenses for personal matters or those which are not for the purpose of generating profit or running the business. Furthermore, the law provides that expenses which are not actually incurred means expenses that are recorded but which have never been paid or were paid but the business never received money, asset or any benefit in return for such payment. Thus, in light of the above if any expense is occurred, the corporate taxpayer should be careful to ensure that there are supporting facts and evidence to justify it as being legitimate, this issue is determined on a case by case basis and will depend on the facts. In this case, the Supreme Court extended the its interpretation of the expense which was not actually incurred to also cover unreliable expenses even if they were really paid by the Plaintiff.

The Supreme Court’s judgment in this case noted that the Plaintiff’s transaction was considered by the Revenue Dept. assessment officers to be tax avoidance because the amount of funds transferred between it and Company F. (a company which it had a close relationship with) was deemed to be abnormal. The Court agreed with the Revenue Department’s view that the Plaintiff’s claim that purchase of the Increased Share Capital was for the purpose of making profit was not true, instead it found that these transactions were implemented so that the Plaintiff could utilize such expenses to offset its CIT liability, the Court justified its decision by pointing out that the Plaintiff only held the shares it obtained under the Increased Share Capital for 7 months and as such the Court felt that it was an insufficient amount of time to properly evaluate the business of Company G. and N. Thus, given the above, the Court deemed the Plaintiff’s actions constituted abnormal investment behavior which was carried out for the purpose of tax avoidance rather than for the purpose of making profits for its business by investment, hence the expenses being claimed by the Plaintiff were found to be prohibited expenses.

In summation, if the Plaintiff wished to effectively contend that it held the shares of both companies for the legitimate purpose of seeking profit or to help the liquidity of both companies according to its claims, then the Plaintiff should have had reasonable evidence to support this assertion and should have held the shares for a longer period of time or at least until the two companies had generated profit or until the losses of both companies had decreased sufficiently to enable the Plaintiff to sell such shares without incurring excessive losses. If the above approach were followed then this would help to convince the Revenue Department & the Court that the sale of the shares was reasonable, which in turn would have enabled the expenses to be considered as expenses legitimately incurred for the purpose of making profit or for the business, and as such the Plaintiff would have been able to use such expenses to use in the calculation of net profits in accordance with Section 65 Ter (9) (13) of the Revenue Code. Given the above, the writer agrees with the Supreme Court’s Judgement in this case.

Writer: Warinthorn Saruno

Should you require any legal advice on Thai tax law then please contact us at Dharmniti Law Office Co., Ltd. 2/2 Bhakdi Building 2^nd Floor, Witthayu Road, Lumphini, Pathumwan, Bangkok 10330 Tel: (66) 2680 9777 Fax: (66) 2680 9711 Email: budhimak@dlo.co.th