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| • EXCH RATES |
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Baht/$ 33.49/52
Bid/Ask
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GOLD |
14,600
- 50
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TaxCORNER
LAWALLIANCE LIMITED
Many of you may have heard of or invested in instruments known as zero-coupon bonds or zero-coupon bills. The magic of these investment instruments is that when the bond is sold in the secondary market at a price that includes the accrued interest up to the transfer date, or the so-called "dirty price", the Revenue Code does not recognise the dirty price as interest, but classifies it as capital gains instead.
If you invest in zero-coupon debt and pay a discount price for the coupon, how do you calculate the amount of tax related to your investment? Generally, you are required to deduct expenses on an accrual basis under Section 65, paragraph two of the Revenue Code. The general rule is to apply the accrual basis method, rather than upon the actual receipt or payment. The explanation can be found in Departmental Instruction No. Tor. Por. 1/2528 (subsequently modified by Tor. Por. 155/2549).
Briefly speaking, the law requires that you deduct the operating expenses in the year that such expenses relate to the business carried out. The law also prohibits expenses in the nature of capital expenditures to be deducted in the year of payment, but requires that such amount be amortised or depreciated over its useful life.
Thus, the general rule is that a discount should be amortised over the life of the bond and realised as a deductible expense in each year by deeming that such amount of discount so amortised be related to the business conducted in the relevant fiscal year.
Surprisingly, the Revenue Department has issued rulings permitting you to deduct the entire amount of the discount upon maturity. Thus, based purely on the ruling, you should not have a problem with the Revenue Department if you deduct the entire discount in the year of repayment of the coupon and no amortisation is required in this case. You should, however, be warned that this ruling contradicts the provision of the law, as well as the matching concept of the accrual methodology.
However, many players have followed this bizarre practice and there is no indication that the interpretation of the tax office will change in the near future. It implies that your profit-and-loss account (as a payer) will show the portion of discount so amortised in this relevant accounting year but the same will not appear as expenses in your corporate-income tax return until the year of maturity.
On the income side, as you might have guessed, the general rule under the law is to apply the accrual basis method, but the Revenue Department does not really follow the accrual method. Instead, you have to realise discount income upon maturity of the coupon - similar to the payer.
The next miracle is that interest, discount and capital gains are subject to tax under different rules. This is why market players know that the law has distorted the tax liability and they have enjoyed playing around with these instruments. If you choose the right mechanism to invest in the coupon, you may end up paying no tax at all, depending upon who you are and what type your instrument is.
For example, foreign investors and individuals tend to sell the instruments in the secondary market rather than hold them to maturity. Lucky enough, this practice goes on without any challenge from the Revenue Department, despite the fact that it has been widely used in the marketplace.
As long as you can structure the transaction such that it reflects the actual buy/sell relationship, you should be on the safe side.
By Prangtip Anantavipat and Piphob Veraphong. They can be reached at admin@lawalliance.co.th
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