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Thaksin cases put loopholes in spotlight
WICHIT CHANTANUSORNSIRI
Thailand's tax code needs sweeping reforms that emphasise substance over form to curb tax evasion, according to Tithiphan Chuerboonchai, the dean of the law faculty at Chulalongkorn University.
He said cases such as the high-profile tax liability owed by former premier Thaksin Shinawatra's family over its sale of Shin Corp to Singapore's Temasek Holdings highlighted the need for legal reform.
The Shinawatra case resulted in the Revenue Department doing an embarrassing flip-flop on whether Panthongtae and Pinthongta Shinawatra owed taxes related to the purchase of Shin shares for one baht each from Ample Rich, a Shinawatra-family offshore holding company.
The shares were sold one working day later to Temasek for 49.25 baht each, resulting in capital gains of more than 15.8 billion baht. While the tax code allows for bequests of assets to family members, Mr Tithiphan said, in reality, the transaction was a sale.
However, the current tax code restricts how tax officials can interpret such transactions.
Mr Tithiphan said tax treatment for small and medium-sized enterprises also contained numerous loopholes. The tax code imposes a corporate tax of just 15%, half the normal rate, for companies with registered capital of less than five million baht and annual revenues of no more than one million.
A single corporate entity can reap significant tax savings by splitting up similar units across different companies to keep revenues under the one-million-baht threshhold, a tactic that Mr Tithiphan said did nothing to change the fact that the operations should be considered as one.
Mr Tithiphan, who headed a one-year project commissioned by the Revenue Department to review the tax system, noted that the tax code had not had a substantial review in more than 70 years.
Numerous rules and regulations remained out of date with modern society, he said. For instance, the tax code continues to require women to consolidate their incomes with those of their husbands in assessing personal tax liability, resulting in higher overall tax liability under the progressive tax ladder.
The Chulalongkorn University review proposes allowing couples to file separate tax statements or, alternatively, to continue joint filings with higher tax-deductions to eliminate distortions.
The study also concluded that withholding taxes should be streamlined and reviewed. The existing tax code stipulates a wide range of withholding taxes, depending on the type of work, from 3% for temporary labour to 5% for transport work.
Mr Tithiphan said one common loophole was used by home contractors. A contractor accepting a one-million-baht project could, under the current tax code, be liable to pay a 3% withholding tax, or 30,000 baht.
However, the contractor could easily draft two separate contracts for the work, with a bill of 950,000 baht for materials, which incur no withholding tax, and a second 50,000-baht bill for labour, which is subject to the 3% tax.
Transfer pricing, which refers to the pricing of goods and services within an organisation, is another complex area of the tax code rife with loopholes.
Under the Chulalongkorn University review, transfer pricing under the tax code would be clarified to emphasise the use of ''arm's length'' pricing and ''comparable uncontrolled price'' in determining tax liability.
Multinational companies use transfer pricing by manipulating the price and cost of goods to minimise their tax liability in a given jurisdiction. A company may sell goods at an artificially low price to a subsidiary in an offshore tax haven, which then sells the same products at market price to the final customer.
The review also proposes eliminating differences in tax treatment across various tax rates. Individual taxpayers, for instance, are allowed a 60,000-baht individual deduction, although workers in certain professions are allowed deductions of up to 30% of their income.
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