New partnership rules and your 2014 tax return

New partnership rules and your 2014 tax return

Right after Christmas Day, the government passed the Act Amending the Revenue Code (No.39) to abolish the exemption from personal income tax (PIT) for profits distributed by an unregistered partnership to its partners. The new Act took effect on Jan 1.

Unbelievably, the Revenue Department's proposals were totally disregarded by the drafters in the Juridical Council, who came up with their own version. You may recall that under the original proposal, PIT would continue to be imposed on partnerships, but they would be required to deduct actual expenses instead of standard expenses. A body of persons, meanwhile, would be exempt from PIT, but income would be taxable in the hands of its partners, known as a pass-through system.

The new legislation, however, taxes a partnership and its partners in the following manner:

Similar to the old rule, both a partnership and a body of persons remain a taxable unit and may choose to adopt a standard deduction or actual deduction in calculating PIT; and

Profit distribution from the partnership and the body of persons will not be exempted from PIT in the hands of its partners any more, as Act No.39 has abolished the exemption rule under Section 42(14) of the Revenue Code.

As a result, if you have joined with a colleague and set up an unregistered partnership to conduct business, the structure faces two-tier taxation — one at the partnership level and the other at the partner level. While your partnership will be subject to tax at the progressive rates, how are you going to pay PIT on profits distributed from the partnership?

Since an unregistered partnership is not a juridical entity, the share of profits is generally categorised as "miscellaneous" income under Section 40(8). As a result, there is no withholding tax. But don't perceive this as good news, as you will need to include such amounts in your own gross income and pay tax at the progressive rates at year-end.

When you use a partnership to conduct business, you will find total tax costs are far more onerous than those of a normal company, as the chart shows.

The exceptionally high tax costs are not only attributable to the higher tax rates at the partnership level but also the share of profit is subject to progressive rates instead of the 10% withholding tax that would apply to dividends. As well, you have no right to claim a tax credit, unlike dividend income. You cannot choose to exclude the share of profits from the tax base by electing to pay 10% withholding tax either — unlike an investment in a mutual fund.

Most people think Act No.39 will have no effect on their 2014 taxable income, for which a tax return needs to be filed by March 31. Unfortunately, the trap has already been set — the Revenue Department on Dec 17 issued Announcement No.249 requiring all partnerships to prepare and attach income and expense reports to their 2014 returns.

You must tell the taxman the amount of profits that were distributed to partners during 2014 as well as any remaining amounts carried forward to 2015. Assuming your partnership had undistributed profits of 100 brought forward from 2014 to be distributed to you in 2015, you would need to include it in the 2015 tax base and pay PIT at the progressive rates even if it came from profits earned in 2014 — before Act No.39 took effect.

Clarifications as to how this income and expense report should be prepared as well as the calculation method and definition of the relevant terms can be found in Departmental Regulation No.149/2558 issued on Jan 20.

Bear in mind Announcement No.249 also requires your partnership to disclose the details of the bank account and remaining cash in the hand as of Dec 31, 2014. It also requires you as a partner to certify the information is accurate. It is a criminal offence to provide wrong information for purposes of tax evasion, punishable by a prison term of three months to seven years. A false statement alone is punishable by at least six months' imprisonment.


This article was prepared by Prof Piphob Veraphong. He can be reached at admin@lawalliance.co.th

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