Many people have expressed serious concerns about the implications of a recent Supreme Court judgement against NMB-Minebea Thai Ltd in a landmark tax dispute dating back eight years. The outcome draws attention to the confusion surrounding the treatment of tax losses from businesses that enjoy Board of Investment promotion.
The Minebea case essentially revolved around the offset of a loss on one BoI project against the profit on other BoI projects for tax calculation purposes. The amount of tax in dispute was not small — 502 million baht. The Central Tax Court upheld Minebea’s position in 2010 but the Revenue Department appealed to the Supreme Court, which sided with the department in a ruling issued last month.
Readers should be aware that while the Minebea ruling is cause for concern, there are other aspects of BoI tax losses that have also come under court scrutiny.
Our column on May 31 touched on the Supreme Court’s rationale that a BoI company must net its losses and profits generated from different BoI projects but incurred in the same accounting year — so that the net loss can be determined and can be carried forward for another five years after the expiration of the tax holiday.
Even after the amount of the net loss is determined according to the method set forth by the Revenue Department and the Supreme Court in the Minebea case, the entire amount cannot be utilised after the tax holiday period. Hence, the issue in the Minebea case is a two-tier problem.
For a non-BoI project, Section 65 ter (12) of the Revenue Code allows a tax loss to be carried forward for “accounting periods no longer than five years preceding the current accounting period”. As such, the loss must be used on a “first in-first out” or FIFO basis in determining its remaining useful life.
Using the example in Table 1, the taxpayer must deduct the losses of (500) and (100) from Years 1 and 2 against the net profit of 600 in Year 6 first. This interpretation allows the company to save the losses from more recent years for the future use. Similarly, Section 31 paragraph 4 of the BoI Act allows a promoted company to deduct the net tax loss against profits accrued during the five years after the expiration of the tax holiday. In doing so, the company “may choose to deduct such loss from the net profit of any one year or several years”.
Unfortunately, the Revenue Department has refused to apply its own interpretation. In the recent Supreme Court case, a company that operated both BoI and non-BoI projects, with the net BoI tax loss carried forward, sustained new losses after the expiration of the tax holidays, as shown in Table 2.
Unlike the case involving Minebea, there was no argument regarding the amount of the BoI loss in this case; only the timing of the loss utilisation was at issue. Both the company and the Revenue Department agreed that, at the end of Year 1, there was a remaining BoI loss of 925 million baht — (1,559+48)-444-238 — to be carried forward to Year 5. However, as there were new losses in Years 2-4, could it use the BoI loss carried forward (925) against the taxable profit in Year 5 (529+430) first, or should it use the new losses incurred in Years 2-4 (17+23+344+71 = 455) first and then the carried-forward BoI loss later?
In light of the consensus on “first-in first-out”, and the wording of Section 31 paragraph 4 that allows the carried-forward BoI loss to be applied against the “profit of any one year or several years”, the company adopted the FIFO approach. This means that the full amount of the BoI loss sustained during the tax holiday and remaining as of the end of Year 1 (925) should be used against the taxable profits (529+430) in Year 5 first, and the new losses sustained during Years 2 and 3 (455) could be carried forward to Year 6.
The Revenue Department disagreed and claimed that the new tax losses sustained in Years 2 and 3 (totalling 455) must be used against the profits in Year 5 (totalling 959) first. Then the remaining profits of Year 5 (504) would be reduced by the carried-forward BoI loss. This calculation would result in the expiration of 421 million baht of the unused BoI loss and the company would have no more tax losses to be carried forward to Year 6.
The court ruled in favour of the Revenue Department, noting that Section 31 paragraph 4 of the BoI Act “did not provide guidance” as to how a BoI-promoted company should calculate net profits or losses. Consequently, it said, the department’s position based on the general rules of the Revenue Code, including the Notification of the Revenue Department Re: Computation of Net Profits and Net Losses of BoI-promoted Companies dated Feb 5, 1987, “did not conflict with the provisions of the BoI Act”.
Article 4.2(b) of the Notification states that where a BoI-promoted company carries on both tax-exempt and non-tax-exempt businesses, if the former sustains losses in any relevant year, while the latter has net profits in the same year but sustained losses in previous years, the company must use the losses of the non-tax-exempt business first. If there is any taxable profit left, the company can apply the losses from the tax-exempt business to offset it.
By implication, the court applied the Notification by categorising profits in Year 5 from both the non-BoI project and the BoI project (with a 50% tax reduction) as “non-tax-exempt business” and applied the losses in Years 2 to 4 from the same “non-tax-exempt business” first, then the net BoI loss from the “tax-exempt business” later.
It’s not clear how the private sector will react to these interpretations. In any case, it is reported that the Revenue Department is preparing a new notification with clearer guidance consistent with both precedent cases laid down by the Supreme Court.
By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th