In countless ways, tax laws bear specific characteristics that are materially different from those under commercial laws. Even in a situation where the right to receive income depends very much upon the outcome of a pending commercial court case, a taxpayer is not allowed to use this as an excuse for not realising income or to extend the deadline for tax payments. Therefore, failure to distinguish tax liability from other commercial legal issues could be disastrous for the taxpayer.
Today we'll look at the case of a contractor who undertook work for the improvement of oil refinery for a certain sum _ let's call it 100 _ but received payment from its hirer at 90 only, as the hirer deducted a fine of 10 for delays in delivery and completion of work. The contractor then brought the case to the attention of the commercial court.
As the dispute was still pending, the contractor paid value-added tax (VAT) on the net amount of fees that it received (90) after the deduction of the fine (10). The tax auditor disagreed with such a position and imposed VAT on the deducted amount (10) as well _ by claiming that the contractor was deemed to receive the full amount of 100 already and such a deduction (10) simply reflected a separate payment of the fine.
The contractor argued that, since its liability to pay the fine of 10 to the hirer was uncertain and still pending the judgement of the commercial court, VAT on the deducted fee should not be due until the commercial judgement was delivered.
The Supreme Court stated although there was pending litigation on the contractor's liability to pay the fine, the fact the hirer had offset a portion of the fee against the fine constituted the deemed payment as if the contractor had already received 100 and used the amount of 10 to pay off the fine to the hirer.
Thus, the contractor's VAT liability to the Revenue Department arose on the payment date without having to wait for the outcome of the commercial court case. The consequence of waiting for the judgement cost this contractor penalties and surcharges (1.5% per month on the unpaid VAT) for the delay of VAT payment.
Similarly, the right to claim a tax refund could be jeopardised further if one were to wait for the judgement of the commercial court for too long.
In another Supreme Court Case, a taxpayer asked the Revenue Department for refunds of income tax paid between 1992 and 1997. The tax was paid on loan interest at a time when there was a dispute in the commercial court as to whether the taxpayer had actually received the interest from the debtor.
Only when the commercial court rendered its judgement in 2000, did the taxpayer file a request for the tax refunds on the ground that she had no tax liability (as evidenced by the commercial court judgement) and the tax payments were made by mistake in the calendar years in question.
As the deadline for a taxpayer to request a tax refund is specified in the law to be three years from the last day of the relevant tax return filing, i.e. from the end of March in the following year, the Revenue Department admitted that the taxpayer had no duty to pay tax on interest. But it refused to refund tax for the years 1992 to 1996 since the taxpayer had submitted the refund request after three years from the deadline for the tax return filing. Only the tax refund for 1997 was granted as the claim lodged in the year 2000 fell within the time limit.
The taxpayer, however, asserted that, in order to request the tax refund, she had to wait for the commercial court's judgement first in order to determine if she had the duty to pay tax or not; thus the general three-year rule for the tax refund claim should not apply.
Unfortunately, the Supreme Court ruled that the taxpayer was still required to submit the claim for the tax refund within three years from the deadline for the filing, irrespective of how long it would take for the commercial court to render its judgement. Thus, the Revenue Department was entitled to turn down the tax refund request.
Taking into account the above precedents, where there is a liability to pay tax or the right to claim a tax refund that is linked in any way to a dispute in the commercial court, the taxpayer should take a very close look at the early stage before making a decision to hold up the tax process _ otherwise it could be too late to correct the mistake.
By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th