During the festive season, several new tax laws were passed quietly while all worried eyes were on Thailand's growing political uncertainty. The changes to the progressive rates for personal income tax, which offer lower tax brackets, have already been well publicised. However, the following developments are also worth studying:
The first legislation deals with tax-free corporate reorganisation, under Royal Decrees 573 and 574. The purpose is to resolve a longstanding issue related to how a financial institution and an insurance company should realise reserves for bad or doubtful debts when undertaking a corporate restructuring. While most companies are not allowed to deduct reserves as tax expenses, the tax law allows financial entities and life and non-life insurance companies to set aside reserves for bad or doubtful debts subject to certain conditions.
This may be viewed to give such businesses an advantage over general companies. However, when such an institution carried out a restructuring in the form of a statutory merger or an entire business transfer (EBT), where the transferor company was required to be dissolved within the accounting year that the EBT took place, the "recapture rule" under Section 74(2) of the Revenue Code came into play.
Basically, the old law required that if any reserves or portions of the transferor's profits had been carried forward from the previous accounting year, and no tax had been paid, they must be added back as taxable income in the last accounting period.
Royal Decrees 573 and 574, which went into effect from Dec 24, 2013, exempt the above-mentioned tax imposed on the recapture of such reserves in the hand of the transferor company. However, this is allowed on condition that the transferee company will not be allowed to deduct the same amount of such tax-exempted reserves as an expense. General companies do not require this tax privilege, as no recapture rule applies to them upon implementing a statutory merger or an EBT transaction.
Now let's take a look at Royal Decree No. 571, which was announced in the Royal Gazette on Dec 23 and went into effect retroactively, from Jan 1, 2012. This regulation exempts specific business tax (SBT) on interest that a company or a registered partnership receives from lending money to a "company or juristic partnership in the same group".
Some of you may recall that this exemption has been given since the SBT regime was incorporated into the tax system by means of an instruction under Departmental Regulation No. Paw. 26/2534 (1991). It states that a company or a registered partnership may opt not to include the interest on a loan granted to the same group company or partnership in the tax base for SBT. However, though many taxpayers rely on this rule, it is in fact only an internal directive issued to provide Revenue Department officials with a guideline for interpretation. It does not constitute a law.
This legislation also expands the term "company or juristic partnership in the same group", which originally was limited to "the situation where a company or juristic partnership holds at least 25% of the stake with voting rights in the other for at least 6 months before entering into the loan", to cover a surviving company from a corporate reorganisation. In effect, this means a new company established from a statutory merger and the transferee company in an EBT transaction, for the purpose of counting such a 25% stakeholding period continuously from the merged entity or from the transferor company.
Royal Decree No. 571 also exempts SBT on interest at the normal rate that a company or a registered partnership receives from money deposited with a financial institution, or from bills of exchange (B/E) issued by the financial institution. Unlike the old regulation, Royal Decree No. 571 does not limit that such deposits or B/E holdings must be done by "capital, loan or other remaining cash".
Note that Royal Decree No. 571 does not adopt the condition under the old regulation that the SBT exemptions will not apply to financial institutions. This may raise some issues in the financial industry as to whether they should be entitled to the benefits granted under the new law as well.
However, as the objective of this legislation is to release companies from the SBT burden only where their activities are "similar to commercial banking", we assume at this stage that a commercial bank, securities company, finance company and life insurance company may not be eligible for the tax privilege as they are carrying on a financial business directly .
This new regulation also exempts SBT for the company that receives interest earned from lending money from the employees' funds to the member employees.
While the above could be good news for some people, don't forget that the Revenue Department is eager to increase its tax revenue by chasing after those who fail to comply with tax laws. It recently announced that it would set up a software system to monitor freelancers, medical professionals and others that enter into unacceptable tax-avoidance schemes via a the non-juristic "group of persons" structure. Also in the taxman's sights are cram schools and insurance sales agents who often fail to declare the actual amounts of their income.
By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th