The promotional programme of the Board of Investment (BoI), with its tax incentives, has often been considered by business operators a potential source of tax indulgences to take advantage of. Complex rules must be followed to enjoy the incentives, one of which eliminates tax on dividends paid from profits from BoI-promoted operations. But beware of the distortions that can result when it comes to determining the net amount of dividends that can be paid tax-free.
One popular BoI incentive is the right to deduct twice the amount of the cost of transport, electricity and/or water supply spent in the BoI-promoted business. This special deduction could be a double-edged sword that prevents a business from optimising the tax exemption for dividends distributed during the tax holiday period. You could not only face a higher effective tax rate than expected, but also a surcharge for failure to withhold tax.
To illustrate this issue, let's assume a company entitled to an eight-year tax holiday generates net profits of 100 and incurs electricity costs of 10, as shown in Example 1. If it exercises the special deduction and writes off the electricity costs at 20, what is the amount of profit out of which tax-free dividends can be paid? Should it be the actual profit of 90, as shown in the financial statement, or the tax profit of 80 as shown in the year-end tax return (form PND 50)?
There is no provision or tax regulation stipulating tax-exempted dividends must be distributed from the amount of net profit as shown in the tax return or the financial statement. The relevant Revenue Department notification merely states that in order for the dividends from the BoI-promoted business to be tax-exempt, they must "be distributed by the promoted business during the tax holidays". Hence, most people believe the tax treatment of dividends should not be affected merely by the special deduction.
Unfortunately, the Revenue Department does not hold the same view as most people do. The most recent revenue ruling dealt with a company granted an eight-year tax holiday as well as the special deduction. It subsequently distributed dividends of about 200 million baht from profits of the promoted business to individual shareholders. But the retained earnings as shown in form PND 50 after the special deduction were only 151 million baht.
Four years later, the company, sensing a potential dispute over the dividend amount, amended form PND 50 by adding back the special deduction as revenue. This way, the retained earnings in form PND 50 would match those in the financial statement and be sufficient to cover dividends so distributed without any withholding tax.
Since the company had already taken the special deduction, resulting in the retained earnings of only 151 million baht, the portion of dividends that exceeded such amount (200-151 = 49) was not entitled to the tax privilege and was subject to withholding tax of 10%. The Revenue Department further explained that although the company had amended its return by adding back the special deduction, since the amendment was done after the expiration of the tax holiday, it did not remedy the tax consequences.
The department expressed the same opinion in 2005 when it advised a BoI-promoted company that tax-exempted dividends must be distributed from the amount of net profits as shown in form PND 50 rather than in the financial statement. This means that had the company in the more recent case not claimed the special deduction, it could have saved the withholding tax and the surcharges on dividends.
Some may argue the department's interpretation is unfair, as the actual amount of net profit derived from the BoI-promoted business is the one that appears in the financial statement, not in form PND 50. However, before you complain, note that the department repeatedly mentioned a BoI-promoted company might opt not to use the special deduction, and it was not necessary to apply the same option each year. Thus, if a company derives net profit from the promoted business, which is tax-exempt anyway, it could avoid tax on such a mismatched amount of dividends by not claiming the special deduction.
Furthermore, in a situation where taking the special deduction will generate a loss to the BoI-promoted business, it could be unfair to the Revenue Department as well.
As you can see in Example 2, the loss of (20) from the BoI-promoted business could either be deducted against the net profit derived from the non-BoI business or carried forward for five years after the expiration of the tax holiday. Thus, if dividends as shown in the financial statement are also tax-exempt, the company would receive double tax benefits, which is known as "double dipping" from the tax planning point of view.
This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at admin@lawalliance.co.th