Most people understand that the discharge of a debt by a creditor, or by someone else for the benefit of a debtor, could result in the debtor having taxable income equivalent to the amount of debt discharged. Likewise, when a buyer undertakes to pay off a seller’s debt in exchange for goods or services, the sum of debt released will be treated as part of the sale revenue received by the seller. On the buyer’s side, the same sum will be treated as acquisition costs for income tax purposes.
Based on this principle, the Revenue Department issued Instruction Por 82/2542 concerning the calculation of specific business tax (SBT) on the sale of immovable property. Clause 6(3) states that when a sale of mortgaged land is registered with the Land Department, the amount of “mortgage liability” shall be included in gross receipts and subject to SBT at the rate of 3.3%.
For example, if a plot of land, with a fair market value of 230 and mortgage liability of 130, is sold in exchange for 100 in cash, the total price for tax purposes is equal to the sum of the released mortgage (130) and the cash received (100), or 230. This seems straightforward and there should be no interpretation issue.
To register the ownership transfer, the buyer and seller need to use the one-page purchase and sale agreement form provided by the Land Department. Because space on the form is limited, there is little chance to explain many details, so only brief summaries are possible in each paragraph. This can be a problem leading to double taxation on the released mortgage.
In one precedent case, the parties filled in the following information on the one-page form for registering the ownership transfer:
1. The purchase and sale price is 230;
2. The seller has already received full payment; and
3. The buyer will undertake to carry over the mortgage liability of the seller.
As the seller was receiving a monetary benefit of 230, comprising cash of 100 and mortgage release of 130, it calculated net profit tax and paid SBT on the total consideration amount of 230.
However, Revenue Department officials had a different calculation in mind. They claimed that as the price stated in clause 1 was 230 and the parties had confirmed “full payment” in clause 2, it meant the mortgage release in clause 3 was a separate item and must be added to the sale price, making the total consideration 230+130 = 360. As such, both net profit tax and SBT must be calculated based on 360 rather than 230, effectively resulting in double taxation of the mortgage release.
To most people, this would appear to be a minor miscommunication between the taxpayer and the taxman. If both parties are acting honestly, any discrepancy could be resolved by supporting evidence. This could include as a bank deposit/transfer slip proving the actual cash amount paid, bank confirmation of the mortgage amount released, seller’s profit and loss account showing the actual sale revenue, buyer’s records showing the actual acquisition cost, and confirmation by a licensed auditor of the total consideration. The figures can be reconciled to confirm the total value of the transaction.
In the course of a tax audit, the seller presented the necessary documents to prove that the released mortgage was already included and the amount in clause 1 stated the total consideration. Unfortunately, the tax authorities refused to budge from their position. They insisted that the one-page purchase and sale agreement was an official document binding both parties and was, therefore, the most reliable evidence. As well, they claimed that Por 82/2542 required the mortgage liability in clause 3 to be included in the amount in clause 1, resulting in a total taxable amount of 360.
Sadly, the Board of Appeal, which should have corrected the erroneous tax assessment, agreed with the taxman by looking only at the one-page document of the Land Department.
The Tax Court ruled that the seller had never disputed that the amount of the released mortgage must be included in the tax base pursuant to the terms of Por 82/2542, but the seller was able to prove beyond doubt that the mortgage amount in clause 3 was already included in the total sale price in Clause 1 and subject to all taxes. Hence, the tax assessment was voided. But the Revenue Department is not finished, and the matter has now gone to the Court of Appeal.
What does this precedent case tell us? Not much from a tax policy point of view. However, from a risk management perspective, it does offer a few lessons.
First, you need to be very careful when you produce an official document, as someday it could come back and hurt you. Second, when tax authorities want to attack you, no matter how good your supporting documents are, they will simply ignore them and pretend to rely solely on the “official” documents. Hence, never omit even the smallest item in a document. Choosing a capable person to handle the transfer registration will also reduce the incidental risk.
The most important lesson, however, is the moral of the story. This tax dispute should never have arisen if everyone in the system had performed their duties with integrity, transparency and justice.
By Professor Piphob Veraphong and Rachanee Prasongprasit of Law Alliance Limited. They can be reached at admin@lawalliance.co.th