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Non-deductible Expenses Against Diageo
For more than 20 years, the Thai Revenue Department (TRD) had accepted that the deduction of penalties and any criminal charges for corporate tax purposes would be determined under other tax laws (Customs, Excise, Land and House Tax, etc.) rather than the Thai Revenue Code (TRC). Corporate income tax is a kind of tax under the TRC and such penalties/charges are allowable to deduct for calculation of the taxable net profit. The TRD followed the ruling of the Board of Tax Ruling (BTR) released in 1985 that expenses arising from penalty, surcharge, and criminal charges should be narrowly interpreted so as to restrict it to the aforementioned charges under the TRC.
Taxand Thailand discusses the ruling in the Diageo Moet Hennessy case and its implications.
In early 2011, the Central Tax Court ruled against Diageo Moet Hennessy (Thailand) by disallowing certain expenses claimed as deduction for corporate income tax computation. These include (i) penalty on shortfall import duty; (ii) duty surcharge; and (iii) penalty on interior tax ('Non-deductible Expenses') charged by the Thai Customs Department.
Development of tax challenges
In this case, the TRD found that Diageo Thailand had deducted non-deductible expenses arising from the under-declared custom value of USD 6 million, in which Diageo Thailand and Diageo Offshore were involved in netting transactions. The netting transaction includes the price of goods purchased from Diageo Offshore and offset against the amount of advertising and promotion expenses for Diageo Offshore in Thailand paid by Diageo Thailand for and on behalf of Diageo Offshore without any recharge to Diageo Offshore.
The TRD argued that the advertising and promotion expenses were not expenses incurred for the business of Diageo Thailand exclusively, and therefore, it is regarded as a non-deductible expense. In view of the TRD, when the 'underlying transaction' is a source of a disallowed expense then penalty, surcharges and charges subsequently arising from such disallowed expenses shall not be utilised for tax purposes.
Current interpretation of tax court
The Central Tax Court in this case ruled in favour of the TRD on the basis that the decision made by the BTR in 1985 is not a law for the court to follow. In the past, the TRD and the taxpayers followed to BTR's interpretation in this regard and the TRD have not argued the BTR's decision until now.
It is worth noting that BTR as a body is constituted under the TRC to consider, inter alia, the problematic tax issues that may be raised by the TRD for its tax collection. In addition, the new BTR's tax ruling or court decision may override the past BTR's tax ruling. Diageo in this case filed the appeal to the Supreme Court against the lower court's decision and the final decision at the higher court is expected to rule out not earlier than 5 years.
Trend of anti-avoidance against MNCs in Thailand
Given the global economic climate, it is not a surprising that the government is focussed on collecting more tax revenue at all levels (tax collector and tax court).The TRD defended its past position in many cases where it interpreted its own tax guidelines (not laws) in a way to allow more tax to be collected. In addition, TRD appears more and more to be challenging the past decisions of the Supreme Court, which were held in favour of the taxpayer.
Future tax audit
Under the AEC Free Trade Agreement, Thailand will be fully integrated into the ASEAN Economic Community (AEC) by 2015 and will be seen as a free market player. Thailand's corporate income tax rate will be reduced from the standard rate of 30% to be 23% in 2012 and 20% in 2013 onwards. From the state's view, the Government will lose tax revenue worth USD 500 million for every 1% reduction in the tax rate. As a result, tax holidays under the current investment promotion by the Board of Investment (BOI) are being reconsidered to suspend in order to compensate the state fiscal shortfall after tax rate reduction. The BOI's role will be changed to mainly facilitate and encourage the outbound investment.
In the absence of tax holidays there will be more scrutiny on tax. Taxpayers should proactively respond to the increase in tax audit and be well-prepared to challenge tax planning transactions, especially cross-border activities.
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