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The Recent Court Judgement on the Profit and Loss of BOI Projects
After a long dispute between the Thai Revenue Department ("TRD") and Board of Investment ("BOI") regarding the offset of loss on one BOI project against profit on other BOI projects, the Central Tax Court passed its judgment on 23 October 2010 whereby it agreed with BOI's opinion. Taxand Thailand reviews the court case and discusses how this impacts multinationals.
The dispute came from NMB-Minebea Thai Ltd. ("Minebea"), a leading global supplier of high-precision mechanical and electronic components, who had been granted a tax exemption on many of its projects from the BOI. Minebea generated loss on some projects as well as profit on other projects. The question was raised whether its loss on one BOI project should be offset against its profit on another BOI project. If the profit and loss under all BOI projects should be offset with one another first, Minebea would lose the benefit of offsetting its five year loss carried forward after the tax holiday period expires under BOI projects with its taxable profit from non-BOI projects.
TRD applied Section 65 of the Revenue Code in calculating net taxable profit for tax purpose of the taxpayer. Section 65 considers one taxpayer as one tax unit. Therefore, the net taxable profit or loss derived by one taxpayer from more than one project under BOI shall be combined first before offsetting with taxable profit from non-BOI business and taxed as one tax unit.
TRD also used the Notification of the TRD (regarding the calculation of net profit and loss for entity granting for investment promotion dated 5 February 1987) which states that the net profit and loss of BOI and non-BOI business shall be calculated separately. However, in calculating net profit for payment of corporate income tax, the profit from BOI and non-BOI businesses shall be combined. This implies that the net profit and loss of all BOI projects must be combined first before combining with profit and loss from non-BOI business.
BOI took the view that the net profit/loss of each BOI project should be calculated separately without combining all BOI projects together in calculating net taxable profit/loss for payment of corporate income tax purpose.
In this regard, BOI prepared and submitted a ruling to the Council of State to determine the definition of "annual loss" in the case of a company being granted more than one BOI project. The opinion from the Council of State was in favour of BOI, that is, BOI Act is a special law and overrides the Revenue Code which is a general law. The Council of State viewed that the spirit of BOI Act is to provide the privileges to the investor based on a project-by-project basis. This is according to Sections 16 and 19 of the BOI Act.
The Court accepted that Section 31 of BOI Act is not clear on the direction and method of how to calculate profit for BOI projects which will be eligible for tax exemption. The Court applied Section 11 of Civil and Commercial Code to rule that, where in case of doubt, the interpretation shall be done in favour of the party who incurs the obligation. The Court viewed that the rationale of BOI Act is to exempt the corporate income tax to the granted taxpayer by each BOI project. This is different from the implication given under the Revenue Code.
The Court also referred to Section 16 and Section 19 of the BOI Act that empower BOI to consider type and size of entity to be granted for BOI privileges as well as conditions which a granted entity must meet in order to enjoy the tax privilege. The intention under both Sections is to grant the tax privileges on a project-by-project basis. Therefore, in the case where a taxpayer is granted tax privileges by BOI for more than one project, the taxpayer shall be eligible to separately calculate the taxable profit and loss on each project.
We note that not only are Minebea facing these issues, many multinationals granted on tax privileges are also having the same problem. At least, the result from this judgement will make them more confident to challenge TRD in preparing and filing their tax returns based on the interpretation made by BOI.
However, it is more likely that TRD will not accept the judgment of the Court, which will result in it losing approximately THB500 million in tax collections, and will appeal the case to the Supreme Court for the final judgement. On this basis it is expected that TRD will still rely on its interpretation in offsetting the loss that the net profit and loss of all BOI projects must be combined first before combining with profit and loss from non-BOI business and would expect BOI granted companies do the same.
Therefore, during this uncertain stage, multinational companies who have invested in Thailand with the BOI promotion have two options:
(i) prepare and file the tax return as interpreted by TRD and if later the Supreme Court's judgement is in line with the Central Tax Court, then file a tax return adjustment and request for a tax refund, or
(ii) prepare and file the tax return according to the Central Tax Court's judgement and if later the Supreme Court's judgement is against the Central Tax Court, then file a tax return adjustment corresponding to TRD's opinion and pay the shortfall tax with penalty and surcharge.
The timescale for the final court decision will be in the range of 5 - 7 years and the tax refund period will be allowable for 3 years from the date on which the court's final judgement is passed. The taxpayer should take into account the timeframe and assess the options to maximise its tax benefit.
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