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Reduction in corporate tax rate – What it means for businesses?
The Thai government released its Royal Decree in late December 2011 to reduce the corporate income tax rate from 30% to 23% in 2012 and to further reduce the rate to 20% in 2013 and 2014. This is an interesting development given the 2012 deficit budget which has purportedly been designed to claw back THB 400 billion (USD 13 billion) in revenue. Taxand Thailand discusses what the proposed reduction in corporate tax rate will mean for multinationals based in Thailand as well as the benefits to be derived.
In view of the proposed reduction in the corporate tax rate, the Government is expected to lose corporate tax revenue to the tune of THB 15,000 million for every 1% reduction in the tax rate. The reduction in the tax rate coupled with the recent flood disaster in Thailand means that the Government needs to generate revenues which it expects to achieve through the issuance of additional public debt and the more efficient collection of taxes.
International Tax Competition and Tax Policy
In the same meeting, the Thai Cabinet ruled that the Ministry of Finance should reconsider its incentive framework directed at the promotion of investments implemented through the Board of Investment (BOI). The incentives cover both tax and non-tax privileges. The need to revamp the incentives framework is to respond fully to Thailand's entry into the ASEAN Economic Community (AEC) in 2015 in terms of tax competition. Ceasing the 'tax holidays' under the BOI schemes, thereby widening the pool of taxpayers would generate additional tax revenues to compensate for tax revenue which will be lost as a result of the corporate tax rate reduction.
By 2013, once the 20% tax rate is adopted, Thailand will rank as the second most tax competitive country in the region, behind Singapore. Singapore's current corporate tax rate is 17%. A further measure to counteract the loss of revenues from the reduction in corporate tax is likely to be an increase in the value added tax (VAT) rate from the reduced rate of 7% adopted in recent years to a standard rate of 10%. At present, tax revenue from VAT is a major source of revenue for the Government and is much needed particularly since the revenue from customs duty is declining (approximately 10-15%) as a result of international free trade agreements (FTAs).
Effective Tax Administration and Tax Collection
The Revenue Tax Authority (Revenue Department) will lead the Government's move to increase tax collection to gain more tax revenue from corporate and personal tax, VAT, specific business tax, stamp duty, and petroleum income tax.
Tax audits will be an effective tool for the Revenue Department to expand its tax targets, provided that the database of taxpayers is well managed. Further, new anti-avoidance rules are likely to be adopted to challenge tax planning, for instance by the adoption of 'thin capitalisation' and 'substance over form' rules. Additionally, large taxpayers with cross-border transactions are expected to come under more scrutiny as the Government increasingly seeks to impose transfer pricing adjustments on such taxpayers in an attempt to increase tax collection.
Practically, it will also be difficult to pursue tax refunds from the Government. A tax health check will be required by more taxpayers to take a 'pro-active practice approach' prior to tax refunds being issued. Self-tax diagnosis will be a key tax risk management tool for businesses in the coming years.
Trend of Judicial Practices
The Central Tax Court at the court of first-instance and the Supreme Court are expected to rely on precedent cases which are increasingly adopting the 'substance over form' principal to invoke tax avoidance and tax evasion rules. Most of the precedent cases involve large taxpayers involved in cross-border transactions without appropriate rationale/reasonable grounds.
Tax Risk Management & Good Corporate Governance
With the Government stepping up its efforts to ensure an increase in tax collection, taxpayers should adopt effective tax risk management policies and practices to mitigate tax risk and inculcate good corporate governance practices. In-house tax departments should be monitored closely by management to ensure that the company's tax affairs are managed effectively and efficiently to minimise risk and to maximise benefits arising from the reduction in the tax rate.
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