Tax Newsletter, Issue no. 1/2018

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1 Tax Newsletter, Issue no. 1/2018 Tax developments from 16 August to December 2017 In this issue: Tax developments from 16 August to December 2017 I. Additional expense deductions/other deductions Double tax treaty between Thailand and Cambodia New payment system law Interesting Supreme Court case 1.1 Acquisition of computer software Royal Decree No. 647 was issued to grant qualified corporate entities an additional 100% deduction for expenses incurred for purchasing or hiring the production of computer programs or for computer program service fees up to a maximum of Baht 100,000. Payments must be made to the sellers, contractors or service providers of computer software which have registered with the Digital Economy Promotion Agency. This benefit will be available for the accounting periods commencing on or after 1 January 2017, but not later than 31 December The criteria and conditions prescribed by the Revenue Department must be followed. However, at this stage, none have been issued. The qualified corporate entities must meet the following conditions: (1) The paid-up capital on the last day of any accounting period must not exceed Baht 5 million, and (2) The income from the sale of goods and provision of services must not exceed Baht 30 million in any accounting period. Furthermore, the above corporate entities cannot use the tax benefits available for computer software under other tax regulations issued under the Revenue Code, either partly or wholly 1.2 Donations to assist flood victims Royal Decrees Nos. 645 and 650 grant a deduction for donations made between 5 July and 31 December 2017 to assist flood victims in Thailand as follows: For individuals, a deduction of 150% is granted for donations in cash. However, these donations together with other donations for charity, public benefit and for educational institutions and clinics must not exceed 10% of net income (assessable income after allowances and other deductions). For companies, a deduction of 150% is allowed for donations in cash or assets. However, these donations together with other donations for charity and public Page 1 of 9

2 benefit must not exceed 2% of net profit. The above donations can be made in one of the following ways: 1. To government authorities or qualified charity organisations 2. As qualified donations for charity or public benefit, or 3. To other companies or juristic partnerships authorised as agents for obtaining donations since the 2011 floods. 1.3 Repairs resulting from floods Ministerial Regulation No. 331 together with the Notifications Nos. 307 and 308 allow a special deduction for individuals who have been victims of the floods in Thailand, as follows: 1. Expenses paid for repairing condominium units, buildings or properties permanently attached to the condominium units, buildings or land on which the buildings are located, that are damaged by floods during the period from 5 July to 31 December 2017, including the cost of materials and equipment required to undertake the repairs. The expenses allowed as special deduction must be paid during the same period and are subject to a maximum of Baht 100,000. The deduction is granted to taxpayers who are owners, lessees or users of the properties for residence, business or other benefit. Where there is more than one property to be repaired, all expenses incurred for all properties must be combined for determining the maximum allowance of Baht 100, Expenses paid for repairing vehicles or accessories in vehicles that are damaged by floods during the period from 5 July to 31 December 2017, including the cost of materials and equipment required to undertake the repairs. The expenses allowed as a special deduction must be paid during the same period and are subject to a maximum of Baht 30,000. The deduction is granted to taxpayers who are the owners of the vehicles or lessees under a hire purchase contract. Where there is more than one vehicle or accessory to be repaired, all expenses incurred for all vehicles must be combined for determining the maximum allowance of Baht 30, Deduction granted to individuals for expenses paid for goods or services to a VAT registrant Ministerial Regulation No. 333 was issued to grant a deduction to individuals for expenses actually paid to a VAT registrant from 11 November to 3 December 2017 for the purchase of goods or services in Thailand in an amount not exceeding a total of Baht 15,000. The expenses for goods or services exclude: Liquor, beer and wine Tobacco Fuel and gas for vehicles Motor vehicles, motorcycles and ships Travelling expenses paid to tourism operators under the law governing the travel agency business and guides Hotel expenses paid to authorised operators under the law governing hotels. Page 2 of 9

3 2. Value added tax 2.1 Extension of 7% VAT rate for one more year Royal Decree No. 646 was issued to extend the 7% VAT rate for one more year from 1 October 2017 to 30 September Unless a further extension of the reduced rate is granted, the VAT rate will be 10% commencing on 1 October Other liberal profession exempt from VAT The Notification of Director-General of the Revenue Department No. 217 was issued to prescribe the profession of tax auditor as another liberal profession that is exempt from VAT with effect from 24 October Health insurance premiums granted as allowance Ministerial Regulation No. 334 and the Notification of the Director General of the Revenue Department No. 315 were issued to grant a deduction for personal income tax purposes of a premium paid for the health insurance of the taxpayer from 1 January 2017 onwards to a life or non-life insurance company carrying on business in Thailand, up to a maximum of Baht 15,000. However, the deduction for this premium together with the deduction for life insurance premiums paid cannot exceed Baht 100,000 in total. Page 3 of 9

4 Double tax treaty between Thailand and Cambodia Thailand and Cambodia signed the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income on 7 September The treaty entered into force on 26 December 2017 and therefore will be effective from the tax year commencing on 1 January A brief summary of the main articles of the treaty is as follows:- Taxes covered Income tax and petroleum income tax Permanent establishment includes: A building site, a construction, installation or assembly project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months. The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days within any twelve-month period. The carrying on of activities (including the operation of substantial equipment) in the other Contracting State for the exploration or for exploitation of natural resources for a period or periods aggregating more than 90 days within any twelve-month period. Dividends The tax rate on dividends is 10%. Interest The tax rate on interest is 15% except that if it is received by any financial institution (including an insurance company) the rate is 10%. Royalties The tax rate on royalties is 10%. The definition of royalties includes payments for the use of industrial, commercial or scientific equipment. Fees for technical services The tax rate on fees for technical services is 10%. The fees for technical services mean payments for managerial, technical or consultancy services. Capital gains Capital gains from the sale or transfer of shares or other securities are taxable in either contracting state. This means that both Thailand and Cambodia can tax such gains. Elimination of double taxation An ordinary credit will be granted to eliminate double taxation whereby the credit for the tax paid in one country against the tax payable in the other country cannot exceed the amount of tax as computed in the other country. Tax sparing is allowed in the treaty. The purpose of this provision is to allow residents to obtain a foreign tax credit for the taxes that have been spared under the incentive programme of the source country. However, tax sparing is given for a Page 4 of 9

5 period of 10 years beginning on the first day of January of the tax year following that in which the treaty entered into force. This period may be extended by mutual agreement. New payment system law Introduction The Payment System Act B.E (2017) (PSA) will come into force and effect on 17 April The PSA was enacted to consolidate the existing laws regarding electronic payment systems and to prepare for rapid changes in technology (especially for e-payment systems and services) while developing the payment systems so that they align with international standards. Key aspects of the PSA 1. Important payment systems Payment systems established and regulated by the Bank of Thailand (BOT) are classified as important payment systems (IPS). The BOT is responsible for overseeing the IPS, e.g. the BOT automated high-value transfer network (BAHTNET) and the electronic cheque clearing system (ECS). One of the new characteristics of the IPS worth noting is the finality of payment. The PSA sets a clear cut-off point when a transaction is literally final in a particular situation. Under the current law, IPS transactions, whether pending or completed while a participant is under receivership or a business reorganisation can be cancelled or reversed. Under the PSA, money transfers, clearing and settlements through the IPS before a court order has been issued will proceed in accordance with the payment system rules until the end of the day on which the court issues the order. This means that transactions processed through the IPS prior to the day following that on which a court order has been issued will be deemed complete and so cannot be cancelled. This new aspect of the PSA, the finality of payment, helps minimise the effect on a participant who is under receivership or a business reorganisation. 2. Supervised payment systems Under the PSA, a payment system having the following characteristics is a supervised payment system which requires a licence. a) A payment system that operates as a centre for or a network of system users to process fund transfers, clearing or settlements, e.g. interinstitution fund transfer systems, payment card networks and settlement systems, or b) Other payment systems that may affect the public interest, public confidence or the stability and security of payment systems. 3. Supervised payment services Under the PSA, the following payment services are supervised payment services which require a licence. a) Payments via credit cards, debit cards or ATM cards b) Payments via e-money services c) Electronic payment services to receive payments on behalf of sellers, service providers or creditors d) Electronic money transfers Page 5 of 9

6 e) Any other payment services that may affect the financial system or the public interest. Also, any payment service provider who receives prepaid funds from customers must keep them separate from its own assets and cannot use the funds for any other purposes. The prepaid funds will be protected and will not be subject to seizure or payment to creditors in bankruptcy proceedings. Penalties under the PSA A. Administrative penalties 1. Important payment systems Failure to comply with the IPS rules and regulations will incur a fine of up to Baht 3 million. 2. Supervised payment systems and services Failure to comply with the BOT s rules and regulations will incur a fine of up to Baht 2 million. B. Criminal penalties 1. Certification to operate supervised payment systems and services Any person who fails to obtain a certification before operating supervised payment systems or supervised payment services will be subject to imprisonment for a term of up to five years or a fine of up to Baht 500,000, or both. 2. Licence to operate supervised payment systems and services Any person who fails to obtain a licence before operating supervised payment systems or supervised payment services will be subject to imprisonment for a term from 2-10 years or a fine of from Baht 200,000 to Baht 1,000,000, or both. Interesting Supreme Court case Subject: Loss on sale of an investment disallowed pursuant to a share capital increase (Supreme Court case No. 8745/2559) Facts In 2005, Revenue officers conducted a business operation visit on the plaintiff for the 2003 accounting period and found what they considered to be excessive losses on investments, which they viewed as being artificial or fictitious expenses and not for the purpose of the plaintiff s business according to Section 65 ter (9) and (13) of the Revenue Code. The plaintiff did not agree to resubmit its tax return to adjust the amount of the losses so the Revenue officers issued a summons for investigation of the plaintiff. In 1993, the plaintiff acquired 39,993 shares of Co A, representing 99.98%, at the par value of Baht 1,000 per share, totalling Baht 39,993,000. At the same time, the plaintiff also bought 299,993 shares of Co B, representing 99.99%, at the par value of Baht 100 per share, totalling Baht 29,999,300. In October 2002, the plaintiff sold a part of its own business to Co A. A feasibility study and analysis of Co A s business was carried out and indicated a favourable outlook. However, Co A did not have sufficient funds available at the time to pay the Page 6 of 9

7 plaintiff so it arranged for an increase in its share capital. On 10 March 2003, the plaintiff subscribed to an additional 80,000 shares of Co A at Baht 1,000 per share, totalling Baht 80,000,000, thereby increasing the total number of shares it held to be 119,993. Co A used the proceeds of the capital increase to pay the plaintiff for the purchase price of the business acquired in At the same time, Co B increased its share capital for the purpose of constructing an animal feed plant since a feasibility study and analysis of Co B s business was also favourable. The plaintiff subscribed to an additional 900,000 shares of Co B at Baht 100 per share, totalling Baht 90,000,000 thereby increasing the total number of shares it held to be 1,119,993. However, the factory could not be built because of the outbreak of the avian influenza (bird flu) problem. Later, on 1 November 2003, the plaintiff sold all the shares it held in both Co A and Co B to Co C, another subsidiary, at the net book value, which was according to the criteria for the market value of non-listed companies set by the Revenue Department. This resulted in a loss of Baht 88,277,186 on its investment in Co A and Baht 87,476,398 on its investment in Co B. In its accounts for the year ended 31 December 2003, the plaintiff recorded a total loss on investment of Baht 175,753,584. To enable Co C to pay for the shares acquired, the plaintiff repaid a loan from Co C by bank transfer in an amount equal to the selling price of the shares. On the same day, Co C remitted the same amount back to the plaintiff via the same bank account. The plaintiff claimed that the bird flu in 2003 affected its business as well as that of Co A and Co B so it had to sell all of its shares in these companies to Co C and turn Co C into the holding company of the group instead of the plaintiff. Co C would then be the centre of management in the region. Furthermore, the plaintiff planned to list its shares on the SET. The sale of the shares resulted in the plaintiff not having to recognise the losses of Co A and Co B anymore so its financial position improved. The Supreme Court s decision 1. Tax deductibility of loss on the sale of shares in an affiliated company seven months after share subscription The Supreme Court ruled in favour of the Revenue Department because it did not believe that the plaintiff invested in Co A and Co B for the purposes as it claimed. On the contrary, the conduct of the plaintiff showed its intention to subscribe to a share capital increase merely for a tax benefit and not as a genuine investment. Therefore, the Revenue Department was legally empowered, according to Section 65 ter (9)(13) of the Revenue Code, to disallow for tax deduction the loss on investment in the amount of the increase in share capital of Co A and Co B since it was not incurred for the purpose of seeking profit or for the business. In this regard, the Court viewed that the plaintiff should have been aware that it would take a reasonable period of time for the two subsidiaries to turn into a profit position. The plaintiff s claim that it would reduce the negative impact on its plan to list on the SET was not reasonable since the Court viewed that listing on the SET would require the plaintiff to plan for the long term. In addition, the plaintiff should have known that it would have to invest in Co A and Co B for a longer period so as to earn a profit because these companies had continually made losses and would not be able to earn profits in the short term. The plaintiff claimed that Co C would be the centre of management in the region but, in fact, Co C operated only the business of leasing a chicken farm. In addition, the plaintiff repaid a loan to Co C so that Co C could pay the Page 7 of 9

8 plaintiff for the purchase of the shares, which was accomplished by a fund transfer in and out on the same day. 2. Method of determining the tax deductible loss on investment in the affiliated companies Since the Supreme Court ruled that the plaintiff did not intend to seek a profit on its investment in the lossmaking affiliated companies but merely wanted the tax benefit from subscribing to the additional shares of both companies, it should be deemed that no shares were issued from the capital increase in Consequently, the shares sold by the plaintiff were only the existing shares that the plaintiff had acquired before the capital increase in As a result, the loss on investment from the capital increase was disallowed in the corporate income tax computation and only the cost of the shares acquired in 1993 was allowed to be deducted against the proceeds of sale at the net asset value as of 1 November Key take away The Revenue Department and the Supreme Court shared the same viewpoint that an investment in shares should have the objective of seeking a profit in the form of either dividend or capital gain. Therefore, both considered the overall circumstances underlying the increase of the share capital and the sale of the shares undertaken by the plaintiff. Importantly, the transactions that took place were between related parties which made it difficult to convince the Revenue Department and the Court that the newly-issued shares were acquired for the purpose of seeking a profit. Page 8 of 9

9 Contact us Tax Mergers and Acquisitions/ Tax Structuring Paul B.A. Stitt, Partner ext Prema Ramachandra Rao, Associate Partner ext Vanida Vasuwanichchanchai, Associate Partner ext Orawan Phanitpojjamarn, Associate Partner ext Tax Reporting & Strategy Somsak Anakkasela, Partner ext Ornjira Tangwongyodying, Partner ext Prapasiri Kositthanakorn, Partner ext Thirapa Glinsukon, Associate Partner ext Indirect Tax Services Somsak Anakkasela, Partner ext Ornjira Tangwongyodying, Partner ext Thirapa Glinsukon, Associate Partner ext Business Process Outsourcing Services Prapasiri Kositthanakorn, Partner ext Somsak Anakkasela, Partner ext Transfer Pricing Peerapat Poshyanonda, Partner ext Janaiporn Khantasomboon, Partner ext Niphan Srisukhumbowornchai, Partner ext Tax Dispute Resolution Niphan Srisukhumbowornchai, Partner ext Ornjira Tangwongyodying, Partner ext Sudarat Isarakul, Associate Partner ext Financial Services Orawan Fongasira, Partner ext Ornjira Tangwongyodying, Partner ext Legal Services/BOI Services Somboon Weerawutiwong, Lead Partner ext Vunnipa ruamrangsri, Partner ext Japanese Business Desk (JBD) Atsushi Uozumi, Partner ext U.S. Tax Desk Thirapa Glinsukon, Associate Partner ext Global Mobility Services Jiraporn Chongkamanont, Partner ext Customs & Trade Paul Sumner, Partner ext Nu To Van, Partner ext th Floor Bangkok City Tower, 179/74-80 South Sathorn Road, Bangkok Tel: +66 (0) Fax: +66 (0) Website: Editor: Somboon Weerawutiwong, Lead Partner ext Vanida Vasuwanichchanchai, Associate Partner ext At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PwC. All rights reserved. PwC refers to the Thailand member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.

Tax Newsletter, Issue no. 2/2017

Tax Newsletter, Issue no. 2/2017 Tax developments from 1 April to 15 August 2017 In this issue: Tax developments from 1 April to 15 August 2017 Interesting Supreme Court case I. Additional tax deductions