Net Profit Com­pu­ta­tion - Rem­edy for BOI Com­pa­nies?

Thai-American Business (T-AB) Magazine - - Front Page - Writ­ten by: Panya Sit­ti­sakon­sin and Nop­porn Charoenki­traj


On May 16, the Supreme Court of Thailand in­ter­preted the In­vest­ment Pro­mo­tion Act B. E. 2520 ( IPA) in a man­ner which was seen by many as breach­ing the rea­son­able ex­pec­ta­tions and re­liance in­ter­est of many for­eign as well as do­mes­tic in­vestors. Rea­son­ing that the IPA does not stip­u­late any spe­cific method in the com­pu­ta­tion of net profit, the Supreme Court ruled that the Rev­enue Code’s pro­vi­sions must pre­vail with re­gard the com­pu­ta­tion method of net profit and loss de­riv­ing from Board of In­vest­ment ( BOI) - pro­moted ac­tiv­i­ties. The Rev­enue Depart­ment’s po­si­tion, in ef­fect, pre­vails. How­ever, cer­tain le­gal prac­ti­tion­ers and schol­ars were and have re­mained doubt­ful whether this in­ter­pre­ta­tion of the IPA would pre­vail in fu­ture de­ci­sions.

Sub­se­quent to the de­ci­sion, BOI- pro­moted com­pa­nies must now in­clude its profit and loss from each and ev­ery one of its BOIpro­moted projects to off­set one an­other in or­der to be el­i­gi­ble to ben­e­fit from Sec­tions 31 Para­graph 4 of the IPA ( the Tax Loss Ben­e­fit) and the 5% de­duc­tion from in­creased ex­port in­come ben­e­fit un­der Sec­tion 36( 4) of the IPA must be taken into con­sid­er­a­tion based on the to­tal in­come of all pro­moted projects.

How­ever, to nor­mal­ize the in­vest­ment land­scape, on June 16, the Min­is­ter of Fi­nance ex­er­cised his author­ity un­der Sec­tion 3 Octo Para­graph 2 of the Rev­enue Code and is­sued the Min­is­te­rial No­ti­fi­ca­tion On the Time Ex­ten­sion for Cor­po­rate In­come Tax Re­turn Pur­suant to the Rev­enue Code ( the No­ti­fi­ca­tion) to help BOI- pro­moted in­vestors who un­wit­tingly found them­selves to be in de­fault of their tax li­a­bil­i­ties as a re­sult of the de­ci­sion in May.

Af­ter the is­suance of the No­ti­fi­ca­tion, it has been con­tro­ver­sial among BOI- pro­moted com­pa­nies that the No­ti­fi­ca­tion’s lim­ited scope was prob­lem­atic. Some con­tin­u­ally sought the jus­tice, equal­iza­tion and fair­ness from the Gov­ern­ment. As such, on July 29, in his ca­pac­ity as the Leader of the Na­tional Coun­cil for Peace and Or­der ( the NCPO), Prime Min­is­ter and Com­man­derin- Chief Prayut Chan- o- cha has is­sued an or­der ti­tled the Or­der from the Na­tional Coun­cil for Peace and Or­der No. 45/ 2559 ( the Or­der). This Or­der was is­sued un­der the ex­ecu­tory author­ity un­der Sec­tion 44 of the 2014 Con­sti­tu­tion of the King­dom of Thailand ( In­terim).


The Prime Min­is­ter ac­knowl­edges the dam­ages in­curred by BOI- pro­moted com­pa­nies as a re­sult of the Supreme Court’s judge­ment ren­dered on May 16. Sec­tion 44 of the 2014 Con­sti­tu­tion of the King­dom of Thailand ( In­terim) states, “[ f] or the sake of the re­forms in any field... or the pre­ven­tion, abate­ment or sup­pres­sion of any act detri­men­tal to... na­tional econ­omy or pub­lic ad­min­is­tra­tion... the Leader of the Na­tional Coun­cil for Peace and Or­der, with the ap­proval of the Na­tional Coun­cil for Peace and Or­der, may issue any or­der or di­rect any ac­tion to be done or not to be done, ir­re­spec­tive of whether the or­der or ac­tion would pro­duce leg­isla­tive, ex­ec­u­tive or ju­di­cial ef­fect.

“Those or­ders or ac­tions, as well as their ob­ser­vance, shall be deemed law­ful, con­sti­tu­tional and fi­nal. Af­ter the exercise of such power, the Pres­i­dent of the Na­tional Leg­isla­tive As­sem­bly and the Prime Min­is­ter shall be in­formed thereof with­out de­lay.” ( trans­lated and para­phrased)

Through the exercise of this broad and pow­er­ful ex­ecu­tory author­ity, the Prime Min­is­ter wishes to ex­press his com­pre­hen­sion of the sit­u­a­tion with re­gards to the di­verg­ing statu­tory in­ter­pre­ta­tion be­tween the two gov­ern­men­tal in­sti­tu­tions, which caused many BOI- in­vestors to in­cur mone­tary dam­ages in the forms of in­creased tax li­a­bil­i­ties as well as penalty fees and sur­charges.

As such, the dom­i­nant pur­pose of the Or­der is to pro­vide in­vestors, do­mes­tic and for­eign alike, with con­fi­dence and re­as­sur- ance in their good faith re­liance of Thailand’s in­vest­ment in­cen­tive law. The Prime Min­is­ter un­der­stands and ap­pre­ci­ates the grav­ity of the con­flict­ing in­ter­pre­ta­tions be­tween the Rev­enue Depart­ment and the BOI, and ram­i­fi­ca­tion that this may have on in­ter­na­tional in­vestors’ per­cep­tion of the Thai eco­nomic cli­mate. Fur­ther­more, the Prime Min­is­ter is also cog­nizant of the short­com­ings of the No­ti­fi­ca­tion by the Min­is­ter of Fi­nance.

For the preser­va­tion of in­vestors’ good faith re­liance on the now in­op­er­a­ble ac­count­ing method that had un­til re­cently been al­lowed by the BOI but was later nul­li­fied by the Supreme Court’s de­ci­sion, there­fore, the Prime Min­is­ter has is­sued the Or­der with the ob­jec­tive to ad­dress the short­com­ings and the patently nar­row scope of re­dress pro­vided un­der the No­ti­fi­ca­tion. Thus, the Or­der ex­tended the dead­line for fil­ing both cor­po­rate in­come tax re­turns for af­fected com­pa­nies as well as part­ner­ships to Au­gust 15, 2016.

Fur­ther­more, af­fected busi­nesses could also ap­ply for the re­fund of any sur­charges or penal­ties that they may have al­ready paid for as a re­sult of hav­ing been ren­dered to be ret­ro­spec­tively in delin­quency due to the ac­count­ing method that has been up­held by the Supreme Court.

None­the­less, the Or­der is not with­out am­bi­gu­ity. Sec­tion 2 of the Or­der leaves many prac­ti­tion­ers and in­vestors ques­tion­ing whether or not all the short­com­ings that the Min­istry of Fi­nance’s No­ti­fi­ca­tion has sought to ad­dress have been reme­died, as well as what the roles and re­spon­si­bil­i­ties of the BOI should be in the resti­tu­tion process of the af­fected com­pa­nies. Among other ram­i­fi­ca­tions on the rights and ben­e­fits un­der the IPA in light of the Supreme Court’s de­ci­sion are Sec­tion 36 ( 4)’ s right to de­duc­tion of 5% from in­creased an­nual ex­port in­come, Sec­tion 34’ s div­i­dend with­hold­ing tax ex­emp­tion, as well as Sec­tion 35 ( 1)’ s cor­po­rate in­come tax re­duc­tion have not been re­stored to their for­mer in­tegri­ties. Sec­tion 2 of the Or­der states:

“The ex­ten­sion un­der para­graph one of Sec­tion 2 of the No­ti­fi­ca­tion, which is au­tho­rized un­der Sec­tion 3 Octo Para­graph 2 of the Rev­enue Code, shall ap­ply mu­tatis mu­tan­dis with re­gards to the af­fected com­pa­nies with re­gards to the pre­vi­ously non- com­pli­ant com­pu­ta­tion method( s) em­ployed in the fil­ing of their cor­po­rate in­come tax re­turns, which, but for the di­ver­gent statu­tory in­ter­pre­ta­tion be­tween the gov­ern­ment agen­cies of Thailand, have not been com­mit­ted with the in­ten­tion of avoid­ing their tax li­a­bil­i­ties, as stip­u­lated by Sec­tion 3 of the No­ti­fi­ca­tion.” ( trans­lated and para­phrased)

From the ex­cerpt of Sec­tion 2 of the Or­der, prac­ti­tion­ers as well as in­vestors re­main uncer­tain with re­gards to what other resti­tu­tion reme­dies may be at­tained by this Or­der in ad­di­tion to the re­fund of the penalty fees and sur­charges. The ques­tion that re­mains, thus, is whether or not this Or­der has done enough to fully re­store the rights and ben­e­fits un­der the IPA to their for­mal in­tegrity.

None­the­less, many prac­ti­tion­ers be­lieve that the word­ing of Sec­tion 2 of the Or­der, read in com­bi­na­tion with the spirit and in­ten­tion ex­pressed therein, may be in­ter- preted to be suf­fi­ciently com­pre­hen­sive so as to ad­dress most of the short­com­ings of the No­ti­fi­ca­tion. How­ever, it has been widely sug­gested that the Rev­enue Depart­ment has in­ter­preted the am­bi­gu­ity of Sec­tion 2 of the Or­der as sim­ply a dead­line ex­ten­sion of the Min­istry of Fi­nance’s No­ti­fi­ca­tion, which the Rev­enue Depart­ment con­tends, also cov­ers the ef­fects in­flicted upon the orig­i­nal tax­payer in­volved in the Supreme Court’s de­ci­sion. This in­ter­pre­ta­tion is seen to be the Rev­enue Depart­ment’s stance on the ac­count­ing prac­tice con­tention, not­with­stand­ing the clearly worded in­ten­tion and pur­pose of the Prime Min­is­ter’s Or­der. There­fore, more in­tra- gov­ern­men­tal statu­tory in­ter­pre­ta­tion con­flict may arise and BOI- pro­moted in­vestors should take pre­cau­tions be­fore com­mit­ting them­selves to any ac­count­ing method for tax pur­poses.

As the Prime Min­is­ter has ex­pressed his view that it would be in­cum­bent on the BOI to pro­vide sup­port and to pro­mote in­vest­ments in Thailand through means of con­sul­ta­tion and clar­i­fi­ca­tion of le­gal as­sump­tions and un­der­stand­ings with re­gards to the prac­ti­cal ap­pli­ca­tion and im­pli­ca­tions of the laws re­lat­ing to the BOI, per­haps, the BOI should take the ini­tia­tive to ad­dress the dam­ages in­flicted upon many for­eign and do­mes­tic in­vestors who had re­lied on the BOI’S ac­count­ing method in good faith. Ul­ti­mately, how­ever, the im­ple­men­ta­tion of the Or­der as well as its im­pli­ca­tions on each of the ef­fected pro­vi­sions of the IPA would de­pend on the NCPO’S clar­i­fi­ca­tion. Lastly, the Or­der states that the Min­istry of Fi­nance and the BOI should also con­sult each other to clar­ify any am­bi­gu­i­ties in the IPA as soon as pos­si­ble. Nev­er­the­less, although the IPA falls within the ad­min­is­tra­tive purview of the BOI, as the Rev­enue Depart­ment and the BOI may once again en­ter into a dis­pute, in­vestors are ad­vised to con­sult with the BOI and the NCPO, re­spec­tively, for fur­ther con­fir­ma­tion prior to adopt­ing a new tax com­pu­ta­tion method. In the ab­sence of any clear agree­ment be­tween the BOI and the Rev­enue Depart­ment, af­fir­ma­tion from the NCPO may at least have some ev­i­den­tiary value in tax lit­i­ga­tions.

Panya Sit­ti­sakon­sin and Nop­porn Charoenki­traj are Part­ners at Baker & Mcken­zie. They can be con­tacted at panya. sit­ti­sakon­sin@ bak­erm­cken­zie. com and nop­porn. charoenki­traj@ bak­erm­cken­zie. com.

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