CHOOSING BETWEEN A TAX APPEAL AND A TAX REFUND

You may be surprised to learn that some people do not always claim the preferable tax treatment offered by the government. This is not a surprise to those of us who deal with taxation professionally, as some tax officials interpret the law narrowly and impose extra conditions to prevent abusive transactions based on their understanding or attitudes.

Consequently, some taxpayers would rather play it safe by paying tax first and claiming a refund later. This way, they would avoid the prospect of costly penalties and surcharges should a dispute arise. But a recent court case, in which an individual tried to claim withholding tax on dividends as a final tax, shows that this strategy can backfire.

The Revenue Code explicitly provides that a resident shareholder can opt to leave the 10% withholding tax as a final tax, instead of including dividends as income in tax calculation, on which the progressive tax rates ranging between 5% and 35% would apply. In that case, the taxpayer would not be able to credit the 10% withholding tax against his year-end tax liability.

An individual who includes dividends in gross income is entitled to a dividend tax credit and withholding tax credit. While the withholding tax credit is fixed at 10%, the dividend tax credit is calculated as shown in Part A of the table.

Let’s look at the example shown in Part B: A company has a net profit of 100 that is subject to 20% corporate income tax, and distributes all net profits after tax, totalling 80 (100-20) as dividends to its shareholders, from which 10% withholding tax (80x10% = 8) will be deducted and paid to the Revenue Department. The individual shareholder receives a net dividend of 72. If he opts for the dividend tax credit, the shareholder must include as taxable income both the dividend of 80 and the tax credit amount.

As the calculation formula for the dividend tax credit requires the shareholder to know the underlying tax rate, no dividend tax credit will be granted where dividends are distributed out of net profits that are exempted from corporate income tax.

That brings us to the court case illustrated in Part C. Mr A held shares in a holding company (HoldCo), which in turn held shares in a company that had Board of Investment (BoI) privileges (BOICo). BOICo distributed dividends from net profits of 6 million baht, which were tax-exempt during the tax holiday period, both in the hands of BOICo and HoldCo. Thus, when the dividends were distributed to Mr A in 2007, the underlying tax on the dividends was zero.

Due to a misunderstanding, instead of treating the 10% withholding tax as a “final tax”, Mr A sought a tax refund by claiming the dividend tax credit and including dividends as income in his year-end tax return.

The Revenue Department detected an irregularity, as no corporate income tax was paid by HoldCo and BOICo. It ordered Mr A to pay additional tax on dividends without any tax credit of approximately 1.3 million baht, together with surcharges, based on the dividend amount appearing in the tax return (for which the effective tax rate was higher than the withholding tax of 10%).

At first Mr A disagreed and appealed. But then, realising his error in interpretation, he cancelled his appeal, a decision supported by the Tax Appeal Committee. Mr A then filed an amended tax return and paid the assessed tax and surcharges. He followed up by filing a second amended return — on the advice of a tax official — in which he opted not to include dividends as taxable income, and to leave the 10% withholding tax as final, in order to claim a refund of the assessed tax and surcharges. The Revenue Department rejected his request and the case went to court.

The Supreme Court stated that “due to the cancellation of the tax appeal, the assessment by the Revenue Department had become definitive, thus the tax so assessed must be paid. The later filing of an amended tax return that excluded dividends as income at the year-end could not override the earlier tax assessment”.

The court also explained that “where there was an error in tax return filing, the amendment, irrespective of whether it was for additional payment of taxes or for claiming a tax refund, must be made before the tax was assessed. Otherwise, the taxpayer must seek a correction via the tax appeal process to change such assessment.”

Significantly, the court pointed out that even though a revenue official had advised Mr A to cancel his appeal and file two amended returns to resolve the problem, “such advice had no legal binding effect”. Thus, raising this fact during the trial was not helpful, as the court needed to follow the correct interpretation of the relevant legislation.

Mr A might have won the case if he had amended his tax return immediately and opted to exclude such dividends before the tax assessment was issued. At any rate, the case is another bitter lesson that a taxpayer should thoroughly review his position before making any move in a tax dispute — and should not easily trust tax officials’ advice.