Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the July 25, 2006 issue of the Bangkok Post.
By Sira Intarakumthornchai
While every company wants to reduce its tax payments, some may believe they have already achieved the lowest possible level of payments. Others may suspect that things are not as they could be.
Most companies tend to pursue short-term solutions to tax issues instead of applying a strategic approach. They are therefore unable to determine whether they have achieved the lowest possible tax payment level. This may happen because tax planning is delegated to the accounting department, which often does not have a mandate from management to look beyond tax and address the underlying issues causing high tax costs.
This lack of a strategic approach overlooks the fact that taking steps to lower your company's effective tax rate (ETR) can significantly enhance shareholder value. A slight reduction in the ETR can produce the same bottom-line impact as a significant increase in revenues. If a company can increase revenues and trim taxes, the net income impact is further magnified.
Let's first understand why the ETR points a company toward a need for a tax plan. Given the statutory (corporate) tax rate in Thailand, the overall ETR should be (or near) 30%. However, most Thai companies have an ETR above 30%. A divergence of the ETR from the statutory rate is generally driven by differences in the recognition of certain transactions for tax and accounting purposes.
Such differences may be permanent or only temporary. "Permanent differences" are those arising as a result of the treatment accorded certain transactions by the tax law. These permanent differences will not reverse in subsequent periods. "Temporary differences" arise because of differences between tax and accounting bases of assets and liabilities that will result in deductible or taxable amounts in future periods.
There are a number of permanent difference items and in practice they are difficult to avoid and do not warrant a tax plan. Tax-planning strategies therefore generally focus on temporary differences.
It is apparent that the tax saving value of expenditure is greater, in net present value terms, where the deduction may be claimed in earlier rather than later years. Temporary differences generally give rise to a delay in the recognition of tax deductions. If differences are material, appropriate strategies should be devised to permit earlier recognition of the deductions. Typical temporary differences are provisions for doubtful accounts, provisions for inventory obsolescence and other similar provisions or reserves.
One key area of strategic tax planning is the efficient use of tax losses. Thai companies are taxed on an entity-by-entity basis and there is no form of group tax relief. Therefore, although tax losses can be carried forward for five years, the tax losses available within one company cannot be used to offset taxable income of another company, even where there is a direct parent-subsidiary relationship.
This factor can significantly affect the ETR of a group. In the example shown in the table, although the ETR for the parent company (on a stand-alone basis) is 30%, the group ETR is 50%.
Given the time limit on the carry-forward of these tax losses, future operating profits may not be sufficient to fully utilise the available tax losses before they expire. It would be necessary to employ strategic tax techniques to utilise or refresh the expiring tax losses.
Before it is too late, management should therefore address the following questions:
- What is the overall ETR? Has the company or the group achieved the possible lowest ETR when compared to the industry?
- If the company or one of the entities within the group is in a tax-loss position and management foresee that tax losses could possibly be left unutilised, has consideration been given as to how the tax losses could be refreshed?
- If no tax losses are available, have strategies been identified that will permit timing difference items to be crystallised in a more tax-efficient manner?
By thinking through the above questions, management may be better suited to form a strategic tax plan.
