A cautionary tax-evasion tale

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 October 28, 2008 issue of the Bangkok Post.

By Paul Stitt

Franklin D. Roosevelt once remarked that “taxes are, after all, the dues we pay for the privileges of membership of an organized society”. It is, however, a universal truth that no-one likes paying tax and most tax payers will do what they can to reduce their tax burden. The right of tax payers to choose to arrange their affairs in such a way as to reduce their liability to tax has been recognized by the Courts in many jurisdictions, including Thailand. In most cases reducing a tax burden will be done through entirely legitimate means which are supported by government policy. However, the report that 251 of the 458 cases being investigated by the Department of Special Investigations related to tax fraud suggests that not all tax payers are resorting to legitimate means.

A recent Court case on tax evasion has highlighted certain issues which should be of interest to tax payers generally and especially to those who advise on or assist with tax planning.
In the case, the Court found the three defendants guilty of fraudulent tax evasion, an offence under Section 37(2) of the Revenue Code. Two of the defendants were also found guilty of providing false information, an offence under Section 37(1).

The case concerned the transfer of shares in a listed company from one defendant to another. This transfer was ostensibly made through the Stock Exchange of Thailand. However, central to the conclusion that the parties had attempted to evade tax was the Court’s view that a purported sale of the shares between two defendants was a ‘concealed’ transaction and that the shares were in fact transferred from one party to another without any payment, that is, effectively as a gift.

Whilst the defendants maintained that the transfer was a tax exempt gift, it was the judgment of the Court that the defendants had entered into the concealed transaction for the purposes of disguising the transfer of the shares for no consideration. As the recipient of the shares failed to record the value of the shares as income – and thus failed to pay tax – the Court concluded that all the defendants had acted together to evade tax contrary to Section 37(2) of the Revenue Code..

One of the interesting features of the case is that the all three defendants were found guilty of the same offence even though only one of them actually had a tax liability. In particular, the third defendant, who was only involved in implementing the scheme, received the same sentence for the offence as the first two defendants. Tax payers, as well as the lawyers, accountants and others who advise and assist tax payers in managing their tax liabilities should therefore beware of becoming involved in practices that may result in a jail sentence!

The lessons from the resent case indicate that avoiding such an unpleasant outcome means asking a few questions of any tax planning scheme.

Is the position taken by the taxpayer supported by a credible basis in tax law?
Can the scheme be fully and truthfully disclosed to the Tax Authorities?
Is the tax position reported consistent with the facts and circumstances?
Is there a legitimate document trail which supports the facts and circumstances?
Are all transactions entered into to implement the scheme legitimate and genuine?

A tax planning scheme for which a positive answer cannot be given to all these questions should be approached with extreme caution. Not only may the Tax Authorities have grounds for attacking the transaction, but the tax payer, and the advisors, may have strayed from the path of legitimate tax planning and risk accusations of fraudulent tax evasion.