State council rules in favour of boi?

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 April 21, 2009 issue of the Bangkok Post.

By Thavorn Rujivanarom and Siripong Suppakijjanusorn

It is now more than 30 years since the Investment Promotion Act of 1977 ("IPA") came into existence. It was designed to encourage and promote both domestic and foreign investment in activities considered important and beneficial to Thailand's economic and social development.

In today's investment climate, it remains no less relevant than it did 30 years ago. The IPA provides a number of tax and non-tax incentives to investors. It grants the Board of Investment (BoI) the discretion to stipulate the conditions under which promotion will be granted, as well as the responsibility for the overall administration of the act.

Importantly, Section 3 of the IPA clearly states that all other laws, rules and regulations - in so far as they deal with matters governed by the IPA, or are contrary to, or inconsistent with, its provisions - are replaced by the IPA. This means, for instance, that the provisions of the IPA should override those of the Revenue Code where there is a need to determine how companies with BoI privileges should pay tax.

It is inevitable that granting tax privileges to investors (under Section 31) will crimp tax revenues, at least in the short term. The laws grants the BoI sole discretion in determining whether this cost is acceptable.

In practice, however, this does not prevent differences of opinion arising between the BoI and the Revenue Department.

One such difference of opinion arose in 1987 in connection with a Revenue Department instruction issued to promoted companies. The matter was referred to the State Council, which ruled in the favour of the BoI and held that the instruction could not be applied to promoted companies.

This has not stopped the Revenue Department from issuing interpretations on the correct application of tax privileges. Almost inevitably, the position taken by the Revenue Department will seek to maximise tax revenues rather than enhance the privileges for promoted companies.

It is also the case that the Revenue Department does not generally implement its position by using its statutory powers to issue a decree or regulation, but rather through the medium of a notification or ruling. An example of this practice is the recent Board of Taxation (BOT) Ruling requiring the loss of one promoted activity to be set-off against the profit of another promoted activity. This requirement sub-optimizes the benefit of the privileges granted to the investor and may therefore be contrary to or inconsistent with the provisions of the IPA and, thus, invalid by virtue of Section 3 of the IPA.

While the BoI has provided a number of rulings to promoted companies disagreeing with the Revenue Department's position, the Revenue Department did not change its position on the grounds that the practical application of tax privileges is the responsibility of the taxing authorities, rather than the investment promotion authorities. With the encouragement of promoted companies and tax professionals BoI approached the State Council for a ruling.

We understand that the State Council issued an opinion on March 18, 2009, agreeing with the BoI's position (that the losses of one promoted project need not be offset against the profits of other promoted projects). BoI has now moved this matter up to the Finance Minister and it is hoped that the appropriate instructions, which will reverse the BOT February ruling, will be issued before the corporate income tax filing deadline in May 2009.

The issue that taxpayers need to consider is that if the BOT Ruling is not cancelled by May 2009, should the taxpayer follow the BOT ruling or the State Council ruling?

If a taxpayer was not assessed by the Revenue Department but still complied with the BOT Ruling for this year's filing, resulting in additional taxes payable, the taxpayer will have to claim for a tax refund if, after May 2009, the Revenue Department complies with the State Council ruling. Hence the taxpayer should carefully weigh the consequences of complying with the BOT ruling before doing so, as this approach may not have an optimal outcome.

As we are all aware, a claim for tax refund is usually followed by an intensive investigation by the Revenue Department. In such cases, the Revenue Department would likely try to find other areas of non-compliance in order to reduce the tax refund amount as much as possible. Taxpayers willing to gamble that the Revenue Department will lose this battle may therefore prefer to keep their cash on their balance sheets

To eliminate such ambiguity and enhance Thailand's attractiveness for investors, in light of the current economic situation, one would hope that the ministries involved in establishing the policy and administration of tax incentives would work towards ensuring appropriate amendments are incorporated in the Revenue Code, to establish consistency in the administration of the tax privileges granted under the IPA.

Thavorn Rujivanarom and Siripong Suppakijjanusorn are tax and legal partners at PricewaterhouseCoopers Thailand. Any comments, please contact us at leadingtheway@th.pwc.com.