Leading the Way: When the revenue department changes its mind, the taxpayer gets the headache

Leading the Way is a column written by PwC's professional staff. It appears in the Business section of the Bangkok Post twice monthly. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.

This article appeared in the June 26, 2012 issue of the Bangkok Post.

By  Vanida Vasuwanichchanchai


Two things that taxpayers like are simple compliance procedures and certainty of law.regulations, or in their interpretation,Frequent changes in rules and create uncertainty and risk for taxpayers.Under our self-assessment system, the burden is on the taxpayer to pay the right amount of tax and there are severe penalties for failing to do so. It does not,therefore, help the taxpayer that the Revenue Department has a wide discretion to interpret the law and may change its interpretation at will!

An example of this can be found in the answer to the relatively simple question,"What is the cost of a share?".

The cost basis of any asset is usually the amount you paid for it. This is important because it determines how much of a taxable gain or a loss is reported in a tax return. However, in the case of shares, calculating the gain or a loss can be complicated where shares are bought and sold in a series of transactions.

What do Thai tax laws have to say with regards to determination of cost of shares? Section 65 bis (3) of the Revenue Code states that "the value of all assets other than that specified in (6)(i.e.inventory) shall be taken at the price at which they may normally be purchased".

The simplest interpretation of this provision is that, when a share is sold,the actual cost of that specific share should be used to calculate the resultant gain or loss. There is a simple logic in this. In most essentials, a financial asset,such as a share, has the same characteristics as a physical asset, such as a car. If a taxpayer has two cars and sells one of them, it is reasonable that the gain on sale is calculated based on the cost of the car sold and not on some other basis. The same logic should apply to shares.

The Revenue Department confirmed this logic in tax ruling No.0804/19253 dated Oct 18,1977. The ruling concerned the imposition of withholding tax on sales of shares in a Thai bank by a foreign shareholder. The shares had been purchased on a number of occasions and had various acquisition costs. The sale of some shares resulted in a loss while some were sold at a gain. Overall there was a loss.

The department ruled that gain and loss must be calculated on a share-byshare basis and that any gains were subject to withholding tax. Losses could not be offset.

For shares in an unlisted company,where the shares are recorded on a share certificate, there is no difficulty in identifying specific shares and therefore matching a cost to a share.

In the case of shares in a listed company, the position is more difficult as shares may be purchased and held in scripless form (without a certificate). As a result, it is not possible to specify which shares are being sold or how much they cost.

However, when asked by the Stock Exchange of Thailand to address this issue, the Revenue Department merely reiterated its earlier decision. In ruling  No.0804/14018 dated July 20,1981, the SET asked the department to consider how gains and losses could be determined when sellers held multiple lots of shares and the shares sold could not be identified by share number. The department confirmed the share-byshare approach and stated that average costing could not be used.

This decision stood for 16 years, until 1997, when the Revenue Department reconsidered its position.

Ruling No.0811/01147 dated Jan 29,1997, stated the following:

  • Where securities are certified and the serial numbers of the shares are identified, the specific cost of the share has to be used. The taxpayer is not allowed to use any other accounting method such as first-in first-out (FIFO),last-in first-out (LIFO) or weighted average method as the specific securities can be identified.
  • For scripless securities, the taxpayer is allowed to use any acceptable accounting method such as FIFO, LIFO or weighted average method in calculating cost of securities.
  • Once any of the accounting methods is used for calculation of cost basis, such method has to be used consistently.

This ruling introduced the concept of cost averaging for purchases and sales of scripless shares. This is entirely sensible as the scripless trading system has made it difficult, if not impossible, to identify when individual shares were bought or sold. This approach simplifies matters for the taxpayer.

Where the shareholder has a certificate, however, the "share-by-share" basis is retained.

So far, so good. But what happens if the taxpayer holds a mixture of scripless shares and shares held in certified form?Applying the principles of the 1997 ruling,if the certified shares are sold, the outcome should be calculated by using the cost of those specific shares.

However, recent experience suggests that the Revenue Department has had another rethink. In similar circumstances,the Revenue Department has indicated that an averaging method should be applied to all shares held  whether certified or in scripless form.

The taxpayer may, therefore, in good faith follow the guidance provided by the Revenue Department only to discover that the guidance has changed. It is only to be hoped that the Revenue Department takes a lenient approach to the imposition of penalties in such circumstances.

Vanida Vasuwanichchanchai is a director of tax services at PwC Thailand. For questions and comments, please contact leadingtheway@th.pwc.com