As Thailand enters recession, companies should prepare for tax audit
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Well, it's official, Thailand has entered a recession, and whether it can be considered "technical" or not, it could mean that tax collections fall over the short term as businesses and consumers start to pull back on spending.
This is supported by recent statistics issued by the Revenue Department. While January saw revenue collections come in at an unexpectedly high rate of 11.7 per cent over forecast, since then they have increasingly fallen short of annualised forecasts during five of the past six months.
The government had projected that it would collect about Bt1.7 trillion during the current fiscal year ending this month, but the economic slowdown coupled with increasing collection shortfalls have some people questioning whether this target can be met.
The recent fall-off has been attributed mainly to reductions in collection of value-added tax. Fully 60 per cent of VAT collections are derived from imports, and the rest from domestic consumption. With many of the post-flood economic-recovery programmes ending and the baht sliding in value, there is a chance that both domestic consumption and imports will decline over the near term as foreign goods become relatively more expensive, thereby exacerbating VAT declines.
This is leaving some to speculate that a VAT increase may be in the works. While such an increase would prove extremely unpopular, it may be a necessary one if the economy does not recover quickly and if capital retreat from emerging markets continues to accelerate.
Even if the VAT rate remains at the current 7 per cent, we are beginning to see signs of increasing pressure on the Revenue Department to ensure that VAT owed is properly collected. Recent calls to investigate certain industries historically prone to poor VAT compliance have been widely reported.
Additionally, in light of the confusion created by a Supreme Court VAT ruling this year regarding the taxability of export services and subsequent Revenue Department statements about its position on the issue, it would not be surprising to see the department increase VAT audits and even begin to focus on export-services claims in order to raise collection rates.
As pressure to collect revenue mounts, it’s also possible that the Revenue Department will feel more pressure to increase income-tax collections. Signs of this can be seen in recent announcements that the department is considering implementing new international tax rules around transfer pricing as well as others and in calls even to expand the domestic and international tax base. For example, the number of individual taxpayers in Thailand is estimated at a relatively low 8 per cent of the workforce, prompting some commentators to argue that the base should be expanded to a level that would be considered a little more equitable.
Our experience indicates that when recession hit and tax revenues start to decline, audit activity tends to pick up and revenue departments tend to become much more forceful with tax-collection efforts.
We have witnessed this trend time and time again.
Our experience also indicates that those companies that properly prepare for the increased scrutiny tend to be in a better position to defend themselves during VAT and corporate-income-tax audits.
Thus, it is a good time for companies to make sure they have all their documentation in order and even in some cases to take a good look at their current tax positions to ensure they are well prepared in case their friendly regional tax officer decides to pay them a visit.
The best time to perform a tax health check or audit preparation review is at the beginning of a recessionary period before tax collections decline too much, as the pressure on revenue departments in such economies tends to increase moderately at first and then accelerate as economic conditions deteriorate. The time may be right for companies to ask themselves if they are really prepared for an audit, for once one starts, it is simply too late.
Given the current uncertainty, now looks to be the perfect time to prepare for a tax audit before the pressure really takes hold and the taxman comes knocking.
The author Jonathan Blaine is associate principal at KPMG Thailand.
This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.
