Justify your management expenses; advice on foreign tax credits

This year there are two matters which have recently come under intense scrutiny by the Revenue Department that we would like to point out for companies to consider.
The first is management fees. This is a very common kind of expense generally incurred by most members of a group of companies. It is basically in the nature of a service fee charged by a related company for providing services such as general technical assistance and administration work to another company. Examples of administration work are human resources, accounting, legal, marketing, budgeting and financing.
In practice, many companies receive only an invoice requesting a management fee payment for a period without further explanation. It is unlikely that such a document would be sufficient to justify a tax deduction.
Generally, a company has to prove that the service was performed for the purpose of its business, otherwise it may be disallowed by a revenue officer and the company will be liable for the tax shortfall and a monthly surcharge 1.5 per cent if additional tax for the year is payable. This would also result in the input VAT incurred from the disallowed portion being un-claimable for VAT.
The Revenue Department does not provide any guidelines advising what supporting documents would be acceptable. Therefore, all meaningful evidence should be maintained to demonstrate the actual services rendered and benefits received, such as an agreement, details of the scope of the service (eg, the required functions, activities, responsible personnel) and deliverables of each service (eg, advisory reports, correspondence between the service provider and the company, written comments or reviews, memos, minutes of meetings). Moreover, a company should have the business rationale or substance to prove that the management fee was necessarily incurred.
In addition, the fee charged must be reasonable and on an arm’s-length basis. This may be achieved by recording the actual time spent to perform the service. The cost allocation method may be acceptable if the company can substantiate the reasonableness of the allocation basis, which would include maintaining a breakdown of the expenses and the nature of each expense, and can demonstrate that such costs were necessarily incurred and fairly allocated on the same basis to other companies.
The second matter relates to taxes paid in a foreign country. A company can use such tax as a tax credit or a deductible expense. As a tax credit, the amount allowed cannot exceed the amount of tax that would be payable on that income in Thailand.
Based on our experience, Thai companies inexperienced in dealing with foreign taxes may misunderstand the use of foreign tax-credit offsets against tax payable. Allow us to enlighten you:
lThe foreign tax credit would be disallowed if the tax was paid on income which should have been exempt from tax under a double tax treaty;
lThe period for using the foreign tax credit is really different from the local withholding tax rules in that the foreign tax should be credited against the tax in the accounting period in which the related income is included and not in the year in which the tax was withheld or paid;
lIf the foreign tax is higher than the maximum allowed as a tax credit, the excess can be taken as a tax deductible expense;
lSupporting documents for the foreign tax should be translated into Thai or English and contain the following particulars: the name of the income earner, the particulars of the income and the amount of tax paid in the foreign country.
Recently, some companies have had their foreign tax credits disallowed by the Revenue Department on the grounds they were unqualified. Consequently, those companies became liable for the tax shortfall and a monthly surcharge of 1.5 per cent in case there was any tax payable for the year. It is therefore advisable for companies having foreign taxes to review their transactions and prepare themselves in advance.
To sum up, companies should revisit their corporate income tax computations to ensure there is not only business rationale for significant expenses but also the supporting documents are adequate to justify the expenses to the Revenue Department. Additionally, the foreign tax credit should arise from income subject to tax in the foreign country and the required supporting documents should be maintained.

This article was contributed by|PwC Thailand director Thirapa Glinsukon, and manager Cheeranun Naksomsong.