Upsurge in audits likely to help increase tax revenues

In the broad picture, the government has continued to stimulate the economy, domestic consumption and foreign investment through its tax policies, such as reducing the income-tax rates and introducing tax incentives for the establishment of international headquarters. 

The corporate-income-tax break was extended for another year covering accounting periods following the calendar year. The 20-per-cent rate makes Thailand the third-lowest in Asean behind Singapore’s 17 per cent and Brunei’s 18.5 per cent. It can only be hoped that this temporary rate reduction will become permanent so that Thailand’s competitiveness will continue to improve. 

The Revenue Department also plans to propose to the Finance Ministry an extension of the7-per-cent value-added tax (VAT) for another year, as the present rate, reduced from the normal rate of 10 per cent, will be in effect only until September 30. 

Considering the current economic climate and the desire to stimulate domestic consumption, this is definitely not a good time to revert to the 10-per-cent rate. 

In the long term, the Revenue Department still plans to hike the VAT because it can boost tax revenue significantly and Thailand’s VAT is not high compared with other countries in the region.

These tax-incentive policies sound positive for business but are definitely tough for the Revenue Department when it looks into its tax-collection performance. 

The department initially set its 2015 fiscal year (October 2014-September 2015) tax-revenue target at Bt1.97 trillion. However, tax collections are now expected to be about Bt160 billion short of target. 

In terms of fiscal-year-to-date tax revenue, collections in the first eight months to May reached Bt1.02 trillion, which was lower than budget by Bt115 billion or 10.1 per cent. 

In the event that the department tries to bridge the gap to achieve its collection target, it will not be a surprise if it becomes more aggressive in conducting tax audits. Of course, this will not be a good sign for taxpayers. 

Examples of common issues often raised during tax audits are the following:

Transfer pricing: The department continues to focus on transfer-pricing issues, such as management fees. These were always disallowed for tax deductions if nothing more than an invoice and fee calculation sheet were available to support the expenses. A key development this year was the approval by the Cabinet of a draft bill amending the Revenue Code to introduce specific transfer-pricing provisions into the law. This will include the requirement to disclose transfer-pricing practices annually within 150 days from the year-end closing date (same deadline as for the filing of corporate income-tax returns). Failure to comply would result in a fine of up to Bt400,000.

VAT compliance: The VAT law is very detailed legislation that easily leaves room for interpretation and many unclear areas. Common pitfalls include the erroneous charging of VAT on certain types of income, incorrect issuance of tax invoices and other VAT documents, and wrongly claiming input tax on invoices not properly prepared. 

Discrepancies: These may be uncovered from the reconciliation of revenue reported in the corporate income-tax return with monthly VAT returns.

Misclassification of revenue and expenses: This may arise between businesses exempt from tax by virtue of the Board of Investment’s promotions and taxable businesses. 

Failure to withhold and pay tax correctly: This may arise on payments made, especially international payments.

Failure to affix stamp duty on certain types of instruments: It is evident that many companies are still not aware that their contracts will be regarded as hire-of-work contracts subject to stamp duty. In the case of assessment by an officer, companies may suffer the maximum surcharge of up to six times the stamp-duty shortfall.

If identified by tax authorities, these issues could give rise to a material tax liability, so management should be encouraged to be well prepared for an intense tax audit and make sure day-to-day tax compliance is handled by competent staff. All supporting documents should be prepared on a contemporaneous basis.

Just as everyone wants to take care of his or her own health and get an annual medical check-up, a company should also undertake a tax health check or a mock audit on a regular basis. This will help management ensure that there will not be any surprises or unexpected additional tax costs arising from the Revenue Department’s audits. 

 

Siriwan Sereeyothin, author, is a PwC Director