After the flood: Insurance claims and tax challenges

Businesses directly and indirectly affected by flooding are up against a lot of challenges. These include preparing insurance claims, recovering data and renegotiating contract agreements. Businesses that survived the crisis in good shape may now be experiencing aftershocks because of problems involving customers and/or suppliers. Staff may have to be assisted through the disaster aftermath. Stock shortages can constrain business activity and cash flow can dry up quicker than the flood.

With the end of 2011 almost in sight, the likely depth and duration of the economic downturn caused by the devastating deluge remains unclear. 

What is clear, however, is that although everyone is understandably focused on helping those victims in direst need, it is important for affected businesses to also pay attention to the several post-flood tax implications relevant to the process of restoring and rebuilding their operations.

One of the major challenges company’s face is filling in an insurance claim for damage to assets or lost revenue/profits caused by the flooding. Forensic accountants can give, among other things, valuable support in quantifying losses due to business interruption, capturing sufficient documentation (when financial data and other important records are damaged) to support the insurance claim, and providing support and negotiating skills in arbitration.

Besides the crucial role of insurance claims and settlements, taxation may also offer relief in the wake of the crisis. Let’s take a closer look at the possible tax implications.

_ If a company incurs a loss of assets from flooding, can the company write off the entire residual value and treat it as a deductible expense in its corporate income tax computation?

There are two scenarios for this situation.

1 For a company that has insurance: 

If an asset is lost and a company is in the process of claiming compensation from an insurance company, that loss cannot be immediately claimed as a deductible expense in the corporate income tax calculation. The company will be entitled to a deduction in the year that the company receives the compensation from the insurance company.

2 For a company that does not have insurance: The company can treat the total residual value of the asset as a deductible expense in the year that the loss of the asset occurs, but the company is required to possess reliable records as proof of the loss (ie, fixed assets register, police report of the loss, purchase invoice, etc). 

_ If a business receives compensation from an insurance company, is the business required to include the compensation received in its corporate income tax computation?

In principle, if the damages exceed the compensation, the difference can be treated as a deductible expense for corporate income tax purposes. Conversely, if the compensation exceeds the damages, the difference shall be treated as follows.

For the income received from the insurance company as compensation for  damage due to floods, storms, fires, or other natural disasters occurring in Thailand after January 1, 2011, such income, specifically the amount exceeding the residual value of the property after the deduction of wear and tear and depreciation, shall be exempted from the corporate income tax computation in the accounting period that the company receives the compensation from the insurance company. 

However, compensation for business interruption (other than the compensation for damages from floods, storms, fires, or other natural disasters) would not fall within the scope of the legislation. Therefore, companies will be required to include such compensation in the corporate income tax computation. 

For an individual taxpayer, the individual can obtain an exemption for the total amount derived from the insurance company.

Though the road of business continuity and survival is hard, special tax law provisions may give businesses some financial relief from the major impact of the flooding. For additional insights on the tax implications, and also accounting implications of the flood situation, visit www.kpmg.com/TH/en/Pages/Flood-Support-Center.aspx.

 On a final note, the author would like to express her deepest and sincere sympathy to those communities affected by the flooding.

 

Nichalin Martina is a manager at KPMG Thailand.