Corporate income tax in time of dynamic change

To propel Thailand into the international market, the Federation of Accounting Professions has aligned Thai Accounting Standards (TAS) with International Financial Reporting Standards (IFRS) in order to set a common financial language for investors. Without doubt, these dynamic changes are going to result in the creation of numerous differences between accounting and tax reporting. As such, preparation of the annual corporate income tax (CIT) return is no longer the simple task that it used to be, as it will require up-to-date knowledge of both accounting and tax matters. 

For example, the component approach under TAS 16, Property, Plant and Equipment (PPE), requires the initial cost of an asset to be allocated to each one of its significant components (each part of an asset with a cost that is significant in relation to the total cost), which are then depreciated separately. In the accounting books, one item of asset may therefore be broken down into several significant components which will be treated as separate individual items with potentially different useful lives. For example, the acquisition cost of an aircraft could be appropriately split between its airframe and engines if they have significantly separate periods of useful life. The company that adopts the component approach must then raise the question as to whether this concept will also be acceptable for tax purposes. 

The Revenue Code is silent on this matter. Separation of the asset is dealt with by the Civil and Commercial Code, which tells us that if any individual component part of an asset is by its nature essential to the existence of the asset and could not be separated from the asset unless it was destroyed, damaged or altered in its form, it should be regarded as a “component part”.  As such, it cannot be separately depreciated from the asset itself. Therefore, although one asset may be broken down into several significant component parts with different depreciation rates in the accounting books, each component could be regarded as just one asset with a single depreciation rate for tax purposes. If so, a tax adjustment for depreciation will be required. Another issue may then arise as to which depreciation rate among the different rates for each component would be the most appropriate one to use for tax purposes. 

The above is just one example of where the accounting standards could create tax and accounting differences and impact the CIT computation. In fact, some companies may face multiple items of accounting and tax differences depending on the accounting standard adopted, for example, decommissioning costs, employee benefits and share-based payments, etc.

On the tax side, there were also interesting updates in 2011. The Board of Taxation’s ruling No 10/2528 (1985) and several rulings of the Revenue Department have been used to support the opinion that only penalties, surcharges and fines under the Revenue Code are not allowed as tax-deductible expenses while those under other tax laws such as Customs and Excise would be deductible. However, the Central Tax Court (Red Case No 55/2554 (2011)) has now reversed this long-held position and concluded that penalties for import duty shortfalls, customs surcharges and interior tax fines are not allowed as deductions. Although the Supreme Court has not yet issued its final decision on this matter, taxpayers should be aware that the Revenue Department may question the deductibility of penalties under the other tax laws. 

While financial statements are required by law to be audited by an authorised auditor, the self-assessment and collection system for the CIT computation in the tax return is not required to be audited or certified by an authorised person before filing with the Revenue Department. Therefore, every company is responsible for ensuring its own tax compliance and the submission of complete and accurate CIT returns. 

The December 31 2011 year-end CIT filing will be due on May 29. In the case of filing via the Internet, the due date is June 6 (eight days extension). It is therefore crucial for companies to examine their tax preparation process to determine whether it is sufficient to ensure compliance and that tax benefits provided by the current laws are fully utilised, such as the additional deduction of 50 per cent for donations to flood victims given from September 1 to December 31, 2011. Proper documentation to support the tax adjustments and the control process should also be in place. “Do it right the first time” is the best concept to follow, rather than waiting until the Revenue Department decides to “make it right” by correcting the return at a later date. The painful result of non-compliance with the tax regulations could be an additional tax liability together with a 1.5-per-cent per month surcharge (capped at the amount of the tax shortfall) and a possible 100-per-cent penalty. 

 

Siriwan Sereeyothin is an associate director of legal and tax services at Pricewaterhouse Coopers, Thailand.