Article in The Nation, December 20, 2011
By Benjamas Kullakattimas, KPMG Tax Partner
Taxation in Thailand is based on a self-assessment system, with taxpayers responsible for correctly assessing their obligations.
For corporate income tax purposes, the onus is on the company to determine whether the expenses are deductible in calculating net profits for payment of income tax. Section 65 ter of the Thai Revenue Code (TRC), detailing when a deduction is not allowable, can be summarised in terms of three main factors the company should consider in determining tax-deductible expenses. Those factors are: type of expenses, proof of payments/recipients, and the benefit test.
First, the company should review whether the expenses fall under the type identified as disallowed items, and whether there are any threshold limitations. The expenses included in this group include income tax, fines or penalties, reserves and funds (except a registered provident fund), excessive qualified entertainment and donation expenses, a donation to non-public charity or benefits, or value added tax of a VAT registrant. If the company incurred these types of expenses, the adjustment for allowable deductions is required without it being necessary to review the other issues.
If the expenses do not fall under the types of disallowed expenses, the next step is to determine whether there is sufficient evidence to support the payment of expenses. Without supporting evidence, the tax authorities can disallow the deduction by applying Section 65 ter (9) and (18) of the TRC which states that "Expense which is not actually incurred" and "Expense which a payer cannot identify the recipient" shall not be allowed as expenses in calculating net taxable profits. Tax authorities will require evidence to support the deduction of expenses, such as the company's payment vouchers together with suppliers' invoices or tax invoices and receipts issued by the suppliers. In cases where receipts are not available, such as for payments to individuals and overseas suppliers, the company should retain items such as a completed bank remittance form and bank advice (for payment to overseas suppliers), or a copy of an individual's identification card duly signed by the recipients (for individual suppliers). In the case of employees who have paid for items and have been reimbursed by the company, the company should ensure proper evidence of the reimbursement.
Lastly, it is important to note that proof of the payment of expenses, and/or receipts, may not be sufficient for tax-deduction purposes. The company may also be required to demonstrate whether the "benefit test" has been satisfied. Tax authorities can disallow a deduction on private expenses, or those not exclusively for business purposes, by applying Section 65 ter (3), (13) and (14), which provide that a deduction will not be allowable to a company in respect of: (3) "Expense for personal, gift, or charitable purpose except expense for public charity, or for public benefit as the Director-General prescribes with the approval of the Minister…."; (13) "Expense which is not for the purpose of making profits or for the business"; and (14) "Expense which is not for the purpose of business in Thailand".
Applying these provisions is commonly referred to as the "benefit test". If the benefit test cannot be satisfied, the company may not be allowed to deduct the entire amount of expenses, which would then result in additional income tax, plus a surcharge at 1.5 per cent per month and possible penalty up to one time of the tax due.
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.