Looking for Tax Incentives? Make sure you comply

Looking for Tax
Incentives? Make sure you comply

Tax
incentives can be as sweet as honey, but making a mistake in compliance,
inadvertently or otherwise, can leave a taste as bitter as gall. Corporate
taxpayers have learned this painful lesson in light of court rulings on the tax
treatment of losses carried forward from Board of Investment-promoted
businesses.

If
they want to avoid similar misunderstandings or disputes in the future,
taxpayers should be aware of developments on two fronts where incentives are
concerned. One involves the so-called RD 630 regulations, and the other
involves incentives for setting up international headquarters (IHQ).

As
you will recall, last year the cabinet approved a new programme intended to
encourage certain types of individual entrepreneurs to carry on business as
companies for tax purposes. The aim was to bring more businesses into the tax
system, and numerous incentives were offered to encourage the likes of
goldsmiths, pharmacists and others to make the change. Royal Decree No.630 was
issued this year to exempt the transfer of assets by an individual to a company
from almost all taxes.

Rich
individuals wasted no time finding ways to transfer their wealth to newly
set-up companies in exchange for newly issued shares at fair market value and
free of tax, pursuant to RD 630. The Revenue Department was equally quick to
react to potential abuse.

Given
that new legislation will soon require an individual selling immovable property
to pay tax based on fair market value, instead of the low government assessment
value as is now the case, property transfers have been rising. A number of
immovable properties have been transferred by individual taxpayers to their
companies, set up under the ambit of RD 630, at high prices so that the
subsequent resale by such companies to the ultimate buyers would result in
minimal taxable profits.

To
close this loophole, the Revenue Department has just issued a new announcement
to limit the transfer price of immovable properties from an individual taxpayer
to a company set up under RD 630 to the government assessment value. That
brings a tidy end to attempts to inflate the expenses of new companies to bring
down their tax payments.

Meanwhile,
for corporate taxpayers looking to take advantage of incentives under the
international headquarters (IHQ) programme, the Revenue Department explains the
conditions in detail in the Notification of the Director-General dated May 29,
2015, but some issues still need to be clarified.

For
instance, where a company carries out both IHQ and non-IHQ businesses, net
profits (or net losses) of each business must be calculated separately, with
pooled expenses (if any) divided in proportion to the amount of income derived
from each business. The same calculation applies where the IHQ business has
tax-exempt income and income subject to the reduced tax rate, at 10% of net
profits.

However,
when it comes to prorating pooled expenses, the Notification does not clarify
how to treat income arising as a byproduct, such as gains from exchange rates.
Also, it is silent on how to apply the 15% flat personal income tax (instead of
the normal progressive rates of 5-35%) to salaries paid to expatriates working
for both IHQ and non-IHQ divisions.

Let's
look at the example of a Japanese carmaker operating both IHQ and non-IHQ
businesses. The IHQ business earned both tax-exempt income and income taxable
at 10%, and had 54 expats working on both IHQ and non-IHQ activities. It was
impossible to specify the amount of salary paid for IHQ activities for the
purpose of 15% withholding tax, but the Revenue Department gave it a try.

It
said the salaries should be "prorated based on the amount of income
derived from IHQ and non-IHQ businesses". It also said that "gains
from the mark-to-market of foreign currency exchange of cash, assets and debts
in the IHQ business would be deemed as income from the IHQ business for
allocation purposes, but interest from deposits of cash with banks would be
excluded".

Another
important issue that all IHQs should bear in mind is that, as the main role of
the IHQ is to provide services to offshore affiliates, whether an entity from
which the IHQ receives income is regarded as an "affiliate" is
significant. This legal interpretation is different from that of an earlier
programme that governed regional operating headquarters (ROH).

For
example, a company registered as an ROH provided administrative and marketing
services to affiliates in Vietnam, Bangladesh, India and Australia. In 2009,
the ROH received dividends from an affiliate and submitted the information
about the affiliate to the Revenue Department in 2010. The department said that
"the names of affiliates … were information required upon the submission
of the ROH registration only, and the update was not specified as one of the
conditions for ROH tax incentives under the notification of the director-general".

As
long as the entity that distributes dividends to the ROH is qualified as an
"affiliate" under the prevailing definition, and other requirements
are also fulfilled, the ROH is exempted from tax on such dividends. Similarly,
supporting service fees received from new foreign affiliates are also
tax-exempt without the ROH having to report their names first.

While
there are some similarities between the ROH and IHQ requirements, the IHQ
Notification requires a list of affiliates, divided into those in Thailand and
offshore, together with details of their shareholding (or controlling)
structures. Also, any changes to the list must be reported to the Large
Business Tax Administration Office within 30 days from such a change, but no
later than the end of the relevant accounting year.

In
light of the stricter notification requirement, it is not recommended that
anyone operating an IHQ attempt to apply the ROH interpretation.