False appearances: tax loopholes and real intentions in Thai tax law
See “Ample Rich, a gold mine for everyone” (business, page 2)By Jon Fernquest
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Rich people who can hire expert tax lawyers will always be able to find tax loopholes to avoid paying taxes. Today’s article focuses on the implications of the Ample Rich case for Thai tax law. It is about the role of intent in law. The law usually tries to determine what people “really wanted and planned to do”, not what they “appeared to do or wanted you to think that they did”.
Reading legal arguments is difficult for everyone, except maybe lawyers. It’s still good English practice though, because we often have to read legal documents and figure out what they mean. To understand these documents, we must 1. be very strict about the meaning of words, 2. reread the document several times, and 3. think hard about what the words mean. All of these are good language learning strategies for advanced language learners.
Make a list of the laws that are cited in the article. The following words are often used when citing a law: code, statue, precedent, provision, section, division, decision, ruling, holding, opinion, or assessment. Try to summarize the argument made. The author doesn’t directly state a conclusion. What do you think his implied or intended conclusion is? Try writing it down in a few sentences. (See answer key for my conclusion).
Vocabulary (in discussion above)
ingenious – very clever, using new ideas, methods, or equipmenttax loopholes – a place where the law doesn’t cover certain actions that people can take to avoid paying taxes
implication – what something logically implies (“if x, then y” means “y is the implication of x”)
cited – mentioned to provide proof for a legal case
interpretation – opinion about meaning
intended - what he wanted to do
Vocabulary (in the article)
ample – enough (and probably a little bit more than enough)the fine line between – there are only small differences between two things, one bad,the other good
tax planning – creating strategies to minimize tax liability, a lawyer or accountant usually helps you to create these strategies
tax evasion – avoiding paying your taxes
intent – (legal language) intention, what you wanted and planned to do versus what you appeared to do (For example, consider a person who borrows money, but doesn’t plan to give it back. Their intention is to steal from you. Their intent is to steal.)
a regime – the way something operates or runs, like a government or a system of laws
comb through – look at information very carefully to find something
genuine – real, true, not pretended or fake
intention – intent, what you wanted and planned to do versus what you appeared to do
parties - people involved in a legal case
surface – appearance, what something appears to be on the surface, not necessarily what it actually is
scheming – making secret plans to gain something for themselves
shifts the line between x and y – changes the definitions of x and y, the difference between x and y is defined by a threshhold or a line (for example: “if you make more than 100,000 baht, then you are rich”) and this line has changed (for example: “now if you make more than 120,000, then you are rich”)
tax avoidance – avoiding paying taxes that you should legally pay
substantive intention – the real and most important intention
ample room – enough space in a place
levy taxes – a legal request by the government that someone pay taxes
not liable to taxation – legally responsible for paying taxes
assess market value – estimate how much it could be sold for in a free market
juristic companies – a company that has an identity separate from its owners
partnerships – a legal form of business organization in which two or more people provide the capital or equity for a business
solely – only
exercise – use
precedent – a legal precedent, because it was done in the past, there’s a good reason for doing it again now.
spirit – intent
surcharge - extra or additional charge
Answer key:
A. Laws cited in the article:
1. “Thailand's Revenue Code has no specific anti-tax avoidance provision”
2. “the Supreme Court on several occasions supported the Revenue Department's opinions and assessments to collect tax based on the genuine intention of the parties with the application of the general provisions of the Revenue Code”
3. “The Revenue Department's decision not to levy taxes on the sale of shares of Shin Corp by Ample Rich”
4. “…the provision of the Revenue Code regarding a foreign company…Section 66 provides that: "All juristic companies or partnerships which are organised under the Thai law or which are organised under foreign laws but carry on business in Thailand shall pay tax under the provisions of this Division. (i.e. pay tax on net profits)…”
4. “…Revenue officials can exercise its power under section 65 bis to assess market value on the sale of shares at the price below market value.”
B. One possible interpretation of the author’s conclusion:
“Tax law changed with the Ample Rich case. If it had remained the same, Prime Minister Thaksin would be liable for '200% of the tax amount plus a surcharge of 1.5% of the same amount per month' and this would include past dividends also. Prime Minister Thaksin would be liable because Ample Rich was a foreign company that did business only in Thailand with its directors living in Thailand.'"
Try to map the parts of this conclusion back to specific pieces of the text.
Article
Ample Rich, a gold mine for everyone
ANUPHAN KITNITCHIVAThe fine line between tax avoidance _ acceptable tax planning _ and tax evasion _ illegal tax planning _ is intent, and substance beyond the surface transaction. Anti-tax avoidance provisions are common to well-developed tax regimes the world over. Tax authorities and the courts will comb through a particular transaction to find the genuine intention of the parties, then collect tax based on that intention. The surface transactions, if not discarded, are perhaps lunchtime discussions among officials, praiseworthy for their degree of scheming and creativity.
Although Thailand's Revenue Code has no specific anti-tax avoidance provision, the Supreme Court on several occasions supported the Revenue Department's opinions and assessments to collect tax based on the genuine intention of the parties with the application of the general provisions of the Revenue Code, and, used substance to reinforce the line between the acceptable tax avoidance and the unlawful tax evasion.
The Revenue Department's decision not to levy taxes on the sale of shares of Shin Corp by Ample Rich seemingly shifts the line between tax avoidance and tax evasion given the apparent, substantive intention of the selling party. If this kind of transaction is acceptable tax planning, the line's shift allows ample room for tax planning by general businessmen.
Revenue officials publicly expressed their opinion that the Revenue Department cannot collect tax from Ample Rich on the sale of the shares at one baht to Thai shareholders _ who on the next day sold them at market value of 49.25 baht on the stock market, tax-free. Revenue officials reasoned that as Ample Rich does not carry on business in Thailand, it is not liable to taxation on net profits. They also claimed to lack authority to assess market value under Section 65 bis (4) of the Revenue Code because this section can apply only in case of companies paying tax on net profits. This means Ample Rich could sell the shares at cost and accordingly no tax. Officials further claimed they cannot collect tax from Ample Rich's sale knowing that the stock market is used as a mechanism to avoid tax.
The question is whether the Revenue Department cannot really tax Ample Rich because the Revenue Code does not provide a mechanism to do so.
Let's quickly explore the provision of the Revenue Code regarding a foreign company. Section 66 provides that: ``All juristic companies or partnerships which are organised under the Thai law or which are organised under foreign laws but carry on business in Thailand shall pay tax under the provisions of this Division. (i.e. pay tax on net profits).
The juristic companies or partnerships organised under foreign laws, carrying on business in various countries including Thailand, shall pay tax on net profits arising from or in consequence of the business carried on in Thailand during an accounting period.''
Both paragraphs refer to foreign companies. The difference is that paragraph 2 refers to foreign companies carrying on business in various countries including Thailand whereas foreign companies referred in paragraph 1 means foreign companies carrying on business solely in Thailand.
The following substance and circumstances should be sufficient to consider that a foreign company should carry on business solely in Thailand under Section 66, paragraph 1 of the Revenue Code.
1. Its only business is holding the shares of a Thai company listed on the Thai stock market.
2. All of its directors are individuals residing in Thailand. This means that the management and control of the company is exercised in Thailand.
3. All of its shareholders are individuals residing in Thailand. This means that the capital fund is provided from Thailand.
4. Its registered address is only a post-office box. This would indicate that its real place of business is where its directors reside.
Under the word and spirit of the Revenue Code, such a foreign company, similar to a Thai-registered company, would need to pay Thai corporate income tax at the rate of 30% on its net profits and to file a tax return within 150 days from the end of its accounting period, on the self-assessment basis. The Revenue Code is clear about penalties. Failure to file a tax return and pay tax properly will subject the foreign company to a penalty at 200% of the tax amount plus a surcharge of 1.5% of the same amount per month.
Most importantly, the Revenue officials can exercise its power under section 65 bis to assess market value on the sale of shares at the price below market value. The foreign company under such conditions must include not only gains from the sale of shares as revenue in the tax computation but also past dividends.
Taxpayers should not question the ample wisdom of a revenue collection centre that would create precedent that may ultimately limit its ability to collect revenue. Rather, if the Revenue Department's decision stands, businesses and individuals should focus on the new range of tax-planning options that should be equally and fairly applicable to them. The new tax planning options will not only benefit larger Thai companies, but small- and medium-sized enterprises and smaller start-ups. Though knowing the new rules is obligatory. This is the fairness claim.
Anuphan Kitnitchiva is a senior partner of the Dherakupt International Law Office. He can be contacted at anuphank@drklaw.com
