Challenges of tax refund applications
Companies conducting business operations in Thailand need to comply with various tax reporting requirements. Companies are subject to direct and indirect taxes. Corporate Income Tax (CIT) is a direct tax levied on a juristic company or partnership carrying on business in Thailand or those foreign companies deriving certain types of income from Thailand. Companies are entitled to request refund of excess withholding tax and input tax. The Thai Revenue Department conducts a full tax investigation before a refund is granted.
A tax investigation is time consuming and costly. Thus, companies must have a robust tax compliance practices and appropriate documentation to support such practices. Otherwise, a tax refund application could lead to a significant tax assessment, fine and penalty.
Conducting a tax health check is recommended before requesting a tax refund. At a minimum, companies must have the following:
- Appropriate tax or VAT invoice: The Thai Revenue Code prescribes the minimum requirements or contents of a valid tax/VAT invoice. Companies must ensure that both of its VAT invoice and its suppliers’ tax invoices are proper. Taxpayer is unable to claim input tax from an invalid VAT invoice.
- Various reconciliation: Among others, companies must reconcile the revenue reported for CIT and VAT purposes. It is important to identify the reason for any discrepancy. Otherwise, a tax assessment will be made on unexplained discrepancy.
- Withholding tax certificate: Original copies of withholding tax certificates must be kept and made available for inspection by the RD officer. In addition, the details of the withholding tax certificate must comply with the regulations. Otherwise, the request for refund will be denied.
- Transfer pricing documentation: Companies with related party transactions must have a transfer pricing documentation in place. The transfer pricing regulations in Thailand have been amended recently. The transfer pricing documentation summarizes and explains all related party dealings of a company. It is a very important supporting document to a related party transaction.
- Management fees: Payment of services availed from related parties (especially management services) must adhere to the conditions provided under the Notification of Director General No. 400. The payment must be made for actual services, and the service recipient derives economic or trade benefits therefrom. Also, the service fee must be agreed at arm’s length.
- Inter-company loan: inter-company loans must bear an interest at market rate. If the Thai company is the borrower, withholding tax on such interest payment (actual or constructive) must be made. Deductibility of the interest expense may also be a concern.
- Stamp duty: Stamp duty on certain instruments under the Revenue Code may seem to be an insignificant amount. However, during a tax investigation, the Thai Revenue Department will verify if such duty was paid on certain instruments, one of which is a service or management agreement. A surcharge of up to six times is imposable.
BDO Insight: The outstanding tax receivables does impact the working capital. However, companies should be mindful that the process of a tax refund is time consuming, and more often, costly. There is also a risk of having assessed a tax liability because of the tax investigation instead of a tax refund. If the company undertakes a proper tax health check before applying for a refund, it may be able to mitigate some of these risks and plan their working capital requirements in a more efficient manner.