It is often said that income tax returns are more imaginative than best selling novels. The truth, in both types of documents, is stretched, spun, colored and twisted to make things appear almost unrecognizable. However, new Thailand laws have been developed by the Revenue Department to ensure that capital losses, an area of tax returns rife for unethical deductions, are now fairer. Business legal services in Thailand are also trying to comprehend the effects on their clients.



The Revenue Department in Thailand is now focusing on the Thailand law regarding capital losses, in light of a traditional tax planning technique involving transactions of a circular nature. These circular transactions are entered into by the parties with the main or single purpose of carrying out a series of deals that will generate tax expenditure, eventually.

To be legal under Thailand law, business legal services in Thailand are now advising their clients that the expenditure generated must have the characteristics required in the Revenue Code, that is, it must be spent exclusively for profit or business seeking purposes. Otherwise it will not be considered deductible in calculating income tax for corporations.

An example is where the price of a subsidiary's shares deteriorates, and a parent company deducts that capital loss of the sale of such shares. This will be allowed provided they are sold at fair market value. If the price they are sold at is lower than market value, the Revenue Department is allowed to revise this up in their tax estimates. However, the motivation of a parent company for engaging in the sale of shares to begin with has bnever really been scrutinized, until now.

A recent revenue ruling of a recent case is being cited by corporate legal services in Thailand. The parent company in this case subscribed to a packet of shares issued by a subsidiary of itself, established to run a mall. When the subsidiary's business became dormant in the economic crisis of late last century, it owed service fees to the parent company. In order to repay these, the subsidiary increased its capital, and the parent company subscribed to the second lot of shares here. When the debt was repaid, the parent company sold both lots of shares to other companies, at a loss of around 21 million baht.

The Revenue Department ruled in this case that the capital loss attributable to the sale of the second lot of shares, after the debt was repaid, was not allowed as a deduction. This was mainly because iof the parent company's motivation for selling the shares. It was considered that it was not for genuine investment purposes, but was a blatant attempt to convert bad debt into an investment loss. As it was not spent exclusively for business or profit seeking purposes, it was disallowed.

It seems that the hasty sale of the shares was the aspect of the transaction which gave away the parent company's intentions. Perhaps if it had waited a while before offloading the shares, it may have been seen as a more legitimate business activity - although perhaps not a wise one.

What business legal advice in Thailand should have told the company to do was to deduct the same amount of expense by following the procedures for bad debt write offs pursuant to the relevant regulation. They should have taken civil action against the subsidiary, with the help of corporate legal services in Thailand, and obtained a court order for the debt to be repaid. Despite the time consuming nature and expense of such a procedure, it would have eventually saved the company money, considering that the deduction was eventually disallowed