BDO Richfield Advisory Limited Tax & Legal Services
One of the guiding principles behind tax planning is that everyone has the right to arrange their affairs so they do not pay more tax than what the law requires. Aggressive tax planning tends to test the boundaries of the legal framework and is more likely to be challenged by the Revenue in a tax audit. Arrangements found to be ineffective may be faced with paying back the tax plus interest and very substantial penalties. I get the impression that the real estate industry in Phuket has its fair share of players that push the limits of tax planning. One of the factors that appear to drive it is the fact that the majority of the clientele is foreign and so this can translate into an opportunity to receive money offshore with a view to avoiding Thai tax. Often there can be a number of contracts involved in a property deal and so the prices put in the contracts may be influenced by what is received offshore (read not taxed) and what is onshore (read taxed). I believe we can expect the Revenue to continue mounting challenges to the taxes paid in some of the property structures used on the island. What will be interesting to see is whether the property developers are willing to taken on the Revenue and defend their tax planning and ultimately be prepared to take the matter to court.
Leaseholds – the next target? More and more foreigners these days are leaning towards leasehold interests over Thai residential property. Under the law, a gain made from the transfer of lease by a personal taxpayer will be taxed as ordinary income whilst a foreign corporate can also be taxed if the gain is derived from carrying on business in Thailand. To pay tax on the capital gain, the foreigner must voluntarily file an income tax return with the Revenue Department. This of course raises enforcement issues if the taxpayer normally resides outside Thailand. One possible solution is to introduce a withholding tax at source, similar to the withholding tax that applies to the transfer of freehold land and buildings. The issue of enforcement will probably still arise however because the transferee will often be a foreigner too. One way to address the enforcement issue is to ask the Land Department to collect withholding tax when the transfer of a lease is registered at the Land Department. This was how the Revenue addressed the collection of specific business tax on real estate sales. In the past the seller was allowed to self assess his liability to specific business tax and pay it to the Revenue Department the month after the sale. These days you must pay it at the Land Department office at the time of registering the transfer of real estate. I think we might see some developments in this area in the future, especially if we start to see more leased properties changing hands but very little tax being collected.
Hong Kong & Seychelles – the next big investors in Phuket? Thailand is currently one of the few countries in the world that has a comprehensive double tax agreement (DTA) with Hong Kong. The DTA has only been effective since 2006. Thailand is also on a very short list of countries that have concluded a DTA with Seychelles, which came into effect on 1 January 2007. These DTAs are interesting not only because of the Thai tax savings that they provide, but also because of the tax laws that prevail in Hong Kong and Seychelles which can make it quite favourable to conduct business with Thailand through these countries. We could very well see more foreign investors in the future looking at these countries as a gateway for investment into Thailand or at the very least incorporating companies in these jurisdictions into their offshore structures for property developments in Thailand.
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