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Realisation of Expenses under the 'Canon of Certainty'

January 2017 - Tax & Private Client. Legal Developments by LawAlliance Limited.

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Realisation of Expenses under the 'Canon of Certainty'


More than two centuries ago, Adam Smith set out the rule that equity, certainty, convenience and economy are the top four canons for a good tax system. But since government authorities tend to care less about these principles and more about collecting taxes, it's no surprise that confusion persists when it comes to realisation of expenses.

Basically, in computing net profits for tax purposes, an expense should be realised and deducted if it is relevant to the income that was earned during the same accounting year. However, this matching principle may not always apply to tax deductibility, as the occurrence of expenses and income must be ascertainable rather than probable.

As the Supreme Court explained in one of its decisions: "[T]he rule of thumb in realising income or expense under the accrual basis methodology is that the right to receive such income, or the liability to pay such expense, including their amounts, must be ascertainable.

The case in question dealt with a company paying its board of directors for work performed in 1992, but the payment required approval from the shareholders' meeting that took place in 1993. The court ruled that "since the certainty regarding the definite right of the board to receive consideration, as well as the amount, was not ascertained until the approval was given at the shareholders' meeting in 1993, the consideration must be realised and deducted for tax computation in that year.

Mind you, this does not necessarily mean that such expenses must always be realised and deducted immediately after shareholders approve them. If the company or the shareholders' meeting impose certain conditions on the payment, those terms also must be fulfilled so that the expense can be ascertained.

In a recent revenue ruling, a company paid bonuses totalling 42 million and 38 million baht to eligible employees for work done in 2007 and 2008, respectively. The bonuses were subject to approval by the board of directors, and the employees had to continue to work with the company until March of the following year in order to receive the money.

The Revenue Department declared: "[I]f the bonuses could only be paid after they were approved by the board, and the eligible employees continued to work at the company until March of the following year, then such bonuses must become tax-deductible as expenses only when all such conditions were fulfilled.

More complex issues arise with regard to damages that result in a company taking criminal action against an offender. Since it is uncertain whether the damages will be recoverable, it is not clear when they should be realised as expenses, especially since legal procedures can take years. Even the Revenue Department has offered differing views.

In one case, a sales manager embezzled money from his company in 2003. In 2004, the company filed a criminal case, the manager confessed and agreed to compensate the company in instalments over three years. The Revenue Department said the company was entitled to deduct the damages as expenses "when the damages took place". That was not 2003, but 2004 when the manager confessed his crime. The company was also required to book the compensation paid by the sales manager as income in the year of receipt.

However, the story was different in a subsequent case involving a sales manager who swindled his company out of 710 million baht. The company reported the case to the police and filed a criminal complaint against the manager. In this case the Revenue Department said that "when the damages took place" was the accounting year in which the swindle took place, not the accounting year in which the legal procedure was completed. This now appears to be the department's default position.

A recent revenue ruling reinforced this view and offered some welcome leeway to the taxpayer. The case involved an employee who sold fuel to customers at unusually low prices between 2003 and 2007. The company and the public prosecutor took criminal action in 2008 for embezzlement. The employee was eventually found guilty and imprisoned under a Supreme Court judgement issued on Dec 25, 2014 but pronounced on June 22, 2015.

The Revenue Department reiterated that "when the damages took place" meant the accounting years in which the employee committed the embezzlement. However, if the company could not book the expenses in those accounting years, it could realise the damages in the accounting year of the court judgement, which was 2014.

This decision reflects good faith on the department's part, and could save the company from some potential losses. After all these years, if it was required to deduct damages incurred from 2003 to 2007, it would need to file an amended tax return and seek a refund, which may be limited due to the expiration of the three-year period for a refund application.

That said, the decision unintentionally raises one critical issue. Keep in mind that the damages were to be realised when the Supreme Court made its judgement in 2014, but not when the judgement was pronounced on June 22, 2015. It was impossible for the company to know the outcome of the Supreme Court judgement in 2014. This would ultimately lead it to amend its tax return for 2014 and to apply for a refund when it learned of the judgement on June 22, 2015.

In short, it seems that determining the certainty of the tax expenses is a story of never-ending complexity.

By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at

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