The Legal 500

Published: 11/09/2012 at 01:43 AM

Newspaper section: Business

News about a famous actress and her "tax management" strategy reminds us once again of Benjamin Franklin's well-known quote: "In this world nothing can be said to be certain, except death and taxes."

The reports not only provided the media with excitement, it also pushed the tax avoidance issue in the limelight, which, without any doubt, has drawn the Revenue Department's attention.

It is interesting to explore public understanding about tax avoidance, and the department did its part by offering a tutorial course to stars and people in the entertainment industry last week.

The case has also brought up an interesting question: how is the actress's case different from those where corporate entities saved billions on tax through a sophisticated tax planning scheme?

First of all, let's note that "tax evasion" is different from "tax avoidance". In general, tax evasion refers to illegal arrangements such as false statements, under declaration of your income amount and misrepresentation of the facts, all aimed at lowering or eliminating tax liability. Tax evasion is basically a crime and could subject a wrongdoer to a jail term of 3-7 years and/or a fine of 2,000 to 200,000 baht.

The fact of the case was that while the actress received an income from an event organiser, the ID card of a different person was used in receiving it. At issue here is if the identity of the income recipient was switched intentionally, then the department may consider it as tax evasion for two reasons. First, it was aimed at illegitimately reducing the withholding tax rate from 5% for income paid to a public entertainer to 3% for service fees paid to people in other professions. Second is the obvious reason of reducing tax liability to a lower bracket on the progressive scale when filing each year.

On the other hand, "tax avoidance" refers to a transaction arranged also for the purpose of paying less taxes but within the legitimate framework. It may not necessarily be fully acceptable from the department's perspective and may be regarded as a sham for tax purposes or an unethical arrangement to obtain favourable tax consequences. As such, there should be no criminal punishment for such transactions even though it is unacceptable in some quarters.

In a recent revenue ruling, an arrangement was made to save tax from a gift in the form of immovable property. Normally, where an immovable property is given for free to an individual, the recipient will be deemed receiving a taxable income in an amount equal to the assessed value of land. Such tax is required to be withheld at the source by the Land Office when the registration for ownership transfer takes place.

To help the recipient save on taxes, the transferor did not give away the entire plot at once. Instead, it was divided into 30 portions, and the recipient was registered as a joint owner of each portion on a different day. The scheme saved the recipient 7 million baht in taxes, as tax was calculated based on a smaller value of each portion of land at which time the progressive rate of the tax always started from the lowest bracket. The land transfer took place continuously for 30 days (except on weekends), and in the last registration the recipient eventually became owner of the entire plot.

Although at each registration of a joint ownership actually took place bit by bit under commercial law, without any false statement or evidence in computing withholding tax, the department advised that the real intention of the parties were to transfer the whole plot to the recipient from the beginning. The sole purpose of the parties in entering into this complex arrangement was to achieve the same result as an outright gift but with a lesser amount of tax, without any other commercial purpose. Therefore, the department required the Land Office to recalculate the tax based on the value of the entire plot and withhold such tax after crediting the tax that was already withheld in the previous 29 registrations.

In fact, using the third party to receive income on one's behalf or dividing a plot into 30 registrations amount to the same thing _ pushing taxable income to a lower tax bracket.

To be blunt, they are not different in any way from the more familiar use of the "body of persons" or "unregistered partnership" to receive taxable income. The difference seems to be that while the former could trigger a question of tax evasion easily, the consequence of the latter tends to be limited only to the tax avoidance issue. This is why many taxpayers still enjoy the latter arrangement.

Besides criminal punishment, where it is deemed that tax payment is delayed due to a tax-evasion or tax-avoidance scheme, penalties not exceeding 100% or 200% of the unpaid amount plus a surcharge of 1.5% per month may apply, depending on each case.

Therefore, before applying any arrangement to save tax, you should consider the potential outcome in a proper manner and choose well between a tax-avoidance and a tax-evasion scheme.

This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at admin@lawalliance.co.th