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The importance of the effective date in tax laws

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

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8 Aug 2017 at 04:00 / NEWSPAPER SECTION: BUSINESS

The importance of the effective date in tax laws

The government of Prime Minister Prayut Chan-o-cha has passed a number of tax laws and regulations -- far more than its predecessors in the previous decade of political turmoil -- since coming to power in 2014. Keeping track of the enforcement of these new rules is complicated, as some have retroactive effect and some grant grace periods.

For example, to accelerate spending by the private sector, the government on July 9 this year announced Royal Decree No.642 to extend the double deduction for corporate income tax purposes to taxpayers that have invested or will invest in qualifying assets such as machinery or computers between Jan 1 and Dec 31, 2017. Although Section 2 clearly states that the decree will come into force on the day after its publication in the Royal Gazette, which was July 10, subsequent provisions retroactively allow capital expenditure incurred before the enforcement date to qualify for the double deduction.

In another case, the Customs Act and Excise Tax Act were legislated on May 14 and 18, 2017 but will only come into force after 180 days from their publication in the Royal Gazette, on May 17 and May 20. This means that the notorious Section 27 of the existing customs law, long viewed as the most abusive provision available to government officials, will be in force for a few months yet. It allows for fines of four times the CIF (cost, insurance and freight) on importers, but it has been replaced by Section 243 in the new legislation with somewhat lighter punishments.

When it comes to effective dates, there is only one rule for taxpayers to follow. In claiming favourable tax treatment granted in new legislation or under a new interpretation made by a court, taxpayers must not only understand their entitlement, but also must be aware of precisely "when" such claims became available. This principle has been mentioned in recent Supreme Court cases.

For example, there was a sensational legislative change in 2012: repeal of certain provisions of the Revenue Code that required wives' incomes (other than salary) to be included as income of their husbands in computing year-end personal tax.

As the old rule subjected married couples to a heavier tax burden, the legislative change was based on Constitutional Court Decision No.17/2555 (2012), made on July 7, 2012: that the Revenue Code violated constitutional rights.

The court based its ruling on the following passages from the charter: "All persons shall be equal before the law and shall enjoy equal protection under it. Males and females shall enjoy equal rights" and "The Constitution is the supreme law of the state. The provisions of any law, rule or regulation, which are contrary to or inconsistent with this Constitution, shall be unenforceable." The new constitution contains the same provisions. This decision also overruled Constitutional Court Decision No.48/2545 (2002), which stated that the Revenue Code was not unconstitutional.

The Supreme Court was subsequently asked to rule in the case of a married woman who claimed a tax refund for the year 2011 on the grounds that Sections 57 ter and 57 quinque of the Revenue Code were null and void from the beginning by virtue of Constitutional Court Decision No.17/2555. The Revenue Department rejected her request on the grounds that before the effective date of the new legislation, she was still required to include her income in her husband's tax base according to the old rule.

The Supreme Court explained that, since the first Constitutional Court Decision No.48/2545 ruled that the Revenue Code sections in question did not contradict the constitution, and the second decision was not rendered until July 7, 2012, it meant that these provisions became unenforceable only from the date of the second decision. Therefore, the woman's tax calculation for the year 2011 must follow the old rule.

Not all claims based on the timing of tax rulings turn out badly for taxpayers, however.

In another Supreme Court case, a company listed on the SET made a claim under a tax incentive programme for which the relevant Royal Decree had an effective date of July 14, 2006. It provided that listed companies were entitled to an exemption equal to 25% of the expenditure on long-term assets during five accounting years starting on or after Jan 1, 2006.

But the decree specified that more detailed criteria and conditions must be issued via a Notification of the Director-General of the Revenue Department. The department announced that the expenditure would qualify only if it was made from the effective date of July 14, 2006 onward, and not the start of the accounting year.

In this case, the company had invested in petroleum quality enhancement and oil tanks before July 14 but after Jan 1, 2006, but the department held that the company was not entitled to the tax exemption. It said laws granting the tax privileges must be interpreted strictly, so only expenditure made after the Royal Decree went into force on July 14, 2006 could be claimed.

The court had other ideas. It noted that the Royal Decree "stated clearly that the tax exemption was given for expenditure made during five accounting years starting on or after Jan 1, 2006, and none of its provisions stated that the expenditure must be made from the date it went into force". Thus the Revenue Department's announcement that the expenditure must be made from July 14, 2006 contradicted its own Royal Decree and was considered illegitimate by the court.

Cases such as these give taxpayers a good idea of how important the effective date of a tax law and interpretation can be for them. A good thing will only be the right thing if it is claimed at the right time.

By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th