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25 Jul 2017 at
04:00 / NEWSPAPER SECTION: BUSINESS
Tax issues and business
transfers: The devil is in the details
Ever since tax incentives for business
reorganisation were introduced two decades ago, different issues have arisen
intermittently, especially as they relate to an entire business transfer (EBT),
which has become a popular practice.
Unlike a statutory
merger, an EBT is not governed by the general rules of the Civil and Commercial
Code or the Public Limited Company Act. Consequently, an EBT's merit relies
solely on the provisions of the Revenue Code.
To support economic
growth and increase the financial strength of local industries, the income tax
burden that should have been borne by the transferor of a business is deferred
and indirectly passed on to the transferee. It is not exempted, contrary to a
common misunderstanding in the market.
While the law requires
the assets to be evaluated at the market price, the transferor is not required
to include gains arising from the transfer in its gross income. This applies as
long as the transferee carries over the tax cost base of the acquired assets as
it appeared on the transferor's books as if it were the transferee's own tax
cost base, irrespective of the EBT price the transferee is actually paying.
For example, if the
transfer price is 130 and the tax cost base is 100, the business transfer will
normally result in taxable profits of 30. However, the transferor will not be
required to include the 30 as a gain for tax purposes if the acquisition takes
place under the terms of the EBT. In exchange, the transferee can only book 100
as its acquisition cost for tax purposes, e.g. depreciation over the residual
useful life or calculation of profits upon resale, if any.
Value-added tax,
specific business tax (for immovable properties) and stamp duties are also
exempted.
To ensure than an EBT
is genuine, the Revenue Code mandates that the transferor be dissolved within
the same accounting year that the business is transferred. To accommodate the
tax audit process, a "Form Kor Or 1-4", together with the details of
the parties and transactions, must be prepared and filed within 30 days.
Although an EBT may
sound simpler than applying for Board of Investment promotion, a lack of clear
understanding among tax auditors has led to a number of questions related to
the substance of such transactions. For example:
Is it possible to register
the transfer of certain assets, such as land and buildings, with other
authorities, e.g. the Land Department, after the EBT date or after the
accounting year when the transfer takes place? Is it essential to complete the
transferor's liquidation within the same accounting year as the transfer? Is an
EBT at fair market value allowed, or does the law strictly require the transfer
to be done at book value?
While most tax
authorities have tried their best to eliminate unnecessary debates that would
otherwise hinder business integration, some auditors have raised questions that
have made EBT transactions difficult in some parts of the country. The same
question that was never considered an issue in one tax area office could become
a major obstacle or even a deal-breaker in another. Among the questions that
have arisen: Is it necessary for the transferee to issue new shares to the
transferor as a consideration for the transfer, or is cash payment allowable?
Must accounts receivable and payable be transferred in an EBT transaction? A
recent precedent case reveals that there is always a devil in the details.
A notification of the
Revenue Department director-general requires that Form Kor Or 1-4 be submitted
within "30 days from the day the change is registered in the case of a
business transfer". It is generally understood that this means 30 days
from the day the transferor company's dissolution is registered with the
Department of Business Development at the Commerce Ministry. Some taxpayers
also believe that submission before the dissolution date would meet the
criteria.
Let's look at the
example of an EBT transaction by two transferor companies to one transferee
three years ago. The Kor Or 1-4 forms for both were submitted
"before" the transferor companies' dissolutions were registered. A
revenue official accepted them without any objection, despite the absence of
certification of dissolution from the Commerce Ministry. After the expiry of
the 30-day deadline, a tax auditor decided that the early submissions failed to
meet the criteria because they were made before the dissolution registration,
and thus both transferors should pay income tax, VAT and stamp duties, together
with the relevant penalties and surcharges.
The Revenue
Department finally concluded earlier this year that a transferee was not
allowed to submit Kor Or 1-4 forms before the dissolution registration date.
Nonetheless, as the early submission in this case was caused by a genuine
misunderstanding, the forms were deemed as submitted within the deadline,
provided the transferee submitted the transferors' certification of dissolution
within 15 days from the day it received the ruling.
It is disturbing to
other taxpayers, who may not be as lucky as the parties in this case, to learn
that such overzealous application of EBT laws could raise such a serious issue.
This ruling also shows that a tax auditor can still mount an attack based on a
minor formality, even though there is absolutely no hint of tax avoidance or
any attempt to cause disadvantage to the government.
If you plan on doing
a fancy EBT transaction, take into account the possible risk factors and be
ready in advance in case things go wrong.
By Rachanee
Prasongprasit and Professor Piphob Veraphong. They can be reached at >admin@lawalliance.co.th