LawAlliance Limited | View firm profile
20 Feb 2018 at 06:57
Newspaper section:
business
Double taxation on
mortgage release
Most
people understand that the discharge of a debt by a creditor, or by someone
else for the benefit of a debtor, could result in the debtor having taxable
income equivalent to the amount of debt discharged. Likewise, when a buyer
undertakes to pay off a seller’s debt in exchange for goods or services, the
sum of debt released will be treated as part of the sale revenue received by
the seller. On the buyer’s side, the same sum will be treated as acquisition
costs for income tax purposes.
Based on
this principle, the Revenue Department issued Instruction Por 82/2542
concerning the calculation of specific business tax (SBT) on the sale of
immovable property. Clause 6(3) states that when a sale of mortgaged land is
registered with the Land Department, the amount of “mortgage liability” shall
be included in gross receipts and subject to SBT at the rate of 3.3%.
For
example, if a plot of land, with a fair market value of 230 and mortgage
liability of 130, is sold in exchange for 100 in cash, the total price for tax
purposes is equal to the sum of the released mortgage (130) and the cash
received (100), or 230. This seems straightforward and there should be no
interpretation issue.
To
register the ownership transfer, the buyer and seller need to use the one-page
purchase and sale agreement form provided by the Land Department. Because space
on the form is limited, there is little chance to explain many details, so only
brief summaries are possible in each paragraph. This can be a problem leading
to double taxation on the released mortgage.
In one
precedent case, the parties filled in the following information on the one-page
form for registering the ownership transfer:
1. The
purchase and sale price is 230;
2. The
seller has already received full payment; and
3. The
buyer will undertake to carry over the mortgage liability of the seller.
As the
seller was receiving a monetary benefit of 230, comprising cash of 100 and mortgage
release of 130, it calculated net profit tax and paid SBT on the total
consideration amount of 230.
However,
Revenue Department officials had a different calculation in mind. They claimed
that as the price stated in clause 1 was 230 and the parties had confirmed
“full payment” in clause 2, it meant the mortgage release in clause 3 was a
separate item and must be added to the sale price, making the total
consideration 230+130 = 360. As such, both net profit tax and SBT must be
calculated based on 360 rather than 230, effectively resulting in double
taxation of the mortgage release.
To most
people, this would appear to be a minor miscommunication between the taxpayer
and the taxman. If both parties are acting honestly, any discrepancy could be resolved
by supporting evidence. This could include as a bank deposit/transfer slip
proving the actual cash amount paid, bank confirmation of the mortgage amount
released, seller’s profit and loss account showing the actual sale revenue,
buyer’s records showing the actual acquisition cost, and confirmation by a
licensed auditor of the total consideration. The figures can be reconciled to
confirm the total value of the transaction.
In the
course of a tax audit, the seller presented the necessary documents to prove
that the released mortgage was already included and the amount in clause 1
stated the total consideration. Unfortunately, the tax authorities refused to
budge from their position. They insisted that the one-page purchase and sale
agreement was an official document binding both parties and was, therefore, the
most reliable evidence. As well, they claimed that Por 82/2542 required the
mortgage liability in clause 3 to be included in the amount in clause 1,
resulting in a total taxable amount of 360.
Sadly,
the Board of Appeal, which should have corrected the erroneous tax assessment,
agreed with the taxman by looking only at the one-page document of the Land
Department.
The Tax
Court ruled that the seller had never disputed that the amount of the released
mortgage must be included in the tax base pursuant to the terms of Por 82/2542,
but the seller was able to prove beyond doubt that the mortgage amount in
clause 3 was already included in the total sale price in Clause 1 and subject
to all taxes. Hence, the tax assessment was voided. But the Revenue Department
is not finished, and the matter has now gone to the Court of Appeal.
What
does this precedent case tell us? Not much from a tax policy point of view.
However, from a risk management perspective, it does offer a few lessons.
First,
you need to be very careful when you produce an official document, as someday
it could come back and hurt you. Second, when tax authorities want to attack
you, no matter how good your supporting documents are, they will simply ignore
them and pretend to rely solely on the “official” documents. Hence, never omit
even the smallest item in a document. Choosing a capable person to handle the
transfer registration will also reduce the incidental risk.
The most
important lesson, however, is the moral of the story. This tax dispute should
never have arisen if everyone in the system had performed their duties with
integrity, transparency and justice.
By
Professor Piphob Veraphong and Rachanee Prasongprasit of Law Alliance Limited.
They can be reached at admin@lawalliance.co.th