The Tax Cost Base Rules for Share Trades

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13 Dec

The Tax Cost Base Rules for Share Trades

shares is a common activity today because various authorities — including the
Revenue Department, the Stock Exchange of Thailand and the Securities and
Exchange Commission — have established clear guidelines for almost every
aspect of the process. This helps put investors' minds at ease, as they feel they
have enough knowledge to deal with most of the tax issues without difficulty.
Unfortunately, this belief can be shaken when the guidelines do not strictly
follow the fundamental provisions of the law.

Many precedent cases outline what
is required when a Thai company wishes to purchase shares from a foreign
entity. If the foreign entity is selling shares in a Thai company at a gain
(the portion of the share price that is greater than the cost), unless
otherwise exempted under the relevant tax treaty, the Thai buyer is required to
withhold tax at source at a rate of 15% on such gains. This seems normal, but
it does raise an important question: how should the Thai buyer calculate the
withholding tax? To be more precise, how can the Thai buyer ensure that gains
are properly calculated for tax purposes?

In a recent revenue ruling, a
Japanese company (JCo) holding half of the shares in another Japanese company
(ACo) decided to purchase all the remaining shares in ACo to increase its
holding to 100%. Later, JCo sold 5% of the shares in ACo to a Thai company.
Unlike the tax treaties with Singapore and Britain, the treaty between Thailand
and Japan does not provide for any tax exemption on gains. The Thai company
sought a ruling from the Revenue Department on its potential duty to withhold
tax on the share sale transaction.

The Revenue Department set out a
guideline to confirm that, if the price of the shares paid by the Thai company
to JCo exceeded the latter's acquisition cost, then the Thai company must
withhold 15% tax on gains, irrespective of whether the shares sold by JCo were
in fact issued by a foreign-incorporated company or a Thai-incorporated

This is not an indication of ill
intent by the Revenue Department, or an attempt to interpret the law with a
bias simply to collect tax. Section 70 of the Revenue Code, which is the
fundamental statutory provision governing the above transaction, states clearly
that where the specified incomes (including gains from the trade of shares) are
"paid from or in Thailand", they will be subject to withholding tax.

Thus, the answer in the above
revenue ruling is a straightforward one. If someone or something should be
blamed, it probably is the Revenue Code itself that adopts a primitive sourcing
rule and looks merely at the payment location in imposing such withholding tax.

Since the law shifts the tasks of
paying and filing the tax to the Thai buyer, and imposes a surcharge of 1.5%
per month for any default or error in the calculation, the Thai buyer is often
desperate to obtain evidence to prove the foreign seller's acquisition cost to
ensure the most accurate tax calculation. This should be relatively easy if the
foreign seller has kept good records and there is only one lot of shares.

However, if the transaction involves
more than one lot of shares originally acquired by the foreign seller, matching
up the various acquisition costs is not that simple, unless there are serial
numbers to keep track of the tax cost base for the shares sold.

For instance, let's say JCo in the
above example acquired the first lot of shares (50%) at 300, and the second lot
with the same number of shares at, say, 1,000. When the Thai buyer purchased 5%
in ACo at the price of 1,200, what should JCo's acquisition cost be for
withholding tax purposes? Assuming that JCo could not identify whether the 5%
holding was sold out of the first or the second lot of its shares, applying a
matching basis in determining the tax cost base seems impossible.

The Revenue Department suggested
that the Thai buyer in this situation needed to calculate the cost by applying averaging methodology, a method documented in generally accepted accounting principles. As the average
cost between these two lots of shares was (300+1,000)/2 = 650, the capital gain
from the sale was 1,200-650 = 550.

It is interesting to note that the
Revenue Department did not mention other options such as first-in first-out, or
last-in first-out, also outlined in generally accepted accounting principles.
This suggests that the department is more comfortable with averaging in a
situation where the foreign seller cannot match the cost of the sold shares

Hence, if any foreign investor
wishes to be more selective and apply another method in a similar case, it may
be wise to clarify this possibility with the Revenue Department first.

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

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