When the spirit of the law shines

The current government has been trying very hard to make
Thailand a jurisdiction that places more emphasis on substance and less on
surface appearances. This is evident in recent legal reforms, but the attitudes
of state authorities remain problematic. Many seem to believe that in order to
be patriotic, the private sector must submit to any extra conditions that
authorities impose above and beyond the legal framework.

Of greater concern is the fact that the justice sector
sometimes joins with tax authorities in the pursuit of treasury revenue by
interpreting issues beyond the limit of the law. In this respect, the Minebea
ruling, in which a company was required to net all losses and profits from all
of its promoted projects together before it could carry forward the net loss,
remains traumatic for many companies working under the regime of the Board of
Investment (BoI).

In another curious case, the Council of State recently
upheld an interpretation of the Customs Department and the Department of
Mineral Fuels (rather than the Excise Department) by applying the definition of
the "Kingdom of Thailand" under the Petroleum Act to the Excise Tax
Act simply to collect taxes, effectively ignoring royal proclamations and the
UN Convention on the Law of the Sea that define Thailand's territorial waters.
No legal foundation was established for collecting taxes from the companies
affected.

Thankfully, there are still cases in which the courts allow
the spirit of the law to prevail. It took two separate cases but the outcome
ultimately favoured the taxpayer.

The saga began with a fire at a BoI-promoted company that
had received exemptions from import duty and business tax (later replaced by
value-added tax) in 2001 on imported raw materials used to manufacture goods to
be exported from Thailand. The fire left the materials unusable, but the
Customs Department said the company had breached the conditions of its tax
privileges and demanded import duty. The case was brought to the courts of
justice.

The first court ruling adhered strictly to the letter of the
law: "The company was granted an exemption of import duty and business
tax, only if it utilised the imported raw materials for the manufacturing of
the goods for export, and there was no other way that the company could fulfil
the condition for such exemption."

As for the company's assertion that it had no intention to
breach its BoI conditions, the court said: "Since Section 54 of the BoI
Act allowed the BoI to give a warning letter before revoking the promotion
certificate where the promoted company appeared not to have an intention to
commit such a breach, it meant that the promotion certification could be
revoked, even if the company had no intention to breach the condition.

"If the company had not been promoted with the BoI, it
would have been liable to pay import duty and business tax right upon the
import of raw materials, and had no right to claim refunds, even if the
imported raw materials caught fire or were damaged later."

In the same year that the above judgement was made, a fire
damaged imported goods at another BoI-promoted company that had similar
incentives. It reported the incident to the BoI.

BoI officials initially resolved that the company could
write off the raw materials without having to pay import duty. But at a second
meeting the decision was reversed. The BoI revoked the company's promotion and
said it must pay import duties and VAT, citing the ruling in the earlier court
case. This case ultimately reached the Supreme Court.

The Supreme Court ruled last year that the fire was
"neither caused by intention, or negligence, of the company. Thus, there
was no intentional breach or violation of the conditions, and the incident was
out of the company's control".

The court took into account the spirit of the BoI Act by
explaining: "[The] intention of the BoI Act for granting the exemption of
import duty for raw materials was to promote investment, and to benefit the
Thai nation through additional job creation and income, without consuming such
raw materials or finished goods that were claimed to cause the state a trade
deficit — which was the basis for the BoI in laying down a condition that the
imported raw materials must be utilised for manufacturing of exported goods
only."

Based on these reasons, it ruled: "While the raw
materials that caught fire were unable to be utilised to manufacture the
exported goods, none of them was consumed in Thailand either. As it was
impossible for the company to fulfil the conditions laid down by the BoI in
this case, its BoI promotion must not be revoked."

The new BoI Act, which has been in effect since the
beginning of this year, also exempts import taxes on raw materials used to make
exported goods. This recent court case should reassure promoted companies that
principles of justice based on the spirit of the law should prevail unless
there is an explicit legal provision stating otherwise.

If your sense of righteousness tells you that you have fully
complied with the law as well as its spirit, never give up hope simply because
someone else lost a similar case earlier.

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