Attractive Corporate Income Tax Exemptions For BOI Companies
The Board of Investment of Thailand (BOI) promotes certain business projects by attractive Corporate Income Tax Exemptions. Only the income derived from the business promoted by the BOI is exempted from Corporate Income Tax. In practice this leads to many disputed questions, as many companies which hold a BOI certificate receive income not only from the business promoted by the BOI, but also from additional, i.e. non-promoted, sources of income.
The computation of the Tax base of Corporate Income Tax is governed by the Revenue Code. The Revenue Department has issued a Notification regarding the computation of the tax base of BOI promoted companies which enjoy tax privileges. Under the Revenue Department’s Notification a BOI company’s needs to be computed according to Thai Accounting Standard and you should seek always advice from a qualified tax advisor. Please note that this article only serves to give you a brief overview over a highly complex and partly controversial topic and cannot replace professional tax advice in any case.
The following types of income are regarded as derived from the BOI business of a BOI company:
- Income from the sale of products or output or performance of services within a project that receives the BOI promotion, but not exceeding the maximum manufacturing output or other specification of the BOI certificate.
- Income from sale of by-products and semi-manufactured products as set forth in the BOI certificate.
- Income from the sale of machines, components, equipment, tools and property used in operating the BOI promoted business that has become unusable.
- Interest income or other income derived in the normal operation of the business as approved by the Office of the Board of Investment and the Revenue Department.
In the case that the BOI Company engages in BOI promoted and non-promoted businesses the profits/losses of both types of businesses are combined according to a set of rules and the sum of both is referred to as combined operating result. However, first the profits/losses of both types of businesses are calculated separately according to Thai Accounting Standards.
Where a clear separation is not possible or practical such as in the case of sale of machinery or property used in both types of business, the company’s income shall be prorated as follows: A ratio must be found which reflects the real proportion of the BOI promoted business and the non-promoted business of the company.
To be on the safe side and avoid any argument with the Revenue Department in cases of doubt regarding the proportion of both business types, promoted and non-promoted, a “safe” ratio can be chosen, as the Revenue Department construes the tax exemption rather narrowly. Your accountant and tax advisor need to answer this question based on the peculiarities of your company. Furthermore, to be on the safe side the company can set up a separate new company for each of its new BOI projects which also seems to be in line with the new BOI policy.
Another hot topic in this context is the treatment of losses of BOI businesses, how such losses may be deducted from profits of non-BOI businesses of the same company, and how they may be carried forward to subsequent accounting years. As the Central Tax Court and the Supreme Court have been scrutinizing the practice of BOI companies to offset losses of different BOI projects against their non-BOI revenues, I would like to outline the basic principles of treatment as they can be found in the relevant sections of the law.
- Section 31 paragraph 4 of the Investment Promotion Act sets forth the general rule for carrying forward losses as follows: In the case where a loss has been incurred during the period of receiving exemption of juristic person income tax, the Board may grant permission to the promoted company to deduct such annual loss from the net profits accrued after the expiration of the period of exemption of juristic person income tax for a period of not more than five years from the expiry date of such period. The promoted company may choose to deduct such loss from the net profit of any one year or several years.
The above mentioned Notification of the Revenue Department complements this general rule by providing some guidance for the case that a promoted company has tax-exempt and non-tax exempt profits/losses as follows:
- Section 4.2 (a) of the Notification provides that in the case that a BOI-promoted business shows net loss and a non-BOI business shows net profits, the promoted company is entitled to deduct the net loss from the promoted business from the net profit of the non-promoted business.
- And Section 4.2 (b) of the Notification provides that where the tax-exempt business sustains losses in any relevant year and the non-exempt business has net profits in the same year but sustained losses in previous years, the company must use the losses of the non-exempt business first and can apply the losses from the tax-exempt business only to offset against the remainder.
The above rules as contained in the Investment Promotion Act and the Revenue Department’s Notification still are not clear enough if a company has more than one tax-exempt business. For example, if tax-exempt business A sustains a loss and tax-exempt business B earns profit it is thinkable to take the loss of business A to offset against a profit from non-exempt business C. However, according to the Revenue Department’s tax ruling dated 17th May 2005 the promoted company has to calculate the net profits/losses by taking into account all tax-exempt businesses together.
As a side note: Just recently the Finance Ministry proposed a change of the current BOI practice to close loopholes which made it possible to decrease the income tax payable by taking advantage of the BOI practice to grant one BOI privilege for several projects to one company. The BOI has responded by explaining that a new company should be set up for each BOI promoted project. At the moment it is unclear to what extent the BOI will finally depart from its current practice. We will monitor any new development and report about it.