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BoI policy on machinery presents challenge to auditors

One of the major challenges faced by companies promoted by the Board of Investment, and their auditors, is a new practice that has recently been adopted by the BoI.

Just like any other company, one that has received promotional privileges from the BoI is subject to an independent audit. In the latter case, one of the purposes of the audit is to form an opinion as to whether the performance and nature of the project comply with the conditions stipulated in the BoI certificate. If the report provided by the auditor shows that the company has satisfied the conditions, the agency will authorise the company to use the privilege of corporate-income-tax exemption.

This simply means that the BoI will rely on the opinion of the auditor when issuing such authorisation. The purpose of this article is to raise awareness of the significance of the auditor's report to the BoI.

The BoI requires the auditor to examine certain information regarding the machinery used by promoted companies because it has found that some have not complied with such conditions. In most cases, it is a requirement that the machinery to be used in a project must be new and imported or purchased locally after the application for privileges or after the certificate BoI has been granted.

If the machinery was imported or purchased locally prior to the date on which the BoI application was filed, it would be considered used or old machinery and would not qualify. If the company fails to comply with this requirement, the amount of corporate income tax to be exempted could be adversely affected.

A few years ago, BoI officers found several cases where machinery for a project had been purchased and booked in the accounts of the company before it had submitted its application for investment promotion. Such machinery was then not accepted for use in the BoI project. Disputes arose when BoI officers did not believe that the machinery or other assets were new, while the companies insisted that they had never been used before.

It was then decided that an independent auditor should be the person most qualified to verify and identify the condition of machinery in such cases.

As a result, BoI officers now request that auditors of promoted companies verify this matter. This has created a huge burden on the auditor, who now has to face the problem of how to prove that the machinery or other assets had never been used before the application was submitted to the BoI.

As well, in spite of such requirements, the BoI does not have a manual or provide any guidelines for the auditors to follow, or even a form to fill out with regard to this matter. The auditors have to find their own ways to manage this issue, and often the facts on which their opinion will be based occurred two or three years previously. If this issue had been raised at the stage when the BoI was considering the application, the auditor would have been easily able to check whether the machinery or other assets existed and what their apparent condition was.

If a company were to fail to satisfy its BoI conditions, it would be a disaster, because the agency would cancel its tax privileges. As a result, the company would have substantial tax issues with the Revenue Department.

At present, the BoI has to rely on the auditor's confirmation report because it does not have its own evidence to prove the status of the machinery, and the report of the independent auditor is deemed valid and reliable. Therefore, every BoI company will have to consult with a professional adviser and its independent auditor carefully in order to defend its position on such matters.

Suradech Hongsa, the author, is a PricewaterhouseCoopers manager.


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