INCOME tax paid in a foreign country ("foreign tax paid") by a company established under the laws of Thailand ("Thai company") can be used as a tax credit against Thai income tax up to the amount of Thai income tax due on income from the same period, acco
So if the Thai company does not treat the foreign tax paid as a deductible expense in computing its net taxable profit, the foreign tax paid is allowed as a credit. In addition, if the Thai company cannot utilise the entire foreign tax paid as a tax credit because the foreign tax paid exceeds the Thai tax due on the same income, the Thai company is able to deduct the remaining balance of foreign tax paid in computing its net taxable profits.
A question arises when deciding whether the foreign tax paid should be credited against Thai income tax versus deducted as an expense in the computation of net taxable profits. Several tax rulings in the past have provided guidance on the issue but none had definitively discussed when the foreign tax paid can be credited or deducted, that is, until the recent tax ruling No. 0702/8746 was issued on October 7, 2013 (“tax ruling”). The facts in this tax ruling were that a Thai company recognised income subject to income tax in Thailand and in the foreign country (“foreign income”) in 2012 Thai corporate income tax return (“TCIT return”) but the tax on such foreign income was paid in the foreign country in 2013. The TRD ruled that the Thai company can claim the foreign tax paid in 2013 as a tax credit or deductible expense in 2012 by amending the 2012 TCIT return, on the grounds that the foreign income was recognised in the 2012 TCIT return.
Please note that the tax ruling does not imply that the TRD allows a Thai company to claim foreign tax credit or tax deduction in the year the foreign income is recognised regardless of when the foreign tax is paid. This view is supported by Notification of the Director-General No 65 (“DG 65”). Under Clauses 2 and 7 of DG 65, foreign tax which is eligible for credit against Thai tax payable on the same income must be a foreign tax which has been paid in the foreign country and shall be converted into baht at the market rate on the date of the payment of such tax. In addition, Clause 9 of the DG 65 provides that a Thai company may file an amended TCIT return for the year in which foreign income is recognised if the foreign tax is paid after the TCIT return for the year was filed.
Based on these clauses, together with the tax ruling, it should be interpreted that a Thai company is only able to claim foreign tax credit if the foreign tax has been paid in the foreign country and is claimed in the year in which the foreign income is recognised. Although this practice may not seem practical, it should not have much impact on a Thai company if its foreign branch can manage to pay tax in the foreign country before the Thai company’s TCIT return filing deadline. It would present a concern in the case of foreign income, which is subject to withholding tax in the foreign country upon the remittance of such foreign income to the Thai company. The Thai company will have to amend the TCIT return to claim the foreign tax credit if the tax on such foreign income is delayed due to long outstanding debts and finally deducted and paid in the foreign country after the filing deadline of TCIT in which the foreign income is recognised. The worst case would be that the foreign tax paid is lost if the foreign income is not paid within three years because the statute of tax limitations’ refund period is within three years after the due date of the tax return filing. Since DG 65 supports the opinion in the tax ruling, it is likely that the tax ruling would be utilised as a guide in this respect.
The author, Benjamas Kullakattimas is tax partner in charge, KPMG Phoomchai Tax Ltd.