THE NATIONAL Council for Peace and Order recently announced that it would keep the VAT (value-added tax) rate at 7 per cent for an additional year, from October 1, 2014, to September 30 2015, and after that the rate will increase to 10 per cent.
As we all know, the establishment of the Asean Economic Community in December next year will open up a market of more than 600 million people. It is expected that the AEC will encourage consumer spending in the region, and thus indirect taxes will be a key source of government revenue, while corporate tax will be reduced.
Most Asean member countries have adopted a form of VAT or GST (goods and services tax), with the rate of 12 per cent in the Philippines not only highest in Asean but also in the entire Asia-Pacific region. Meanwhile, Indonesia, Cambodia, Vietnam and Laos impose VAT at the rate of 10 per cent and Thailand and Singapore currently impose 7 per cent.
Malaysia will implement a GST next March at the rate of 6 per cent, the second-lowest in Asean after Brunei, which has no VAT or similar system.
Myanmar applies a commercial tax, which is a turnover tax levied on goods and services at rates ranging from 3 to 100 per cent.
According to the director-general of the Thai Revenue Department, if the VAT rate is increased to 10 per cent, the department will earn Bt201 billion more in annual tax revenue. Currently it is facing pressure to increase its revenue as tax collection has fallen short of target. In the last nine months of the fiscal year 2014, disclosed tax collection was 7 per cent behind target and even 2 per cent lower than in the same period of the last fiscal year.
This situation would have caused put pressure on the Revenue Department to strengthen its tax collection, which could lead to more tax audits in the final quarter of the fiscal year (August to October).
VAT is always in the spotlight during a tax audit, especially when the company reports a significant amount of unused input tax to be carried forward or requests a VAT refund. A significant increase or decrease in VAT reporting in the current month or period compared with the same year to date month/period year on year could also trigger a VAT audit.
In conducting a VAT audit, the Revenue Department normally starts with a reconciliation of revenue between VAT returns and corporate-income-tax returns, which can easily detect missing revenue from either source. In addition, the reconciled revenue provides information on the taxpayer’s VAT treatment, that is, whether it is treated as VAT or non-VAT revenue.
The department can very often identify non-VAT compliance from merely this reconciliation of the revenue. In this regard, the business should reconcile its revenue from two sources and prepare explanation of any difference.
This will also assist the business to review its own compliance. The sooner non-compliance is found, the easier it will be to avoid surcharges and penalties. A surcharge at 1.5 per cent per month and penalty of up to 100 per cent of tax due will be imposed in case of underpaid VAT.
Apart from the VAT treatment on revenue, claiming disallowed input tax is one of the top issues raised during a VAT audit. The highlight is on input tax paid on the expenses not directly related to the carrying on of business of the VAT registrant – Section 82/5 (3) of the Revenue Code – as different views may occur on whether the expenses were for business, because of the absence of clear guidance.
It is important to note that if the input tax is disallowed for this reason, it will also be an issue for corporate income tax, as expenses that are not exclusively incurred for the business are not deductible in the computation of net taxable profit for corporate tax payment, as per Section 65 ter (13) of the Revenue Code.
There have been cases where the VAT issue was initiated as a result of matching taxpayers’ records, that is, matching input tax claimed by one taxpayer against the output tax paid by another, regardless of whether they are in the same areas or provinces. Starting from January 1, 2015, VAT registrants will be required to include VAT-registered customers’ taxpayer ID numbers in their tax invoices. This will help the Revenue Department more easily and quickly detect non-compliance in VAT reporting and determine whether the tax invoice is genuine.
Benjamas Kullakattimas is tax partner in charge, KPMG Phoomchai Tax Ltd.