The fine line between “Legal Tax Avoidance” and “Illegal Tax Evasion”

“Money is a Misery” seems to be the truth for our former beloved leader whose spouse was served a verdict for three years imprisonment by the Criminal Code for tax evasion by creating the fraudulent transaction under Section 39 of the Revenue Code of Thailand.

All lawyers learn only how to make a fine line between “Tax Avoidance” which is legitimate and “Tax Evasion” which is illegitimate and punishable. It can be a slim fine line between “Black” and “Grey” or “Limbo” and “Inferno”.  Nowadays we have to add another concept of “Ethical Tax Planning” for all tax professionals.  Even some tax planning is legitimate because it involves only “Tax Avoidance” but it can be “Unethical”.

“Tax Avoidance” is a legitimate means to avoid excessive tax liabilities. Some people may try to ascertain the most appropriate business structure while some try to find loopholes of tax laws. Al Capone was put in jail for “Tax Evasion”, while our beloved prime minister was toppled by the military junta for “Unethical Tax Planning”.

“Tax Evasion” under Section 39 of the Revenue Code involves a fraudulent act of making a false statement or production of fake evidence or create he artificial transaction to circumvent tax laws, e.g., book crooking by using fake invoices to maximize deductible expenses like a big accounting firm in the US recently closed for accounting  scandal.

We have a story of a man who was caught for “Tax Evasion” by falsifying many invoices to claim his deductible expenses. He was brought to the judge who asked him “We find no previous criminal record in your file. If you repent and decide to plead guilty, we may grant you probation by imposing either only a fine penalty of fifty thousand baht or social service work for 100 hours”. After a silence, then the judge added “Do you have any questions””.

“Yes, your honor”, the man replied with tear of joy. “I would like to know if the penalty fine I”ll pay can be deducted from my personal income tax”.

The legitimate tax avoidance is to find out the most appropriate tax rate by flying over all relevant tax laws before setting up a business structure or transaction. For example, you may set up a company with a registered capital of One Million baht even you will use this company to buy property with a value more than ten millions baht. The reason is if your company has the registered capital of only one million baht, your company will be deemed as “SME” (Small & Medium Enterprise) with the preferable income tax rate of 15% in stead of 30% from the net profits. This is a clear example of tax avoidance to ascertain the most appropriate business structure. Some unlicensed consultants wrongly advised their clients to register the high registered capital for their service fees. Not only the exorbitant fees you have to pay, but you are also exposed yourself to the excessive tax liabilities.

Even the company has the registered capital of only one million baht, the company can buy the property with the value of ten millions baht because nine millions baht will be recorded as a loan from a director as “Debt Equity”.

There is a say   “There is no business without tax”. The good tax planning will ensure the most appropriate business structure and transaction which will not create any excessive tax liabilities. You have to fly over all tax laws to find the area which will be “Tax Wise”. Some areas are grey while some areas are black. You may pay tax less but it can be a pitfall in the future. You have to check if the tax planning will put you in a “Legal Jeopardy” instead of “Tax Preference”. Some contractors separate their construction contracts into a construction contract and supply of materials contract. They want to avoid a withholding tax of 3% for the construction contract because the supply of materials contract is exempted from a withholding tax.

The taxman may randomly inspect the inventory stock of materials. It can be “Tax Evasion” if they find no materials in the stock.

If a foreigner wants to buy a house for his retreat, he may set up a Thai company to buy this house. If this foreigner has no plan to do business, he may set up a “Dormant Company” with business objectives of “import or export” or “consulting”. The registered capital can be only One Million baht.

The tax structure of this company will be as follows:-

1)       Corporate Income Tax of 15% from the Net Profits for SME with the registered capital of One Million Baht

2)       Withholding Taxes of 3% for payments for services, 5% for rental fees and 2% for advertising fees

3)       Withholding taxes for remittance of money to aboard with a tax rate according to a Treaty of Double Taxation

The dormant company is not required to register NEITHER the “Value Added Tax”(VAT) being 7% NOR “Specific Business Tax” (SBT) which is 3.3% on the gross income.

The company will be required to register VAT if its income is more than 1.8 millions baht per year.

The company will be required to register SBT if it engages in real estate business. We have come across many foreigners who were wrongly advised by unlicensed professionals to register the business objectives of “buying, selling and renting of property” for the company they set up to buy property. These business activities are regarded as the real estate business. The real estate business is subject to the “SBT” of 3.3% from the gross income. In addition, you will have to register the land trading under Section 101 of the Land Code.

Nobody can tell the exact amount of tax that foreigners setting up companies to buy property should pay. Some taxmen use the criteria that if a foreigner who is a director lives in the house owned by the company, that foreigner will have to pay rental fees to the company. All rental fees will be deemed “Taxable Income” which is subject to the “Corporate Income Tax” which is 15% on the net profit for SME. The net profit is calculated from Gross Income deducted by Deductible Expenses which are actual expenses and depreciation of 5% for the period of 20 years. For small detached house, the tax from the rental fee should be about 4,000-5,000 baht per year.

However, if the company sells the property with profits, these profits will be subject to tax on a “Capital Gain”.

Some foreigners face a real dilemma by declaring a lower price of property for transfer of ownership or conveyancing at the land office. However, once they record the value of property in their accounts, they will have to use the declared price based on the receipts of taxes paid. It can be a “Monster of your own creation”. The “Anti-Money Laundering Office” (AMLO) may question them about the money lost in space. It is advisable to seek the advice from the real licensed professional who will not jeopardize you by their wrong advices. You should try to avoid using an offshore company in a tax heaven country like British Virgin Island or Isles of Man which may create suspicion in the eyes of the authorities.

Most of you are decent and ethical person even you are not a real rich man. You come to Pattaya to pursuit your happiness not to share the same fate with the persons involved with “Tax Evasion” or “Unethical Tax Planning”. You just pay the appropriate amount of tax for the country you love, you will be definitely happier than these scandalous men. However, nobody can tell you the “Appropriate Amount of Tax” without “Double Standard” between “Ample Rich” and “Ample Poor”.

Most expats in Pattaya suffer not only from “Double Standard” but also from “Double Price” which is “Double Jeopardy” for our justice system. Our interim government especially our prime minister is very keen on reconciliation. We are quite confident foreigners in Pattaya will be well treated who can live in the “Sufficiency Economy” under the doctrine of his majesty the King.

Most of you can be happy with one rai of land (1,600 square meters) in Pattaya than living in an expensive apartment in London. “No country for old men” should not be the situation you may worry for your long stay in Pattaya if you know the simple magic sentence “enough is enough”.

There are good news about the decrease of the government fees and taxes for transfer of land to 0.01% to stimulate the real estate business. The cabinet has already approved the principle but we will have to wait for the legislative process which will take many months.