Revenue Department Investigation

[JOCK67]

My small company (myself and my wife) was investigated by the Revenue Department for making a loss in 2009. The reason they say I made the loss is because I increased the salary the company pays me by 3x the level it was at in 2007 and 2008. The reason I did this was because the company had secured a long-term consultancy contract in August 2008 which meant I was working continuously and longer and harder as a result and also to provide suitable salary for current outgoings (the previous salary had been kept minimal, not adequate to cover outgoings)due to the company only being established in 2007. Then due to the economic downturn in September 2009 the long-term agreement was replaced with a daily-hire agreement and revenue substantially decreased as a result. In 2010 I reduced the salary by 60,000 to keep it more in line with the workload and the reduced revenue.

They have assessed an additional tax payment due (but this isn't written in the official record of the investigation) based on 60,000 Baht x 12 months (720,000 Baht) x Corporate Tax Rate. I stated that this logic wasn't correct as Personal Income Tax had already been paid on the Salary (and at a higher rate than the Corporate Tax rate). I shouldn't pay tax twice on the same money. They said it doesn't matter.

They said that if I didn't pay then they would further investigate the comapny in respect to the benefits the company pays me as part of the salary package (health insurance, housing allowance, utilities allowance) and also why my wife's salary was so high (35,000 Baht) for the work she does (and why did she receive a 5,000 Baht increase in 2009) - the officer also kindly pointed out that this was more salary than she received after working for the Revenue Dept for 15 years, and why I had transferred my car into the company name (as a company car and asset)and why I was claiming yearly insurance and registration costs as expenses, and so on...

I asked my accountant to talk to them afterwards as this made no sense. The logic and basis of calculation of the additional tax wasn't based on anything other than their own judgement as to why the loss occurred and only took into account the salary and not the economic downturn and decreased revenue. I aksed my accountant to point out that in the 2009 half-year Profit & Loss forecast the company was due to make 1,000,000 profit and it was the substantially reduced revenue in the last 3 months of 2009 that had caused the problem. The officer said they didn't accept this and that if I didn't pay by the end of this month they would charge penalties and further investigate the company!

This is not a normal assessment and my accountant says it seems not fair, but they seem powerless to help. I do not want to pay tax twice on the same money when I have already paid them personal income tax. This is a lot of additional tax. I shouldn't need to seek the Revenue Dept's permission before I adjust salaries in my own company.

Any advice will be gratefully received. Thanks.

Edited April 25, 2011 by JOCK67

[gregb]

I think people are trying to help and you aren't picking up on the subtle hints.

If you've been in Thailand this long and don't understand what is going on then I don't think anyone can help you. Even if you managed to get out of it this year, your business would be marked every year from now on. It doesn't pay to try and fight this farang style even if the law is on your side. There is no way around this problem other than to make an offering to the revenue officials directly. The last company I worked for used to give out gold rings every year to some of the senior officials. They never had problems like this. Draw your own conclusions.

[xbusman]

gregb has the clue. We have been through this same scenario often. In Thailand, everything is possible... for a price. Since you posted, you are obviously looking for advice so lets see if we can make this at least as clear as mud.

First point, do your best to resolve this as quickly as possible. The longer it goes, the more people will want to be "satisfied" with your compliance.

Second point, nothing the revenue is doing is based on any sort of logic, law, fairness, common sense, courtesy or public interest so avoid spending more than five wasteful seconds trying to understand what is going on.

Third point. In this type of negotiation its important to get a number and stop the silliness. They will run you to death asking for obscure paper, weird receipts, and on and on all in a meaningless attempt to wear you down. Put up the wall, and get a number for a starting point. You have to get this number to resolve this issue and move on. When you talk with revenue, tell them that obviously your accountant does not understand the Thai tax system and ask them to recommend a consultant to get you in compliance. That tax consultant will be the bag man and be able to conclude negotiations and transfer your wealth to the appropriate party.

Usually for a tiny business like yours, the final payment will not be less than 10,000 and not more than 20,000 baht unless they can see a lot of cash/profit in the company. Thats pretty dependent on where you are located too. The Revenue dept is just as isolated and corrupt as the police stations and are not interlinked. Each is its own profit center for business shake downs. From anecdotal information, Bangkok mafia is usually more expensive than the burbs. If you are in the grip of Wang Thong Lang forget it, they are going to go for everything you got.

Like the police, just understand and appreciate that the tax rate is so low here that its a cost of doing biz.

[keestha]

Are you paying VAT, or is the turnover too low for that?

Don't scold me for asking an irrelevant question please, it is just that it would surprise me if the Revenue Department would investigate a company with a comparatively low turnover.

Edited April 26, 2011 by keestha

[p_brownstone]

xbusman is correct - although I think he's being very optimistic about the final figure the Revenue Department will accept.

I have been through this twice in about 15 years - a smallish Company can expect to be audited every 5 or 6 years.

The ruling from the Officer never has any basis in logic or even common sense - one year they simply disallowed a flat 60% of my expenses even though we had genuine Receipts.

Don't waste your time arguing or expecting any relief - do what every other Company does, accept the panalties and then "adjust" your accounts for the next year to make up whatever you have been unfairly charged.

Patrick

[JOCK67]

Thank you for the advice so far.

I have been in Thailand a good number of years and know the alternative ways that Government Departments can be dealt with to get round specific problems and 'taking care' would not be an issue but no 'hints' have been made in that respect. The message I am getting is that I must pay. This makes it more frustrating. Possibly the problem may be the accountant who advertise themselves as being above board and doing everything legally. That being the case I most likely need to talk to the Officers again directly and see if I can minimise the figure, as the accountant seems unable to do even that.

The company does generate good turnover and especially in the 2nd half of 2010 and now 2011 as business has improved. We diligently pay VAT (at least 30,000 every month). I believe what they are thinking is that I am 'creating' company expenses through our salaries and benefits to minimise taxable profit and whilst they can't nail me on that they have come up with this alternative route to gain more tax out of the company with the threat of further investigation if I don't comply.

I am happy to clear the problem and not have it ongoing but getting at least some agreement in place to have 'a number' seems to be the problem. I will go back to my accountants and advise them to take a harder line to reduce the amount in question. Failing that I'll give the Officers a call myself and see where I get to.

Luckily I'm not in Wang Thong Lang but Pathumwan, though thinking that may not be much better

[JOCK67]

Thanks Patrick. Your advice is about where I believe it is going to end up. I just spoke with the accountant again and she advised that they have been trying to do a deal since the start of the month to get the amount reduced but getting no where. She said that there is an option for me to go and meet with the investigating officers boss myself (she can arrange this) and see if I can get a better result but the danger is they don't accept and will investigate more - message is pay up or else.

Any experience or benefit in going to their Offices and trying to reach a better result with the boss or am I more likely to end up worse off and having to make an 'extra' payment for my troubles?

[JOCK67]

Another point which I forgot to make was that they had calculated wrongly the difference in salary between 2009 and 2010. Instead of taking the whole taxable package including housing, utilities, health insurance allowances and compared totals on a like for like basis, they only took the different amount transferred into my bank account each month which was a higher difference than the whole taxable package difference.

Have tried to get some understanding from them on the incorrect basis of calculation to reduce the figure but even that has been ignored. The 'real' differnce should only be around 40,000 Baht per month. Now considering I'm how much would be reasonable to offer as an 'incentive' to either completely erase the problem or at least to have them accept the reduced figure based on avoiding either approx 200,000 Baht additional tax at the high end or 100,000 Baht additional tax at the reduced salary difference.

Any suggestions welcome.

Edited April 26, 2011 by JOCK67

[AliasJohn]

Your story is a 100% carbon copy of my small company in 2008. My accountant arranged a meeting with the revenue department officer at the main office in Bangrak and after a brief "how do you do" and a informal chat, I was asked to hand over a small donation of 10,000 baht.

On receiving that she bid me farewell and said you will not hear from us again. I still had to pay corporate tax which I believed I should not have had to pay, but in the long run it works out cheaper if you just pay it.

My suggestion to you is go there with your accountant and nip this in the bud before it gets out of hand. Good luck!

[p_brownstone]

I would be very surprised if you could pay "under the table" to solve this type of situation - that is not what they are looking for.

Basically the Government has a Budget to balance, and a major source of revenue - to pay the expenses - is Corporate Income Tax.

Every year when the Director General of the Revenue Department looks at the projected Tax Income he invariably finds it will fall short of his given "target" so the order goes out to the Provincial Tax Offices etc. to increase Tax Revenue - each Office is given an individual Target and the Provincial Tax Chief apportions that among his Officers and they have to meet their individual target for increased Revenue by putting the pressure on smaller Companies in their zone of responsibility. If they fail they could lose their jobs or be transferred to Nakorn Nowhere - they will not risk that simply for a Baht 10,000 - 20,000 Baht personal payment - they have to produce genuine increases in Tax Revenue.

In the end of course it is totally unfair ......... and totally self defeating. I am a U.K. qualified Accountant and a Fellow of the Institute of Directors; when I started my Company here I was scrupulously honest in all my Bookkeeping – much to the disgust of my Thai friends when they found out I should add. After the first time I was “audited” and treated in a similar fashion to the OP I learnt my lesson, recouped the unfair penalties within a few months of the next financial year and have no intention of being treated in that way again without ensuring similar “payback” - but I will not waste a moment of my time disputing or even discussing whatever penalties some junior Tax Collector conjures up.

Charge me what you like - it's all coming back to me anyway!

Patrick

[AliasJohn]

Hi Patrick....Sorry to say but I found myself inside the main tax office at Bangrak, in the open for all to see and there was no hesitation in the officer accepting my donation to get them off my back. After that, never heard a word from them. Maybe in a year or two they will knock on my door again though haha cheers

I would be very surprised if you could pay "under the table" to solve this type of situation - that is not what they are looking for.

Basically the Government has a Budget to balance, and a major source of revenue - to pay the expenses - is Corporate Income Tax.

Every year when the Director General of the Revenue Department looks at the projected Tax Income he invariably finds it will fall short of his given "target" so the order goes out to the Provincial Tax Offices etc. to increase Tax Revenue - each Office is given an individual Target and the Provincial Tax Chief apportions that among his Officers and they have to meet their individual target for increased Revenue by putting the pressure on smaller Companies in their zone of responsibility. If they fail they could lose their jobs or be transferred to Nakorn Nowhere - they will not risk that simply for a Baht 10,000 - 20,000 Baht personal payment - they have to produce genuine increases in Tax Revenue.

In the end of course it is totally unfair ......... and totally self defeating. I am a U.K. qualified Accountant and a Fellow of the Institute of Directors; when I started my Company here I was scrupulously honest in all my Bookkeeping – much to the disgust of my Thai friends when they found out I should add. After the first time I was "audited" and treated in a similar fashion to the OP I learnt my lesson, recouped the unfair penalties within a few months of the next financial year and have no intention of being treated in that way again without ensuring similar "payback" - but I will not waste a moment of my time disputing or even discussing whatever penalties some junior Tax Collector conjures up.

Charge me what you like - it's all coming back to me anyway!

Patrick

[p_brownstone]

Hi Patrick....Sorry to say but I found myself inside the main tax office at Bangrak, in the open for all to see and there was no hesitation in the officer accepting my donation to get them off my back. After that, never heard a word from them. Maybe in a year or two they will knock on my door again though haha cheers

Well, since you also say :

"I still had to pay corporate tax which I believed I should not have had to pay, but in the long run it works out cheaper if you just pay it."

I'm not at all sure what benefit you received from paying the Baht 10,000.- .... and it seems the local Revenue Office still received the extra Tax they wanted from your Company - as I said, that's what they want, increased Tax Revenue.

Certainly if someone wants to pay a bribe but still pays the imaginatively calculated "penalties" they would be foolish to refuse!

Patrick

[jcon]

Don't go to the Revenue Department yourself. Send your accountant.

xbusman's 10-20K Baht figure is IMO (and experience) at least an order of magnitude off, and can easily be 2 orders of magnitude off depending on your revenues.

This is definitely NOT a "slip money under the table" issue with the Revenue Department. They have not been messing around at all since around year 2551 (2007).

If you show a real attempt to sort it out asap, then your accountant may be able to have the fine ''reduced" but it is case by case. Keep in mind the Revenue Department is charging you interest (1% per month, IIRC) for whatever fines/taxes they have levied on you, so the longer you wait, the more you will have to pay. They will make you pay.

Patrick is giving some good knowledgeable advice. Send your accountant to make your case, try to pay 50% of what their number, and chalk it up to experience (and then follow Patrick's advice for the future). You may have to pay 100%, so be prepared for that.

edit: forgot to mention, the Rev Dep't also offers a % reward for ratting out others..... 15% IIRC. They are pretty methodical and I believe they are hunting through the list ''by industry.''

Edited April 26, 2011 by jcon

[AliasJohn]

If I did not pay the "under the table" donation, they would still persist and the amount would rise on each visit. This by the way went on for 6 months and was driving me crazy so as much as I regretted making the payment I reluctantly paid up. Who knows what would have happened if I refused to pay. The Revenue department seem to make up the rules as they go and depending on each case I think. Anyway...all is ok now "touch wood" Thanks for your reply Patrick. Cheers

Hi Patrick....Sorry to say but I found myself inside the main tax office at Bangrak, in the open for all to see and there was no hesitation in the officer accepting my donation to get them off my back. After that, never heard a word from them. Maybe in a year or two they will knock on my door again though haha cheers

Well, since you also say :

"I still had to pay corporate tax which I believed I should not have had to pay, but in the long run it works out cheaper if you just pay it."

I'm not at all sure what benefit you received from paying the Baht 10,000.- .... and it seems the local Revenue Office still received the extra Tax they wanted from your Company - as I said, that's what they want, increased Tax Revenue.

Certainly if someone wants to pay a bribe but still pays the imaginatively calculated "penalties" they would be foolish to refuse!

Patrick

[xbusman]

As is typical in Thailand, anecdotal experience is all over the board. As with everything here, the variables are never ending. What kind of business, how much profit, how difficult to move, what Revenue station, what revenue officer, and on and on. In my case, I manufacture and assemble here parts from all over the world, then export them to US companies. I have set up my company so it could easily and quickly be transferred to Cambodia or Malaysia (mostly because of the fluctuating baht but also because you never put enough investment locked down in a third world so as to become a victim). During the negotiations, we talk about how many Thais would lose their jobs and how much export business would be lost if they push too hard and what a shame to have to notify AmCham of this terrible problem of doing business in Thailand, blah blah blah. In the long run, they dont care but it gets their attention.

Here is what I think you can take away from all these posts.

The Revenue department like every other aspect of Thai society is endemically corrupt from top to bottom. They run independently and are determined to steal as much as they can from any victims they can identify. They have you in their grasp and are going to steal from you, the question is only how much. Sometimes you can pay a person, sometimes you can pay a tax, but you are going to pay unless you have contacts higher up than the general in charge of Revenue collection.

While every situation is different, you should probably identify your top and bottom limits and talk with other business owners in the Revenue district to see how they made their payment. You will find around 90 percent of the Thai businesses around you keep no books at all or if they do its strictly a work of fiction. But most of them at some time or another had to grease the wheel, if you can find one or two to tell the truth it might give you perspective on how much you should pay. Again, no benchmark in reality has anything to do with this payment. Its simply how much they can steal from you at this moment.

I have to agree with Patrick. Because the Revenue department is corrupt and they steal from us. So we in turn, have to steal it back. That way Revenue knows we are stealing and is entitled to steal it back which in turn entitles us to steal more in order to pay off their stealing. Simple aint it? Has worked here for at least a few hundred years and is a good lesson for anyone running a business in asia.

The first few times you get shook down its a bit hair raising but you will get the hang of it if your are lucky. The good news is that these goons wont break your limbs or put a bullet in you, its only your money they want.

[gregb]

Thank you for the advice so far.

I have been in Thailand a good number of years and know the alternative ways that Government Departments can be dealt with to get round specific problems and 'taking care' would not be an issue but no 'hints' have been made in that respect. The message I am getting is that I must pay. This makes it more frustrating.

Not a problem. I guess I was thrown off because you were posting irrelevant details about the unreasonable rules you had supposedly broken, and were concerned you didn't want to fall victim every year.

As others have posted, the Revenue Department has 2 issues. 1) They have goals they need to meet for revenue collection. 2) They have goals they need to meet for personal collection.

You are going to need to make a personal offering to the officials in charge. It would be foolish in the extreme not to do this. Moreover, you need to plan on repeating this every year. If you make friends with these people, then you will find you enjoy a degree of protection from this stupidity in the future. Look at this current crisis as the price of introduction to some people who will make your life easier in the future.

A proper gift today will likely go some way towards reducing the payment associated with issue #1. It may or may not go away completely, depending on how much pressure the particular office is under. Even in the US, it is considered bad form for an IRS agent to report no penalties on an audit. Everyone is assumed to cheat. If you aren't, then you are being foolish, because you will just be subjected to tighter and tighter scrutiny until it is discovered how you cheated. In Thailand, it will be made up if it doesn't exist. You are better off making your cheating highly visible. That way, everyone wins. The revenue department finds your cheating with a minimum of hassles, and your fines are usually less because you didn't make them tax their brains to find ingenious ways to make their argument.

But again, it is important you take advantage of this situation. I highly encourage you to go meet the highest level official you can, and bring along a Thai who is sociable and knows how to move through the system. Meet these people, and befriend them. Accept you have just added some new employees to your payroll. Off the books of course. As long as their salary is sufficient, I think you will be pleased by the results going forward.

A 1 or 2 baht gold necklace for whoever has ultimate authority in that office is not an unreasonable annual gift for their patronage of your firm.

Edit: forgot to say I really enjoyed xbusman's suggestion of hiring their "tax consultant". I hadn't heard that particular approach before. I will remember it.

Edited April 27, 2011 by gregb

[smerty]

They did on my company

Are you paying VAT, or is the turnover too low for that?

Don't scold me for asking an irrelevant question please, it is just that it would surprise me if the Revenue Department would investigate a company with a comparatively low turnover.

[jimky]

I'm a US citizen living in Thailand and was the sole founder of an internet marketing company that merged many times, ended up based in Canada and now has ten business partners. We're now in the process of selling all our assets (sale in contract stages now) will soon dissolve and all have cash looking to start something new seperately. I'm fairly certain I'm going to end up in 80% (them) 20% (me) partnership with at least 4 of them on new projects. I had originally been thinking of just going solo, but then seeing how many affiliate networks and companies won't deal with Thailand, I've been leaning on this 20% partnership option using a Thai company to own those shares, because life is simple this way and I'm confident in each partners abilities and know their past performance.

If I do this, this is how my Thai company will run.

Income:

12-15 payments per year totaling about 2.5 million baht (which VAT will be paid on) for services I perform in Thailand.

Foreign Dividends as it will hold 20% of the shares in 4-5 private corporations.

Expense:

Bank Fees

Currency Conversion Fees

Accounting

Salary (Monthly: 50,000 baht me, 15,000 baht my wife, 5,000 baht part-time assistant).

Office Rental 2,500 Baht per month (I personally rent this to company)

Income - Expense = amount to pay CIT on.

There will be nothing else for income or expenses, nor are there any homes, cars, or anything else as assets.

If the only personal income I have is 600,000 baht annual salary, 30,000 Baht annual rental income and everything else is paid to me in dividends from a Thai company: Am I also supposed to be worried about shake downs from the Revenue Department? It's squeaky clean and it is simple with a very low # of annual transactions to report, and no hidden income anywhere. 100% of my world wide income passes through my Thai Limited company.. I can't see any expenses to disqualify on my CIT, nor is there anything on my PIT other than 600,000 baht salary, 30,000 baht rental and a bunch in annual dividends CIT has already been paid on.

Immune to the problems in this thread? or still something I should be worried about?

(Edit: The only thing else I could think of would be on CIT: disallowed tax credits already paid to the foreign country on the foreign dividend lol, but that would be amazingly wild and violate tax treaties they have. TiT so anything possible, but that one just seems extremely unlikely).

Edited April 28, 2011 by jimky

[jcon]

I'm a US citizen living in Thailand and was the sole founder of an internet marketing company that merged many times, ended up based in Canada and now has ten business partners. We're now in the process of selling all our assets (sale in contract stages now) will soon dissolve and all have cash looking to start something new seperately. I'm fairly certain I'm going to end up in 80% (them) 20% (me) partnership with at least 4 of them on new projects. I had originally been thinking of just going solo, but then seeing how many affiliate networks and companies won't deal with Thailand, I've been leaning on this 20% partnership option using a Thai company to own those shares, because life is simple this way and I'm confident in each partners abilities and know their past performance.

If I do this, this is how my Thai company will run.

<snip>

If I read that correctly, although you would be a 20% partner in the newly formed company (with the other partners), as I understand it you would be 100% owner of the Thai company, which is obviously over the 49% foreign ownership limit. You would need Thai partners/owners. Other members please correct me if I'm wrong or if I read that incorrectly.

[jimky]

I'm a US citizen living in Thailand and was the sole founder of an internet marketing company that merged many times, ended up based in Canada and now has ten business partners. We're now in the process of selling all our assets (sale in contract stages now) will soon dissolve and all have cash looking to start something new seperately. I'm fairly certain I'm going to end up in 80% (them) 20% (me) partnership with at least 4 of them on new projects. I had originally been thinking of just going solo, but then seeing how many affiliate networks and companies won't deal with Thailand, I've been leaning on this 20% partnership option using a Thai company to own those shares, because life is simple this way and I'm confident in each partners abilities and know their past performance.

If I do this, this is how my Thai company will run.

<snip>

If I read that correctly, although you would be a 20% partner in the newly formed company (with the other partners), as I understand it you would be 100% owner of the Thai company, which is obviously over the 49% foreign ownership limit. You would need Thai partners/owners. Other members please correct me if I'm wrong or if I read that incorrectly.

* I will own 98% of Thai Company (American/Thailand Amity Treaty)

* There will be 4-5 other companies (for certain: Canada, Singapore, UK, US, and MAYBE Malta) in which my Thai Company owns 20% of shares of each and one or two "individuals" (none of them myself or at all related to me, other than past business dealings) owns the remaining 80%. Thai company receives annual dividends based on profits from each company.

*There will also be 12-15 separate invoices per year totaling around 2.5 million baht.

*Low expenses, not much to see, nothing is hidden and everything extremely easy to explain audit or w/e else.

(Seriously thread here had me all worked up, but keep thinking what could they possibly have to see. Figured maybe ask the opinion of others here who have had dealing with them or not. I mean with my structure it seems so tough to make anything up out of thin air, but TiT.)

[gregb]

If the only personal income I have is 600,000 baht annual salary, 30,000 Baht annual rental income and everything else is paid to me in dividends from a Thai company: Am I also supposed to be worried about shake downs from the Revenue Department?

Short answer? Yes. You would be foolish to assume you will never be shaken down by the Revenue Department. It generally takes a few years, but especially with small numbers that don't grow they will eventually take you in their sights.

It is best you plan on setting aside a fund to deal with this. It is part of the cost of doing business in Thailand.