LL.M. (Business Law) Chinawat Assavapokee 3 November 2011

1. Advanced Business Tax PlanningTAX PLANNING:CASE STUDY LL.M. (Business Law) Chinawat Assavapokee 3 November 2011

2. DIFFERENCE • Tax Planning • Tax Evasion • Tax Avoidance 2

3. TAX PLANNING Safe Tax Planning involves organizing one’s affairs using legally acceptable means in order to minimize the amount of tax which would otherwise be payable. As well as complying with all the statutory requirements the arrangement entered into should be a genuine commercial transaction or one which is a normal family arrangement. Effective & Legitimate Tax Planning – Les Szekely, Cynthia Coleman, Geoff Hart, Horwath & Horwath 3

4. TAX EVASION Tax evasion involves minimization of tax through deliberate wrong doing. Effective & Legitimate Tax Planning – Les Szekely, Cynthia Coleman, Geoff Hart, Horwath & Horwath 4

5. TAX AVOIDANCE • The term given to Artificial and contrived schemes to minimize tax is tax avoidance • The arrangements entered into under a tax avoidance scheme are usually legal • Strict letter if not the spirit of the law • Tax avoidance and tax evasion and tends to use the two term interchargebly Effective & Legitimate Tax Planning – Les Szekely, Cynthia Coleman, Geoff Hart, Horwath & Horwath 5

6. 10 Strategies for Tax Planning • Tax planner must understand the Revenue Code • Tax planner must be knowledgeable of other tax-related laws • Tax planner must know which type of corporate entity to choose and how to structure the holding • Tax planner must understand about incomes/expenses/deduction • Tax planner must know how to take benefits on related rights and privileges or concession 6

7. Tax planner must know how to minimize tax when they enter into the contract • Tax planner must plan on the basis of prevailing facts and substances and not according to the form (“Substance over the Form”) • Tax planer must be done by competent lawyers and accountants • Tax planner must understand that the Ruling from the Revenue Department will be done in case of extreme necessity only • Tax planner must consider whether tax planning is worth the expenses and image or reputation. 7

8. Principles of Tax Planning for Family Business • How to choose various forms of business entity: Holding Company • Limited company, Baht 5 million registered capital (SME) • Which form?/how many organization? • Components • Capital • Estimates of incomes and expenditures • Credibility of customers and creditors • Responsibility • Tax-exempted businesses 8

9. Tax burden of business entity and investors Tax rates of business entity Dividend/profit sharing Profit from share transfer Body of persons Exemption N/A 5% - 37% Limited company/ordinary partnership 30% Limited company/public limited company • Natural person subject to progressive tax at 5-37% except in the case of stock market • Juristic person subject to 20-30 per cent tax • Foreign entity subject to 15 per cent tax • Juristic person of some DTA countries will be exempted 30% • 10 percent withholding tax • Natural person gets tax credit from dividends • Juristic person is exempted under Section 65 bis (10) • Foreign juristic person 10% SME 15, 25, 30% Listed company 25, 30% Listed companies in MAI 20% Business entity 10% and 30% exemption Regional Operation Headquarters (ROH) Tax exemption on the investment-promoted part of business only 20 – 30% exemption • Natural person subject to progressive tax at 5-37% • Juristic person subject to 20-30 per cent tax • Foreign entity subject to 15 per cent tax • Juristic person of some DTA countries will be exempted Board of Investment Tax exemption on profit sharing 30% Joint Venture Each pays his own 20, 30% Consortium Foreign juristic person not entitled to tax privileges under Section 65 bis (10) 30% Foreign branch Exemption (incomes from dividend and capital gain) Venture Capital Co Ltd Exempted Exempted 9

10. W/T = Withholding Tax DTA = Double Tax Agreement Financial Tax Flowchart Local Foreign Royalty S. 40 (3) RoyaltyS. 40 (3) Rental S. 40(5) Rental S. 40(5) Service Fee S. 40(2) (6) (7) Sale of Goods S. 40 (8) Service Fee S. 40(2) (6) (7) Sale of Goods S. 40 (8) W/T 5%or 15% W/T 3% No W/T W/T 5% No W/T 15% No W/T for some DTA 15%or No W/T if (1) DTA (2) Income under S.40(7) W/T 1%, 2%, 3%, 5% (Tor Por..4/2528) Domestic Loan • Interest • No W/T if it is a financial institution • 1% W/T for Thai Juristic Person Carrying on business Ordinary Shares Create Debt S.40(4) (a) Debt Instrument Equity Raising Preferred Shares Company Debenture/Note Warrant 15% W/T for Individual Convertible Debenture Foreign Currency Loan Return from Investment S.40(4) (b )(j) Foreign Juristic Person 10% W/T (DTA) 15% W/T Discount 10% W/T (DTA) 15% W/T Individual Foreign Juristic Person Thai Juristic Person Dividend • Exempt under S.65 bis, if not 50% • Exempt under Tor Por 4/2528 • 10% W/T with tax credit of 3/7 • 10% W/T Capital Gain • W/T at an aggressive tax rate 5%-37% except companies listed in SET • 15% W/T except some DTA countries • No W/T but incorporate as income 10

11. Case study SME: Body of Persons Bara Co Ltd is registered with Baht 6 million. The firm produces and sells rubber-based products. More than 30 per cent of the company’s costs goes to raw materials bought from local people, that’s why there is no receipt. Bara Co Ltd’s sales total Baht 100 million where cost is Baht 80 million. Bara (Partner) Other expenses raw materials without receipt 30% 70% Expenses without receipt cannot be deducted as expenses under Section 65 ter (18) 11

12. Pre-Planning Tax Income 100,000,000 Cost (Accounting for 30 per cent. The expenses are without receipts and therefore can’t be deducted as expense)56,000,000 Earning before tax 44,000,000 Income tax (44x30%) 13,200,000 12

13. Tax Planning 1. Reduce Bara’s registered capital to Baht 5 million. The remaining Baht 1 million reduced will be lent by shareholders at the interest rate of 10%. 2. Set up a body of persons to buy raw materials from local people and resell them by issuing receipts to Bara Co Ltd Shareholders Lending with 10 per cent interest rate Bara Co Ltd (partners) Other expenses Body of Persons 70% 30% 13

14. Company with no more than Baht 5 million registered capital will be subject to 20 per cent tax for the first Baht 1 million net profit and 25 per cent for the next Baht 2 million. • Regarding money converted from equity into loan, shareholders will have to pay tax on interest incomes, which however can be deducted as expense. • Receipts issued by the body of persons to Bara can be considered Bara’s expenses. • The body of persons must pay personal income tax by deducting lump sump expense at 80% and Baht 60,000 personal deduction 14

15. Post-Planning Tax Bara Co Ltd’s Tax Incomes 100,000,000 Costs (80% can be deducted as expenses) 80,000,000 Initial profit 20,000,000 Interest expenses 100,000 Pre-tax profit 19,900,000 Income tax 0-1,000,000 15% 150,000 1,000,001-3,000,000 25% 500,000 3,000,001-19,900,000 30% 5,070,000 5,720,000 15

16. Tax of the Body of Persons Incomes 24,000,000 Deduction of lump sum expenses of 80% 19,200,000 Less deduction 60,000 Net income 4,740,000 Income tax 0-100,000 exempted - 100,001-500,000 10% 40,000 500,001-1,000,000 20% 100,000 1,000,001-4,000,000 30% 1,122,000 1,262,000 Total Post-Planning Tax (5,720,000+1,262,000) 6,982,000 After tax planning, can save 13,200,000-6,982,000 = 6,218,000 Baht or 47.10 per cent 16

17. 2. Expand tax bases • Set up a body of persons (which can issue receipts and invoices) More than one body can be set up. • Use loss-making company 3. Separate business/separate agreement • Reduce withholding tax burden • Separate businesses paying value-added tax from those not paying the VAT • If you can’t separate them, average the amount for VAT refund 17

18. Case study Building for Rent Ea-Arthorn Co Ltd will build a tower for rent with facilities such as certain office equipment, public utilizes including security service. The office space is Baht 400 per square meter/month. Yaowaraj Co Ltd wishes to rent 1,000 square meters. • The following are tax burdens from rental service • Withholding income tax for 5 per cent of the rent • Land and building tax for 12.5 per cent of the total rent • 1 per cent rent registration fee if the lease agreement is more than 3 years • Exempted VAT as this is a lease of property • Duty stamp for 0.1 per cent of the rent • Input tax from construction can’t be refunded 18

19. Tax Planning Divide the lease agreement into three contracts; namely, Agreement to Lease Space, Agreement to Lease Equipment and Service Agreement. Tax burden will be as follows. 19

20. Results from Tax Planning • Withholding tax under the Service Agreement is down from 5% to 3% • Although Agreement to Lease Equipment and Service Agreement is subject to 7% VAT, this can be charged from tenants and there is no need to pay 12.5% building and land tax • Agreement to Lease Equipment is not subject to stamp duty. • Can apply for input tax refund incurred from procurement under the Agreement to Lease Equipment and the Service Agreement 20

21. 4. Tax planning for remunerations of business owners and family members Remunerations • Salary • Director’s fee/consultant fee/rent • Deduction, existing expenses, legal rights • Retirement Mutual Fund • Set up a body of persons to earn incomes from the firm 21

22. Choice of paying low taxes • Tax credit in the case of dividend • Lend money to the company which will subject the company to 15 per cent withholding tax but it can deduct the interest as expense. 22

23. 5. Seeking benefit from the business’s assets Incase of business asset • Sell shares in the stock exchange • Sell shares at par value In case of non business asset (car/home/building/land) • Seeking benefit from company’s car • Seeking benefit from company’s building • Lease property to the company • Lease land while the company invests in the building construction 23

24. 6. Opt for tax-exempted incomes • In the case of holding company • Choose to operate tax-exempted business • 7. Determine non-prohibited expenses under Section 65 bis and 65 ter. For example, use loss-making company 24

25. 8. Opt for tax rights and privileges or concession • Apply for [privileges under] BOI/EPZ/Bonded Warehouse • R&D expenses will be subject to special deduction rates (Royal Decree 145) • Set up a skill development training institute to train workers of affiliated companies (Royal Decree 284) (Exempted income/expense deducted up to 150%) 25

26. Case study Training Institute The Bara Group of Companies has more than 60 companies under the group. Every year, companies within the group have to send executives and staff to attend several training courses for skill development. Tax Burden Expenses from sending employees to train in education institutes or private professional training schools can be deducted as expenses for as much as 150 %. 26

27. Tax Planning Set up a company as a training institute exclusively for employees within the group • Company incorporated as a training institute will be exempted from corporate income tax incurred from net profits and announced dividends • Companies sending staff to train can deduct training cost as expense for 150% • If incorporated as private school under the law governing private schools, the incorporation will be exempted from the VAT. 27

28. 9. Choose which assets to be transferred to the company and in which form • Business assets (shares/factory) • Non-business assets • Expense deduction/depreciation • To whom these assets will be subsequently transferred when tax privileges are used up • 10. Hire accountant and financial planner to do accounting and pay appropriate taxes 28

29. Selling shares in a company family has invested in Case Study No. 2 • Through overseas company in countries with and without double taxation treaty • Through natural person 29

30. British Virgin Island Oversea Patana Co Ltd 20 % Thailand Mr. Ea-Arthorn: 30% Mrs. Yaowaraj: 10% Mr. Nimo: 10% 50 50 million Thai Furniture Co Ltd Baht 100 million registered capital 2 30 % Bara Co Ltd 30 million Thai Siam Co Ltd Buying Baht 1.1 billion shares 2 Share value = Baht 10 Tax book value = Baht 50 30

31. Shareholder’s tax obligations if sold to Thai Siam Co., Ltd. Oversea Patana Co Ltd profits Baht 200 million (15%) = 30 million Bara Co Ltd profits Baht 300 million = 89.8 million Mr. Ea-Arthorn profits Baht 300 million (First three million paying Baht 700,000 or 30%) = 111 million Mrs. Yaowaraj profits Baht 100 million = 37 million Mr. Nimo profits Baht 100 million = 37million Total taxes to be paid = 304.8 million 31

32. British Virgin Island Mauritius/Singapore Oversea II Oversea Patana Co., Ltd. 3 20 % Thailand Mr. Ea-Arthorn: 30% Mrs. Yaowaraj: 10% Mr. Nimo: 10% 50 million Thai Furniture Co Ltd Baht 100 million registered capital 3 30 % Bara Co Ltd 30 million Thai Siam Co Ltd Buying Baht 1.1 billion shares Share value = Baht 10 Tax book value = Baht 50 32

33. Transfer and sell shares to overseas companies/DTA • Thai Patana Oversea transfers and sells shares to Oversea II in a DTA country at = 200 million Baht • Oversea II sells shares to Thai Siam Co Ltd at = 200 million Baht = No tax obligation 33

34. Transfer and sell shares to overseas companies/DTA • Mr. Ea-Arthorn et al transfer and sell shares to Oversea Patana Co Ltd at = 50 million Baht • Oversea Patana sells shares to Overseas II in a DTA country at = 500 million Baht • Oversea II sells shares to Thai Siam at = 500 million Baht = No tax obligation 34

35. Transfer and sell shares to overseas companies/DTA • Bara Co Ltd sells shares to Thai Patana Oversea at Baht 50 a share At Baht 40 profit per share = 120 million Baht profit • Pay 30% tax = 35.8 million Baht • Thai Patana Oversea sells shares to Oversea II at Baht 330 million • Oversea sells shares to Thai Siam at Baht 330 million = No tax obligation Compared cases where tax is planned and not planned = 304.8-35.8 million Baht Save as much as = 269 million Baht 35

36. Mr. A owns one plot of land. At present, the land has a official price Baht 10 Millions. • Mr. A has cash in hand Baht 10 Millions. • Mr. A intends to construct an apartment on the land for rent. The cost of construction is Baht 15 Millions. • Apartment has 100 rooms. The rental fee for one room is Baht 5,000per month. 36

37. Assumptions: • Income generating Bath 6 Millions per year • Loan Baht 5Millions, interest 10% per annual • Sale and Administrative Expenses Bath 1.2Millions • Purchase Car Baht 2.4Millions • Payment of Loan Principle Baht 1 Millions per year and interest per year 37

38. Questions: What is the best business organization that Mr. A should select for maximum tax benefit. 38

39. Tax Implications: Apartment • Income Tax • Withholding Tax • Stamp Duty • House and Land Tax 39

40. Business Organization: Individual Issue • Income Categorized • Deducting Expenses • Standard Reduction Expenses • Actual Expenses • Loan Interest Paid to the Bank • Tax Exemption on net income Baht 150,000 40

41. Individual: Standard Reduction Expenses • Standard Reduction Expenses of 30 % • If the actual expenses is more than the Standard Reduction Expenses, it is not allow to use in calculation of income tax. • Loan interest paid to the Bank does not allow to use as tax deductible expenses. 41

42. Standard Reduction Expenses: Tax Calculation 42

43. Net Cash: 43

44. Individual: Actual Expenses • Receipt • Actual Expenses - Depreciation of Building, Stamp duty, House and Land Tax, Sale and Administrative Expenses • Loan Interest can be use as tax deductible expenses • Depreciation of Car ?? 44

45. Actual Expenses: Tax Calculation 45

46. Net Cash: 46

47. Business Organization: Company • Issue • Land Ownership or Lease of Land • Capital of the Company: Baht 10 Millions ?? • Thin Capital: (Baht 1 Million) Loan from Shareholder (Baht 9 Million) • Accrual Basis • Accounting • What type of car?? 47

48. Company: Own the Land Ownership • Transaction Tax on transfer the ownership of Land • Cost of Land: Depreciation ?? 48

49. Tax on transfer the ownership of Land • Withholding Tax • Transfer Fee (2%) • Specific Business Tax (reduced from 3.3% to 0.11% until 28 March 2009) or Stamp Duty (0.5%) 49

50. Tax on transfer the ownership of Land (Cont’) Base on assumption that:- Mr. A buy and transfer the land to the Company in the same year. Mr. A transfer the land to the Company as a consideration of payment of capital. 50