Penalties, criminal fines no longer deductible expensesSpecial to
All penalties, criminal fines and surcharges imposed under any tax laws can no longer be claimed as a deductible expense. Section 65 ter (6) of the Revenue Code provides that penalties, criminal fines and surcharges are disallowable expenses in the determination of taxable net profits.
However, following the Board of Taxation’s ruling No 10/2528, it was confirmed that the disallowance under Section 65 ter (6) only applies to penalties, criminal fines and surฌcharges imposed under the Revenue Code.
In 2005, the Revenue Department disallowed the deduction of penalties paid by a company to the Customs Department. The penalties imposed by the Customs Department are not governed by the Revenue Code. The dispute was then brought to the Central Tax Court. On March 31, 2011, the court held that the penalties were not deductible under Section 65 ter (6), regardless of the Board of Taxation’s Ruling No. 10/2528.
The case was subฌsequently heard by the Supreme Court (No 1109/2559) on February 26, 2016 which upheld the Central Tax Court’s view that the penalฌties are not deductible for income tax purposes.
The Supreme Court further held that the penalties were expenses not exclusively incurred for the purpose of acquiring profits or for the purpose of the taxpayer’s business and were, therefore, disallowed under Section 65 ter (13) of the Revenue Code. The Supreme Court’s view was based on the premise that the payment of the penalties were to release the company from liabilities derived from previous illegal actions.
Following these cases, the Thai Revenue Department requested the Board of Taxation to reconsider its ruling No 10/2528. The Board concluded that the purpose of imposing penalฌties, criminal fines and surcharges is to penalise the offender and if these payments are allowed as tax deduction, it could reduce the severity of such penalties, fines and surcharges.
On February 27, 2017, the Board of Taxation repealed the ruling No 10/2528 and issued a new ruling No 40/2560. The new ruling confirms that Section 65 ter (6) of the Revenue Code shall apply to penalties, criminal fines and surcharges under all tax laws and for all types of taxes.
The ruling was published in the Royal Gazette on March 17, 2017 so it is effective from March 18, 2017 onwards. The interesting issue is whether penalฌties, criminal fines and surcharges that are paid before the date on which the ruling becomes effective, but which are only reflected in a tax return which is due after the ruling becomes effecฌtive, will be allowed as a deductible expense or not.
Contributed by Benjamas Kullakattimas, KPMG in Thailand
