The Central Tax Court has recently overrode their previous ruling in the NMB Minibea Case on determination of profit and loss of a business obtaining an investment promotion from the Board of Investment (BOI), upholding the criteria and methods prescribed by the Revenue Department (RD).
A BOI promoted business is generally entitled to exemption from income tax, reduction of tax rate upon expiration of the exemption period, as well as utilization of the net loss incurred during the promotion period to offset against the net profits gained after the end of the exemption period.
Absent exact methods for determination of profit and loss of the promoted business for taxation, the BOI and the Revenue Department adopt different perspective on the methodology and criteria for calculation of profit and loss especially where the promoted person has several promoted projects or carries on other non-promoted business.
According to the Decision of Taxation Commission No. 38/2552, a promoted investor has to consolidate the profits and loss of all promoted businesses for determination of its net profits as a whole and any net loss incurred from any promoted business during the tax exemption period can offset the profits of the non-promoted business after the end of the relevant tax exemption period.
The BOI rejected the RD’s methodology, saying that a promoted investor were not requird to consolidate the profit and loss of all of their promoted business, but legally allowed to determine the profit and loss from each project in order to enjoy the tax exemption, tax reduction and loss utilization according to Section 31 of the Investment Promotion Act.
In October 2010, the Central Tax Court ruled in favor of NMB Minibea. The court said that although the Investment Promotion Act was silent on the specific methodology of determination of profits and losses to enjoy the exemption from tax or utilization of loss upon expiration of the exemption period, the interpretation had to be made in such manners not against the privileges granted to the investor, which represented the core spirit of the Investment Promotion Act. The court added that the Investment Promotion Act was intended to provide specific methodology of profits and loss determination in deviation from the general methodology set forth in the Revenue Code.
The court ruled that the net profit and loss of each promoted business would be determined project by project as the privileges granted to each project differ from one another in terms of criteria, conditions and periods set out in the relevant investment promotion certificate.
The Central Tax Court just overrode the previous decision in November 2014.
In this case, the plaintiff carried on several promoted projects with non-promoted business and determined the profits and losses for each and every promoted and non-promoted business separately as guided by the BOI. They however offset the loss incurred from a promoted project against the profit from the non-promoted before the end of the exemption period, and claimed for refund of the tax excessively withheld, based on the BOI’s guideline. As for the other promoted projects, they requested the BOI tax exemption for each of them. The RD recalculated the net profits of the plaintiff according to the Decision of the Taxation Commission, resulting in significant reduction of the refund amount.
The court held that since the Investment Promotion Act is silent on the methodology of determination of net profits and losses of a promoted business, the determination of profits
and losses for taxation must followthe Revenue Code. Even though the Commission’s decision was not a law, it prescribed the methodology of net profit and loss determination according to the Revenue Code. As it didn’t appear that the methodology laid down by the Commission and applied by the RD’s officer was contrary to any statutory provisions or the accounting principles, it was deemed lawful.
The Minibea case is pending appeal to the Supreme Court. It is expected that the Supreme Court will uphold the Central Tax Court’s decision or many BOI promoted companies run into trouble. Anyhow, in light of the recent tax related judgments by the Supreme Court, anything may happen.