New technologies often create new markets that existing regulatory frameworks are not equipped to govern. Sometimes, these emerging markets are so novel that they create uncertainty or gaps in the tax system. The challenge for governments is to devise new tax rules that neither stifle the development of these markets nor create unfair tax loopholes. This is not an easy task.
The advent of digital services and digital assets is a prime example of technology innovation that brings about new commercial realities. Goods no longer needed to be sold through “brick and mortar” stores; services no longer needed to be provided in person or at fixed locations, and payments do not need to be made via fiat currencies. Sometimes, entirely new categories of goods or services are created — for instance, hybrid vehicles and drones. This can lead to uncertainty around how such goods should be taxed, such as with import tariffs and excise taxes.
The legislative process naturally takes time. Thus, a regulatory vacuum could span years before a new tax regime is established. During such periods, businesses must balance the need to compete in an unregulated environment against the potential risk of adverse tax assessments. For businesses that value good corporate governance and transparency, this may result in a decision to stay on the sidelines or exit the market in entirety. Some businesses, however, do not have the luxury of such options. In such circumstances, they must decide how to manage these risks in order to minimise and ring fence the impact of potential adverse challenges by the tax authority.
Pertinent Examples
In 2015, Toyota Motor Thailand was stuck with a tax bill of $315 million US dollars after losing an import tariff dispute regarding parts for its Prius cars. Though the auto manufacturer maintained that the parts in question were locally made, thereby qualifying such parts for a 10% tariff rate, Thailand’s Supreme Court determined that the parts did not meet the requirements for such treatment — and therefore subjected them to the standard import duty of 80%.
A more notorious case is that of Enron, the US-based energy company that tried (and ultimately failed) to boost profits by avoiding taxes and passing off debt to shell companies. The company’s subsequent bankruptcy seemed an inevitable end to a business that was structured upon skirting the rules.
Staying in Bounds
While navigating tax laws and the tax landscape is challenging, the cost of a breach goes beyond mere fines and court penalties. The reality of our social media culture is such that, should a company be exposed as a tax dodging entity — whether inadvertently or not — the damage to its reputation as well as its loyalty among customers may exceed any direct financial consequences imposed by the government.
Simply put: no one likes a freeloader, and the tax-paying public will resent any business in its midst which fits that description. The damage to reputation once made is often irreparable.
How We Can Help
At Grant Thornton, our tax specialists help businesses navigate complex tax environments and meet their tax compliance needs. With over 30 years of experience in Thailand, we have guided countless clients through changes in the country’s tax landscape, ensuring their continued success in doing business here.
Our tax team provides tax advisory, planning and structuring, dispute resolution, transfer pricing, and tax compliance services to leading MNCs, foreign businesses, and Thai businesses across various industries. By having us address tax uncertainties and fulfil their tax compliance needs, our clients are able to devote their energies and attention to growing their business.
Note
This article is part of an ongoing series entitled 6 Ways Your Business Can Fail: A Guide to Recognising and Avoiding and Avoiding Critical Threats to Your Company's Success
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