We also pointed out that if such a conflict occurs in the course of a potential investor’s transaction and it is not recognised and resolved in favour of legal fact rather than the official’s incorrect legal opinion it can – indeed it almost certainly will – have a negative impact on the potential investor.
This conflict can sometimes lead to legal and commercial pitfalls for the potential investor if the conflict is not recognised and resolved in a manner consistent with the law.
Perhaps nowhere is this conflict more evident than in the taxation of real estate transactions.
One of the most common misconceptions in the real estate market is that individuals are subject to a hefty capital gains tax in Thailand when it comes to the sale of their property.
This misconception might tempt an owner of an immovable property to try to “mitigate” the potential tax liability by "under-reporting" the purchase price to the Land Department.
Such an under-declaration of the sale price, however, would break the law on two counts: criminal tax evasion and making a false statement to a government official.
Moreover, it would not be of any meaningful commercial advantage as it would also fail to achieve significant “savings.”
There are two forms of tax payable on a non-commercial transfer of an immovable property by an individual: Specific business tax (SBT) or stamp duty (SD); and personal income tax (PIT). The standard rate (including the local municipal component) for the SBT is 3.3 per cent.
However, if the seller has owned the property at the time of transfer for more than five years, SD of 0.5 per cent is generally applicable and SBT is not payable.
The basis for the calculation of the SBT or SD payable is the sale price or the Land Office-appraised value, whichever is higher.
To explain the appraised value: Each land plot, condominium unit or villa in Thailand has a price set on it by the government. This price is usually much lower than any actual market value.
So declaring a lower transaction price than was actually paid will indeed most likely result in some savings in SBT or SD tax payable. Some, but not a lot. For example, if the seller knocks B1 million off the price in his or her declaration to the Land Office, this would bring a tax “saving” of only B33,000 in relation to SBT or a mere B5,000 in relation to SD.
With regard to the PIT payable, Thailand does not, in fact, have any capital gains tax on the non-commercial sale of immovable property. In fact, the PIT payable is independent of the sale price and, therefore, independent of any capital gain.
So, since the sale price is not a basis for the calculation of the PIT, an under-declaration of the sale price will have no impact whatsoever on the seller’s tax situation.
In other words, a B1 million reduction of the sale price – or any reduction of the sale price for that matter – will not result in less personal income tax being payable.
The reason that sellers in Thailand are commonly tempted to risk such serious violations of the law by under-declaring the sales price at the Land Department for such marginal tax “savings” is their reliance on incorrect common knowledge of the law rather than on what the law actually states.
DUENSING KIPPEN is a multi-service boutique law firm specializing in real estate and corporate/commercial transactional matters as well as arbitration proceedings arising therefrom. It is the only such firm in Thailand that also compliments its transactional expertise with a core tax law practice. DUENSING KIPPEN can be reached at: firstname.lastname@example.org or for more information please visit them at: www.duensingkippen.com