Planning Around Non-Deductible Expenses

When calculating Thai corporate income tax, some items are recorded as expenses in your books but cannot be deducted for tax. These are “non-deductible expenses” under Section 65 ter of the Revenue Code, and they must be added back in the corporate income tax return (PND.50).

The most common point of dispute

Section 65 ter (13) disallows any expense that is not incurred specifically to earn profit or for the purposes of the business. Business owners tend to see every expense as being for the business, while a tax assessor may see it as unnecessary or excessive. Because needs differ from business to business, there is no fixed line — some businesses, for example, genuinely need heavy advertising spend to earn revenue.

Expenses that are normally deductible

Expenses incurred directly to earn profit or run the business are deductible: staff salaries, office costs, selling and promotion costs, directors’ remuneration, travel and accommodation, freight, repairs, commissions, advertising, accounting and audit fees, and advisory fees.

When a normal expense becomes non-deductible

A business-related expense can still be disallowed if it is excessive. What is reasonable depends on the nature of the expense, how it is paid, who receives it, why it is needed and what evidence supports it. An expense that is necessary in one situation may not be in another.

Typical examples that assessors cut include unusually high salaries, or extra directors’ pay disguised under another name — such as a large “management fee”.

Some expenses are also non-deductible under other sub-sections of Section 65 ter even when they relate to the business, such as entertainment expenses above the legal limit and the VAT a business pays each month.

How to keep your expenses from being disallowed

You know best what level of spending makes sense for your business. If asked, you need to explain what the money was for, how it benefited the business, and what you would have lost without it. If you cannot answer, the expense is at risk.

Before recording any expense, check it against these four questions:

• Was it paid under an obligation — a contract, a benefits policy, an employment agreement or a legal duty?
• Was it paid specifically to earn profit or for the business?
• Is the amount reasonable, or excessive?
• Is there evidence that identifies who received the payment?

If you can answer all four, the risk of that expense being disallowed drops considerably. The Revenue Department updates its rules regularly, so keep up to date or check in with an expert from time to time.

This article is general information. Thai tax law and Revenue Department practice can change; consult an expert before making decisions for your own case.