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Is your company unable to collect money from a person
that owes you certain funds? In that case your company might be eligible to
write-off that Bad Debt. From a corporate accounting perspective, a "Bad
Debt" is generally defined as an account receivable that is uncollectable.
From a tax perspective, however, Bad Debt is also not automatically and in
all cases eligible to be erased from your company's accounts receivable
ledger or “written-off”. If your com-pany writes-off a Bad Debt then it
would be relieved of the tax burden it incurred. Thus, the Revenue Code of
Thailand (“RC”) contains certain hurdles for a creditor before such creditor
is able to use the Bad Debt as an expense that reduces the taxable profit.
It is paramount, however, for your company to clear these Bad Debt write-off
hurdles when a debt turns bad. If your company does not do so it will have
to pay income tax on that debt even though it was never collected. Section
65 of the RC defines "net profit" as the result of taxable income from
business or arising out of business in one accounting year less certain
expenses. Section 65 requires that this calculation is done on an "accrual
basis". Accrual basis, as opposed to cash basis, is a method of accounting
in which each item is entered as it is earned or incurred regardless of when
actual payments are received or made. Cash basis recognizes income when
funds are physically received. Since the RC follows the accrual basis the RC
treats all your company's receivables as "income" even if they have not yet
been physically received by your company.
On the other hand, where a receivable later meets the criteria to be
considered as a Bad Debt then, in accordance with Section 65 RC, it is
treated as an expense. This of course re-duces the net profit and tax burden
of the creditor. To be eligible for such "conversion," such receivable must
meet the definitions and requirements outlined in RC Sections 65bis and
65ter. RC Section 65bis(9) states that “[w]riting off bad debts from a
debtor's account shall be done only if it follows rules, procedures and
conditions prescribed by a Ministerial Regulation (...)” The relevant
Ministry of Finance regulation is No. 186 (1991) (“MR”). MR Clause 3 defines
the qualifications of a Bad Debt that is eligible to be written off as
“(1) Debts that arose from carrying on a business or in connection with
business or have been included as revenue in the computation of net profits,
but not including debts owed by a person who is or used to be a director or
managing partner whether or not debts arose before or during the time such
person is a director or managing partner; and
(2) The claim for debts is not barred from court action by time limitation
and is sufficiently evidenced for the purpose of suing the debtor."
Please note that the following "prescriptions periods" or time limitations
beyond which court action is barred, exist in Thailand in accordance with
the Civil and Commercial Code of Thailand (“CCC”) depending on the kind of
(a) Ten years is the basic prescription period in Thailand if the law does
not establish a shorter period for a specific claim in (CCC Section 193/30);
(b) Five years for certain claims relating to, for example, interest,
salaries (CCC Section 193/33);
(c) Two years for most commercial transactions (CCC Section 193/34).
Note: after the expiration of the above mentioned periods, the debt will not
be eligible for deduction.
In Part II of this two part article we will examine the additional
requirements for writing off your company's Bad Debt under the MR.
Duensing Kippen is a multi-service boutique law firm specializing in
property and corporate/commercial matters and is also the only such firm in
Thailand that compliments its property and corporate/commercial legal
expertise with a core tax law practice. Duensing Kippen can be reached at:
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