From a corporate accounting perspective, a bad debt is generally defined as an account receivable that cannot be collectable.
From a tax perspective, however, bad debt cannot automatically and in all cases be written off, or erased from your company’s accounts receivable ledger.
If your company writes-off a bad debt then it is relieved of the tax burden it incurred. But before that can happen, the Revenue Code of Thailand (“RC”) contains certain hurdles the creditor must jump before counting the bad debt as an expense that reduces the taxable profit.
It is essential 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.
It also requires that this calculation is done on an accrual basis rather than a cash basis.
Accrual means that each item is entered as it is earned or incurred regardless of when actual payments have been received or not.
(Cash basis accounting recognises income only when payments have been received.)
Since the RC stipulates accounting on an accrual basis, it treats all your company’s receivables as “income” even if the money has not yet come into the company bank account.
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 reduces the net profit and tax burden of the creditor.
To be eligible for such “conversion,” the receivable must meet the definitions and requirements outlined in RC Sections 65bis and 65ter.
RC Section 65bis(9) states that “writing 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 follows:
“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
“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, are listed in the Civil and Commercial Code of Thailand (“CCC”):
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);
Five years for certain claims relating to, for example, interest and salaries (CCC Section 193/33);
Two years for most commercial transactions (CCC Section 193/34).
Note: after the expiration of these 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 specialising in property and corporate/commercial matters and dispute resolution proceedings arising therefrom. It is also the only such firm in Thailand that complements its property and corporate/commercial legal expertise with a core tax law practice. Duensing Kippen can be reached at: phuket@duensingkippen.com. Website: www.duensingkippen.com