Unfortunately, when a business provides goods or services on credit terms there is the sometimes onerous task of subsequently collecting revenue from debtors.
And whilst the majority of debtors comply with the credit terms and settle their debts on time, there are some that, for a multitude of reasons, will not pay and the company is forced to write off the debt.
A debt write-off is a cost that any company would rather avoid, but taxpayers can obtain some relief in the knowledge that they can claim a tax deduction for certain bad debts that are written off. The rules and procedures are outlined in the Ministerial Regulation No 186 (MR No 186). Whilst these rules have been around for a number of years, it is worth revisiting them to ensure that all conditions are met and to provide some level of certainty that the bad debt written off will be deductible for tax purposes.
Firstly, to qualify for a tax deduction under MR No 186, the bad debt:
(a) must result from business operations (or arise as a consequence of business operations),
(b) must not be a debt owed by a director of the Company,
(c) must not be barred by prescription, and there must be grounds for taking legal action against the debtor.
If the bad debt meets the above criteria, there are specific actions that must be taken before a tax deduction can be claimed for any write-off. These actions will differ according to the amount of the debt that is written off. The regulation MR No 186 groups bad debts into three bands according to their size, namely:
(a) debts less than Bt100,000 (for companies other than banks or finance companies),
(b) debts greater than Bt100,000 but less than Bt500,000, and
(c) debts exceeding Bt500,000.
The actions that must be taken for each of these bands are as follows.
(a) Debts less than Bt100,000
A bad debt that is less than Bt100,000 may be a tax deductible expense if there is evidence that reasonable actions have been taken to recover the debt and the debt remains unpaid but the expense of pursuing a lawsuit against the debtor is not commensurate with the debt.
As evidence to support the deduction, the company should have copies of at least two demand letters sent by registered mail to the debtor and there should be written approval from the company's director(s) to write off the debt on the basis that the recovery costs would be higher than the debt itself.
(b) Debts greater than Bt100,000 but less than Bt500,000
A debt that is greater than Bt100,000 but less than Bt500,000 may be a deductible expense for tax purposes if a civil court or a bankruptcy court has received the case and there is director approval for the write-off issued within 30 days of the company's balance date.
(c) Debts exceeding Bt500,000
For debts exceeding Bt500,000, there must be either a civil court or a bankruptcy court action brought against the debtor.
For a civil court case, a civil action must have been brought to court or there is a petition for sharing the proceeds in another case brought against the debtor by another creditor. In either case, a court injunction must have been issued, but the debtor has no property to settle debts.
For a bankruptcy court case, a bankruptcy action must have been brought to court or there is a petition for debt settlement in a bankruptcy action brought against the debtor by another creditor. In either case, a compromise must have been reached and approved by the court or the debtor has been adjudged bankrupt and the first lot of property has already been shared out.
What happens if the debt is paid later?
There is always a possibility (however remote) that the customer will pay the debt later. In that case, it will be necessary to do a reverse bookkeeping entry and the amount received will have to be returned as income.
However, if all the above avenues of collection have been exhausted it would be quite unusual to later receive payment so it is critical that the correct documentation exists to ensure the debt written off will also qualify for a tax deduction.
This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information
Lynette Morris is a partner at KPMG Thailand.