Seeking relief from double taxation

Refraining from incorporating the companies under the Companies Act seems to be a way out

Business: Several big business establishments in the private sector are intentionally refraining from incorporating their companies under the Companies Act to avoid being trapped in the double taxation structure like the Druk Holdings Investment (DHI).

An incorporated company would end up paying 51 percent corporate tax, instead of 30 percent if it forms a subsidiary company and also incorporates it.

For instance, company ‘A’ has a subsidiary ‘B’ and company ‘B’ earns a profit of Nu 100. Company ‘B’ is levied a 30 percent tax on profit, which amounts to Nu 30. If the remaining Nu 70 is remitted to Company ‘A’ as dividend, this is again taxed since it is reflected as income for Company ‘A’. In the process, the same earning is levied 51 percent tax.

The tax swells to 66 percent, if the subsidiary company forms a sub-subsidiary company and again incorporates it.

To avoid this double taxation, businesses are either not incorporating their subsidiary companies or venturing into sole proprietorship and partnership with a chain of businesses.

Kuensel learnt that some private players only incorporate the parent company and formed several units under the same company with different licenses. This would give the company with an advantage to consolidate all accounts into one and declare a consolidated tax under a single entity.

Others preferred sole proprietorship since the proprietor can opt to declare his /her business as their own income and only pay the personal income tax instead of business income tax.

“That is why some big sharks are not even in the top ten tax payers list,” a businessman said requesting anonymity.

However, the private sector is also faced with double taxation when the dividend is remitted to their promoters or investors.

This also applies to the public who has invested in shares of different companies. Individual companies are already levied a 30 percent tax on profit and companies usually declare dividends from profit after tax. But the shareholders are again levied with taxes on the dividends they earn.

Incorporation dilemma 

Business establishments are usually incorporated under the Companies Act for greater transparency in financial reporting and risk reduction.

All incorporated companies have to conduct statutory audits hired from Indian auditing firms certified by the Royal Audit Authority (RAA).

“There are 101 things that an incorporated company has to abide by and it cannot also separate once its incorporated,” an industrialist said. “The only option is to declare bankruptcy,” he said.

However, not incorporating the company would leave room for manipulation in the book of accounts.

Besides ensuring minimum tax revenue leakage for the government, another advantage for incorporated companies is the limited liability.

This means that in case of bankruptcy, the stake is limited to the company’s asset and not the investor’s personal asset, unlike the sole.

However, some promoters of private companies who have incorporated their companies said the incorporated companies do not enjoy the advantage.

One of the promoters said that banks always ask for personal assets like land as guarantee besides the viability and worth of company’s asset, regardless of a company’s incorporation status.

“So where is the incentive of incorporating your company, when you gain a lot by not doing it,” he said adding that it was also not healthy for the economy.

Double taxation impedes FDI

The first question foreign investors pose, sources at DHI said, is on the tax rebate. Such a system of double taxing the dividends, the official said, was a major impediment in promoting foreign direct investment (FDI) in the country.

If the government is serious about improving the investment climate, another official from the DHI said that the income tax amendment Act should consider avoiding double taxation.

But there is no consideration on the double taxation as per the draft income tax amendment Act.

Even if the government has relaxed the repatriation norms for the service sector with tax holiday in the FDI rules, the foreign investor is still taxed on the dividend because the income tax Act states that Companies shall withhold 10 per cent of the gross dividend income at source at the time of distributing dividends.

The investor would be again taxed in his/her country because Bhutan has no double tax avoidance agreement with other countries, except India.

Why DHI?

Since DHI companies and their subsidiaries are levied 30 percent corporate tax on the profit, the dividend remitted to the parent company, DHI, is again taxed. This is because all DHI companies and all its subsidiaries are incorporated.

A DHI official said that the investment arm of the government has no agenda to shrug off its responsibility of paying to the government. However, as mandated by the Royal Charter, the official said that DHI is supposed to build national reserve and it’s unable to do so with the current tax structure.

It also impedes DHI’s initiative of investing in efficient projects because tax is now considered a real cost of financing and the company will have to explore means to reduce tax burden.

Tshering Dorji

2 replies
  1. chopel
    chopel says:

    If DHI takes all the state owned companies (actually taken), which were major source of revenues for government and retain the income, how will government survive. The likes of currently under construction hydropower projects, once commissioned, it will be under DGPC which is another company of DHI. This hydropower are not investment of DHI, but tax payer’s money.

    Well DHI need to invest and prove themselves worthy of such demand which I did not see so far rather than taking more state owned companies under its umbrella.

  2. online
    online says:

    DHI is a government owned company, as such it doesn’t make much sense whether it pays double, triple or quadruple taxes. After all whether in the form of tax or profit, the same sum amount goes to government coffer. Unless the shrewd managers in the company need some disposable income for themselves to spend at their whims, I don’t see the need to reform the current taxation policy.

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