The Cabinet in a meeting held earlier this year turned down the Druk Holdings and Investment’s (DHI) proposal to do away with what DHI said was double taxation of its earnings.
According to a senior government official the cabinet turned down DHI’s proposal as the cabinet felt that if the proposal was just from DHI then definitely there could be no approval. The cabinet felt that government could look at a proposal only if it can benefit the whole economy.
The cabinet asked the Ministry of Finance which made the presentation to discuss the issue of double taxation with the Ministry of Economic Affairs and see if there can be a greater benefit to the economy.
However, a senior and reliable source said that at the moment there were lesser chances for the government agreeing to do away with double taxation.
On the DHI proposal the cabinet noted that in the eventuality of DHI not having money or needing money the government would anyhow pump in money. On the other hand if the government needed money DHI would have to share its surplus revenue for the government.
DHI put up its proposal in late 2014 through the MoF to the Cabinet to amend the Income Tax Act 2001 to avoid double Taxation. For example currently Tala’s profit is first taxed with a 30 percent Corporate Income Tax as it is a separate legal company, then when it passes on its dividends to Druk Green Power Corporation the dividends to DGPC is taxed by another 30 percent and finally when DGPC passes on the dividends to the holding company of DHI it is taxed by another 30 percent. This would mean that the real or effective Tax rate by the time the dividends reach DHI is around 66 percent tax on the actual profit of Tala.
DHI wants to avoid this for two major reasons. One is that its performance is based mainly on the dividends it can give and thus it would prefer to give higher dividends than just tax. The other reason is that since dividends is a negotiated process DHI would have some leverage in keeping a larger reserve to fund its own investments. There has been long standing concerns within DHI and its companies that it is not able to keep enough reserves to invest and reinvest in its own companies or projects.
On the other hand the government feels DHI is a government company and since it anyhow gets government support when needed like in the case of buying Druk Air planes there is no need for any such arrangement.
The senior official said, “If they are taxed twice then they pay lesser dividends. If we do away with the system then they will pay anyhow have to pay high dividends.”
The main fear of the government is that if it agrees to DHI’s proposals then its revenue projections from DHI could come down.
The DHI proposal to the government said that the current system results in an excessive effective tax rate on the original earned income.
DHI apart from asking for a change in the Income Tax Act also asked for a Tax exemption of DHI till the Tax Act has been appropriately amended. It says that in lieu of tax, DHI and MoF could agree to higher dividend amount.
DHI in its proposal has listed out the negative impacts of a double taxation system. According to DHI, this system impede the growth of the private and public sector including DHI, and the economy as a whole by limiting the capacity of the private sector as well as the public sector to mobilize and make any major investments.
DHI said it discourages companies from setting up subsidiary companies or investing in equities of other companies and discourages private sector and DHI companies from facilitating investments into Bhutan by entering into Joint Venture with foreign companies.
The holdings company has pointed out that it discourages the use of deal structures that might be optimal such as the creation of Special Purpose Vehicle companies which limits risks to parent companies while through leverage increases the parent company’s capacity to execute projects of larger scale.
The company pointed out that it forces the use of financing structures that might not be optimal in order to minimize tax burden.
“Further in the case of DHI, since tax is not considered a part of the remittance package and is now a real cost, DHI will have to also look at means of reducing the tax burden. This is however, not desirable for a wholly owned holding company of the government,” said the DHI proposal.
DHI has pointed out that many other countries seek to reduce or eliminate the double taxation of the inter-corporate dividends by providing for the partial or complete exemption of dividend income from the taxation income of the shareholder entity. In countries like Australia, India, Indonesia, Malaysia and Philippines the tax is exempted on the parent company.
DHI said that while the government is seeking various measures to improve the climate of doing business by making it less complicated and more efficient, the double taxation policy is actually hindering the investors as well as the present companies from growing and functioning efficiently.
According to one the DHI official, Tashi Group of Companies, although being the biggest conglomerate in the country does not have a holding company which logically justifies that they see the current form of double taxation as an inefficient means to function.
However, a new factor in this whole issue is the Bhutan Chamber of Commerce and Industry (BCCI) which is also taking up the issue.
Ugen Tsechup, President of BCCI said, “The policy of double taxation should be eliminated as it is obstructing the efficient functioning of the companies. BCCI has earlier appealed to the government for the reforms in the current taxation policy and we will again be putting forward the issue.”
He said the income from a bottom level subsidiary may be taxed two or more times, which results in an excessive effective income tax rate on such bottom-level subsidiary’s income, ultimately hindering the holding company’s ability to operate effectively and earn profits.
Officials from DHI said that when DHI ask for elimination or mitigation of double taxation policy, many people have the wrong notion that DHI just wants to escape tax which in turn might lead to shortfall to the government revenues.
“However, as far as DHI is concerned, whatever the short fall in taxes from doing away with the double taxation, DHI is willing to add it up to their dividends to ensure that the revenue to the government is not interrupted,” said the official. The official said that with the current double taxation policy DHI is not able to operate efficiently and bring in investors.
The official said that many countries in the region has done away with the double taxation policy because foreign investors see it as a trait of backward economy whereby the country has not made the necessary move to make the investment climate conducive to foreign investors.
The official said that DHI is supposed to build a reserve but DHI is still not able to build the mandated reserve as bringing funds from the subsidiaries is very expensive.
In 2014 DHI made a profit before tax of Nu 9.343 bn. After a Nu 5.034 bn tax the profit after tax was Nu 4.309 bn. For the Financial Year of 2014 the DHI and MoF signed a dividend agreement of Nu 1.813 bn plus 90 percent of Tala’s profit after tax. Therefore the total dividend would be Nu 3.690 bn.
Rachna Sharma, SonamYangdon & Tenzing Lamsang /Thimphu