Negative goodwill can be taxable

Business News - Tuesday December 18, 2007

TaxCORNER

Negative goodwill can be taxable

LAWALLIANCE LIMITED

Some of you may have come across the notion of "goodwill", which arises at the time of a business transfer. The sale price of a business depends on several factors including the fair value of the assets and the expected cash flow from the future performance. To the seller, if the business is profitable, he can demand from the buyer a price higher than the book value of the assets. The portion of the price that exceeds the asset value is often referred to as goodwill.

Goodwill normally stands for company's name and reputation, customer relations and value of intangible assets, all of which are not shown in the financial statement as asset items but more as a measurement of the ongoing business when the business is being sold.

In theory, such "goodwill" represents the present value of future excess earnings of a company over the company's asset value.

Needless to say, payment for the goodwill is taxable in the same way as ordinary income.

As for the buyer, the amount of the goodwill paid is considered as a capital expenditure that may be amortisable under the terms of the law. This seems to be straightforward.

What is "negative goodwill"? According to internationally accepted accounting principles, when the asset value is higher than the purchase price of the business, it constitutes "negative goodwill". Such difference will reduce the non-current assets so acquired (except for long-term investment). Thus, if the business is not profitable, the acquisition price could be lower than the asset value.

To the seller, the law provides that any sale of assets must be made at a price not lower than their market value unless there are justifiable grounds. Absent the market value, the book value of the assets is often taken as a benchmark for tax purposes.

The term "justifiable grounds" is a question of fact that the seller needs to explain to the tax auditor on a case-by-case basis.

If he fails to persuade the tax auditor to believe that a sale at a loss was not caused by any tax-avoidance motive, the auditor may make a tax assessment against him by applying the deemed market value.

If you are thinking of acquiring a business at a price lower than the asset value, your future may not be as smooth as silk.

Recently, a buying company acquired a business from a selling company at 200 million baht. According to an independent appraiser, the asset value was approximately one billion baht.

Thus, the buying company booked the difference of 800 million baht as negative goodwill and recognised it as taxable income over the life of the assets.

This situation raises some issues on taxes, e.g. (i) whether the negative goodwill should be considered taxable income to the buying company, and (ii) if it is taxable, whether such amount is entitled to depreciation under the tax law.

Surprisingly, the legal office of the Revenue Department ruled that the negative goodwill being the difference (800) between the actual purchase price (200) and the price at which the buyer should have bought the assets in the ordinary course of business (1,000), it was taxable in the accounting period in which the buying company acquired the business.

As a matter of fairness, the department allowed the buying company to depreciate each type of asset based on the price at which he should have bought the asset in the ordinary course of business for tax purposes.

If the position of the Revenue Department is correct, from now on, although you are buying a business and paying money _ without receiving anything, you may face tax on the negative goodwill despite the fact that the acquired price reflects the financial value of the acquired business.

No one knows exactly why the department has adopted this position, but it is believed that the Ample Rich case involving the Shinawatra family may have had some influence on the working team.

It is unfortunate that the Revenue Department ignored the fact that the low purchase price of the business above was made in accordance with the appraisal report of an independent consulting firm _ not a scheme to avoid tax.

Perhaps the department is sending a signal to the industry that if the financial value of your business is less than the asset value, then what you should do is not dispose of the business but sell the assets piece by piece instead.

By Piphob Veraphong and Thanasak Chanyapoon, they can be reached at 0-2651-5490 or admin@lawalliance.co.th

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