Chirayuthchai TraisaengsatheanStrategic Finance for Property Development

Approach to calculating CIT from WIP to COGS

Calculate multi-year profit and CIT, use accumulated losses within the 5 accounting periods, and read the ETR across the whole project

Key takeaways

Project CIT is calculated on profit after WIP is transferred to COGS, less any accumulated losses that have not yet expired. A low ETR in the transfer years does not mean that tax over the life of the project has fallen, because losses during construction are real expenses, and the portion that expires pushes the project-wide ETR above 20%.

Overview of the mechanism

During construction

Costs accumulated in WIP: construction costs per the BOQ, professional fees, land and land development costs, and interest that meets the TAS 23 conditions

Costs that go to the P&L: SG&A such as sales staff salaries and advertising, overhead, office expenses and audit fees

While there is no revenue, the company incurs tax losses, which can be carried forward for no more than 5 accounting periods under Section 65 ter (12)

Ownership transfer day

  • WIP per unit transferred to COGS
  • Revenue recognised at a point in time under TFRS 15
  • SBT of 3.3% paid and WHT of 1% deducted
  • Transfer fee normally 2% of the appraised value; the seller's share depends on the contract
  • Total profit forms the CIT base for the year

Illustrative example: a 120-unit project

Selling price of THB 30 million per unit, GDV of THB 3,600 million, cost of THB 22 million per unit, 5 years of construction, and transfers in years 6-8

Tax losses during construction

YearLoss (THB million)Usable until
Year 130Year 6
Year 290Year 7
Year 3120Year 8
Year 480Year 9
Year 540Year 10
Total360

Years 6-8

THB millionYear 6Year 7Year 8
Units transferred208020
Revenue600.02,400.0600.0
COGS(440.0)(1,760.0)(440.0)
SBT 3.3%(19.8)(79.2)(19.8)
Profit after COGS and SBT140.2560.8140.2
SG&A and overhead(120.0)(160.0)(90.0)
EBIT20.2400.850.2
Less: accumulated losses used(20.2)(330.0)0.0
Net taxable profit0.070.850.2
CIT 20%0.0014.1610.04

In year 6, only THB 20.2 million of the year 1 loss can be used; the remaining THB 9.8 million expires at the end of year 6

SBT and CIT

ItemSBTCIT
BaseHigher of revenue or appraised valueNet taxable profit
Rate3.3%20%
Payment timingRegistration datePND 51 and PND 50
RelationshipA deductible expense, so it reduces the CIT baseCalculated after deducting SBT

Total SBT for the project is THB 118.8 million, which can reduce CIT by up to THB 23.76 million if all the profit is within the tax base, giving a net burden of THB 95.04 million

Overview of tax across the project

TypeTHB million% of GDVPayment timing
SBT 3.3%118.803.30%Years 6-8, on transfer day
CIT 20%24.200.67%Years 7-9
Transfer fee of 2%, assuming the seller bears half, with the appraised value equal to the selling price36.001.00%Years 6-8, on transfer day
Total179.004.97%

WHT of 1%, totalling THB 36 million, is a prepayment that is used as a credit, not additional tax

The true effective tax rate

Transfer-year view

CIT of 24.20 ÷ EBIT for years 6-8 of 471.20 = 5.14%, which looks low because accumulated losses have already been deducted

Whole-project view

Total profit after construction losses is 471.20 − 360 = 111.20. CIT of 24.20 is 21.76%, higher than 20% because the THB 9.8 million loss expires

Accumulated losses do not lower the actual tax rate over the life of the project. They only defer payment, and preserve the tax base only when used before they expire. Planning should therefore aim to use losses within the 5 accounting periods, allocate WIP and the P&L correctly, and prepare cash for SBT.

Conclusion

Project CIT is not simply profit multiplied by 20% in the transfer year. You need to look at the whole path from WIP to COGS, net profit and the life of accumulated losses, which affect IRR and equity returns through the timing of cash flows.