BOI company accounting: keeping exempt and taxable income apart

01What is exempt is the activity, not the company

This is the most practical thing on the finance side once the certificate is in hand. It involves no approval from anyone, yet it decides whether the exemption on that certificate can actually be used.

A promotion certificate names specific activity categories and a defined project scope. Income falling inside that scope is exempt; income outside it is taxed as normal. Income that commonly falls outside includes product lines the certificate does not cover, resale of a trading nature, services provided to related parties, gains on disposal of assets, and various kinds of non-operating income.

Companies that hit trouble in year one usually got there by assuming that being a BOI company made all of their profit exempt, and only discovered at the annual filing that a large slice of revenue had never been inside the certificate scope.

A company holding more than one certificate has to split one level further. Exemption periods, caps and start dates differ from certificate to certificate, so the books have to collect by certificate. You cannot merge them into one exempt set of accounts. See which date the exemption starts running from.

02How finely the books have to be split

Three layers, at minimum.

• Revenue. Collected separately by certificate, by promoted activity and by non-promoted activity, and reconciling with how you invoice and how you file VAT.
• Direct costs. Materials, labour and manufacturing overhead that can be attributed directly go straight to the activity they belong to.
• Shared costs. Administrative expenses, finance costs, depreciation on shared equipment, utilities in a shared plant — the parts that will not separate cleanly need an allocation basis that is fixed in advance, applied consistently from year to year, and capable of being explained. Common bases are revenue share, output volume, floor area occupied or labour hours.

The worst thing to do with an allocation basis is switch each year to whichever one happens to suit. Changing basis from year to year is very hard to explain during an inspection.

03Frequent points of dispute

Four recur more than the rest.

• Allocating period costs. Head office management charges, audit fees and similar costs with no direct link to a particular activity: write the allocation method into the accounting policy and keep to it.
• Losses. A loss on promoted activity and a loss on non-promoted activity are not treated the same way for tax. They cannot simply be netted off against each other.
• Related-party pricing. Pricing on internal transactions between promoted and non-promoted activity, or with related parties abroad, drives where the profit ends up on each side, which makes it a focus of transfer pricing review. Deliberately shifting profit into the exempt basket is the easiest thing to be caught doing.
• Tying back to the annual reports. The split financial data has to agree in three places: the books, the annual operating results report, and the annual corporate income tax return. If the three sets of figures disagree, a spot check on any one of them pulls in the other two. See what has to be filed after the certificate.

04When to start building this

The answer is: before the first promoted revenue arises. Going back to unpick the accounts at the year-end filing means the vouchers are already mixed together, and what you pull out is neither reliable nor easy to support.

The practical approach is three things done after the certificate is issued and before production starts. Add an analysis dimension to the chart of accounts that distinguishes by certificate and by nature of activity. Write the allocation basis and the accounting policy into an internal document. Make sure invoicing, warehouse and production paperwork carries an attributable marker from day one. Done up front, these cost little. Done afterwards, they cost a lot.

Which revenue your certificate scope actually covers, what basis the shared costs should be allocated on, how the existing chart of accounts has to be reworked, and whether anything in earlier years needs correcting all have to be checked item by item against the certificate conditions, the accounting policy in place, the structure of the ledgers and the figures already filed. We suggest having the advisory team design the accounting structure before production starts, and running a dedicated review at the end of the first year. What the BOI engagement covers.