Government action on outstanding tax issues would reduce investment uncertainty

FATCA is a new US measure whereby all financial institutions outside the United States are required to report certain account and transaction information of American account holders to the US Internal Revenue Service (IRS) on an annual basis. This new law brings reporting by foreign financial institutions (FFIs) of such balances and information into line with what is already required inside the US. 

The Thai government’s progress on initiating the IGA negotiation process is a positive step towards helping Thai financial institutions meet the reporting obligations under the new FATCA regulations. 

The completion of an IGA with the US would change the reporting obligations of Thai financial institutions under FATCA from a voluntary compliance agreement with the IRS into a domestic Thai reporting requirement. 

Under an IGA, Thai financial institutions would be able to deal directly with the Thai government regarding providing information instead of having to interact directly with the IRS. This could eliminate a whole host of problems including potential language issues, ongoing interaction with the IRS in some cases, and client-relationship issues that could arise from requirements that Thai FFIs collect certain US tax documentation from customers. 

This move could also be helpful from the perspective of the Thai Revenue Department, in that requiring Thai financial institutions to report financial information on Thai customers could help ensure compliance with Thai tax laws and improve collections.

Additionally, movement on personal-income-tax rate reforms would eliminate uncertainty around withholding issues for companies that perform withholding and for taxpayers who are uncertain as to how much after-tax income they should receive. 

The Cabinet has approved a draft bill for amending the Revenue Code to incorporate the proposed new income-tax rates and make them retroactive to January 1, 2013. While it was reported last week that the government had requested that a Royal Decree be issued temporarily to implement the changes for 2013, this is not a permanent change in the tax law. Therefore, swift action on making these changes permanent would help provide companies and taxpayers with certainty as to withholding obligations. 

Other outstanding tax uncertainties would also benefit from a more permanent solution, such as the corporate income-tax rate, which is currently set at 20 per cent, and value-added tax (VAT), which is set at 7 per cent. 

Both of these rates are currently in effect pursuant to a Royal Decree, but there is some uncertainty as to their permanence because a Royal Decree is only temporary. While a Royal Decree can, and in the case of VAT has been, made quasi-permanent through the issuance of additional Royal Decrees extending the benefits, unless and until they are actually enacted in the Revenue Code, there is always the possibility to the rates could return to their statutory levels of 30 and 10 per cent respectively. 

While the Royal Decrees covering these two rates will not expire until next year, government legislative action to make these rate reductions permanent would be a welcome note to the business community’s ears. 

Given all the uncertainty that exists in the Thai economy currently, it could be a stabilising factor and a positive signal to the business and foreign investment community if the government were to move on settling these open taxation issues. 

While tax is almost never the main driver or No 1 consideration in whether to make investments, uncertainty around taxation policy makes investment modelling difficult and can in some cases make or break an investment decision. Removing this uncertainty will help support businesses in their efforts to adjust to the new realities of increased regulation and the challenges and opportunities presented by the creation of the Asean Economic Community in 2015. 

With the ordinary session of Parliament currently at an end, it seems as though the MPs will not be able to move required legislation through this year. Let’s hope they can settle some of these outstanding issues when they reconvene in 2014.

 

This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided. 

The author: Jonathan Blaine, is executive director at KPMG Thailand.