Will taxing mutual funds achieve tax parity?
Until August 20, mutual funds established under the Securities and Exchange Act are perceived as non-taxable entities. Taxation of the income derived from investments in mutual funds is achieved at the investor level, rather than at the fund level.
Taxes currently imposed at the investor level vary depending on the type of return of investment and the tax status of the investor. This creates issues of inequality of taxation, most prominently in the following areas:
• Overseas corporate investors in mutual funds are not subject to Thai tax on any return of their investments, while taxes are imposed on profit sharing and capital gains in the hands of Thai corporate investors.
• A Thai individual investor can opt to indirectly invest in debt instruments through mutual funds and pay the 10 per cent final tax on the profit sharing received, whereas a 15 per cent final tax rate would otherwise apply to interest income from a direct investment in the debt instruments.
Similarly, an overseas corporate investor would be subject to the 15 per cent withholding tax on a direct investment in Thai debt instruments. This gives rise to the issue of different tax rates applying to the same source of income.
This will change once the new tax law takes effect. Mutual funds will be established as juristic persons and so will be taxable entities liable to corporate income tax at the rate of 15 per cent on their gross interest income received from their investments in debt instruments.
Returns on investments in mutual funds in the form of profit sharing and capital gains will be classified as assessable income in the same category as dividends and capital gains from an investment in securities.
This will eliminate the disparity in the tax rate between a direct investment in a debt instrument and an indirect investment via a mutual fund that exists in the current regulations.
Also, overseas corporate investors could potentially be subject to Thai tax on both profit sharing and capital gains from their investments in mutual funds.
As a consequence, the new tax law would allow the Revenue Department to collect more tax revenue as it broadens the scope of taxation.
Some observations on this new tax law are as follows:
According to the newly enacted legislation, income from an investment in mutual funds could potentially be taxed at both the fund and investor levels. This gives rise to the issue of an economic double taxation as the same income will be taxed twice, which contradicts the objective of the new law.
The government is aware of this situation and the Cabinet has agreed to enact subordinate laws to introduce a tax exemption at the investor level to resolve this issue, including:
• Tax exemption for profit sharing distributed by a fixed income mutual fund.
• Tax exemption for capital gains on the disposal of units in a fixed income mutual fund in the case where the seller is a Thai corporate investor or a foreign corporate investor carrying on business in Thailand.
The issue of economic double taxation could still persist though in the case of mixed mutual funds which invest in debt instruments and other types of assets so would not be entitled to the above tax exemption at the investor level.
In the past, mutual funds were unable to access the tax benefits provided by double tax treaties for their overseas investments. This is because certain jurisdictions require a tax residence certificate of the mutual fund when applying the treaty benefits. Since a mutual fund is not a taxable entity until the new law becomes effective, it has been unable to obtain a tax residence certificate so has lost the opportunity to access the treaty benefits.
Under the new law, a mutual fund will be a taxable entity with the obligation to have a tax identification number. It would then be entitled to obtain a tax residence certificate to meet the requirements for applying the treaty benefits.
As there are some unclear interpretations of the new tax law, asset management companies and investors are encouraged to monitor the development of the subordinate laws and guidelines which the Revenue Department is expected to issue to address these uncertainties.
About the writers: Orawan Fongasira is a Tax Partner, Jareeporn Phongsuriyanunt is Senior Manager and Suttinunt Pattayanunt is Manager at PwC Tax & Legal Thailand.
