The government is currently struggling with an important decision as to whether it should increase the value-added tax (VAT) rate to cope with the need to cover the rising budget deficit. As the increase will certainly have a negative impact on living costs, raise inflation and reduce domestic consumption, some government officials favour expanding the tax base as much as possible in lieu of increasing the VAT rate.
Earlier this month, chaos arose in the capital markets when the Securities and Exchange Commission (SEC) sent out letters containing a surprising request to brokers, custodian banks and Thailand Securities Depository Co (TSD). It asked them to hand over information regarding over-the-counter (OTC) trading of shares, warrants, derivative warrants, non-voting depository receipts (NVDR) and depository receipts (DR), for which they act as intermediaries. The request originated with the Revenue Department, which is looking to plug loopholes and collect unpaid tax, especially personal income tax, from OTC transactions.
When an individual derives capital gains from the "sale of the securities in the Stock Exchange of Thailand", that person will be exempted from personal income tax under Section 2 (23) of the Ministerial Regulation. This exemption does not apply to "gains from the sale of debentures or bonds". The Revenue Department normally treats gains from the sale of warrants, derivatives, NVDR and DR as capital gains from securities trading exempted from personal income tax as well _ when traded on the SET.
Notwithstanding this exemption rule, some investors choose to carry out OTC transactions, which are subject to normal tax liabilities, because trading over the counter gives them greater freedom to negotiate and customise a transaction without being restricted by SET or SEC regulations. As well, the investor can save some costs and keep information, especially the selling price of the shares and names of the purchasers, out of the public eye. Unlike a transaction that is crossed on the main board or through a big-lot transaction, the normal brokerage commission fee is not involved.
Since an OTC transaction is not on the radar of the relevant authorities, a number of investors fail to fulfil their tax liabilities. For example, a buyer of shares ignores obligations to withhold tax at the progressive tax rates, assuming that such withholding obligation applies only when the buyer is a corporate entity rather than an individual. The seller also intends not to declare gains in his or her tax base at year-end. The truth is that gains from an OTC transaction of shares are categorised as Section 40(4)(g) income: "gains derived from the transfer of partnership, shares, debentures, bonds, or bills or any debt instruments those are issued by a company or juristic partnership or by any other juristic person", and fully subject to withholding tax at the progressive tax rates. Only where the seller is a non-Thai tax resident individual, a 15% withholding tax rate will be imposed instead of the progressive tax rates.
Here is the problem: since the withholding tax is not the final one, a seller including a non-Thai tax resident individual is still liable to pay annual tax at the progressive rates and to file a tax return. In practice, most individuals, especially non-residents, are not aware of such year-end tax liability and rarely comply with this requirement. It will be a great challenge for the Revenue Department to plug this loophole, as currently there is no means to enforce such tax compliance.
Also note that in computing capital gains that are subject to tax, an interpretation issue may arise as to what should be accepted as tax-deductible costs _ loan interest, legal fees or appraisal fees _ spent in the course of acquiring the shares. Being aware of these issues, the SEC has sought clarification from the Revenue Department regarding the enforcement of tax collection for each OTC transaction.
Bear in mind that what we described above reflects only a fraction of the potential questions, and in reality the Revenue Department will surely have a bunch of homework to do before it will be able to issue a new instruction to effectively monitor OTC trades.
According to the SEC letter dated Sept 5, 2013, the selling broker is required to report "all" transfer instructions within 15 days of the following month to the Revenue Department in the form of an Excel file. In any month where there are no OTC trades at all, brokers are also required to submit similar information to confirm that that fact.
One should not expect that personal income tax can simply be avoided by transferring securities through an OTC transaction in lieu of payment for consideration for services rendered or for sales of assets.
The most interesting part of the SEC letter, however, deals with the reporting requirements imposed on fund management companies for the cross-trade of securities by mutual funds or private funds. From now on, it will not be easy for the rich who have invested intensively in the capital market to expect tax-free treatment, and there will surely be some tax leakage from transactions.
It appears this new move by the Revenue Department will affect mainly the upper brackets of income earners. In any case, this approach reflects a sound policy in that it will help to ensure that the industry will be fully in compliance with the tax laws. This seems only fitting, as it has already enjoyed many tax benefits for a long time.
This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at email@example.com
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- Writer: Lawalliance Limited Company