A Proposed Amendment to the Foreign Source Income Tax?

Proposed Amendment to the January 2024 Thai Foreign-sourced Income Tax for Thai Residents

A Short Analysis by Jack Mazzola Esq., and Wannapa Mazzola CPA, MBA of

NAPA Business Solutions Co Ltd.

Thailand's tax regulation for foreign-sourced income has a proposed amendment, which this author believes will become law shortly with very few alterations.

The History

The January 2024 Rule Change

Thailand's personal income tax rules underwent significant changes on January 1, 2024: a Thai tax resident (someone who lives in Thailand for 180 days or more in a calendar year including both expats and Thai citizens) is now required to pay personal income tax on foreign-sourced income transferred to Thailand, regardless of the calendar year it was earned.

This was a change from the long-standing, previous regulation in which earnings produced in previous years and brought into Thailand after the year it was earned was not taxed.

The Proposed Amendment

The "Two-Year Window"

Owing to detrimental effects on foreign investment and repatriation of money by Thais and expats abroad, the Thai Revenue Department has suggested a modification: this proposed reform seeks to provide a tax break for foreign-sourced income that is transferred to Thailand within a two years from when it was earned.

The following are the important points of the proposed amendment:

Tax Exemption Window

Foreign-sourced income remitted to Thailand is exempt from personal income tax if it enters Thailand in the same year or the next year in which it was earned.

Taxation after the Window

If the foreign income is remitted after the two-year period, it will be taxed at the usual graduated Thai personal income tax rates, topping out at 35 percent.

The Goal of the Amendment

The primary reason for the proposed amendment is to encourage Thai citizens and residents to repatriate cash from abroad to stimulate domestic investment including securities, business, real estate, services, and the like. A secondary reason is to increase flexibility for international transactions. The new regulation has had a chilling effect on all transfers of cash.

Targeted Funds

There exists idea a substantial amount of overseas Thai & Thai expat investment that has slowed or ceased moving into Thailand as a direct result of the January 1, 2024 foreign-source income regulation.

Retroactive Application

Thus far, we have not heard or read if this new regulation will apply retroactively to income remitted to Thailand in 2024. Our opinion is that it will not.

LTR Visa Holders

The proposal might have some interesting effects for Long-Term Resident (LTR) visa holders (specifically "Wealthy Investor," "Wealthy-Retiree," & "Work-from-Thailand Professionals") who have some exemptions from personal income tax on offshore, repatriated income. In some ways, it will lesson the overall value of the LTR, but not in any meaningful way. With permanent residency at a standstill for the time being, the LTR is the only game in town.

Current Status and Implementation

It is vital to understand that this proposed revision is still a draft decree, and it has not yet been formally issued or implemented. Before it becomes law, it will require not only the approval of the Cabinet, but also an assessment of the Council of State.

If the change is made, Thai tax residents–whether citizens or expatriates–will have a significant incentive to bring their foreign-sourced income back to Thailand within the two-year window without paying personal income tax. This should manifest in a large amounts of cash inflow. Although many expatriates acted quickly to park cash elsewhere, this was not as prevalent among Thai citizens.

Foreign Residents & Expats

Although much of the discussion centers on Thai nationals, the "resident rule" applies to anyone (Thai or foreign) who lives in Thailand for 180 days or more in a tax year.

Almost obviously, this led to some of the wealthiest expats spending 179 days or less in Thailand, exempting hem from the tax and yet reducing their spending and buying in Thailand.

Speculation on the Impact of the Economy

The Thai government's aims is to stimulate domestic investment and spending.

(First, a better understanding of tax treaties is needed. Such treaties are often known as DTAs or Double Tax Agreements, but this is jargon and really a misnomer. A tax treaty is far more than a mechanism to avoid double taxation. In fact, a DTA or double tax provision is usually only one term of a tax treaty. Tax treaties are usually 20-30 pages long, and the DTA provision is usually half of a page. It is boilerplate language in tax treaties–almost always the same wording in tax treaties around the world. This is important because foreign-sourced income deals with multiple aspects of tax treaties, such as what constitutes residency, definitions of foreign-sourced income, what types of income are included or excluded, what professions are allowed tax exemptions, and so on.)

Thailand has over 60 tax treaties, and the double tax provision allows foreign taxpayers to deduct other taxes paid from their Thai tax liability, usually in the form of a tax credit. This avoids taxing the same income twice–in theory. But the analysis of the tax credit can be far more complicated to asses than it may seem

A Theoretical Case Study–US Retiree Expats

For example, let's look at the US government mechanisms for retirement money. (This analysis will not include pensions, nor social security payments for reasons of simplicity and clarity).

America allows for three main government plans for retirement funds. The 401(k), the traditional IRA (Individual Retirement Account) and the Roth IRA. All are contributions made over an individual's lifetime and disbursed upon retirement.

Both the funds and accumulated growth of the 401(k) and the traditional IRA are tax deductible when the contribution is made, but taxable when disbursed, including any profits made on those contributions over time. However, Roth IRA contributions are made after taxes are paid, and all accumulated profits and principal are paid back tax-free. However, both types of IRAs are often held by the same individual and often exist within the same financial institution. Thus they can be disbursed together, often in the same check or transaction. In fact, it would take some doing, not to mention double the transaction fees, to split the disbursements, evidencing taxes paid and not paid, thus easily understanding the correct tax credit.

American private pensions sometimes have a combination or variation of the two, making things even murkier. But again, private pensions will not be discussed here. However, something must be said on US social security. Even if an American has no other forms of retirement income, anyone who worked for 10 years (actually contributions over 40 quarters so it can be less than 10 years) will have some US Social Security income. This makes an analysis of whether or not foreign-sourced income was taxed or not, and how much even more complicated. Many countries have social security treaties as well as tax treaties. If, for example, a British citizen worked in the United States and accrued social security benefits, the distributions would first have to go through the laws of the US/UK social security treaty. Only then could Thailand pick up the analysis of whether taxes were paid, and if they were paid in the US or the UK, or neither, or both. This also leaves out the ethical and moral question of whether social security income from one country should even be taxed by different country in the first place. It also leaves out the analysis of how much of an individual's social security payments would be taxed by the US. For example, if a retiree is receiving $1,100 a month in Social Security benefits, this would put that individual under the US poverty line and they would not be taxed in the US at all (if this was their only retirement income). Should Thailand then have the right to tax that income if the United States does not?

This is the analysis of just an American example. Countries provide social security or super annuities in many different ways. Providing evidence of what taxes were paid where and when is complex. And to be frank, the aforementioned is actually a common and comparatively easy assessment. Private pensions, annuities, life insurance, awards or settlements from lawsuits, and other such gray areas of ‘earnings’ have not been addressed. The author chose the aforementioned example for the sake of clarity.

Conclusion

The January 2024 law rendered all repatriated foreign income taxable for Thai tax residents, regardless of when it was earned. However, a clear definition of foreign ‘earnings’ was never put forth by the Ministry of Finance.

This caused a comparative tricking of funds being transferred to Thailand in 2024.

It also allowed for legal loopholes for those who could afford international financial planners. It created mechanisms to avoid taxation by use of other means, including, but not limited to, other tax treaties. As a tax lawyer and accountant, the authors use the example skirting taxes via treaty law because it’s always a winner, owing to the monism theory of treaty law’s required superiority to domestic laws. This is especially true in trade and tax treaties.

A Practical Case Study: The Hong Kong-Thailand Tax Treaty on Retirement Benefits

The Thailand-Hong Kong treaty provision on retirement income makes all retirement distributions from Hong Kong retirement accounts into all signatory countries and their residents completely tax free.

This allows for the transfer of foreign-sourced income from abroad transferred into a Hong Kong retirement account, which then can be disbursed into Thailand to a Thai citizen or resident with no taxes, thereby completely avoiding the January 1, 2024 regulation’s ability to tax foreign-sourced income. Making matters more advantageous for individuals using this mechanism, the Hong Kong retirement age is usually 55. Furthermore, it is also possible to choose your own retirement age in Hong Kong retirement accounts! As long as an individual earns no money within the Hong Kong SAR, they can earn anywhere else, officially be retired in Hong Kong, and take advantage of the treaty provision.

This is a practical solution used by many citizens of the 44 countries who are signatories to the Hong Kong treaty, including Thailand.

Again, this was an easy one. It was used in Thailand before the January 1, 2024 law, and it was used a lot more once it went into effect. And again, it is absolutely legal.

Summary

Current Regulation. Any Thailand tax resident is required to pay personal income tax on foreign-sourced income sent into Thailand, regardless of the calendar year it was earned, with the rationale of increasing Thai tax revenue based upon taxation by residency in line with the OECD and almost all industrialized nations.

Proposed Amendment. Foreign-sourced income remitted to Thailand is exempt from personal income tax if it enters the nation in the same year or the next year–a very generous two-year grace period for tax-free transfers (which may be a temporary measure) with the rationale of attracting more funds back to Thailand.

Authors’ Opinion. This amendment to the 2024 regulation will be passed, maybe with some minor tweaks–possibly to the length of the window, but we don't think so. Not now, not in the current economy. At some time in the future, Thailand will tax foreign-sourced income with a more comprehensive law, but not for a while.