The draft inheritance tax and gift tax legislation continues to cause a lot of discomfort among those who have had a chance to review it. One area of great concern is the tax could be extended to movable properties such as jewellery, amulets, art collections and gold, as the draft empowers the government to impose tax on all types of properties including those outside Thailand. At the same time, it also allows the government to issue a ministerial regulation to limit the scope of the term "movable properties" as appropriate, but details of this remain unknown.
But enough about the inheritance tax for now. A more urgent concern has arisen regarding changes that could threaten taxpayers who use a "partnership" or "body of persons" in doing business. The proposed legislation is expected to be applicable starting with the 2015 tax year, so time is of the essence.
Individual taxpayers engaged in well-paid business activities tend to join with partners in carrying out the business and paying tax in the name of a partnership or a body of persons. As a partnership or body of persons is treated as a separate taxable entity from the individual partners, each time a new one is set up the progressive tax brackets are reset, and a 150,000-baht exemption can be claimed. Authorities estimate almost 70,000 such entities are now active.
The Revenue Department for the past two years has been attempting to limit the number of bodies of persons by asking individual taxpayers to limit their use to no more than three. The taxman also wants to make sure each participant in a partnership is a genuine business partner and not just a name being used to create a fake taxable entity.
Much speculation remains about what the department has in mind next, but one fundamental change you will find from next year onwards is the tax system for a partnership will become totally different from that of a body of persons. For unknown reasons, the Revenue Department has decided to split the tax regime into two different approaches.
For a body of persons, instead of imposing a flat tax rate of 20% like authorities had discussed earlier, the department favours the "pass through" approach that is widely accepted in more developed countries. Under this approach, income will be "passed through" to each member and taxed at the member's level in accordance with the ratio of membership. Where a body of persons pays withholding tax in its name, each member will be entitled to the withholding tax credit at the same ratio to offset his or her personal income tax, and the body of persons will have no more liability to file a tax return at year-end.
The legislation will also allow members to choose not to include income in the nature of dividends, interest and sales of immovable property in gross income and leave the withholding tax paid in the name of the body of persons as final.
On the other hand, a partnership will continue to be treated as a taxable entity separately from its partners. The partnership will need to file a tax return and pay tax under its own name, but the new regime will not allow the partnership to claim a standard deduction any more. Instead, it will need to prepare books and records and claim actual expenses. This change has created a serious concern, particularly in the property market, as calculating actual expenses is not always easy.
For example, where two individuals jointly purchase condominium units and lease them to tenants, now they pay individual income tax in the name of the partnership by claiming the standard deduction of 30% — or 15% for land without construction. Once the new legislation takes effect, allocating the purchase price of a condo for depreciation purposes will be almost impossible for such individuals.
The draft legislation further punishes the use of a partnership by stipulating that income in the nature of dividends, interest and sales of immovable property be included in the partnership's tax base. Currently, the partnership may exclude such income from the tax return and leave the withholding tax as final. This new tax regime will have no effect on a registered partnership, which falls under the corporate — not personal — income tax regime.
It remains unclear if profit distribution from a taxable partnership to partners will continue to be exempted in the hands of the partners. There is a rumour the exemption may be abolished, and the use of a partnership could result in double taxation.
The goal of tax policy should be to achieve personal income tax equality no matter what form of business is being used, but the proposed regime seems to reflect certain attitudes Revenue Department officials have towards certain areas of the workforce. This serves only to discourage the use of a partnership or body of persons regardless of whether such entities have a genuine purpose such as co-ownership of a condo unit or plot of land.
This article was prepared by Prof Piphob Veraphong. He can be reached at admin@lawalliance.co.th