Relying on double tax agreements (DTA) as the basis for dealing with your tax problems is a tricky business. Although they have a place as one of a few effective tax management tools, they need to be used carefully, and as usual, the devil is in the details.
Last week we looked at some of the steps governments have been taking in an attempt to increase their tax revenues. Readers raised some interesting points, but it was clear that some expats believed they were "safe" and exempt from tax in their home country or elsewhere through a DTA. They further believed they were exempt from tax in Thailand, which is often far from the case.
One of the hot topics we have seen emerge over the past year involves qualified recognised overseas pension schemes (QROPS), following the introduction of new rules by Her Majesty's Revenue and Customs (HMRC) in April, 2012. The most significant of those rules is that pension income must be taxed in the jurisdiction of the QROPS in the same way for residents and non-residents. This led to almost all the schemes domiciled in Guernsey being disqualified. The reality is that HMRC has adopted a view that originating contributions were tax-exempt when paid into such schemes, and thus the resulting income should be taxable no matter where it is generated.
DTAs are designed to relieve a person who is resident in one country from paying tax in that country and another jurisdiction where income is generated. Thus tax will only be paid once. This is reasonable and satisfies both tax jurisdictions as well as the taxpayer.
However, the way these agreements are administered can cause a lot of confusion, because they involve different countries that may not follow the same principles. For example, in some DTAs pension income is specifically excluded, sometimes making it taxable in the source country. Thus if you have a QROPS pension in Malta and you are resident in China, you will find that your pension income is actually taxed in Malta. Tax rates there are rather high and you will find yourself paying 35% tax once your small personal allowances have been used up.
Similarly, if you live in South Africa the DTA is specific, requiring that tax is to be levied by the country that makes payments rather than the country where the pension recipient is resident. Once again, you would be taxed in Malta on your QROPS income. If your income from a Malta QROPS was, say, 10,000 (467,000 baht) a year, the tax would be 2,834, or 28.34%.
In evaluating your tax position in Thailand you need to be careful. A number of advisers are promoting QROPS in Malta, saying that a DTA between Malta and Thailand is in force. This is not the case _ yet. There is a draft agreement but it is not yet signed or ratified. Thus if you are relying on a DTA here you are taking a risk _ something you should never do with your pension.
In addition, if you carefully study the standard administrative procedures for a DTA in Malta, you will see that before Malta agrees to exempt tax at source from QROPS income payments, it requires a certificate from the resident member's tax jurisdiction stating that it is receiving tax on the income being received. Thus, if and when the DTA is introduced, you will need to declare and pay tax on your pension payments from Malta, in Thailand, and obtain a certificate from the Thai Revenue Department confirming that fact before you can claim relief from the high tax deductions being made in Malta.
If you have gone ahead with a QROPS on the advice that a DTA between Malta and Thailand will automatically exempt you from taxes imposed in Malta, you ought to urgently seek a second opinion.
As an expat residing in Thailand you are likely among the majority who live here on a one-year renewable visa of some sort. That may be a retirement visa, a "spouse visa" or a non-immigrant O visa that is linked with a work permit. In this case, any income you generate in Thailand is subject to Thai tax. This includes employment within Thailand and other income generated in the country.
However, any foreign-source income will not be taxed unless you actually remit it to Thailand in the tax year it is generated. Thus if you are paid pension income outside Thailand and you remit this income to Thailand in a different tax year, then it is not taxable in Thailand. If you recently received approval of your permanent residency (PR) visa in Thailand, or you already hold Thai PR, you are now in the privileged position of paying Thai tax on your worldwide income, no matter where it is generated or paid. This will include rental income from foreign sources; dividends; interest and any other income no matter where it is generated.
There are exceptions to these rules which are too lengthy to detail here. Therefore, if you feel you need to get a handle on this you ought to be taking advice from an expert on Thai tax laws.
Thai PR visa holders quite likely intend to spend the rest of their lives here, but for those expats who are here on a temporary basis or as yet undecided, there are some things to consider when evaluating where to live. I am aware of a number of expats who have decided to move elsewhere because it is cheaper to live in another country. The cost of living has generally increased in Thailand and the strength of the Thai baht has exacerbated this situation and made it even more expensive to live here in terms of home currencies.
Those expats who are concerned with these issues would be wise to take international tax advice which relates not only to Thailand but to the possibility of relocating to other jurisdictions.
There are sometimes facts that may sway an expat to move or stay put depending on the taxation situation in the place where he is proposing to move.
Lastly, there is a new type of agreement currently being introduced globally which will obviate the requirement for a DTA in many jurisdictions. This is Unilateral Tax Credit Relief (UTCR). Some of these agreements were implemented in 2012.
UTCR is relief given by a home tax authority for income received from foreign sources which has already been subject to taxation. In effect, a country is saying that if income has been subject to tax elsewhere, it will be exempt from any home country tax. If they are considered effective, UTCRs will likely be implemented steadily over the next few years and remove the requirement for DTAs. Time will tell.
Because the world is shrinking, taxation seems to be getting more complex and is complicated further by the fact that many governments are seeking to increase their tax revenue because they are broke. If you have not sought tax advice as an expat, then it is about time you did, even if only to understand your own position and rest assured that you're doing the right thing.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to email@example.com.
About the author
- Writer: Andrew Wood