Thai Bond Market Association seeks withholding tax review

Thai Bond Market Association seeks withholding tax review

The Thai Bond Market Association (TBMA) will meet with newly appointed Finance Minister Uttama Savanayana to request a review of the 15% withholding tax placed on fixed-income funds set to take effect on Aug 20.

There are concerns that such withholding tax will affect long-term financial liquidity of bonds traded in the secondary market, said TBMA president Tada Phutthitada.

In 2018, the cabinet approved the tax tweak as a means to reduce inequality in taxation between direct investment in debt securities and investment in debt securities through mutual funds.

Individuals who invest in debt securities or make deposits in banks are subject to a 15% withholding tax rate on interest, profits or discount, while investment in mutual funds with an asset allocation in debt instruments is tax-exempt before the 15% withholding tax comes into effect.

Fixed-income funds' unit holders are currently subject to a 10% withholding tax on dividends.

Retirement mutual funds (RMFs) remain tax-exempt, as do fixed-income funds established before the law's enforcement.

Unit holders of mutual funds investing in fixed-income securities established before Aug 20, 2019 will also be exempted from the 15% withholding tax, but investors who purchase these mutual fund units from Aug 20 onwards will be subject to taxation.

The 15% withholding tax placed on investment in fixed-income funds from Aug 20 may be unfair because such taxation will be deducted based on returns generated for investors, or the coupon rate, without taking into account how such returns could decrease over time, Mr Tada said.

For instance, a 5% yield generated from fixed-income fund investment could decline to 4% over time, but investors would still be taxed based on the 5% yield, he said, adding that it would be difficult to request a tax refund.

Retail investors are not expected to face hurdles on seeking a tax refund to compensate for lower yields from fixed-income funds, as they can compile evidence and forward it to the Revenue Department, Mr Tada said.

But such requests could be difficult for fixed-income funds to deliver because they have to conduct mark-to-market accounting every working day, he said, noting that storing personal customer data by asset management companies will incur an additional cost.

A possible scenario is that unit holders of existing fixed-income funds will not sell their units in order to reap a tax-exemption benefit, while those investing after Aug 20 will be liable for both the 15% withholding tax and a possible reduction on investment return.

This would eventually curb financial liquidity in the secondary bond market.

Comparing investment in debt securities to deposit interest is irrelevant because long-term deposit interest has a fixed rate, Mr Tada said. On the other hand, although there is a fixed return for bonds, market volatility or adverse issues related to bond issuers have an effect on the movement of the yield curve.

"Our proposal is to request the Revenue Department revise this tax measure by only making tax collection on fixed-income funds established after Aug 20," he said. "The Finance Ministry also should find an uncomplicated solution for investors seeking a tax return in case of a downgrade in bond ratings or extensive losses."

Offshore fund outflows, meanwhile, continue to be seen in July for short-term domestic bonds after the Federal Reserve signalled potential rate cuts to shore up US economic growth, Mr Tada said.

Non-resident net outflows yesterday totalled 3.76 billion baht, while month-to-date net outflows stood at 3.84 billion, according to TBMA data.

Offshore net inflows into Thai bonds totalled 3.21 billion baht during the first half of 2019, but they have turned into net outflows worth 829 million on a year-to-date basis.

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