New tax poised to diminish bond activity
15% withholding on fixed-income funds
Active bond trading and new debenture issuance are expected before the 15% withholding tax imposed on fixed-income funds takes effect on Tuesday, in order to avoid the latest tax tweak aimed at reducing inequality.
Trading liquidity of debt securities is expected to dwindle in the secondary market after the effective date, since fixed-income funds make up about 50% of total corporate bond trading, says the Thai Bond Market Association.
TBMA president Tada Phutthitada said mutual funds make up about 50% of active trading in the corporate bond market, therefore if debenture investors shoulder more cost that could jeopardise investment returns, investors will shy away from this type of investment.
Lower inflows into bonds could have an impact on the capital market ecosystem.
If this holds true, corporates will opt for other fundraising methods such as bank loans or capital increases via the stock market, Mr Tada said.
"Bond issuance is one of the essential options of companies' management strategy to manage funding costs," he said.
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 exempt from the 15% withholding tax, but investors who buy these mutual fund units from Aug 20 onwards will be subject to taxation.
Ariya Tiranaprakit, senior executive vice-president of the TBMA, said the association already sent a letter to Finance Minister Uttama Savanayana to consider adjusting the upcoming withholding tax to prevent confusion over taxation for both investors and asset management firms.
There could be a misunderstanding among market participants because the latest tax tweak will not be applied to unit holders of mutual funds investing in fixed-income securities established before Aug 20, but the 15% withholding tax will be applicable if unit holders decide to sell their investment units in the secondary market, Ms Ariya said.
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 without taking into account how such returns could decrease over time, she 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 and it would be difficult to request a tax refund.
If returns on fixed income are not attractive, fund managers will offer other investment products instead, such as equities or other assets in the global markets, said Narongsak Plodmechai, chief executive of SCB Asset Management.
"It is too late to stop now," he said. "The bond market will be hurt as trading liquidity trading is expected to decrease, but investors will always have others choices to invest in."