The mixed track record of inheritance tax regimes

The mixed track record of inheritance tax regimes

Independent analysis of the government's fiscal policy is needed to assess the long-term sustainability of public finances, fiscal performances, and related risks. Our group Thai PBO — short for the Thai Parliamentary Budget Office — aims to do just that. Such fiscal policy includes taxation which is at the top of the government's reform agenda.

Among a few new taxes to be implemented, the inheritance tax is the most imminent. The cabinet approved a inheritance tax bill last month, which is expected to come into effect in the middle of next year.

The inheritance tax will apply to registered assets, including residential properties, land, vehicles, bonds, equities, and deposits at financial institutions. It will be calculated based on net wealth, which is the value of received assets deducted by any debts inherited. Net wealth worth no more than 50 million baht would be exempt from the tax, while the excess will be taxed at a fixed rate of up to 10%.

Generally, inheritance tax is collected concurrently with gift tax, which is aimed at closing loopholes of inheritance tax enforcement. Since inheritance includes only the assets given to the beneficiaries by the deceased, many people attempt to evade inheritance tax by transferring assets as gifts before they die.

To prevent tax evasion, the gift tax, which is levied on the assets given to others by one living person within a specific period, is imposed to supplement the inheritance tax. In the case of Thailand, the specific period is two years before the person dies.

The people who stand to be affected are only the wealthiest in Thai society. Compared with other countries that apply inheritance tax, Thailand's exemption threshold (50 million baht) is set at the highest level, while the proposed 10% rate, on assets in excess of 50 million baht, is among the lowest in the world.

In principle, the inheritance tax helps promote economic efficiency as well as reduce economic inequality. A well-designed inheritance tax will encourage people to spend more while they are still alive, which in turn will stimulate the economy. The tax also promotes fair competition and charitable donation. Apart from boosting the economy, the tax can also raise government revenues, while it does not put any burden on the poor.

However, the lessons from various countries, which collect inheritance tax or used to collect it, indicate many problems in practice. This is mainly because the definition of inheritance and some specific conditions for tax implementation often open loopholes for avoiding or escaping from tax payment.

Consider some examples of avoiding the tax as follows: an owner who has property worth 200 million baht might allocate his inheritance to many heirs, each of whom receives inheritance valued at no more than 50 million baht. The owner might also gradually transfer ownership of his properties to the heirs long before his death.

As a result, his properties will not be subject to any inheritance tax. In addition, the owner might turn his cash or registered assets into gold bullion or rare collectibles, which would not be payable under the current inheritance tax bill.

We know from international experience that people will resort to a number of complicated methods to avoid inheritance tax such as establishing a new company or changing the structure of ownership by making use of preferred stocks, creating a sale agreement with heirs which is not regarded as transferring inheritance, purchasing life insurance putting the heirs as beneficiaries, establishing an irrevocable trust to distribute the value of properties, gradually transferring properties when the market price is lower than the acquisition price, transferring some properties overseas, and so on.

Due to an unclear definition and obscure methods for assessing the value of property, coupled with various ways to evade inheritance tax, the revenue collected by the tax is relatively low. From international experience, revenue raised by the tax is below 1.5% of gross government revenue or below 0.5% of the country's GDP.

But the administrative cost is somewhat high because it needs a good property database, as well as effective data collection and value appraisal. A number of lawsuits filed concerning methods of value assessment and tax calculation will arise.

For these reasons, countries, including Norway, Singapore, and Canada, have abolished their inheritance tax. In Thailand's case, close monitoring and assessment is needed after the bill is enacted.

Pawin Siriprapanukul, PhD, is a lecturer at the Faculty of Economics, Thammasat University. He is member of the Thai Parliamentary Budget Office, a research team at the Thailand Development Research Institute which analyses the government's fiscal policy. Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

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