Thailand’s New Approach to Taxing Foreign-Sourced Income
Overview of Changes
Orders No. P.161 and P.162 of the Revenue Department (RD), effective from January 1, 2024, represent a significant shift in Thailand’s approach to taxing foreign-sourced income.
What Counts as Assessable Income?
Assessable income now includes a broad range of earnings such as employment income, professional fees, dividends, interest, royalties, rental income, capital gains, and other gains as defined under Section 40 (1) through (8) of the Revenue Code. However, certain types of income, like inheritances or family support within the tax-free limit, are still exempt.
The Importance of Understanding Global Changes
Given the increasing globalization and mobility of individuals and their capital, and the increased access of governments to financial information, a full understanding of these new regulations is crucial for both residents and non-residents with foreign income.
Navigating Cross-Border Tax Complexities
In order to navigate this new landscape effectively, it is important to understand the implications of information sharing and cross-border changes, including the Common Reporting Standard (CRS) Base Erosion Profit Shifting (BEPS). It is also important to note that there is considerable confusion about the interpretation of tax implications on many aspects, including capital gains on overseas assets which are situated in tax jurisdictions that do not treat gains as liable to income tax.
Principles Behind RD Orders No. P.161 and P.162
These orders, outlined in Section 41 of the Revenue Code, establish two primary criteria for assessing income tax on foreign-sourced income:
- Foreign-Sourced Income post-January 1st, 2024: Income from foreign sources that is earned from 1st January 2024 onwards, by a Thai resident, is taxable if remitted to Thailand that tax year. Tax residency in Thailand typically applies if an individual spends 180 days or more in the country during a calendar year. It’s important to note that tax residency is not exclusive i.e. it’s possible to be tax resident in more than one country in a tax year) but also that Thailand generally bases taxation on residency rather than nationality, unlike the USA. In recent days, the RD has indicated that they are exploring an expansion of residence-based income taxes to include global earned income, whether remitted to Thailand or not. See ‘Clarifying Misconceptions’, point 2. We will continue to monitor this space.
- Income Remittance to Thailand: Under the new framework, even if the income described above is remitted to Thailand during any subsequent year when the recipient remains a Thai tax resident, it is still taxable. This represents a departure from the previous rule, which taxed income only if remitted in the same year it was earned.
In simple terms, Thai residents who generated foreign income were previously only taxed on that income if they remitted it to Thailand in the year that they earned it. This has now changed, for income generated from 1st January 2024 onwards so that if they are Thai tax resident in the year that they generate the income and if they remit that income, in whole or part, to Thailand in that year OR IN ANY SUBSEQUENT YEAR, when they are also Thai resident, this will now generally be taxable in Thailand when it is remitted.
Clarifying Misconceptions About Thailand’s New Tax Rules
There are a number of important aspects of this which have been widely overlooked in some of the reactions that we have encountered:
1. Applicable Only to Income Generated During Thai Tax Residence
The new basis only applies to income generated, from 2024 onwards, during a year in which the taxpayer was Thai tax resident. There is no intention, for instance, to capture income generated in periods prior to establishing tax residence.
2. Remittance Rules for Professional Expatriates
It only applies to income remitted in a period when the taxpayer is Thai tax resident – in other words, for ‘professional expatriates’ who might have a limited posting in Thailand (say 3-4 years), it should be relatively straightforward to tax plan during a fixed, limited period of Thai residence. It should however be noted that a recent article in The Bangkok Post [1]reported that Revenue Department official, Kulaya Tantitemit, stated that RD is looking at ways to impose taxation of Thai residents on a worldwide basis, irrespective of whether the income is remitted to Thailand or not. While this would potentially be a significant development, it is important to remember that this remains in the discussion stage and that there are no firm proposals at this stage. Once more details emerge, it will be important to review these and to determine appropriate responses.
3. Treatment of Remittances
The new basis only applies to that element of remittance that is income – a key point here is that money is fungible (i.e. holdings of local currency in bank accounts outside Thailand are mutually interchangeable – if, at 31st December 2023, you have $250,000 in your bank account and earn another $50,000 this year, you now have $300,000 – if you remit this amount in its entirety, then it will comprise $50,000 that is taxable and $250,000 that isn’t. Therefore, if you remit $250,000 or less, it appears that RD treatment allows this to be wholly treated as forming part of the untaxable amount. This would allow remittances to be planned in carefully structured ways that would mitigate the risk of tax exposure in Thailand. As individual situations vary significantly, care does need to be taken so we would stress the importance of professional advice.
4. Double Taxation Agreements
Thailand has over 60 double taxation agreements (DTA) which confer taxing rights. The text of these agreements can be found on the RD website (although they are not always the easiest reading). Under the terms of each of these agreements, taxing rights are allocated between Thailand and the reciprocal jurisdiction, with the general principle that the same income is not taxed twice (or if it is taxable in both jurisdictions, then a tax credit can be applied). Again, every circumstance is different, and it is recommended to take professional advice, but this potentially provides further opportunities for mitigation.
5. Tax Exemptions and Reduction Opportunities
Where tax is payable in Thailand, there are a number of exemptions and ways to legitimately reduce tax exposure in Thailand, which can be applied in order to reduce the quantum of tax due.
6. Capital Gains on Overseas Assets
It is worth remembering that if proceeds comprising capital gains on overseas assets held by Thai residents are remitted to Thailand, the remittance might be liable to Thai income tax. Thai income tax does not always provide relief for the capital element (for instance the liability to personal income tax on the sale of immovable property in Thailand is generally based on either the full sale price or the full amount of the assessed price, less a standard deduction, based on the holding period.
Conclusion and Comparison of Tax Bases
In light of the proposed changes, mentioned in Point 2 above, we have prepared the following comparison of our understanding of the previous, current, and proposed bases. It should be noted that many aspects of the current basis still require clarification in practice and that the proposed basis is simply a reflection of our understanding of the reported intentions of RD, based on similar worldwide income schemes – however, in all cases, DTA and other mitigations may apply:
Comparison of Overseas Employment or Investment Income Tax Treatment
- Previous Treatment: Taxable on Thai residents if remitted to Thailand in the year it was earned.
- Current Treatment: Taxable if remitted to Thailand during any period of Thai residence if Thai resident when earned.
- Proposed Treatment: Taxable if earned during a period of Thai residence, whether remitted or not.
Proactive, informed planning can make all the difference !!
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[1] https://www.bangkokpost.com/business/general/2805305/new-overseas-income-rules-proposed
