tax on foreign income to be levied by Thailand

Update: Thailand Clarifies Tax on Foreign Income

Background to Thailand’s Plan to Levy Tax on Foreign Income

Recently we published “Tax Alert: Thailand to tax foreign income”, an article about significant new changes introduced by the Thai Revenue Department through Revenue Order 161/2023, that seek to tax Thai tax residents on any foreign-sourced income that they bring into Thailand at any time after 1st January 2024.

In short, Revenue Order 161/2023 reversed Thailand’s long-held policy of not taxing foreign income (where that income was not brought into Thailand during the year of receipt). The new revenue order declared that foreign income remitted to Thailand would be taxable in Thailand, regardless of when that income was received!

However, the revenue order was very short on details, leaving many questions unanswered about exactly how the Thai government would apply and enforce the new rule.

This lack of clarity caused a significant public outcry since the announcement of Thailand’s change of policy, particularly among tax professionals (including ourselves) and among Australian and foreign expats living in Thailand.

In response to that large public outcry, the Thai government has just released another new revenue order that seeks to clarify the operation of these new rules.

Update – Thailand issues New Revenue Order 162/2023

On 20th November 2023, the Thai Revenue department issued Revenue Order 162/2023 (a follow-up and amendment to Revenue Order 161/2023). The new revenue order states that, in relation to the rule outlined in Revenue Order 161, that all foreign income remitted to Thailand would be taxable in Thailand, regardless of when that foreign income was received but this new rule:

. . . shall not apply to assessable income arising before 1 January 2024.”!

What this means is that any foreign income earned prior to 1st January 2024 and remitted to Thailand on or after that date will not be subject to Thai taxation.

Ultimately this is qood news as it means that any savings generated by Australian expats before 1st January 2024 (from income earned outside Thailand) will be quarantined. This means that the income can be brought in any time after 1st January 2024 without any tax issues at all.

This latest development appears to be a direct response to the concerns raised by the expatriate community and financial experts, indicating the government’s readiness to address and streamline the complexities involved in the international taxation landscape.

Although this is good news for Australian expats (as it helps to clarify the operation of the new rules), in our view, significant questions still remain about exactly how these new rules will operate going forward, particularly in relation to co-mingled funds (post 31 Dec 2023 income mixed with clean/exempt pre-1st Jan 2024 funds) and other related questions.

Pros and Cons: Evaluating the Impact of the New Ruling

Pros: Revenue Order 162/2023 is a positive development, especially for those who have been living in Thailand as part of the Thai economy since before 2024.

It eliminates the retroactive tax implications on foreign income of the the new rules and it provides an opening for some potentially effective tax planning for re-2024 income and funds.

This revision is particularly beneficial for those who have accrued long-term savings outside of Thailand, as it means that those savings should not be taxed when brought into Thailand.

Cons: Yet, the situation is not entirely straightforward sadly!

The amendment, while providing some answers, fails to address other complexities, particularly relating to the tax treatment of funds sent to Thailand from foreign accounts containing mixed funds (i.e. accounts containing pre and post 1st Jan 2024 income) and the determination of tax rates for various types of income.

These unresolved issues continue to present significant challenges for Australian expats who will need to plan for, and navigate these uncertainties.

Delving into the Unresolved Issues

Despite the clarity brought by the new order in relation to pre-2024 foreign income, several crucial questions remain unclear:

  • Mixed Funds Management: One of the most pressing concerns is how will Thai tax authorities differentiate between income earned before 2024 and after, particularly when that post 2024 income has being banked and co-mingled into accounts containing funds earned prior to 2024?
  • Understanding this distinction will be crucial for Australian expats who may have accumulated funds over several years and who will manage those funds carefully to avoid being taxed unexpectedly by Thailand.
  • Tax Rates for Foreign Income: There’s ambiguity over whether foreign-sourced income will attract a specific rate of tax in Thailand or whether it will be subject to Thailand’s ordinary tax rates.
  • This uncertainty makes tax-planning and financial planning more complex for Australian expats who rely on their Australian income (e.g. pensions, non-government superannuation, dividends and other investment income etc) to live off and survive on in Thailand.
  • Distinguishing ‘Clean Funds’ from Income: For those with co-mingled funds, it will be critically important to separate and segregate ‘clean funds’ (e.g. savings generated from income earned prior to 1st January 2024) from the earnings, which may have different tax implications.
  • What rules will Thailand implement involving recognition of clean funds in mixed fund bank accounts, and will Thailand deem that funds remitted to Thailand are deemed to be from income first, and clean-funds second?
  • Exchange Rate Variations: The impact of fluctuating AUD/THB exchange rate will potentially add another dimension of complexity, affecting Thailand’s assessment of foreign income for tax purposes. How does Thailand plan to address this?

Tax-Planning Strategies for Australian Expats

In light of all these uncertainties, we suggest that Australian expats should consider implementing some of the following potential strategies:

  • Separation and Segregation of Funds:Clearly separating and segregating your funds (based on when they were accrued) will be prudent move, as it will allow you to quarantine your ‘clean funds’ (pre-2024 income) from income earned on or after 1st January 2024. Essentially this involves separating your income earned before 2024 from income earned afterward into separate accounts to align with the new rules.
  • Income earned on or after 1st January 2024 should not be banked into a separate/new account that does not contain any pre-2024 funds.
  • Specifically, income earned on or after 1st January 2024 should not be banked into any account that contains any savings generated before this date.
  • Organising and separating funds based on when they were earned will simplify your Thai tax reporting obligations and it will dramatically reduce the risk of your pre-2024 funds being taxed by Thailand.
  • Consider a Change of Residency Status: For some expats, re-evaluating their tax residency status in Thailand could be a good, strategic move.
  • If becoming a non-resident for Thai tax purposes is feasible and aligns with your lifestyle, it may offer you significant tax advantages because non-residents are typically not taxed on foreign income that is not remitted to Thailand.
  • If considering this strategy be aware that it will require detailed consideration of both the Thai and Australian tax implications (including the effect that may have on your Australian tax residency status).
  • This will be so, even when you are considering relocating to a third country, such as the Philippines, or elsewhere.
  • If considering basing yourself in a different country, you’ll also need to consider the implications for that country, including the potential impact on your global income.
  • Seek Expert Advice: Engaging with tax professionals who are well-versed in both Australian and Thai taxation law. This is vital.
  • Expert tax advisors can provide tailored advice that will help you navigate the new rules and minimise your overall tax obligations.
  • Stay Updated: It’s important that you keep abreast of any further developments and/or updates from the Thai government.
  • Keeping informed will help you to make time sensitive decisions effectively so that you can optimise your circumstances for the best result possible.

Important Reminder on Current Tax Rules

Australian expats should remain mindful that until 31st December 2023, Thailand’s existing rule relating foreign income taxation still applies.

What this means is that, whilst any income that you’ve earned prior to 1st January 2023 can be remitted to Thailand tax free before 31st December 2023, any income earned after 1st January 2023 and before 31st December 2023, will be taxable in Thailand if you bring it in to Thailand on or before 31st December 2023.

Thus, on this point, it’s important to understand that only foreign income earned and received before January 1, 2023, can be brought into Thailand tax-free before the end of 2023.

Expats must remember that until December 31, 2023, Thailand’s existing rule on foreign income taxation remains in effect.

Foreign income received between January 1, 2023, and December 31, 2023, and remitted to Thailand within this period, is subject to taxation under the current Thai tax laws.

Only foreign income earned and received before January 1, 2023, can be brought into Thailand tax-free before the end of 2023.

Conclusion

The introduction of Revenue Order 162/2023 is welcomed as it brings much-needed clarity to the operation of Thailand’s new rule for the taxation of foreign income for Australian expatriates in Thailand.

However, in our opinion, the new revenue order does not go far enough.

Despite the new ruling, there remains significant uncertainties about the treatment of co-mingled funds and when income will be considered as having been remitted to Thailand.

At Expat Taxes, we’ll endeavour to provide further updates on this topic as and when the Thai government provides further guidance or issues new orders.

Don’t Bury Your Head in the Sand!

In the meantime, we recommend that you consider reaching out to our team to discuss how these changes may affect you.

We also recommend that you consider exploring and implementing various tax-planning strategies, including potentially changing your tax residency status (for Thai tax purposes)

The worst thing that you can do is bury your head in the sand and assume either, that the changes won’t affect you, or that the Australia-Thailand tax treaty will protect you – in most cases, it won’t!

In most cases, when you are a Thai tax resident, the treaty will specify that Thailand has the right to tax your income, (not Australia).

This is particularly relevant for those living in Thailand and surviving on their Australian age-pensions, and/or on their Australian (non-government) superannuation pensions, as the tax treaty states that ONLY Thailand can tax those pensions!

Whatever you do, staying informed and seeking expert advice from specialist expatriate tax advisory firms like us here at Expat Taxes, will be key to ensuring that you manage these challenges so that you comply with Thai and Australian tax laws in the most tax effective manner possible.

Stay tuned to our website for more updates and if you have any questions or would like to discuss how these new rules might affect your circumstances, please do not hesitate to book an appointment with us to discuss your situation – we’d be happy to run through all the issues with you.

Shane Macfarlane CA
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