Can inheritance tax work?

Now that we have new cabinet ministers to drive the economy forward, the next expectation is for martial law to be lifted so that foreign investors and tourists can feel more comfortable about returning to Thailand. Meanwhile, the junta is determined to quickly show the people some signs of genuine reform, so it’s no surprise it has revived the idea of an inheritance tax (IHT).

The prospect of IHT is like a tidal wave bearing down on people who hold properties, but the lack of clarity is frustrating. The director-general of the Revenue Department has said only that a bill to introduce IHT, at rates between 5% and 30% of asset value, would be proposed to the cabinet very soon.

The exact tax rate is a secret for now. Although a flat rate of 10% is possible, many believe a flat rate creates vertical inequity. Instead, progressive rates are likely, with the value of assets to be taxed starting from 50 million baht, admittedly a high starting point. A lot of people talk about IHT as a way to bridge the gap between rich and poor. But making the rich poorer is not wealth redistribution. The truth is that IHT never leads to redistribution of wealth in the short term. For a start, consider how many (or few) very rich people die each year, and how long it might take before authorities collect tax on their estates.

The current individual income tax system, coupled with Board of Investment policies that give away tax holidays to the rich like Santa at Christmas, has been hurting the distribution of wealth in thisountry for 30 years. Why aren’t we talking about personal income tax reform and changes to BoI policies that could have an immediate effect on wealth redistribution?

The introduction of IHT will increase the net effective tax rate on a rich family’s earned income from 35% to about 48% of the same amount passed through to the heirs — assuming an IHT rate of 20% (see (see table). The effective tax rate on passive income (dividends) passed through to the heirs would go up from 28% (20% at the corporate level and 10% at the dividend level) to 42.4%.

Such high effective tax rates on the same pool of income earned and passed to heirs will simply encourage the rich to make investments outside Thailand or to adopt tax-avoidance strategies.

Tax base still unclear: According to the Revenue Department, IHT would apply to registrable assets such as housing, land, vehicles, cash deposits, bonds and shares. Non-registrable assets such as amulets or luxury watches would be excluded. However, some registrable assets are illiquid — land with no access to a public road or residences in a flood zone, for example — but a family will need to pay IHT on theses as well.

Authorities have suggested 50 million baht as a starting point, but is this net asset value subject to IHT or gross asset value inclusive of excluded assets?  The bill is also likely to apply only to assets located in Thailandand not offshore.

To prevent tax avoidance and limit the effectiveness of estate planning, tax would also be imposed on certain gifts made within a certain period prior to death. In Britain, there is a time test of seven years.,meaning that tax applies to any gift made within seven years prior to the death of the estate holder.

Some countries including the US impose a gift tax in a way that is similar to the estate tax in order to equalise both transfers. In Thailand, there has been talk of a time test of only two years.

Debt claims after IHT payment: Legally speaking, if the deceased has liabilities to any creditor, his beneficiary will be bound to settle such liabilities. If an heir has already paid IHT and subsequently receives a demand from a creditor of the deceased to settle a debt, there should be a fair refund mechanism because the net wealth transfer after tax will have increased.

Things could get more complicated depending on whether a debt payment is considered as made from registrable assets first, and then non-registrable assets, or the other way around, or on both categories on a pro rata basis.

In terms of valuation, timing can be problematic. Is it based on the time of death, or the time of transfer to the beneficiary — some assets may be tied up because of legal disputes — or at the time that the assets will be used to repay debts (in the case of an IHT refund)?

Who is liable for IHT? Thai tax law employs the concept of self-declaration for filing personal income tax. It is unclear whether the transferor (the deceased’s representative or the estate administrator)r the transferee should be liable for IHT. If there are many transferees, should each be liable for his or her own portion?

Will 50 million baht be measured on assets received by each heir or on the total estate value. What if the deceased appoints an estate administrator to sell registrable assets and distribute only cash and non-registrable assets to his beneficiaries upon death?

Most important of all, however, is the fact that an inheritance tax would not only discourage capable people who could generate wealth for the next generation but also could reduce the incentives o invest in financial and capital markets when the country needs to fund many major projects. At a time when the government needs more cooperation from wealthy people to spur the economy, these factors deserved consideration