The US Foreign Account Tax Compliance Act (FATCA) passed in 2010 may inadvertently impact Thai provident funds and could cause difficulties for Thai employers of Americans.
Under the FATCA rules, all financial institutions with investments in US assets are required to register with the US Internal Revenue Service (IRS) and agree to report certain information such as account balances and transactions in and out of financial accounts held by certain American individuals and non-US entities with significant US shareholders.
These rules are specifically designed to try to catch US taxpayers who underreport their foreign income on their US tax returns. Americans are subject to US taxation on worldwide income and, as such, are required to report all income to the IRS, regardless of where such income is earned in the world.
Currently, the IRS can easily find income generated and paid inside the United States, as payors of such income are required to report such payments to the IRS. The IRS then matches the information received from payors with the individual’s tax return to determine if all income has been reported.
This is, however, not the case with income earned outside the United States, as there has historically not been a requirement that foreign entities report such payments to the IRS. The FATCA rules seek to eliminate this reporting loophole by requiring that all foreign financial institutions (FFIs) report Americans’ income and account balances on an annual basis, or else suffer a 30-per-cent penalty on certain types of investment income they receive from the US.
Under the FATCA rules, the definition of an FFI includes non-US banks, asset managers, custodian and funds. Thus all foreign funds that have investments in the US will normally be required to register as an FFI with the IRS and participate in the FATCA programme unless the fund qualifies for a special exception.
This includes Thai provident funds.
A Thai provident fund is a type of retirement fund mandated by the government of Thailand. These funds are created by asset-management companies and offered as a service to employers, who in turn provide their employees with the ability to save money for retirement out of pre-taxed earnings. These earnings are deposited in the fund and available to the employee upon retirement. The employer often provides a matching amount, thereby making investment in the provident fund more enticing to employees looking to save money for retirement.
Under the final FATCA regulations issued this year, the IRS attempted to carve out certain types of pension funds and other retirement-type funds from the reporting requirements by making such funds subject to registration but not subject to ongoing reporting and account-monitoring requirements. Such funds were seen as unlikely candidates for abuse by Americans looking to avoid paying US taxes, as these funds are only available to employees, and it was seen as highly unlikely that a US taxpayer would seek employment outside the United States at a company having a provident fund as a way of trying to hide significant amounts of income or assets from the IRS.
Unfortunately, this carve-out, as written, does not appear to have accomplished the task.
Specifically, the regulations provide an exception for broadly held pension-fund plans but contain a specific requirement that such funds report income balances annually to the tax authority in the country where the fund is registered. This requirement is consistent with US practice in that an annual statement of contributions and funds balances is sent not only to the employee invested in a provident fund, but this information is also sent to the IRS. However, this is not a common practice outside the US and specifically in Thailand, where the reporting of such information is not required under Thai law.
As such, the exception provided for most broadly held pension-type funds does not appear to apply in the case of Thai provident funds. This is a significant issue for provident funds, fund managers and employers, as they are required to register with the IRS and report on account balances of US taxpayers on an annual basis.
This level of reporting is complicated by the fact that Thai provident funds normally do not know the details of the employees investing in the funds. Such details are normally kept with the employer. This raises serious issues around the ability of Thai provident funds to comply with the FATCA rules, not to mention potential issues around privacy concerns.
As FATCA deadlines quickly approach, significant issues still exist that need to be addressed. Let’s hope the IRS is able to provide additional, much needed, guidance in time.
Jonathan Blaine is associate principal at KPMG Thailand. This information is intended as a general guide only. Tax law is complex, and professional advice should be taken before acting on the information provided.