Levy on foreigners likely to slow inflows
The Finance Ministry is studying the pros and cons of scrapping a long-standing waiver on capital gains taxes for foreign investors in the local bond market, says Deputy Finance Minister Pradit Phataraprasit.
If completed in time, a package of measures aimed at assisting businesses adversely affected by the appreciation of the baht, together with new tax measures to deter speculative inflows would be considered by the cabinet today, he added.
The study follows reports Finance Minister Korn Chatikavanij may propose to the cabinet a new measure to control foreign capital inflows to slow the pace of the appreciating baht, coupled with tariff measures to ease the burden on Thai small and medium-sized business entrepreneurs (SMEs).
Mr Pradit said one idea being considered is to scrap the current exemption on capital-gains taxes for fixed-income investments for foreign investors, and unify tax rules with the 15% capital gains tax paid on investments by Thai individuals.
In any case, the government this week is expected to announce a plan of assistance measures to help SMEs with limited resources to hedge against currency risk or who have been particularly affected by currency movements due to low import content.
“We still have a lot of topics that need to be discussed as there are pros and cons to each tactic. Any group of measures can provide a different outcome,” said Areepong Phucha-oom, permanent-secretary for the Finance Ministry.
The baht and other regional currencies have gained strongly against the dollar this year due to trade surpluses and capital inflows as investors seek to take advantage of higher yields in Asia’s high-performing economies.
With interest rates in the US and Eurozone near zero, investment capital has poured into the region to profit from higher interest rates as well as stronger prospects for capital gains and currency appreciation due to stronger economic fundamentals.
Imposing a capital gains tax would effectively reduce the yields on investments and the attractiveness of local debt. Government bond yields yesterday corrected sharply on reports that authorities are considering a capital gains tax, with the five-year bond yield jumping 16.69 basis points to 2.71594% and the 10-year bond up 12.22 points to 3.12437%.
One hundred basis points is equal to one percentage point. Bond yields move opposite to prices.
The baht has become a political flashpoint in recent months, with industry groups warning that the stronger currency will hurt the country’s export competitiveness over the next several months.
On the other hand, a strong baht reduces the cost of imports, in particular oil, and also eases inflationary pressure within the economy, giving leeway to the central bank to maintain lower interest rates.
Mr Pradit said authorities would co-ordinate programmes with state-controlled banks to develop hedging instruments for private businesses.
Dusit Nontanakorn, chairman of the Thai Chamber of Commerce, said local businesses were having trouble setting export prices due to the volatility in currency rates.
“When you set the selling price today, the actual delivery won’t be for another two months, and who knows what the baht will be then,” he said.
“[An exporter] might profit 5% or 10% from a sale and be happy. But if the baht appreciates 10% over the same period, it means a loss. Sometimes you can only accept the loss, just to help maintain the customer relationship.”