US Thailand Tax Treaty & Thai Provident Fund Pension (TPF)

US Thailand Tax Treaty & Thai Provident Fund Pension (TPF)

US Thailand Tax Treaty & Thai Provident Fund Pension (TPF)

US Thailand Tax Treaty: Several Asian countries utilize a Pension/Social Security system commonly referred to as a Provident fund. In Singapore, it is the Central Provident Fund; in Hong Kong it is referred to as a Mandatory Provident Fund (MPF) — and in Malaysia It is the Employee Provident Fund. Thailand also has a Provident Fund, but unlike Singapore, Malaysia, and Hong Kong  — the United states has entered into a bilateral tax treaty with Thailand.  In countries such as Singapore where there is no tax treaty with the United States, the IRS takes the position that the contributions are taxable — and the growth within the CPF is taxable as well. This is despite the fact that these types of funds typically grow tax free or tax deferred in the foreign country of source — similar to a US 401K. But, since the US and Thailand have entered into a tax treaty, the treatment of pension under the Thailand United States Tax Treaty may be different than the other countries listed above.

Let’s take a look at the US Thailand tax treaty on the issue of pensions for a US Citizens residing abroad.

Thailand Provident Fund Basics

In general, the Thailand Provident Fund operates similar to most other types of Provident funds and pension plans. A portion of the employer’s contribution is tax deductible, as is a portion of the employees’ contribution (up to a certain amount). Within the TPF, income is accumulated and grows tax free. Down the line, once the amount is vested and the employee begins taking distributions, only a portion of the distributions are taxed — and there are various tax deductions, exceptions and exclusions in place to help minimize the impact of the tax on the distributions.

US Persons and Worldwide Income

If a person is a US Person (U.S. citizen, Legal Permanent Resident or foreign national who meets the Substantial Presence Test) then they are considered a US person and taxed on their worldwide income. What happens if a US person works for a Thai employer and that Thai employer and the employee are making contributions into Thailand Provident Fund?

US Thailand Tax Treaty Basics

What does the Treaty Provide:

      • Subject to the provisions of paragraph 2 of Article 21 (Government Service), pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.

      • Notwithstanding the provisions of paragraph 1, social security benefits and other similar public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

      • Annuities derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State. The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

What does this Mean?

Essentially, and subject to the Saving Clause (below), a pension paid to a resident is only going to be taxed in the country where the person resides (limited by Government Service — which is generally only taxable in the country where the services were provided).

In addition, when the payment is actually Social Security benefits or Public Pension, it is only taxable in the country making the payment — and not the country of residence

Saving Clause & Pension in the US/Thailand Tax Treaty

The saving clause is used to reserve the right limit the applicability of the tax treaty on certain tax issues. Form a U.S. tax perspective, it generally means if you are a U.S. citizen, then the US wants to retain the right to its tax citizens based on worldwide income principles.

Paragraphs 2 and 3 of article provide the following:

      • Notwithstanding any provision of the Convention except paragraph 3 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect.

        • For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax (as defined under the laws of the Contracting States), but only for a period of 10 years following such loss.

        • In the case of the United States, the term “resident” shall include a former long-term lawful resident (whether or not so treated under Article 4) whose loss of residence status had as one of its principal purposes the avoidance of tax (as defined under the laws of the United States), but only for a period of 10 years following such loss.

      • The provisions of paragraph 2 shall not affect: a) the benefits conferred by a Contracting State under:

        • paragraph 2 of Article 9 (Associated Enterprises), under paragraphs 2 and 5 of Article 20 (Pensions and Social Security Payments) and under Articles 25 (Relief from Double Taxation), 26 (Non-Discrimination), and 27 (Mutual Agreement Procedure); and b) the benefits conferred by a Contracting State under Articles 21 (Government Service), 22 (Students and Trainees), 23 (Teachers) and 29 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor have immigrant status in, that State.

What does this Mean as to Pension

When it comes to pension, the saving clause may limit the tax benefits provided under the treaty — but still will not impact paragraphs 2 and 5 under article 20

      • Notwithstanding the provisions of paragraph 1, social security benefits and other similar public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

      • Periodic payments, not dealt with in paragraph 4, for the support of a child made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be taxable only in the first-mentioned State.

From a pension standpoint, this would mean that Social Security and other similar public pensions are still only taxable by the state that provides the benefit — — and not the country of residence of the taxpayer.

How are Thailand Private Pensions Taxed in the US?

There is not one set way to conduct this analysis, but the following is generally the most conservative application of the rules:

Thailand TPF Contributions – Taxable

Contributions would not be tax deductible in the same way that a 401K contribution is deductible in the United states, for the simple fact that the treaty does not provide any tax deduction for pension contributions such as they are provided for in the UK treaty.

Thailand TPF Growth – Non-Taxable

When reviewing the tax treaty for pension, it is important to note that article 20 paragraph 1 — which is where presumably the Provident Fund would fall — refers to remuneration being paid to a resident. Therefore, if an EPF accumulates income — but none of it is being paid to the taxpayer — then there is the argument that the growth is not presently taxable on a US Tax Return, because it is not being paid –rather it is being accumulated — and not taxable until it is paid out.

*Subject to 402 and HCE issues beyond the scope of the article.

Thailand TPF Distributions

Whether or not distributions are taxable will be dependent on various issues, including an analysis of the treaty, the type of pension — and whether or not it qualifies as Social Security/Public Pension.

US Thailand Tax Treaty & Provident Treatment is Complex

In conclusion, while several countries use a Provident type of pension system similar to a 401K slash Social Security hybrid, The United States and Thailand have actually entered into a tax treaty , which the US has not done with most other countries utilizing the Providence system . therefore, the tax impact a pension related earnings has to be carefully evaluated to assess the taxpayers tax strategy and overall position involving the TPF.

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