Thai bonds zero in on tax change

A shift to zero-coupon bonds in Thailand is raising concerns that a new 15% withholding tax on interest payments is having unintended consequences in the booming baht market.

By Kit Yin Boey

SINGAPORE, Nov 15 (IFR) - A shift to zero-coupon bonds in Thailand is raising concerns that a new 15% withholding tax on interest payments is having unintended consequences in the booming baht market.

At least three issuers have turned to zero-coupon financings since the Thai tax authorities imposed the levy on income and capital gains made by mutual funds from fixed income assets on August 20.

The move is designed to level the playing field, since the tax previously applied only to individual investors, but has prompted some unusual activity as fund managers look for ways to minimise the impact.

“The logic of the tax on mutual funds makes sense, but the implementation has been problematic for the mutual funds,” said Ariya Tiranaprakij, executive vice president of Thai Bond Market Association.

Under the new rules, mutual fund investors are subject to a 15% withholding tax on coupon payments earned on bonds bought either in the primary or secondary market. However, zero-coupon bonds offer an easy workaround, as there are no interest payments. Mutual funds can also escape tax on a new issue if the bonds are bought by banks and then sold down in the secondary market.

There is no disadvantage for the banks to be the first holder of a new issue. Currently, banks pay a withholding tax of only 1%, which is refundable at the end of the year under certain tax incentives.

Home Product Center last week became the first issuer to sell long-dated zero-coupon notes since the August tax change. It settled a Bt3bn (US$99m) three-year deal, led by sole bank Phatra Securities, on November 14.

ICBC Thai Leasing is expected to follow this week with a Bt7bn plan to sell two tranches of bonds that will include one zero-coupon tranche. Bangkok Bank will be sole lead on the zero-coupon tranche and joint lead manager with Kasikornbank on the other fixed-coupon tranche.

A third issuer, Ayudhya Capital Auto Lease, also plans to sell one-year zero-coupon bonds on top of two and three-year fixed-rate bonds via Bank of Ayudhya, although bankers say short-term zero-coupon bonds have been sold in the past and do not represent a move to avoid the withholding tax.

The Thai bond market is on track for a record year, with new issuance totalling around Bt810bn so far in 2019, up 35% on the same period last year.

Not everyone is embracing the shift towards zero-coupon bonds, with some participants taking a more cautious approach.

“Some banks are uncomfortable with arranging longer-dated zero-coupon bonds for mutual funds as it is not in line with the tax department’s main objective of imposing the withholding tax,” said one Thai DCM banker.

The Revenue Department of Thailand did not respond to a request for comment.

“These are unintended consequences of the tax, we will just have to wait and see what happens,” said Ariya. TBMA has previously asked the Revenue Department to review the implementation of the tax but has not received any positive reply.


Attempts by mutual funds to mitigate the tax impact have also led to unusual spikes in trading volumes around coupon payment dates. Bankers say mutual funds are resorting to selling bonds before the coupon is due to avoid the tax and buying them back immediately after the payment date, and still enjoy accrued interest.

“The buying and selling activities may incur more charges, but it is still far cheaper than paying the 15% tax,” said another banker. “We are watching this carefully to see if this behaviour becomes a long-term pattern.”

Volumes in both the primary and secondary markets have shown an impact from the tax, particularly in the period leading up to the deadline of August 20 as mutual funds rushed to buy bonds to beat the tax change.

TBMA data showed the daily average of short-term bond issuance jumped 23% from Bt2.88bn in July to Bt3.55bn in the period of August 1-19, before plunging 40% from August 20 to September 30. At the same time, mutual funds’ daily average trading value of short-term bonds spiked 80% from Bt1.55bn in July to Bt2.78bn from August 1-19, before collapsing by 61% to Bt1.68bn. No later data were available.

Long-dated bonds showed a similar pattern. Daily average issuance rose 39% from Bt5.7bn in July to Bt7.97bn on August 1-19, before falling 60% to Bt3.1bn from August 20-September 30. In the secondary market, mutual funds stepped up daily average trading volumes by 18% to Bt2.42bn on August 1-19 before declining 33% to Bt1.6bn.

(This article will appear in the Nov 16 issue of IFR Asia magazine. Reporting by Kit Yin Boey; Editing by Steve Garton)

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