Tax Treatment of Pensions in Selected Asian Countries

Transcription

1 Tax Treatment of Pensions in Selected Asian Countries By Mukul G Asher Professor, LKY School of Public Policy National University of Singapore. sppasher@nus.edu.sg Research Assistance by Deepa Vasudevan is appreciated. To be Presented at conference on Tax Reform in Globalization Era: World Trends and Japan s Choice February 22 23, 2008, Tokyo

2 Organization Introduction Pension Taxation Points (Handles) Flows and Stocks Industry Players Implications of New Accounting Standards (on financial statements and valuation of companies) Concluding Remarks 10/1/2008 2

3 Introduction/1 Tax treatment of pensions has significant impact on: Income available during retirement for individuals Reported income statements and balance sheets of firms Domestic companies, when they set up operations abroad Overall development of the pensions industry Fiscal revenue 10/1/2008 3

4 Introduction/2 Why are pensions given tax advantages? Mandatory nature of many retirement financing schemes Long period for which schemes must remain viable Risk diversification through multi tier social security system justifies some (though not unlimited) tax advantages even for voluntary schemes

5 Introduction/3 General Principles in Pension Taxation Level playing field among retirement product providers, and among retirement instruments Need to balance revenue loss due to tax advantages with equity, efficiency and retirement objectives Consistency in pension rules among mandatory and occupational schemes. This applies particularly to National Provident Funds and Civil Service pensions.

6 Pension Taxation Points/1 The taxation impact may be on: Individuals Corporate or Business Organizations Pension Service Providers Provident and Pension Fund Organizations 10/1/2008 6

7 Pension Taxation Points /2 Flows and Stocks: Impact on Individuals Taxation of individuals can be on Flows: Contributions Investment Return Stocks Withdrawals at Retirement: Lumpsum Vs. Annuities

8 Cumulative Balances $ Figure 1 Accumulation and decumulation phases of DC schemes Accumulation Phase Decumulation phase Working phase Withdrawal Age Retirement Period Cumulative Balances = Net contributions (contributions minus withdrawals), plus interest credited on accumulated balances. Decumulation phase: the funds accumulated can be spent rapidly or slowly. Death may occur before the funds are exhausted or reverse is also a possibility. So need to protect against longevity risk. As it is the purchasing power of the funds that is relevant, protection 10/1/2008 against the inflation risk is also desirable. 8 Source: Author

9 Pension Taxation Points/3 EET appears to be most common regime internationally. However (comparatively rare) EEE in Singapore, Malaysia and India TTT in Australia

10 Pension Taxation Points/4 Impact of changes in Sales Tax and others on Cost of Living should also be taken into account, as it can impact on real value of pension balances. Increases in Sales Tax rates may act as tax on pension wealth How are pension balances treated for wealth tax (or estate duty) purposes?

11 Pension Taxation Points /5 Comparison of tax treatment of pensions in the hands of individuals difficult Tax rate applicable to pensions may be lower than marginal income tax rate Existence of non pension tax concessions for individuals Additional general tax benefits may be available for retirees

12 Pension Taxation Points /6 EEE treatment could be inequitable as relatively small proportion of population is subject to individual income tax. The revenue loss could require recourse to regressive taxes (or higher income tax rates)

13 Pension Taxation Points /7 In Asian countries, implicit taxes (and subsidies) on pension balances are also relevant. (For example, Singapore has a large implicit tax on pension wealth which is recurrent; in Malaysia is early years the National Provident Fund was able to obtain government bonds at higher than market rates, as well as obtain divested shares of SOEs at discount prices). 10/1/

14 Pension Taxation Points /8 Tax concessions for retirement savings is equivalent to tax expenditure. Each country treats tax concessions differently Singapore imposes a wage ceiling, so revenue loss capped. In countries such as Malaysia, Sri Lanka, India, Indonesia, this is not the case. This may turn the mandatory savings into a tax shelter. Issues of equity and efficiency

15 Pension Taxation Points/9 Industry Players: Impact on Corporate or Business Organizations Tax deduction for contributions to mandatory DB/DC Schemes Should it be unlimited or subject to a ceiling? Reporting of funding status of voluntary/occupational DB/DC Schemes in financial statements

16 Pension Taxation Points /10 Governance and regulation aspects of considerable importance for viability of occupational pensions UK and US have pension protection funds based on insurance principles. But poor governance and inappropriate funding rules could create a major contingent liability on the State.

17 Pension Taxation Points/11 Taxation of Related Service Providers Tax treatment of record keepers, documenting agency and related ancillary service providers is relevant The general practice is to tax incomes of service providers as business income, and tax it at normal rates

18 Pension Taxation Points/12 Taxation of Provident and Pension Funds Usually national provident funds are tax exempt Provident funds in Indonesia and Sri Lanka are however currently regarded as corporate entities and therefore pay income tax. Indonesia s new SJSN Law will exempt Jamsostek (its national provident fund) from paying corporate income tax.

19 Implications of New Accounting Standards/1 FASB accounting standard no.158 mandates recognition of funding status of a single employer defined benefit postretirement plan as an asset or liability in the statement of financial position Pension assets and liabilities to be marked to market on corporate balance sheets

20 Implications of New Accounting Standards/2 The UK Accounting Standards Board (ASB) is proposing radical changes to pension accounting such as Valuation of pension liabilities using of a risk free, rather than a corporate bond discount rate Excluding forecasts of future salaries from reported pension liabilities All changes in pension deficits and surpluses to be reported in the period in which they arise, rather than over several accounting periods as permitted by International Accounting Standards (IAS 19)

21 Concluding Remarks/1 Tax treatment of pensions is a complex area with significant implications for individuals, companies and fiscal systems Current pension tax practices in Asian countries vary widely. In many countries, it is not consistent with evolving international practices. Reforming them could improve the trade offs between efficiency, equity and revenue generation

22 Concluding Remarks/2 The complexities and non level playing field among different providers and instruments will however pose severe transitional challenges in moving towards internationally accepted EET system. Increasing movement of natural persons across borders raises additional issues, requiring international cooperation. As an example, a person may be liable for social security taxes in US, while working for a relatively short period; but may be ineligible for US pension benefits. Many countries in Asia exclude foreign workers from their pension systems. 10/1/

23 Concluding Remarks/3 Research in taxation of pensions in Asian countries is at a very early stage and needs to be encouraged Rising economies with significant outward FDI would be impacted by new pension accounting norms. They should also consider what accounting rules to apply to foreign companies operating in their jurisdiction.