Personal income tax reduction for the non-Thai employees

July 20, 201510:42 am336 views
Personal income tax reduction for the non-Thai employees
Personal income tax reduction for the non-Thai employees

ONE of the most attractive tax benefits under the recently issued International Headquarters (IHQ) is the reduction of Thai personal income tax for non-Thai employees working at an IHQ.

Under Royal Decree No 586, non-Thai employees who meet the qualifications will have the withholding tax on their gross employment income derived from IHQ reduced to 15 per cent. Non-Thai employees who qualify for the reduced tax of 15 per cent of gross income can then choose to treat the 15 per cent withholding tax as a final tax payment on such employment income.

An individual who earns employment income is generally subject to Thai personal income tax at a progressive tax rate from zero to 35 per cent on net income after deduction of standard expenses not exceeding Bt60,000 and qualified allowance deductions. If the effective tax rate (total tax divided by gross income) of an individual is higher than the 15 per cent withholding tax, an employee would end up with additional tax payable on employment income. In this regard, it would be more beneficial to elect to treat the 15 per cent withholding tax as the final tax paid on employment income. Assuming the employee is single and earns a gross income of US$100,000 (Bt3.2 million) from employment, his or her Thai tax computation based on a progressive tax rate would be about $23,000, which results in an effective tax rate of 23 per cent. In this regard, if a non-Thai employee chooses to pay Thai tax at 15 per cent of gross income, he/she would save tax on 8 per cent of income. The savings will increase to 13 per cent and 15 per cent for gross income of $200,000 and $300,000, respectively.

This not only benefits the non-Thai employees but also the IHQ employer. In most cases, the non-Thai employee would normally come to work in Thailand under the tax equalisation policy, ie he/she should not have additional tax cost when compared with the tax he/she would pay in his/her home country. Under the tax equalisation policy, the Thai employer normally agrees with the non-Thai employee on the net taken home amount and absorbs any additional Thai tax on salary and local benefits, such as housing, school fees, home leave, which are also taxable income for Thai tax purposes. Since tax absorbed by the employer is taxable income to the employee, the employer has to gross-up income to cover tax on tax. For example, if a non-Thai employee receives net income from IHQ at 100, gross-up income at 15 per cent tax rate will be 117.65. That is if the IHQ employer will absorb tax at 15 per cent for the non-Thai employee, the tax cost to the IHQ will be 17.65 per cent of net income. Compared to the gross-up method computed under the normal progressive tax rate, the effective tax |rate would be 34 per cent for a single person with an income of $100,000. That means the cost to the employer for an income of $100,000 under the normal progressive tax rate would be $34,000 (34 per cent) whereas the cost would be reduced by half under the IHQ scheme, ie $17,650 (17.65 per cent), so the employer can save 16.35 per cent. The tax cost savings would increase to 26.35 per cent and 29.35 per cent for income of $200,000 and $300,000, respectively. As said, there seems to be no doubt that the personal income tax benefits is one of the key decisions for multinational companies when choosing to make Thailand a hub for group supporting services.

To enjoy the tax benefits under the IHQ scheme, non-Thai employees must be full-time employees of the IHQ, hold work permits for skilled expertise and must be a tax resident in Thailand, ie must stay in Thailand for 180 days or more in a tax year. In addition, the said employees must have employment income from the IHQ totalling not less than Bt2.4 million per tax year or an average of not less than Bt200,000 per month, if they work in Thailand for less than a year.

Unfortunately, this personal income tax reduction does not extend to Thai employees working at an IHQ. Now many Thai companies are expanding their businesses outside Thailand, especially into other Asean countries where they can utilise the privileges provided under the AEC. Thus, IHQ should be a suitable scheme for them to centralise supporting functions in Thailand. They may employ both Thai and non-Thai employees to render supporting services for group companies both in and outside of Thailand. If this personal income tax reduction is also provided to Thai employees working at IHQs, it would tremendously help promote Thailand as Asean’s hub for shared services centres.

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