April 15 2014
What is the Withholding Tax?
Withholding Tax is a tax collected by a deduction made on a payment when said payment is made. The payer who will remit it to the Revenue Department on behalf of the payee collects the tax. The tax the payer collect and remit to the Revenue Department on behalf of the payee will become a credit that will apply against the income tax (personal or corporate) due by the payee.
The most well known withholding tax is the tax deducted from the wage of an employee by the Employer but there are more than a hundred type of transactions subjected to withholding tax.
We will first review withholding taxes on local remittance then withholding taxes on foreign remittances
Withholding Taxes on Local Remittances
Are there many withholding taxes on local remittance?
Yes, in Thailand they are many categories of payments subjected to withholding taxes (more than a hundred last time I checked). Many foreign investors during the first few months of their presence in Thailand forget to withhold taxes on their payments.
This is a costly mistake because the payer is responsible towards the Revenue Department for the payment of the withholding tax.
If you forget to collect the withholding tax when you make a payment to a supplier you might have problems to claim it back from the supplier.
There are 20 main categories of income subject to withholding taxes not included the sub-categories. Rates of withholding tax are between 0.75% and 10% for the withholding tax on dividends.
Among other, there is 3% withholding tax on services invoices, 5% on rental invoice (if the payee is a juristic person) and 10% if the payee is a taxable foundation.
For example, your company hired a service provider in Thailand and need to pay a service fee of 100,000 THB to said service provider.
Now your provider should calculate in its invoice as follows:
100,000 THB +VAT@ 7% (7000 THB of VAT) = 107,000 THB
100,000 THB – Withholding Tax @ 3% (3000 THB of Withholding Tax) = 97,000 THB
Amount your company will have to pay to the service provider:
= 97,000 THB (100,000 THB-3% Withholding Tax) + 7,000 THB of VAT = 104,000 THB
Amont your company will have to pay to the Revenue Department on behalf of your service provider:
= 3,000 THB
The withholding tax payment you have made to the Revenue Department on behalf of your service provider will become a credit against your service provider company corporate income tax.
The form you use to pay the withholding tax to the Revenue Department will depend of the type of payment.
A company that withholds tax on a payment made to another company will use the P.N.D.53 withholding tax returns form.
A company that withholds tax on a payment made to an individual (monthly rent, services…) will use the P.N.D.3 withholding tax returns form.
Finally, a company that withholds tax on the payment of individuals’ income such as for example salaries must use the P.N.D.1 withholding tax returns form.
In all the cases mentioned above the company needs to file the form within 7 days from the end of the month of the payment.
Finally, the P.N.D.1 kor is the annual withholding tax return for individuals that contain for example the summary of the tax withhold during the year on employees salary income.
The company will need to file this form before the end of February of the year that follows the year when the payments were made.
May you obtain the refund of the withholding tax?
Withholding Tax is why even companies that are incurring losses end-up paying corporate income tax.
Now assume that your company had lost 200,000 THB in 2008. As a result of this loss, your company does not have in theory to pay corporate income tax.
While your company does not have to pay corporate income tax (because it incurred a loss) on its 2008 exercise it may have during the year built a withholding tax credit. For example, if your company is a service company, your clients have paid on your company behalf withholding taxes with the Revenue Department upon payment of your invoices.
Now assume that your withholding tax credit with the Revenue Department for 2007 is 200,000 THB.
If your company does not need to pay corporate income tax, you may be tempted to ask the Revenue Department to refund the withholding tax your clients have paid on behalf of your company over the year.
After all you have a right to it.
Should you claim a withholding tax refund?
No, we do not recommend you to do it because it will trigger a tax audit from your company.
Actually, it is not exact your company will be audited by the tax administration every year anyway.
However, the audit will be more scrupulous if the tax administration knows that you have requested a refund of your withholding tax.
Therefore, our recommendation is to wait for the tax administration to complete its yearly audit account of your company financial statement. If there is a small problem with your financial statements, you can use the withholding tax refund as a negotiating tool.
Note that once the tax audit is completed and even if there were no problems, we still recommend you to “donate” your withholding tax to the Revenue Department for the benefit of Thailand.
Are they withholding taxes on overseas Remittance?
What are the rates applicable to withholding taxes on overseas remittance?
The rate applicable on a withholding tax on overseas remittance will depend whether Thailand has a Double Taxation Agreement with the country where the payment has to be made.
If there is Tax Treaty then reference should be made to the said Treaty for possible tax reduction and or exemption.
The following transactions are subject to withholding tax on overseas remittance:
(1) Dividends paid by a company or any other juristic person to any individual or corporate payee overseas are subject to a withholding tax of 10%.
(2) Interests, professional and other service fees, profit on sale of shares (in Thailand), rent and royalties paid by any payer to any company, juristic partnership or other juristic person registered under foreign law and not carrying on business in Thailand are subjected to a 15% withholding tax.
(3) Payments made overseas for hire of work are subject to a 5% withholding tax. Here again please verify if there is a double tax treaty that override the Revenue Code rate or exempt the payment from the withholding tax.
Note that the rate mentionned above are the standard rates from the Revenue Code of Thailand. Please check if there is a Tax Treaty and what is the rate applicable.
Finally, when remitting money overseas to pay for a service invoice be certain that the amount invoiced to you is indeeed really for a service. Indeed the Thai Revenue Department has a very broad definition of royalites and services which would be qualified in other countries as “services” may be requalified in Thailand as “royalties” and be subjected to the withholding tax rate of 15%. We shall dedicate a post later on on this subject.
Note: This post is an excerpt of Rene Philippe Dubout next book: “How to Invest Safely Into Thailand” to be published in January 2010
About the Author:
The author Rene-Philippe DUBOUT is a lawyer since 1990 when he was admitted to Geneva bar (Switzerland). He practiced as a litigator there for 10 years until he moved to Thailand in 1999. In 2002 he founded with a group of Thai lawyers Rene Philippe & Partners Ltd a local law firm that specialized in Cross Borders Investments and Real Estate. He has been lecturing in several Thai Universities and a speaker to numerous conferences and seminars. He is the author of a must read book:”How to Purchase Real Estate Offshore Safely: The Case of Thailand”.
© Copyrights 2009 – Rene Philippe Dubout – This article may be reprinted if information about the author, the websites, and the URLs remain intact.