Thailand's topsy-turvy tax code

Thailand's topsy-turvy tax code

The idea may seem counter-intuitive _ if you reduce tax rates, tax revenues will rise as more people voluntarily enter the tax system.

Compliance is optional: It is estimated that only one-third of Thailand’s 38 million labour force actually files personal income tax returns.

Local companies since January are already benefiting from this logic, as corporate tax rates this year have dropped to 23% and will fall to 20% in 2013 from the long-standing rate of 30%. The Finance Ministry plans to apply a similar principle to personal tax rates, in the hope that by asking less, people will be more willing to give to the state, particularly those at the very top of the income scale.

The personal tax system is simple enough, with five basic rates ranging from zero (applied to the first 150,000 in taxable income) to 10%, 20%, 30% and a top rate of 37% (covering income of more than 4 million). After deductions, workers earning less than 240,000 baht per year, or 20,000 baht per month, effectively have no personal tax liability.

While details are still being debated, the new tax system will likely see a more granular approach to the tax brackets, through the introduction of additional steps of, say, 15% and 25%, while also reducing the absolute top rate to 30%. Overall, middle- and upper-class taxpayers should benefit from the new approach through the use of intermediary tax rates. A taxpayer with annual taxable income of say 700,000 baht, for instance, would pay zero for the first 150,000 baht, 10% for the next 350,000 and 20% for the remaining 200,000 baht, or 75,000 baht excluding deductions.

But let's say that under the new system, the rates of zero, 10% and 20% are left unchanged, a new rate of 15% is applied for income from 500,000 baht to say 800,000 baht. In this case, the taxpayer with income of 700,000 baht would face a rough tax bill of 65,000 baht _ zero for the first 150,000 baht in income, 10% for the next 350,000 and just 15% for the remaining 200,000 baht. Policy-makers hope that the lower rates will encourage more people to enter the tax system by reducing the overall financial burden from taxes. Another factor is that by reducing the cost of compliance, looked another way, in effect also changes the risks and rewards of staying outside of the system and evading taxes.

From a broader perspective, authorities see the change in tax rates as helping encourage growth of the middle class, namely those middle-bracket taxpayers with annual income of 500,000 to 1 million baht.

Upper income taxpayers, or those with annual income of over 4 million baht, will also benefit from the reduction in top rates. This group, primarily top corporate executives, have long faced a tax rate that ranks among the highest in the region _ Indonesia, for instance, charges a top rate of 30%, Malaysia 28% and just 20% for Singapore.

Finally, the Revenue Department understands well that the adjustment in corporate tax rates must come together with cuts in personal tax rates so as to not encourage taxpayers to "game" the system. Leaving the highest personal tax rate unchanged at 37%, while corporate tax rates fall to 20%, would only encourage the wealthy to move more of their wealth into corporate entities to minimise their overall tax bill. Another welcome change being proposed by the Revenue Department is the long-standing distortion in how men and women are treated under the tax code. Currently women with certain types of income, say, from independent work or property rentals, must combine their assessable income with that of their spouse and file jointly. Doing so results in a higher tax bill due to the progressive tax system than if the same pair filed separately. Under the proposed change, there would be no significant difference in tax liability for whether a couple filed separately or jointly.

All of these ideas are worthy of support. But at the end of the day, achieving the larger goal of public compliance with the tax system I believe depends on something more than tweaking tax rates or removing distortions, important as they may be.

No, what is truly needed is a change in mindset by many to accept the fact that paying taxes is a civic duty, a key element of social contract between the public and the state. Citizens are right to expect that the government will look after the greater good and welfare of its citizens by providing basic services such as security, education and healthcare. And the government is right to expect that citizens pay their fair share for financing these services.

Unfortunately, evasion is rampant. The World Bank, for instance, estimates that given the size of the Thai economy, government tax revenues of 21% of gross domestic product are not unreasonable. But actual tax revenues are significantly lower than potential, at 16% of GDP.

One key principle of any tax is the need for fairness and equality. This applies in two instances _ whether the tax itself is fair, and whether enforcement is fairly applied to all. Clearly, in Thailand, imbalances and injustices abound in both cases. For instance, the tax code includes a number of curiosities that seem wildly out of touch with today's world. The Revenue Department allows taxpayers with employment income, whether from a job in a factory or as a senior office executive, to take a deduction of up to 30% with a limit of 60,000 baht per year. But certain professions may claim deductions of 30%, with no limit, while medical professionals are allowed deductions of 60%.

Taxes imposed on wealth also are significantly different from that on earnings. For instance, investors pay no capital gains taxes for their transactions on the Stock Exchange of Thailand, and have the right to either pay a 10% withholding tax on dividends or opt for a tax credit calculation. And while employees are subject to withholding taxes that follow the personal income tax rates, landlords and entertainers pay withholding taxes of just 5% on rental income. Alas, I see little political will to address these distortions, which no doubt have their own supporters among various special interest groups.

Imbalances within the tax code are bad enough. Worse is the public perception that evasion remains rampant. Consider this: it is estimated that only one-third of the labour force actually files personal income tax returns. Yes, this speaks in part to the large size of Thailand's informal economy. But it also speaks to the reality that for the majority of workers, it appears that complying with the tax law is strictly optional. It seems that we live in an upside-down world, where it's good to be bad, and bad to be good.

Wichit Chantanusornsiri is a senior business reporter for the Bangkok Post.

Wichit Chantanusornsiri

Senior economics reporter

Wichit Chantanusornsiri is a senior economics reporter, Bangkok Post.

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