Thailand’s journey with DTAs began in 1963 when it signed its first agreement with Sweden, marking a significant step toward international tax cooperation.
Thailand has expanded its DTA network over the years and it successfully encompasses 61 countries worldwide.
This network reflects its commitment to protecting businesses and individuals from the burden of double taxation.
Double Taxation Agreements in Thailand
A double tax agreement, sometimes called a double tax treaty, is a bilateral agreement between two countries to prevent the same income from being taxed twice. It usually happens when a person or company earns income in one country but resides in another.
Without a DTA, an expatriate employee working in Thailand might be taxed both in their home country and in Thailand on the same income.
Scope
Thailand’s DTAs cover direct taxes, including:
- personal income tax,
- corporate income tax, and
- petroleum income tax.
Note that indirect taxes, such as VAT and specific business tax, fall outside the scope of these agreements.
Stakeholders Affected by DTAs
The employers. Organizations must understand DTA provisions so they can manage withholding obligations correctly and with ease. They should:
- Classify employees correctly
- Determine the tax residency status
- Apply the correct tax rates based on the relevant DTA
The employees. Thai residents working abroad and foreign nationals working in Thailand are affected by DTAs. Their tax obligations and available benefits depend on various factors. It could be on the length of stay, employment terms, and the provisions of the applicable DTA.
The payroll managers. These professionals need profound knowledge of DTAs so they can properly implement withholding procedures. As a result of this, there is proper documentation and accurate reporting to tax authorities in all relevant jurisdictions.
Residency and Permanent Establishment
To qualify as a Thai resident and be entitled to DTA benefits, an individual must meet the 180-day rule: “Staying in Thailand for a period or exceeding 180 days in any tax year.”
This requirement has important implications for the following:
- Foreign employees on assignment in Thailand
- Thai employees working overseas
- Digital nomads and remote workers
- Business travellers and short-term consultants
For companies, Thai residency is established when a juristic person is incorporated under the Civil and Commercial Code of Thailand. This affects subsidiary companies, branch offices, representative offices, and regional headquarters.
Permanent Establishment (PE)
PE is a crucial concept determining whether a business has a sufficient presence in Thailand to create a taxable nexus.
Under Thai DTAs, a permanent establishment includes…
- Fixed places of business such as:
- Management offices
- Branches
- Factories
- Workshops
- Project-based presence:
- Construction sites
- Installation projects
- Assembly operations lasting more than six months
- Service-based presence:
- Warehouses providing storage facilities
- Oil or gas wells
- Mines and quarries
- Natural resource extraction sites
DTA’s Impact on Employee Compensation
The treatment of basic salary and wages under Thailand’s DTA follows specific principles that payroll managers must understand and apply correctly.
Salary and Wages Treatment
The primary taxing rights typically rest with the country where employment is exercised. In some cases, like if the employer is a foreign company or they don’t have a PE in Thailand, short-term assignments may qualify for tax exemption, provided certain conditions are met.
It becomes particularly complex in cases of split payroll arrangements, where employees receive compensation from multiple sources or countries.
For multiple country employment, there should be a clear documentation of work days in each jurisdiction (for payroll managers). They should also allocate income accordingly.
The source of payment and the entity bearing the remuneration cost can heavily influence the tax treatment under applicable DTAs. Hence, a careful documentation and clear communication between all parties involved is needed.
Benefits and Allowances
Employee benefits and allowances have varied nature and treatment because of DTAs. Housing benefits (including employer-provided accommodation and housing allowances) must be properly evaluated to determine their tax status.
The treatment can differ depending on the provisions of the relevant DTA and how the benefit is structured within the total compensation package.
Cost of living allowances present another layer of complexity. This is true when dealing with currency conversions and timing differences. Evaluate these allowances according to the basic salary for tax calculations. Their treatment may vary across different agreements.
Education benefits (for expatriate employees with children, to be specific) need specific documentation and may be subject to different tax treatments depending on how they are structured.
Stock Options & Equity Compensation
Equity-based compensation also has complex nature and considerations when it comes to timing. The taxation of stock options, for instance, can be affected by multiple factors. It can be the timing of grant, vesting, exercise or the employee’s location during these different periods.
Restricted Stock Units (RSUs) and Employee Share Purchase Plans also need to be carefully considered. The following three aspects of these compensation elements should also be evaluated under the relevant DTAs:
- Vesting period
- Tax point determination
- And the international aspects
Coordination between the home and host country payroll systems is needed for proper reporting and tax compliance.
Special Considerations for Expat Employees
Expat compensation requires particular attention under DTAs.
Tax Equalization
- Home country tax obligations
- Host country tax requirements
- Hypothetical calculations
- True-up payments and their treatment
Assignment-Related Benefits
- Relocation allowances
- Home leave benefits
- Children’s education
- Medical insurance
Social Security Considerations
- Totalization agreements
- Contribution obligations
- Benefit entitlements
- Documentation requirements
Treatment of Bonus Payments & Variable Compensation
The same is true with these aspects. They should be carefully considered under DTAs.
Annual Bonuses
- Attribution to work periods
- Timing of tax liability
- Split-year treatment
- Currency conversion issues
Performance-Based Incentives
- Attribution to performance periods
- Multi-year incentive plans
- International performance measures
- Documentation requirements
Commission Payments
- Source determination
- Attribution rules
- Timing of taxation
- Reporting requirements
Special Awards and Recognition
- One-time payment
- Sign-on bonuses
- Retention bonuses
- Project completion bonuses
Practical Applications in Payroll Management
Payroll managers and business owners in Thailand will need a systematic approach and extensive understanding of various practical elements when translating DTA provisions into day-to-day operations.
Withholding Tax Obligations (WHT)
Payroll managers must first determine the correct withholding tax rates based on the applicable DTA and the nature of the payment.
For regular salary payments to expat employees, the standard withholding rate may be reduced or eliminated if the employee qualifies for treaty benefits. But it is not as easy as it sounds. Proper documentation and advance planning are imperative in doing this.
The timing of withholding obligations is equally important. Thai law requires employers to withhold tax at the time of payment or credited income, whichever occurs first.
For international assignments, this may require coordination between Thai and foreign payroll systems for accurate withholding. Year-end adjustments and bonus payments require additional withholding calculations.
Tax Credit Mechanisms
DTAs provide various mechanisms for avoiding double taxation. Tax credits is one of the most common.
In practice, you would need detailed record-keeping of taxes paid in Thailand and the treaty partner country. It’s important for payroll managers to maintain this.
Complex calculations and timing consideration make it challenging to navigate the process of claiming foreign tax credits.
For example, when an employee pays tax in a foreign jurisdiction, the timing of that payment may not align with the Thai tax year. So, payroll managers must develop systems to track these payments. The systems also help ensure that the payments are properly credited against Thai tax obligations when applicable.
Documentation Requirements
Effective DTA implementation in payroll management is only possible when everything is properly documented. Documents to safekeep include tax residency certificates. These are obtained annually from the relevant tax authorities.
Employment contracts and assignment letters should clearly specify the terms of international assignments, including duration, compensation structure, and tax equalization arrangements if applicable.
For employees claiming treaty benefits, additional documentation may be needed from them. These include work permits, visa records, and travel calendar showing days present in each jurisdiction
Payroll managers should maintain comprehensive files for each employee. They must also have supporting documentation for tax positions under applicable DTAs.
Common Scenarios & Solutions
One common situation is “employees who split their time between Thailand and another country.” In these cases, payroll managers must implement systems to track days present in each jurisdiction and allocate income accordingly.
Another frequent scenario involves the treatment of bonus payments for mobile employees. When an employee has worked in multiple jurisdictions during the period to which the bonus relates, payroll managers must determine how to allocate the bonus for tax purposes.
Short-term business travellers are another unique challenge because they may qualify for treaty benefits. Strict monitoring is needed to ensure they don’t exceed present thresholds that would trigger additional tax obligations.
Tax equalization arrangements are beneficial for mobile employees but need special attention in payroll management. These arrangements necessitate careful calculation of hypothetical tax and actual tax obligation, regular true-up calculations, and clear communication with affected employees.
Payroll managers can effectively manage these scenarios if they develop standard operating procedures that address common situations and be flexible when handling isolated cases.
Conclusion
DTAs are valuable mechanisms, but applying these agreements effectively is another thing. As a payroll manager/business owner, you need to be sharp in scrutinizing details, establish robust documentation processes, and regularly monitor your compliance requirements (due to the ever evolving business landscape).
As Thailand continues to expand its DTA network, your first and always actions are to be informed and prepared. One way to do this is to conduct audits of your payroll systems and procedures. This way, you’d know if they align with current DTA requirements or not.
For professional guidance on implementing DTA-compliant payroll systems or addressing specific challenges in your organization, contact Reliance Consulting. We offer various corporate services in Thailand, such as payroll services.
