A lower domestic withholding tax may not be enough to boost liquidity

The aim is to boost liquidity for businesses as a measure to stimulate business spending. The proposal would also correspond to the reduction of corporate income tax to 20 per cent.

Thailand is one of the few countries to have an extensive withholding-tax regime on domestic transactions. Currently, the rates range from 1 per cent to 5 per cent and cover almost all transactions, including provisions of service, hires of work, rentals, transportation, advertisements, non-life insurance, and interest.

The withholding tax system allows the Revenue Department to collect tax in advance at the time the taxpayers still have cash on hand, whereby the responsibility for tax collection is shifted to the payer of income, who shares joint liability with the recipient of income.

In addition, the tax authorities may use withholding tax records as a data source to cross-check whether the recipient of income has properly filed their tax return. It was not a surprise when the Fiscal Policy Office disclosed that on average, the total of tax withheld from an individual’s payroll was close to the actual tax of the individual, that is, approximately 91 per cent of actual tax collected from the individual.

This is because an individual is deducted tax based on the same individual personal income tax rate as in their annual tax return filing.

For comparison, the data shows that tax withheld from corporate entities represented only about 24 per cent of total tax collected from this group of taxpayers. However, this does not imply that the withholding tax rate for corporate taxpayers is low.

The main reason for the relatively low percentage collected as withholding tax is that the corporate tax calculation is subject to stringent tax regulations resulting in greater tax payable overall.

However, it is likely that small and medium-sized businesses tend to suffer from too large a tax burden due to withholding tax exceeding their annual income tax liability. The reasons are varied.

It could be that their margins are low due to fierce competition and lack of bargaining power, coupled with the fact that revenue is recognised on an accrual basis whereas withholding tax is utilised based on a cash basis; that is, the taxpayer can utilise withholding tax as a tax credit only in the year tax was deducted, regardless of the year in which revenue was recognised.

It is possible that the taxpayer may pay tax in year 1 when revenue is recognised but withholding tax is not yet deducted, and request a tax refund in year 2 when revenue and tax are actually received and deducted in cash if the taxpayer does not have much revenue to cover the withholding tax in year 2.

This situation would likely happen to small and medium-sized businesses which are not able to compete with the large companies and have unstable income. Although the taxpayer has a right to request a tax refund, dealing with the tax-refund audit is time- and cost-consuming, so it is more typical to just consider withholding tax on the cost of business.

Along with the income tax reduction, the proposed reduction of domestic withholding tax could ease taxpayers’ cash-flow problems to some extent. However, it would be better if the measure allowed taxpayers to carry over unused withholding tax to set off income tax liability in the following years. This would tremendously help the taxpayers’ cash flow and reduce tax-refund requests in general.

Another measure to be considered is to reduce the required frequency of domestic withholding tax return filings from a monthly to a quarterly basis. This would not only enhance cash flow but also reduce errors, as the taxpayers would have more time to collect and review the data.

If quarterly filing is not considered practicable by the tax authorities, we suggest that filing the monthly tax return within seven days of the following month is too short. It should at least be extended to within a month.

Quarterly filing may also apply to value-added tax filing, as several countries – including Asean countries such as Malaysia, Singapore and Myanmar – have adopted quarterly filing of VAT returns. In our view, a reduction of taxpayers’ administrative burden should also reduce the tax authorities’ time spent on tax audits.

Benjamas Kullakattimas

Partner, Head of Tax

KPMG in Thailand