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Using the tax system to reduce inequality is a work in progress

February 2017 - Tax & Private Client. Legal Developments by LawAlliance Limited.

More articles by this firm.

24 Jan 2017 at 04:00

Newspaper section: Business

Using the tax system to reduce inequality is a work in progress

The seriousness of economic inequality was portrayed dramatically by Oxfam International last week, when it reported that the eight richest people in the world own as much wealth as the 3.6 billion who make up the poorest half of humanity. In Thailand, the wealth held by the 50 richest people has been estimated at 25% of the country's gross domestic product.

Clearly, how to spread the wealth to people with fewer opportunities remains one of the biggest challenges governments face. Although the current government has been working hard to push new legislation such as inheritance tax and property tax, new measures to tackle poverty and inequality are needed.

However, giving away cash to 8.3 million low-income citizens, as the government did last year, is not a real solution. Extending double deductions for new investment also does little to distribute wealth, though it is important to stimulate the economy.

One important piece of tax legislation that will take effect in the near future will allow the government to collect personal income tax on the sale of immovable property based on the actual sale price instead of the government assessment value, as is done currently. The aim is to tax capital gains at more appropriate progressive rates of tax, which will reduce vertical inequity -- a situation in which high income earners are subject to lower tax brackets -- and enhance the distribution of wealth.

This legislation will compel asset-rich landholders to consider whether keeping ownership in their names is the right strategy, or if a property company should be interposed to hold the assets. Don't be surprised to see a huge number of land transfers this year to limit the downside effect from this legislation as well as from the new property tax.

Another measure to improve welfare involves senior citizens' projects, part of recently approved draft legislation to support our ageing society. For example, the government will promote the construction and financing of accommodation with facilities and nursing systems suited to the needs of older people.

Also, since many senior citizens are still capable of working and earning their own income after retirement age, companies that employ people aged over 60 years will be able to deduct "two times the expenses" of their salaries from taxable income. This incentive will apply retroactively to Jan 1, 2016 but salaries must not exceed 15,000 baht per month per employee, and will be applicable to no more than 10% of an organisation's employees.

Some employers may wonder how this will work in practice. There are two possible approaches: (i) the deduction of "two times the expenses" and (ii) the deduction of normal expenses and exemption of income from tax in an amount equal to the salary paid.

Since the Revenue Code does not have a provision enabling the government to enact a supplementary law to allow extra deductions of expenses, selecting (i) will require an amendment of the law by a bill, which will be cumbersome and time-consuming. However, Section 3 of the Revenue Code allows a royal decree to be issued to "exempt" tax. Because what the cabinet approved was a draft royal decree, it is expected that (ii) will be adopted.

The tax implications differ for each approach. If the employer deducts twice the expenses in (i) but sustains a tax loss, it can carry forward the tax loss for a maximum of five accounting years. However, if (ii) applies, and the employer does not have enough profits to be exempted from tax, there will be no benefits derived and there is no tax loss to carry forward. Hence, the second approach will not attract a loss-making employer.

Further, since many older people have expertise and experience that is worth more than 15,000 baht per month, the tax exemption for such a small amount may not be attractive enough to an employer. The government is now studying an additional measure to allow triple the tax deduction for expenses incurred from hiring senior workers, so we should wait for the final outcome.

The tax implications of welfare promotion also need more attention. In a recent revenue ruling, a marketing programme by a government-owned bank gave gift vouchers to customers for each retired government official and employee they successfully invited to apply for welfare loans from the bank. The Revenue Department said the transaction was equivalent to a hire-of-work, and the value of the gift voucher was considered compensation for services, from which the bank was required to withhold tax at progressive rates.

One wonders how the bank could withhold tax in such a case, as there is no cash attached to the gift vouchers. Perhaps it will need to collect cash in order to pay the withholding tax, or will simply absorb the tax on behalf of the customers. A similar concern applies to the promotions of credit card companies that give rewards to cardholders who introduce friends to join. Not many people in the industry seem to be aware of this issue.

At any rate, it is heartwarming to know the government is working hard to improve the welfare of senior citizens.

By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at

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