Assessing impact of changing personal income tax rules in region
January 28, 2014 00:00 By Mark Kuratana
Across the emerging economies in Southeast Asia there is an urgent need for companies to import specific talent for special projects and business expansion, largely because of a shortage of skilled labour in these countries.
Mobility issues that are often raised relate to stringent requirements set by governments for applications for employment passes, visas and work permits.
Because of this, companies often find themselves having to deal with immigration and employment issues that require solutions to minimise the risk of non-compliance.
Another obvious non-regulatory factor that often influences a company’s decision in seconding an individual is whether there is an adequate business case to do so. A key issue in demonstrating the business case is the associated costs, ranging from the typical individual assignment allowances such as housing and cost-of-living allowances to the personal income tax (PIT), which could form a significant component of the total cost.
The highest PIT rates are still seen in Western Europe, where the average rates are over 45 per cent and are still increasing in some countries because of the immediate need to address some of the region’s public deficits.
In Asia, however, Singapore and Hong Kong have some of the lowest PIT rates at 20 and 15 per cent respectively, and are often seen as competitive and attractive choices for international companies looking to relocate or second their expatriates in the region.
The total rates are not normally made up of just the personal income tax itself but include other mandatory social, pension and other contributions such as the significant social taxes seen in parts of Europe or the central provident funds in Singapore and Hong Kong.
Although the PIT is only one element of the total cost, it can be a major factor, especially for expatriates whose basic salary and assignment allowances form a significant compensation base.
An expatriate seconded to a particular country is often “tax-equalised”. This basically means that the individual is responsible for a “hypothetical” tax as if he or she were working back home.
Any excess to this hypothetical tax would generally be paid for by the company or employer. Tax equalising can significantly increase the tax cost for the employer because any PIT paid by the company on behalf of the individual is normally considered income and is therefore grossed up, or what we would normally call “tax on tax”.
Last December 23, the new Thailand PIT rates were officially approved by royal decree. The new rates saw a drop in the highest rate from 37 per cent to 35 per cent and the introduction of 15- and 25-per-cent rates intended to offer greater tax relief to middle-income earners. High-income taxpayers are also seen as significant beneficiaries from the revised rates.
Although the decreases in rates are not groundbreaking, they should help Thailand become more competitive once the Asian Economic Community becomes effective. Countries such as Indonesia and Vietnam, which are considered to have comparatively high PIT rates for this region, decreased their top rates in 2009. Indonesia’s dropped from 35 per cent to 30 per cent and Vietnam’s from 40 per cent to 35 per cent.
Although a decrease in PIT rates is not the only factor making a country more attractive for investment, the revised rates in Thailand are a step in the right direction to make the Kingdom more competitive and bring it more in line with the rest of the region.
Mark Kuratana is a partner in tax and legal services at Deloitte Touche Tohmatsu Jaiyos Co.