Thirteen years ago I responded to a request for assistance on a teaching forum from a teacher whose school Human Resources (HR) staff would not help her obtain a refund of Thai Personal Income Tax (PIT) in accordance with a Double Taxation Agreement (DTA), and since then my company has obtained tax treaty refunds for more than five hundred teachers.
Thailand has entered into DTA's with several countries but they are not just for the benefit of teachers. DTA's cover many aspects of international taxation including investment income, pensions, and film royalties, and the existence of an agreement does not automatically indicate a teaching exemption. The terms of the agreements differ from one to another, but most provide for teachers to be exempted from PIT, usually for a visit to Thailand not exceeding two years in length, for the purpose of teaching. The purpose of this article is to dispel some of the myths, misconceptions, scare stories and absolute mumbo-jumbo surrounding these claims. In fairness, many teachers new to Thailand have never encountered such confusion and understandably choose to trust their employers, Principals and Revenue Department employees, most of whom are blissfully ill-informed.
Where it is applied correctly a DTA exemption is for the full two years of the contract and not just two income tax years. Thus, if a teacher commences work in September, year 1, works through all of year 2 and completes the contract in August of year 3 that teacher will be eligible for a refund for those parts of years 1, 2 and 3 spent working in Thailand.
There are some agreements, notably with Canada, Singapore, South Africa, Switzerland, and New Zealand which do not provide an exemption for people who were resident in those countries, whereas other countries, such as Saudi Arabia, do not have agreements with Thailand at all. The Revenue Department often apply this aspect incorrectly and refer to a teacher's nationality in determining a claim when it is the teacher's previous country of residence that determines eligibility to claim. The American agreement, for example, exempts teachers of any nationality who were resident in the USA before commencing their first Thai teaching contract. The teacher does not need to be American, but to have been an American resident prior to visiting Thailand. The American agreement only exempts Americans if they were resident in the USA immediately before visiting Thailand to teach, and any Americans who were living in other countries should refer to Thailand's Agreements with those other countries.
Obtaining a refund for a teacher from, say, Canada, who was resident in the UAE prior to Thailand, adds an extra layer of bureaucracy, plus a fee to the Emirates' Finance Department, to the procedure, but it is possible. Since the exemption depends upon a teacher's previous country of residence then, upon conclusion of a teaching visit to Thailand, the teacher may move on to a third country and if that country has a DTA with Thailand which includes the teaching exemption, the teacher will be exempt from income tax in the third country too.
Since, in Thailand, employers usually expect employees to pay for their mistakes, it is hardly surprising that school HR staff are often reluctant to assist teachers with claims which, in many cases, are for more than the HR employee's own annual salary. This reluctance is at the root of many excuses for not assisting teachers with tax treaty claims. HR staff are ill-equipped to deal with questions from the Revenue Department and are far more concerned with protecting their own positions than obtaining tax refunds for teachers who have left the country. It should also be remembered that, once a teacher's contract has ended, the school has no ongoing obligation to assist the teacher, and it is a tad optimistic to think that a school will devote the considerable resources necessary to process these claims, especially if the claim runs into difficulty as so many do.
Sometimes unscrupulous school owners mislead perfectly honest and credible school administrators who, in turn, unwittingly mislead teachers. One former school Principal contacted me after he was misled by school HR staff and consequently cheated out of his own tax treaty refund.
There is a breathtaking level of corruption and dishonesty in Thailand and some school owners offer inducements to Revenue Department staff in order to avoid paying taxes to the Government; especially payroll taxes deducted from teachers who have departed.
It is sometimes suggested that by banking a refund cheque the teacher is "money laundering". This comes from a misunderstanding of sections 341 and 269/5 of the Thai Criminal Code. Money laundering is a practice whereby the proceeds of an illegal activity are given the appearance of having a legitimate origin. There is nothing illegal about these treaties and they may be viewed on the Revenue Department website. The Revenue Department are hardly likely to promote a money laundering activity on one section of their website and warn people about the dire consequences of money laundering elsewhere on the same website. Most foreign banks are, however, unfamiliar with Thai cheques and, as money laundering regulations have become stricter, foreign banks have begun rejecting cheques issued by Thai banks. There are, however, procedures which allow Thai cheques to be cleared through the international banking system but they are not widely known. This aspect is becoming increasingly relevant since Thai banks are freezing accounts which remain inactive, even those accounts that are substantially in credit. It is easy to see how a teacher might believe these claims are illegal if his bank refuses to accept a Thai cheque due to money laundering concerns.
Occasionally school administrators have informed teachers that claiming a refund is "against the law". No indication of any specific law is offered, however, just "the law" in general. This stems largely from the miserable situation many schools got themselves into in 2003. For several years schools applied the exemption at source, by not deducting tax from teachers' salaries, and relying upon their Thai HR staff to determine who was eligible for relief and who was not. This resulted in several schools receiving tax demands from the Revenue Department where they had failed to deduct tax from those teachers who were not eligible for the exemption. In the muddle that ensued Thai Revenue staff misinformed Thai school administrators of the proper regulations, those administrators provided school Principals with misinformation and many teachers paid back taxes unnecessarily. Others skipped the country leaving their schools to foot bills amounting to millions of Baht and many HR staff changed jobs in order to avoid blame.
A few schools have again begun to pay teachers' salaries gross for the first two years using the teacher's nationality and not his/her residence status to determine entitlement, and are making the very same mistakes as before. Teachers who resided in a country which does not have a reciprocal exemption with Thailand, before visiting Thailand, are not entitled to the exemption however and, where schools fail to deduct tax from teachers who should have paid tax, Revenue Department auditors do eventually discover their mistake. In circumstances where a teacher continues to work beyond the second year, administration staff will usually commence deducting tax from the beginning of the third year without considering that the exemption only relates to a visit not exceeding two years. In these circumstances teachers whose visit exceeds two years are no longer entitled to the two-year exemption and should receive tax demands for the years when the school did not deduct tax. There is no negotiation over this, even if the teacher left Thailand and returned with a new contract. Where they discover teachers in this situation the Revenue Department have learned from past experience and usually notify the Immigration Department in order to prohibit the teacher from leaving Thailand until the first two years' taxes are paid in full. This cannot be rectified and teachers have been presented with substantial tax demands in recent years.
School administrators, often concerned by past experiences, sometimes dissuade teachers from claiming the exemption by maintaining a teacher will have to pay tax in their home country if they claim a refund from Thailand. The teachers' tax exemption is contained within Double Taxation Agreements for a very good reason and by combining the treaty exemption with the residency rules of a teacher's home country it is possible for teachers to receive their teaching salary free from tax in both Thailand and the teacher's home country.
American teachers are usually covered by the Foreign Earned Income Exclusion and British teachers who are not UK resident do not pay UK Income tax on overseas earnings. It is important for teachers to obtain professional advice at an early stage in order to ensure that the Thai salary is not only free from tax in Thailand but also in their home country. Misunderstandings, bad advice, or mistakes cannot be always be rectified after the event. Any competent advisor will be able to explain how the DTA exemption interacts with the residency rules in the home country. This is especially important for American teachers, many of whom are currently being misled by incompetent lawyers, ill-informed school administrators, and on one notable occasion by a Thai dentist hoping to make a fast buck.
Every DTA contains a Residency article, usually number four, which lays down rules for determining where a person is resident for treaty purposes. There is a universal concept that a person is resident in a county if that person is physically present there for 183 days or more, on aggregate, in the year. America uses a variation on this rule, known as the Substantial Presence Test. This test looks at US presence over a three-year period and deems a person to be resident in a particular year if the sum of the following equals 183 days or more:
1) The number of days they were present in the US during the current calendar year;
2) One-third the number of days they were present in the US during the previous calendar year;
3) One-sixth the number of days they were present in the US during the second previous calendar year
In addition the teacher must have spent at least 31 days in the United States in the current calendar year.
It is therefore possible to obtain a US Residency Certificate having spent little more than one month in the US during the year immediately preceding the teaching visit to Thailand, and claims have been made to the Revenue Department of Thailand for exemption from Thai personal income tax on the basis that the teacher was a US resident immediately before that visit, using a resdency certificate as proof of this. This relies upon making an incomplete application to the IRS on form 8802, since in applying for the residency certificate teachers are signing a penalties of perjury statement that they were resident in the US within the meaning of the DTA residency article immediately before entering Thailand.
If a teacher was physically present in a country other than the US for 183 days or more then that country will also regard the teacher as resident, thus creating Dual Residency, for which all DTA's contain a tie-breaker whereby "an individual shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests)" The relevant period for this test is the year for which the aspect of residency is being considered.
In 2012 the Tax Court of Canada considered the case of an American citizen who had lived in Canada for 330 days in the year, and the US for 35, and who considered himself to be a US resident by virtue of the Physical Presence Test. He was found to be a Canadian resident under the DTA tie-breaker provision on the grounds that he "spent a lot more time in Canada, did not work elsewhere during that period, and in the settled routine of his life, regularly and customarily lived in Canada while periodically returning to the US". This statement could just as easily apply to any international teacher as it did to the person concerned, and in such circumstances an American teacher who lived in Canada immediately before visiting Thailand for the purposes of teaching should be considered to have been resident in Canada and not the US, immediately before visiting Thailand. This is especially relevant since the Canada-Thailand Double Taxation Agreement does not contain a reciprocal tax exemption for teachers, and since the 183-day rule is universal the deision would apply to any country, not just Canada.
Claiming to be a US resident under the residency article of a DTA when you have spent more time living and working in another country, and not the US, is perjury.
Another reason for the confusion surrounding these claims is that the official Thai translations of the treaties are worded in formal Thai language which many Revenue Department staff experience difficulty understanding and which is not a precise translation of the English version. A teacher may therefore submit a claim based upon the English version of a treaty only for the Revenue Department to challenge that claim using the Thai version. In these circumstances the teacher and the Revenue Department may become embroiled in a spiral of correspondence with each firmly believing the other is in the wrong. Revenue Department Head Office staff will now refer to the English language version of a DTA for clarity, but this is not usually the case at local offices where the English language capability is insufficient for this purpose.
Another common misconception is that a teacher should return to his home country at the conclusion of the visit to Thailand but this is not so and there is nothing in any DTA which requires this. This misunderstanding is mentioned in a post on the TES forum plus other indications that the first visit ends when a teacher returns to his home country for a holiday, but these are merely excellent examples of what happens when Thai Revenue staff invent their own conditions and teachers, or HR staff, lack the expertise to challenge them.
The exemption usually applies for the FIRST teaching visit not exceeding two years although some agreements provide for a three-year exemption whilst others do not stipulate the visit has to be the first such visit at all. There is, however, widespread misunderstanding of what constitutes a "visit". Individual officers attempt to combine consecutive visits into one single visit in order to deny the exemption by maintaining that several consecutive visits constitute one continuous visit exceeding two years. With so many amateurs trying their luck with claims this interpretation has become the norm and, where claims are rejected, the costs of an appeal are prohibitive. Officers regularly seek to apply their own conditions in these circumstances, insisting the teacher should have remained outside Thailand for whatever period of time they can think of before returning to Thailand. That time period will simply be adjusted in each individual case to ensure the teacher is denied the exemption, which is why there is such confusion over how long a teacher should remain outside Thailand between visits.
There are robust arguments and international case law, especially from the US in 2010, against the amalgamation of consecutive visits, although simply because a Revenue officer agrees to something on one occasion does not preclude that Officer from changing their mind twenty-four hours later if it appears they can get away with it, and teachers have handed back refunds in these circumstances without challenge, so it is hardly surprising so many Revenue offices take this approach.
When a teacher returns to Thailand for a second or subsequent teaching visit, the teacher must pay tax FOR THAT SUBSEQUENT VISIT. Some Revenue Officers misunderstand this aspect and believe that upon returning to Thailand the teacher must pay tax for the first visit too, even if there are several years between visits. This is a different misunderstanding from that which sees Revenue officers seeking to combine consecutive visits. This argument accepts that there are two separate visits but asserts that a teacher is only ever permitted one visit to Thailand and when a second visit is made the exemption should be withdrawn for the first visit. After receiving a legitimate refund of tax paid during the first visit there should be no question of teachers having to repay that money unless the claim itself was fraudulent, and therein lies the source of further confusion.
In some instances where a teacher has left Thailand, providing a school administrator with Power of Attorney, Revenue Department Staff with limited experience have requested the school administrator sign a letter confirming the refund will be repaid upon the teacher returning to Thailand. School administrators are an obliging lot and will sign the letters simply because they have no authority to challenge the Revenue Department. Teachers are still falling foul of this.
Some schools maintain they can obtain tax treaty refunds but in reality they are not always filing claims under the relevant tax treaties at all; they are merely doctoring the teachers' original tax documents, understating the salary paid, in order to obtain a refund. Teachers who have been the victim of this treatment have been obliged to pay the refunds back upon their return to Thailand, even several years later, and are misled into believing they are refunding a tax treaty claim. In fact, they are simply handing back a tax refund which was obtained improperly, and the time period for making a genuine claim has been lost in the process.
One remarkable explanation for failed claims provided by Thai HR staff is that the Revenue Department operate a lottery and teachers only receive refunds where they have lucky Taxpayer Identity Numbers. Any teacher who accepts this should seriously consider whether Thailand is really for them.
My favourite assertion, however, is that "the school is paying the teacher's tax". It would be more correct to say the school is deducting tax from the teacher's gross salary and paying it to the Revenue Department. It is possible for a school to pay the teacher's tax but in this situation the regular Personal Income Tax paid by the school must be regarded as additional salary, and additional tax must therefore be paid on the tax which the school pays. This "double grossing" calculation works thus (2555BE figures):
NET SALARY ThB 1,000,000
Personal Income Tax:
350,000 @ 10% = 35,000
500,000 @ 20% 100,000
Employee's Gross 1,135,000
Employer's tax on tax
( 135,000*100/70*30%) 57,857
Total tax therefore ThB 135,000 + ThB 57,857. = ThB 192,857.
In every instance where I have encountered schools maintaining they are paying a teacher's tax an examination of the tax records reveals that the only tax being paid is the regular amount ( ThB 135,000 in the above example) and not the grossed up figure ( ThB 192,857 above). In these circumstances the net pay scheme is commonly used to disguise a reduced level of tax payments to the Revenue Department in the year the teacher departs.
Using the above example of a teacher earning a net salary of ThB 1,000,000 net in a full year, we have established that the full year's tax amounts to ThB 135,000. Hence the monthly net salary is stated as ThB 83,333 and the monthly tax paid to the Revenue Department amounts to ThB 11,250, resulting in a monthly gross salary of ThB 94,583. This is fine for a complete twelve months but in the year of departure there will usually only be seven months' salary, and schools are re-calculating the tax payments using the net salary they have contracted to pay, but over seven months, not twelve, and paying a lesser amount to the Revenue Department, resulting in an overall reduction of gross salaries and the teachers effectively receiving a pay cut without knowing it. Using the example here of a teacher with net salary of ThB 83,333 the tax payments for the final seven months reduce to ThB 6,012 per month thereby reducing the gross salary by ThB 5,238 to ThB 89,345. This is perfectly legal (ignoring that the teacher has been kept in the dark) but the reduced amount of tax paid is still the teacher's money and can be reclaimed.
Determining who may claim what is only part of the process, and as with many aspects of life in Thailand it is not what you do that determines whether a claim is successful, but the way that you do it. Anyone who thinks they are simply going to hand a form in to the Revenue Department and receive a cheque with ease will be very disappointed.
There is considerable prejudice directed against teachers claiming these refunds and in some instances school administrators will collaborate with Revenue Department officers in order to mislead and confuse teachers so as to deny them the refunds they are entitled to. Most Revenue Department staff would rather have their teeth pulled without anaesthetic than hand a Farang hundreds of thousands of Baht, and many school HR staff are of the same persuasion.
Revenue Department officers will often be "too busy" or maintain it is not their job when presented with claims. This can be an indication that the Officer is out of their depth. Most Revenue officials are only familiar with repayment claims under ThB 10,000. Being confronted with claims for millions of Baht worth of refunds presents Revenue officers with more responsibility than they ever expected and they will consequently put off handling a claim indefinitely with all manner of ingenious excuses.
As part of the claim process the Revenue Department require internal tax documents from the school where the teacher worked and paid tax. Some schools do not provide the documents for a variety of reasons. Suffice to say, if a teacher breaks contract, the school may be very obstructive, even if professing to remain professional. Teachers who break their contracts are fully entitled to claim tax refunds but should consult a tax specialist in confidence long before leaving the school. I am aware of one teacher who chose to circulate offensive letters about his Principal and was so mystified over the delay obtaining a tax refund he took to writing even more offensive letters to people in the hope of improving his chances. Take my word on this, it doesn't work.
It should also be considered that the interests of the school and the teacher may sometimes conflict. Principals have been known to make every effort to prevent teachers claiming, or even finding out about the availability of such tax refunds, in order to retain staff. When a school presents teachers with a variety of reasons (see above) as to why they should not claim and, especially, resists requests for tax documents, but then suddenly begins offering a free tax refund service, teachers are seriously deluding themselves if they think they will receive a tax refund once they have left Thailand. It is not unusual for certain schools to under-declare a teacher's salary and consequently the tax documents provided to the teacher do not always agree with amounts paid to the Revenue Department. Sometimes the Revenue Department do not even know the teacher existed. If a school can successfully under-declare, say, ten million Baht worth of salary, there is a potential tax saving of three million Baht. This situation is compounded by inefficiency in the Revenue Department itself and there are occasions when schools have paid the teachers' taxes properly but the Revenue Department have simply failed to record the payments correctly. Determining whether the school or the Revenue Department is at fault can be an arduous task since each will usually attempt to apportion blame to the other.
The Revenue Department have become wary of teachers since there have been significant numbers of opportunistic claims from individuals who regard the Revenue Department as some form of lottery, and many such claims are rejected leading, once again, to rumours that it is "illegal" to claim treaty relief. There have certainly been claims by teachers who know full well that they are ineligible to claim and, at best, these opportunistic claims serve to delay legitimate refunds since the Revenue Department have very few properly trained staff for this work so every failed claim they examine delays a genuine one.
It is now common for the Revenue Department to request sight of an expired passport, and where they think a teacher may have worked in Thailand previously Revenue Officers will not repay a single Baht until they are certain a claim is justified. New passports especially cause suspicion since they are sometimes an indicator that the teacher has deliberately lost or withheld a previous passport revealing an earlier teaching appointment in Thailand. This all provides yet another excuse to stall a claim indefinitely and a request for an expired passport is sometimes simply another deliberate obstruction. The Revenue Department have also been known to request that the teacher return to Thailand in order to attend an interview in the Revenue Department office, with the prospect of the claim being rejected if the teacher fails to attend. Where a teacher does return to attend such an interview it is highly probable that subsequent "interviews" will be requested until such time as the teacher abandons the claim.
In some instances schools have even employed relatives of the owners as "tax attorneys" and these individuals are the source of many misunderstandings. One school Principal even recommended the services of a "lawyer" without mentioning she was his Thai girlfriend. Thai "lawyers", often nothing more than visa specialists, are not beneath offering school HR staff incentives in exchange for introductions to teaching staff which leads to some totally inexperienced individuals trying their luck. It is remarkable that these individuals weren't obtaining refunds before I arrived on the scene, and a good many still aren't. Their services continue to be offered to teachers by the schools concerned, however, for obvious reasons.
Added to all of this is the further complication that many Revenue staff and school administrators are from poor backgrounds. The knowledge that teachers are reclaiming millions of Baht sometimes results in documents being withheld and claims being obstructed in the hope of obtaining an "incentive". Following on from my success we now have a remarkable number of school administrators who have become overnight tax advisors. The ruse here is to withhold documents from my staff in order to "prove" we cannot obtain the client's refund whilst offering their own services to teachers. Some school HR staff are also resorting to offering teachers' contact details for sale to=
Principals have sometimes been known to recruit teachers with the promise they will not have to pay tax in Thailand, referring to the relevant tax treaties as proof, without mentioning the school itself has no process in place for reclaiming the tax it deducts. In these circumstances schools are sometimes offering free assistance from their own HR department in submitting claims. It must be stressed that this is not a "blanket" exemption and some teachers are not entitled to claim. Where it transpires a false claim has been intentionally submitted, even with the full co-operation of the school, the teacher, and not the school, will be held responsible.
Where a false claim is submitted through a school the teacher can expect the Principal to protect his own interests by distancing himself from the teacher and even dismissing the teacher for bringing the school into disrepute. The following is the exact wording of a message I received from a Principal in such circumstances, after assisting a teacher in submitting a claim through the school:
"He (the teacher) was only helped by one of the secretaries but signed his own papers so he faces some difficult questions by himself......his contract has not been renewed".
The author of this message has since left Thailand, but his ideas on how to avoid responsibility for failed claims have most certainly been passed onto his successor who was bewildered to learn that the Revenue Department would not co-operate with the school concerned. This particular school lost all credibility with the Revenue Department and sending along the same HR staff who previously presented false claims with a fresh consignment did not improve the situation, but the HR staff have now created an informal agreement with their local Revenue Department which excludes roughly one third of that school's teachers from ever receiving refunds.
In Thailand many Revenue Department Officers have trouble differentiating gossip from the law. It only takes just one Officer to have an epiphany, possibly influenced by someone with absolutely no tax experience whatsoever, and the entire process comes to a standstill in any particular office.
The uninformed opinion of somebody's older relative can often outweigh anything written in an international treaty, and therein lies another problem with these claims. Teachers are relying on what the staff in local Revenue offices tell them. Try explaining to Noy in Jomtien tax office that the terms she is imposing are other than or more burdensome than those imposed by the IRS, especially when her mother thinks otherwise.....it is, of course, much easier, given all of the above, to just tell the Farang teacher that these claims are illegal, that the exemption has been terminated, that it doesn't apply if you return for a second visit, etc. etc. which is where we were thirteen years ago.
If you have any tax issue questions, you can call Stephen (the writer of this article) directly on 02 391 3906