Sixteen 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), since when my company has obtained tax treaty refunds for more than eight 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, hence 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 for a visit to Thailand not exceeding two years in length. 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 a contract and not just two calendar years. Thus, if a teacher commences work in September, year one, works through all of year two and completes the contract in August of year three, that teacher will be eligible for a refund for the entire time spent working in Thailand. Some Revenue Department officers are of the opinion that refunds should only be issued for the first two calendar years, thus the five months in the first year plus the twelve months of the second year, and refuse to refund anything for the third year comprising the final seven months of a teacher's two-year contract. In some instances entire two-year claims that would otherwise be legitimate are rejected on the grounds that they straddle three calendar years.
The exemption usually applies for the FIRST teaching visit for a period 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. Revenue Department 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 one reason why there is confusion over how long a teacher should remain outside Thailand between visits.
When a teacher returns to Thailand for a second or subsequent teaching visit, the teacher must pay tax FOR THAT SUBSEQUENT VISIT. The current Revenue Department interpretation provides 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, and I am currently challenging this issue through the Central Tax Court.
Some agreements, notably with Canada, Singapore, South Africa, Switzerland, and New Zealand, 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 sometimes 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 correctly determines eligibility to claim. The US agreement, for example, exempts teachers of any nationality who were resident in the US before commencing their first Thai teaching contract. The teacher does not need to be American, but to have been a US resident prior to visiting Thailand. The US agreement only exempts Americans who were resident in the US 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 China prior to Thailand, adds an extra layer of bureaucracy, and requires specific documents from China which are far from easy to obtain, 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 yet another country, and if that country has a DTA with Thailand which includes the teaching exemption, the teacher will be exempt from income tax in that country too. A 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.
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. Establishing a teacher's entitlement is a comparatively straightforward issue since obtaining and compiling documents for a claim rarely presents difficulty. The overwhelming Revenue Department bureaucracy, however, requires specific expertise if a claim is not to become bogged down with pointless administrative procedures, and it is frequently this aspect which prevents teachers ever receiving the refunds they would otherwise be entitled to.
There is often an element of prejudice directed against teachers claiming these refunds and it is common for Revenue Department staff to obstruct payments. Representatives without experience of negotiating claims worth hundreds of thousands of Baht are often forced to abandon claims when dealing with Revenue Department officers who are out of their depth, and who will often be "too busy" or maintain it is not their job when presented with claims. Most Revenue officials are only familiar with repayment claims under ThB 10,000, and being confronted with a refund claim for hundreds of thousands of Baht often presents an officer with more responsibility than they ever expected and they will consequently put off handling a claim indefinitely with all manner of ingenious excuses, including imaginary "laws" if all else fails. I was once informed of a new "world law" by an inspector desperate to avoid approving a claim.
In addition to creating their own imaginary laws, Revenue Department staff regularly ignore the wording of genuine legislation. Claims for three-year refunds under the agreements with China and the UAE are sometimes rejected on the grounds that they cover a visit exceeding two years. When confronted with a copy of the DTA which clearly states the exemption in these instances is for three years they dismiss the document, stating that the treaty is incorrect and that the tax treaty exemption is only for two years. We once lodged an appeal in these circumstances to a regional Revenue Department office who agreed with us, but the local office still refused to pay the claim claiming they did not agree with the decision. There are ways round this level of obstinacy and the claim was paid in this instance.
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. Additionally, HR staff are ill-equipped to deal with questions or obstruction from the Revenue Department and are far more concerned with protecting their own positions than obtaining tax refunds for former staff who they may never see again. 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 a claim runs into difficulty as so many do.
Revenue Department bureaucracy is not the only difficulty facing teachers and their representatives. 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. Sometimes unscrupulous school owners mislead perfectly honest and credible school administrators who, in turn, unwittingly mislead teachers in order to prevent them claiming. There is a breathtaking level of corruption and dishonesty in Thailand and some school owners even bribe Revenue Department staff in order to avoid paying taxes to the Government; especially payroll taxes deducted from teachers who have departed. In some instances schools have even offered the services of relatives of the owners as "tax attorneys" and these individuals are also the source of some misunderstandings. One school Principal even recommended the services of a "lawyer" who was simply his Thai girlfriend. Incompetent Thai "lawyers", often nothing more than visa specialists, are not beneath offering school HR staff money in exchange for recommending their services, which leads to some totally inexperienced individuals trying their luck. I have heard from a former Principal who lost his refund as a result of this conduct. It is remarkable that these tax experts 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. On one occasion school HR staff even introduced teachers to a dentist who was hoping to make a fast buck by masquerading as a lawyer.
Where a school presents teachers with a variety of reasons 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 some 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. In some instances the Revenue Department does 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. In these situations school administrators become overnight tax advisors, offering a free claim service which ultimately amounts to nothing and the time period for making a genuine claim has been lost in the process. This situation is compounded by inefficiency in the Revenue Department itself and there are also 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.
As part of the claim process the Revenue Department requires 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 intend to break their contracts are fully entitled to claim tax refunds but should consult a tax specialist in confidence long before leaving the school.
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 every year when the school did not deduct tax, even the first two. There is no negotiation over this, even if the teacher left Thailand and returned with a new contract. The Revenue Department has now learned from past experience and usually notifies the Immigration Department in order to prevent teachers in this situation 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.
Some schools maintain they can obtain tax treaty refunds but in reality they are not filing claims under the relevant tax treaties at all, but 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 truth, they are simply handing back a tax refund which was obtained improperly, and the time period for making a genuine claim has again been lost in the process.
School administrators, often concerned by past experiences, sometimes dissuade teachers from claiming the exemption by maintaining that teachers 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 since 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. 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. 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 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 and ill-informed school administrators.
One remarkable explanation for failed claims provided by Thai HR staff is that the Revenue Department operates 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.
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 is hardly likely to promote a money laundering activity on its own 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 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.
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's representative 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 should refer to the English language version of a DTA for clarity, but this does not usually happen at local offices where the English language capability is insufficient for this purpose.
Occasionally school administrators will assert that "the school is paying the teacher's tax" and that any refund therefore belongs to the school. 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 a 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.
In recent years the Revenue Department has 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 were 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.
Principals have 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 cooperation of the school, the teacher, and not the school, will be held responsible. 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 has 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. Added to this is the further complication that many Revenue staff are from poor backgrounds. The knowledge that teachers are reclaiming hundreds of thousands of Baht sometimes results in documents being withheld and claims being obstructed in the hope of obtaining an "incentive".
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 for the third calendar year, etc. etc. which is where we were sixteen years ago.
If you have any tax issue questions, you can call Stephen (the writer of this article) directly on 02 391 3906