Tax Treatment on Employee Termination Payments

Keywords: Mazars, Thailand, Tax, Labour law, PND.91, Ministerial Regulation, Severance Pay

15 September 2014

For example:

• Statutory severance pay under labour law

• Non-statutory severance pay

• Additional payments based on duration of employment

• Payout from a provident fund

• Payment for unused annual leave

• Payment in lieu of a required notice period

• Retirement benefits

• Compensation for unfair dismissal

There are different tax treatments for the above payments. Whilst some payments are tax free, others are tax-free up to a capped amount and some are entitled to a special deduction. We will focus on a couple of the more common cases.

Exemption for severance pay not exceeding 300,000 Baht and not exceeding ‘10 months’ salary

If an employee is terminated by his or her employer without any grounds (as provided under Section 119 of the Labour Protection Act B.E. 2541 (A.D. 1998)), he or she is entitled to severance pay under Section 118. The severance pay that the employee derives from the employer under this section is exempted from personal income tax for the portion not exceeding 300,000 Baht and not exceeding “10 months” salary under Clause 2 (51) of the Ministerial Regulation (M.R.) No. 126. The portion over 300,000 Baht or the portion that is more than “10 months” salary is subject to personal income tax to be withheld by the employer. However, in the case where the employee has worked for that employer for a continuous period of 5 years or more, the excess portion may be entitled to a special deduction as a “one-time payment” under Section 48 (5) of the Revenue Code, as noted below.

If the employee takes voluntary redundancy (e.g. by submitting a resignation letter to the employer or by signing a mutual agreement of voluntary redundancy, etc.), the severance pay or any payment received due to such termination is not entitled to any tax exemption under Clause 2 (53) of MR No. 126. Similar to above, in the case where the employee has worked for that employer for a continuous period of 5 years or more, the severance pay or any payment received from the employer may be entitled to a special deduction.

Special deduction for a ‘one-time payment’

In cases where an employee has worked for an employer for a continuous duration of 5 years or more prior to the (either voluntary or compulsory) termination of employment, he or she is entitled to a special deduction on a one-time payment (e.g. gratitude payment, severance pay, pay-out from a provident fund, etc.). When calculating the personal income tax to be withheld from the employee, two additional expenses will be deducted from his or her income.

• Step 1: Expenses shall be allowed on this income for an amount equal to 7,000 baht multiplied by the number of years of employment but not exceeding the amount of this income.

• Step 2: Further expenses shall be allowed at the rate of 50% of the remainder.

The result derived from the special deductions above shall be computed for tax at the personal income tax rate schedule, as follows:

It should be noted from the above table that there still is a tax rate of 5% for the first bracket of income, instead of an exempted (0%) rate.

The employer shall calculate the personal income tax to be withheld on the one-time payment by using the above calculation and shall calculate the tax to be withheld on the salary by using the standard calculation. The employee is entitled to choose not to include the portion of one-time payment into his or her salary when filing the annual personal income tax return (PND.91). Therefore, the withholding tax on this one-time payment will be regarded as a final tax payment, and the employee will be required to declare only his or her salary in the tax return.