What is Withholding Tax? What Business Owners Need to Know

Withholding tax is an important topic that entrepreneurs and business people should understand. Whether you are a small business owner, a freelancer, or a large corporation, understanding this type of tax not only helps your business operate legally but also allows for effective financial planning.

This article will take you on a deep dive into what withholding tax is, how to calculate and pay it, its importance to your business, common types of withholding tax, and what you need to learn to manage this tax professionally.

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Table of Contents

• What is Withholding Tax and Who Needs to Know?
• Who is Responsible for Withholding Tax?
• What is the Withholding Tax Rate?
• How is Withholding Tax Calculated?
• Summary of Withholding Tax: What Business Owners Should Understand

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What is Withholding Tax and Who Needs to Know?

Withholding Tax is a tax that the payer, such as an employer or a client, deducts from the amount paid to the recipient, such as an employee, freelancer, or service provider, before remitting it to the Revenue Department. The recipient receives a withholding tax certificate (50 Tawi) to use as evidence when filing their personal income tax in the following year. The main purpose of withholding tax is to collect taxes in advance, allowing the government to have a steady stream of tax revenue. Recipients can use the amount of tax already withheld to deduct from their payable tax for the next year, or if the tax withheld exceeds their tax liability, they can request a tax refund.

The withholding tax rate varies depending on the type of income and the form of the financial transaction, such as wages, service fees, contract work fees, rent, and interest, all of which are determined by relevant laws. Whether it's an SME or a large corporation, they are responsible for withholding tax at the specified rate and remitting it to the Revenue Department within the designated timeframe to ensure correct tax collection. Recipients of income from various sources should verify whether the withholding tax has been deducted at the correct rate and keep the withholding tax certificate for filing their personal income tax in the following year, as well as for considering a tax refund application according to the prescribed procedures.

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Who is Responsible for Withholding Tax?

Typically, withholding tax is something the payer must remit to the Revenue Department in advance for the efficient collection of annual income tax. Those responsible for filing withholding tax are as follows:

Payers under Form P.N.D.3

Payers responsible for withholding tax under Form P.N.D.3 are those who pay assessable income to individuals who are liable for income tax, such as wages, service fees, or commissions. The law requires the payer to withhold a portion of the tax at the source and remit it to the Revenue Department immediately upon payment. This action is considered an advance tax collection, which helps reduce the recipient's tax payment burden at the end of the tax year.

Payers under Form P.N.D.53

Payers responsible for withholding tax under Form P.N.D.53 are those who pay assessable income to juristic persons (legal entities), whether for goods, services, or other expenses. The payer is required to withhold tax at the legally prescribed rate in advance and remit it to the Revenue Department, allowing the recipient juristic person to use this withheld amount as a tax credit when filing their tax returns. The correct withholding of tax and remittance to the Revenue Department is crucial for managing data in the tax system. Therefore, those responsible should study and understand the relevant details directly from the Revenue Department.

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What is the Withholding Tax Rate?

The withholding tax rate varies according to the type of assessable income. The standard withholding tax percentages are as follows:

Rental of Immovable Property: 5%

When a lessee pays rent to a lessor for property such as a house, building, land, or structure for which the lessee has possession and maintenance rights, they must withhold tax at 5% of the rent amount to remit to the Revenue Department in advance. The payer must issue a withholding tax certificate (P.N.D.50/53) to the lessor as proof for their year-end tax credit.

Contract Work, Services: 3%

For payments for contract work such as construction, manufacturing, production, repair, or general services where the contractor uses their own equipment or materials, 3% must be withheld at the source as specified by the Revenue Department. This withholding covers both material and labor costs, and the payer will issue a certificate for the recipient to use as a tax credit.

Independent Professional Services: 3%

Income from independent professional services (Section 40(6)), including legal consulting, medical, engineering, architectural, accounting, or fine arts services, is subject to a 3% withholding tax on the remuneration paid. The payer must issue a withholding tax certificate (P.N.D.3/53) to the recipient to be used as a tax credit.

Advertising Fees: 2%

Payments for advertising, whether in print media, online media, billboards, or other types of media, are subject to a 2% withholding tax on the advertising fee amount, to be remitted to the Revenue Department in advance. This allows the recipient to use it as a tax deduction at the end of the year.

Transportation Fees: 1%

For E-Commerce businesses, there are service fees for transporting goods. For individuals hiring through a company or private transport operator, the withholding income tax rate is 1% of the transport fee. An exception is made for services by Thailand Post, which is exempt from withholding tax as per the Revenue Department's regulations.

Wages and Salaries: Minimum 0%

Income from labor wages and regular employee salaries is subject to withholding tax at a progressive rate according to the Revenue Code, starting at 0% for income that does not meet the tax threshold. The payer (employer) will issue a withholding tax certificate (P.N.D.1) to the employee for use in their year-end tax filing.

Fees for Work or Services: Minimum 0%

For some types of work or service engagements, such as independent work that doesn't qualify as contract work or professional services (general freelancers), if the payment amount is below the legal minimum threshold (1,000 THB per payment), no tax needs to be withheld (0% rate). However, if the amount exceeds the threshold, it must be considered based on the specified type and rate, and the withholding tax will vary.

For each type of withholding tax, it is essential to study the details about the applicable rates clearly to ensure the most accurate calculation. You should study the relevant details from the Revenue Department.

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How is Withholding Tax Calculated?

There are two main methods for calculating withholding tax, based on the terms of the tax certificate issuance, to be chosen according to the agreement between the parties:

Withholding Tax Borne by the Payer (Gross Up)

Calculation Formula: (Amount Paid x Withholding Tax Rate) / (100 – Withholding Tax Rate)

Example:

1. Income base for tax calculation = 50,000 + 1,546.39 = 51,546.39 THB
2. Withholding Tax = 51,546.39 × 3% = 1,546.39 THB
3. Amount the recipient will receive = 51,546.39 - 1,546.39 = 50,000 THB (Recipient receives the full amount)

Standard Withholding Tax (Deducted from Payment)

Calculation Formula: (Amount Paid + Withholding Tax) x Withholding Tax Rate

Example:

1. Payment for services 50,000 THB, Tax rate 3%
2. Withholding tax at the normal rate = 50,000 × 3% = 1,500 THB
3. The payer agrees to bear the tax for this single payment = (50,000 + 1,500) × 3% = 1,545 THB
4. Income base = 50,000 + 1,500 = 51,500 THB
5. Withholding tax = 51,500 × 3% = 1,545 THB
6. Amount the recipient receives = 51,500 - 1,545 = 49,955 THB (Recipient does not receive the full amount)

When calculating withholding tax payments, you should thoroughly understand the methods and steps to ensure you can file correctly with the Revenue Department. It is advisable to study the relevant details from the Revenue Department.

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Summary of Withholding Tax: What Business Owners Should Understand

Learning about withholding tax is something that should be done in detail, especially for businesses involved with this type of tax, including both private businesses and online businesses. The key aspects to understand about withholding tax are the topics we have covered in the previous sections: what withholding tax is, who is responsible for paying it, the applicable rates, and the methods for calculating and filing it. If you learn and implement everything correctly, it will undoubtedly benefit your business.

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References

1. Withholding Income Tax. (2020, October 17). The Revenue Department. https://www.rd.go.th/27862.html
2. Withholding Tax Guide. (n.d.). The Revenue Department. https://www.rd.go.th/fileadmin/download/insight_pasi/wht_3_53_030260.pdf