The 300-baht daily minimum wage has been the talk of the town and its impact has already affected the operations of many businesses since it took effect in April in Bangkok and six other developed provinces. On Jan 1 the wage will rise to 300 baht in the remaining 70 provinces of the country, with further challenges expected for many employers.
Padermchai Sasomsap, the minister of Labour and Social Welfare, has said that after Jan 1, the main industries to be affected would be auto parts, construction and production, wholesale and retail sales.
Although many of these industries require skilled employees, they also need a number of unskilled workers, who will enjoy much higher pay than before.
Although it will take some time to gauge the full impact from the 300-baht wage countrywide, there is anecdotal evidence already of some factory closings that have been blamed on higher labour costs.
Everyone knows that something needs to be done to tackle this sensitive problem.
Measures to assist small and medium enterprises are being discussed and some are being implemented.
They include a special fund under which qualifying businesses will receive reimbursement for the difference between the wage they are paying now and the increased rate. As well, some will qualify for a reduction in the Social Security Fund contribution from the normal 5% of an employee’s wage to 2%.
One of the tax measures involves a potential reduction in the withholding tax rate on services from 3% to 1% or 1.5%.
Historically, the 3% withholding tax on revenue rests on the assumption that you should have a net profit margin of 10%.
Based on a corporate income tax rate of 30% of profit, a business’s tax liability at year-end should be equal to the amount of tax withheld; hence there is little need to spend too much time on tax collection and audits. But the corporate tax rate has now been reduced to 23% and will fall further to 20% next year, so the 3% withholding rate would exceed the year-end tax liability. Thus taxpayers would have to apply for refunds, which the Revenue Department would have to verify, possibly leading to more audits and a lot of paperwork for everyone. This problem would overwhelm the Revenue Department and also erode the cash flow of SMEs.
In fact, Thailand already has some tax measures that help SMEs, which the government has long maintained are the real strength of the economy and need special promotion wherever possible.
The Board of Investment two years ago granted investment promotion, including an eight-year corporate tax holiday, for SMEs under BoI Announcement No. 1/2553. The criteria for eligibility include:
– investment size of at least 500,000 baht;
– Thai majority ownership (at least 51% of registered capital);
– debt-to-equity ratio must not exceed 3:1;
– investment in each project must not exceed 80 million baht (excluding land and working capital);
– the company must have net fixed assets or investment size (excluding land and working capital) of no more than 200 million baht.
Sadly, this promotional package has already expired. Thus, we are interested in seeing whether the BoI will announce a similar programme or introduce a new one to alleviate the impact from higher labour costs.
The Revenue Department has played a key role in granting tax incentives to SMEs. Their main objective is to stimulate the capital markets and to assist the development of small businesses. Under the current rules, companies or partnerships having paid-up capital of no more than 5 million baht on the last date of the accounting year, with income derived from sale of goods and provision of services of no more than 30 million baht, are eligible for special tax treatment.
For example, net profits in any accounting year of less than 150,000 baht are exempt from corporate income tax, and net profits from 150,000 to one million baht bear a tax rate of only 15%. If net profits exceed one million baht, the excess will be subject to normal corporate income tax rates: 23% for 2012 and 20% for 2013.
Having said this, it can be argued that the tax benefits for SMEs relative to bigger businesses have been reduced since corporate tax rates have been falling. For example, if you have total revenues of 30 million baht (the maximum allowed under Royal Decree No. 530 for SME tax rate reduction), to qualify for the 15% tax bracket, your net profit is limited to one million baht. This means you must be able to come up with allowable expenses of 29 million (no easy feat) _ otherwise the excess profits will be taxed at the 20% rate similar to major enterprises. In light of this limited benefit amount, why bother thinking about tax optimisation? Perhaps it is time for the Revenue Department to reconsider the packages for SMEs to achieve the goals of the government.
Industry Ministry figures show that during the first 10 months of this year, 904 factories were closed, representing 27.57 billion baht in lost business and leaving 28,164 people unemployed. It’s true that many of these closures were related to the severe flooding of the previous year, but some probably took place because employers facing higher wage bills could no longer compete.
No doubt many affected industries need attention from the government _ not too much but not too little either _ in return for complying with the law requiring them to pay workers at least 300 baht a day. If the government does not offer some sound measures, we will see a sharp rise in a number of industries closing down next year.