Investors know they can expect both dividends and capital gains from putting money into dividend-paying stocks. But most of them overlook another advantage of dividend plays: the dividend tax credit, a benefit than can help individual taxpayers not only avoid paying tax on dividends, but also reduce their tax bill on other income.
Many filers have no idea how much money they can really save with the divided tax credit because the tax calculation is mind-numbingly complicated, while others refuse to put the effort into understanding the advantage.
What is the dividend tax credit?
Companies in Thailand pay out dividends from profits on which they have already paid corporate income tax. Shareholders are subject to a 10% withholding tax on the paid dividend.
The Revenue Department has realised it's unfair to tax the same income twice, so it offers the option of dividend tax breaks for shareholders to compensate for the taxes companies have already paid.
When shareholders received dividends, they can choose to treat the 10% withholding tax as a final tax payment for such a dividend, or include the dividend with other income in the computation of individual income tax payable in annual tax returns.
The best way to understand how taxes on dividends can save money at tax time is through examples.
Mr Somchai, in 2017, earned an annual employment income of 1.5 million baht from his salary and bonus, and he received dividends of 1 million baht from listed companies that paid corporate income tax of 30%. He has two alternatives: including or excluding dividends in his annual tax return.
If Mr Somchai chooses not to include dividends in computing his income tax bills, his taxable income amounts to 1.33 million baht after deducting a combined 160,000-baht deduction against employment income and personal allowance, and a 9,000-baht contribution to the Social Security Fund. He is then subject to 197,750 baht in tax payable.
If Mr Somchai decides to include dividends with other income in the 2017 annual tax return filing, he must multiply dividends of 1 million baht by the tax credit factor of 3/7, bringing the tax credit amount to 428,572 baht. His gross-up value of dividend income totals about 1.43 million (1 million baht plus 428,572). The next step is to add the gross-up dividend income to the 1.33 million baht in taxable income; total taxable income will be inflated to 2.76 million.
Based on the total taxable income of 2.76 million, Mr Somchai is liable for income tax of 592,871 baht when personal income tax rates are applied.
The higher tax amount is no reason to panic. The dividend tax credit allows grossing up 100,000 baht incurred from the 10% withholding tax on dividends with a tax credit amount of 428,572 baht and tax from employment income of 197,750 baht, the result being 726,322 baht.
After subtracting the 726,322 baht from tax payable of 529,871 baht, Mr Somchai, in this case, is entitled to a 133,450-baht tax refund.
Since the benefit of the tax credit is larger than the impact of the gross-up, Mr Somchai does not pay any withholding tax at all on his 1 million baht in dividend income, and he also reduces the taxes due on employment income.
The result shows that investing in dividend-paying stocks helps save a bundle. But just how sweet the deal is depends on income levels and dividend payers' tax rate.
Saving through tax credits
Personal income tax return forms and dividend payment letters. Oranan Paweewun
The dividend tax credit is not as advantageous for all individual taxpayers who earn dividends on top of employment income. The impact of the dividend gross-up eclipses the benefit of the tax credit, where the effective tax rate paid by individuals exceeds that paid by dividend payers.
Dividend tax credit benefits are greatest at the lowest personal income tax bracket, dropping as income rises.
Regarding tax rates paid by dividend payers, larger corporate tax rates offer greater tax dividend credits to dividend recipients than smaller tax rates do.
This is exemplified mathematically.
Let's assume Mr Somchai earns 10,000 baht each from Company A and Company B, which had corporate tax rates of 20% and 15% respectively, and he does not have any other income. He will be entitled to a 2,500-baht tax credit (multiply 10,000 baht dividend income by a tax credit factor of 1/4, as Company A is subject to corporate tax rate of 20%).
If Company B pays corporate tax at 15%, Mr Somchai will get a tax credit of about 1,765 baht (multiply 10,000 baht dividend income by tax credit factor of 3/17).
At present, listed companies pay various income tax rates, so the tax credit differs.
The tax credit for those who pay 30% is 3/7. For a corporate income tax rate of 50%, the tax credit is 1. For the 25% bracket it's 1/3, for 20% it's 1/4, and for 15% it's 3/17.
Suniti Thanadavanich, assistant vice-president of Kasikornbank's consumer advisory, said the dividend tax is one of three income items the Revenue Department offers individual taxpayers the option to claim as a tax credit.
Other refundable tax credits are dividends from mutual funds and interest from deposits and bonds, Mr Suniti said, adding that it would not be worthwhile for most who have other income to claim tax credit for both items, as dividends from mutual funds and interest income are liable to withholding tax at rates of just 10 and 15% respectively.
"The easy way to decide whether investors should claim the dividend tax credit is to compare their income tax rate with that paid by dividend payers," he said. "If dividend payers are subject to higher rates than investors pay income tax, it is worth applying the tax credit."
However, for those with many shares in their portfolio with various rates, making the calculations beforehand is necessary to make sure the tax credit can help them save.
The takeaway
Any individual taxpayer who applies for the dividend tax credit must include all dividends received in the same tax year to compute the annual tax return filing. They cannot apply tax credits for only particular dividends.
Individual taxpayers in higher tax brackets can maximise tax deductions to minimise taxable income and benefit from the dividend tax credit, Mr Suniti said.
"If we benefit from the [dividend tax credit], we should utilise it," he said.
There are many tax allowances that qualify for tax relief, in addition to standard tax deductions such as personal, child and parent allowances and deductible expenses. These include investments in long-term equity funds and retirement mutual funds, contributions to provident funds and the Social Security Fund, and payments on premium pension life insurance policies and 10-year-or-longer life insurance policies.
