If you plan to buy a life insurance policy on your own, it’s not much of a problem from the tax aspect. Of course, you need to think a bit if the premium you are paying actually qualifies for the tax deduction up to 100,000 baht per year. The real concern in this case is that you are using your after-tax money to buy it, which is not very effective tax planning.
A major conglomerate tends to have group term life insurance, which costs much less than the policies you can buy directly from most insurance companies. If you are a qualified executive and entitled to this type of benefit, but you have never contacted the life insurer or received anything from it, do you have to include the policy in your tax base and pay personal income tax on it at the end of this month?
Let’s take the example of Company A, which paid 2 million baht to an insurance company to buy a group term life insurance policy for five executives with coverage of 10 million baht per person. How should the company withhold personal income tax and how should each executive declare the income in his tax return?
In one dispute, Company A argued that as it had entered into a life insurance contract with the insurance company under its own name and without any involvement from the executives, the premium paid by the company could not be treated as taxable income to the executives, as they had not yet received any benefits from the policy. The executives would receive income only on the date that the insurer paid compensation to them or to their families under the condition of the policy.
Company A’s argument rests on the cash basis methodology of Section 39 of the Revenue Code in calculating personal income tax, since it deducted the premium as its own expense in calculating corporate income tax in the year of payment.
However, the Revenue Department viewed that, under the matching concept of the tax law, the executives had already enjoyed the benefits in the same year, and Company A was required to withhold personal income tax on the insurance premium as if it had been paid to the executives directly.
The company appealed but the Board of Appeal upheld the ruling and the matter went to the court. Unfortunately, the court also disagreed with Company A’s argument and set out a precedent on group insurance premiums as follows:
In determining the date on which the executives would be deemed as having received the taxable fringe benefit, it was not necessary for an event as defined in the policy to take place, or for the insurer to pay compensation to the executives first.
The fringe benefit under the policy could not be comparable to other fringe benefits that the executives needed to actually receive for personal income tax to be imposed, because incidents stipulated in an insurance contract may or may not happen. Hence, the executives were deemed to be enjoying the fringe benefits in the tax year when the company paid the premium.
As a result, Company A was required to withhold personal income tax and the executives were supposed to include the premium in their gross income at year-end, even if they had no idea of what was going on in that year.
The next question that arises is whether Company A can simply allocate the premium of 2 million baht to all executives equally at 400,000 baht per person in calculating personal income tax if the coverage amount is equal for everyone, or on a pro rata basis if each executive is entitled to different coverage, based on seniority or other factors.
Technically speaking, the actual premium for each executive is different according to age, health and risk even if the coverage amount would be equal for everyone. Therefore, the actual premium amount should be used as the basis in calculating personal income tax.
Nonetheless, most insurers are unlikely to disclose this information to customers, so it is unlikely that the company or a tax auditor can get a definitive figure. Hence, allocating the premium to all executives according to the coverage amount of each person is practically acceptable as a sound method.
Bear in mind that if your employer were to pay you or your family the actual medical expenses that you paid to a hospital, that amount is clearly exempted from the personal income tax base.
Similarly, if your employer were to buy you or your family a health insurance policy in Thailand, that amount is also exempted.
Note also, however, that health insurance covering you outside of Thailand is eligible for the tax exemption only if you are travelling. Unfortunately, these exemption rules do not apply to a life insurance policy.
By Professor Piphob Veraphong. He can be reached at admin@lawalliance.co.th
