Newsletter Jus Laws & Consult (J&C) – September 2016

Part 1: Provident Fund Act in Thailand One of the most common problems once a middle size company or large company have already started to conduct business in Thailand is how to keep the human assets within the company and avoid the negative effects of “job hopping” among their employees. Before starting to approach the topic of Provident Fund we have to understand the “sui generis” situation of the labor market in this country where the unemployment Rate in Thailand is normally 1.48 % and have even decreased to 1.01 % in June 2016. Obviously this lead many employees moving from one company to another what implies a tremendous damage for companies that have invested in their employees in terms of high quality trainings, trips and share of know-how. According to the local statistics, 35% of the Thai employees of any Thai company is actively looking for a new employer and 81% say that the experience with multiple employers is an asset in their career development. This positive impression is totally opposite of the negative perception in other labor markets such as Japan

or Europe. The reasons behind this situation are multiple such as low salaries, lack of career path or promotional incentives. According to my professional experience advising foreign companies to set up subsidiaries in Thailand, one of the main legal element to mitigate the negative effects of job hopping in Thailand is the provident fund. The Provident fund in Thailand is voluntarily established by both, the employer and the employees, consisting of the contributions from both parties call “Employer’s contribution & Employees contribution”. Provident Fund is on a voluntary basis which jointly set up by employees and employer. The purpose of the fund is to encourage savings and provide benefits for employees and their families in case of deaths in the event of the employees’ retirements, disabilities, or resignation from the company. The Provident Fund is stablished as a juristic person and registered. After the appointment of the fund management company, the fund must be registered to the Securities and Exchange Commission (SEC). In terms of compliance, generally the checklist of documents required for Fund registration are usually: - Provident Fund Registration Requested Form - Pay Day Form - Regulations of the Fund - Lists of Authorized Fund Committee Members and Signature Specimen - Agreement of Appointment of Fund Management Company - Memorandum of Associates - Minutes of Company’s Board of Directors to appoint and elected the Fund Committee Members - Delivering the reports and document form The fund committee which comprises of representative elected by employees and representative appointed by the employer is responsible for supervising the management of the fund such as appoint fund management company, custodian, auditor and coordinate with other parties regarding to the fund. The process of setting up a registered Provident Fund follows these steps: A) Fund Management company selection process B) Draft and send a confirmation letter to the Fund Management Company that is chosen C) Drafting own regulations of the fund and prepare registration documents D) Documents and regulations are submitted to the Register office. E) The Register Office will study the documents and will register the fund F) Deposit of first monthly contributions The main two objectives are: 1) to promote the saving of employees 2) to provide the members and their families the guarantee of future security in case of resignation, retirement, disability or death. The involved parties are: the company or employer, Staff or employee, Fund Committee (representatives of both employer and employee that administrate the fund affair) and the Asset Management Company. Normally the employee’s contribution goes from 2 to 15% of the salary.

Finally note that that the articles of association can estipulate the benefits of the provident fund using a vesting scale based on years of service or years of membership with a scale of % in case of finalizing the work relationship before retirement. In case of termination of the work relationship with the employer before the stipulated time to get 100%, the portion of % that the employee will not receive will come back to the fund or to the employer (if the second option happens it will be declared as an income for tax reasons). The philosophy of the Provident Fund is based on risk diversification, instead of deposit money in a bank the fund invest in various financial instruments generating high returns. The fund is managed by a qualified fund manager using the below mentioned financial instruments: -Equity Instruments -Fix Income Instruments -Deposit, Treasury bills -Convertible financial instruments -Derivatives -Other types of securities or asset which are allowed to invest by SEC On the regulation, when the employer and the employer’s employees agree to establish the Provident Fund, the employer has to set up terms and conditions for the fund, for example, the eligibility, termination of membership, payment condition of the company’s portion and employees’ and employer’s contribution rate. According to Thai Law, the management of the fund shall be carried out by “Fund Management Company”, who is not the employer itself and has qualifications as specified by pertinent regulator. Therefore the fund will become a juristic person and completely separated from the employer. In other words the registered provident fund will have its own legal entity separated from the employer but also from the fund management company. The Provident Fund Act stipulates the following documents in order to register the fund: -Minutes of the Board of Directors for the fund registration -Minutes of the Fund Committees -Signature of the fund committee and authorized signatory committee -Fund Regulation -Application of fund registration -Company Certification from Ministry of Commerce -Affirmation of the fund registration -Other documents that is required by the fund registrar These are key benefits for the employer by having a Provident Fund in Thailand: -Encourage the employee loyalty to the employer, which results in work effectiveness and efficiency. The Provident Fund incentive the employees to work with the employer for a longer period and stop the harmful the high rate of “job-hop” in Thailand and protect the data and human assets to remain with the employer in Thailand.

-Generally speaking, the Provident Fund will establish in its articles of association a vesting scale in order to keep the employees in the employer based in years of service. Usually if the employee leaves the company before 3 years the employee will get 0% from the fund and if he/she works 10 years onwards the employee will receive 100%. -Human resources and recruiting departments of companies in Thailand spend a big amount of money hiring new staff when an employee decides to leave. In this case a provident fund can reduce the expenses of the employer on this field. -Unlike pension fund which may cause difficulties in preparing the cash budget for resigned or retired employees, under PVD, an employer’s monthly contribution is defined as the benefits that a company provides for employees; and when the employees resign or retire, they will receive the payment directly from the fund not from the employer. Consequently, the company’s cash flow will be smoothening. -The employer’s contribution is tax deductible. It is treated as an expense item of the company. The limit is a 15% of annual company’s wage expenditure. The employer contribution to the fund is classified as an expense which is taxable expenditure in the same accounting period that company remits the contribution into the fund. -Reduce company works and maximize the benefit from the investment. It will clearly contribute to Thailand development and growth. On the other hand the benefits of Provident Fund for the employees: -The employee receives an extra income from the employer. -Encourage retirement savings among employees. -Future security of the employees and their families in case of resignation, retirement, disability or death. -Tax benefits. -Provident Funds are managed by professionals There are 3 tax benefits. First on monthly contributions. Second on return from investment. Third on amount received upon resignation. a) On monthly contribution. The total amount of employee’s contribution paid to the fund is tax deductible for up to 500,000 THB per year. First, the employee’s contribution can be used for tax allowance up to 10,000 THB. Second, the remaining amount in excess of 10,000 THB but less than 490,000 THB is subjected to tax exemption. b) On return from investment. Interests and dividends received from investment are tax exempted.

c) On the amount received upon resignation. The lump sum amount received from the fund that are taxable includes: 1) The employer contribution 2) Benefit of employer’s contribution 3) Benefit of employee’s contribution. The employee’s contribution (2-15% of salary) is tax free. The benefit of employee’s contribution, the employer’s contribution and the benefits of employer’s contribution is considered taxable income with tax reduction. When employees have at least 5 years of service the lumps sum amount received from the fund is subjected to special tax deduction, using this formula: Step 1, Deductible = 7,000 x years of service. Step 2, 50% of the remaining. The lump sum amount received from the Provident Fund has this tax benefits: If there are less than 5 years of service, it is not tax deductible. The amount received must be taxed as usual. If there is no retirement and the year of service are 5 or more than 5, it is tax deductible. If there is employment termination (55 years old or more) and 5 or more years of membership, then it is tax free and therefore there is no tax calculation. Last 11th of August the new Provident Fund Act (No. 4) 2558 B.E. (2015) was published and modified certain aspects from the previous law such as the employee can make higher contributions than the employer, the Finance Minister can allow employees and employers to stop or postpone submitting contributions for no more than 1 year in case of crisis, an employee who is 55 years old who is going to retire can receive payments that will be tax exempted if the employee has been member of the fund for more than 5 years. Mr. Jose Herrera, Partner at Juslaws & Consult Ms. Phorn Patimon, Senior Associate at Juslaws & Consult