When employment comes to an end, whether due to retirement, redundancy or voluntary resignation, the employer may need to make a lump-sum payment to the employee. As the lump sum could be all that a retired employee has left to live on, or a fund to be used during the vocational transition, the law helps to ease the tax burden by allowing a special calculation so that it is taxed separately from other income.

The special calculation reduces the progressiveness of the tax rates by ensuring that the lump sum will always start from the lowest tax bracket. The taxable amount consists of the lump sum, minus a special deduction of 7,000 baht multiplied by the number of years of employment, with the net amount divided by half.

For instance, Mr A's monthly salary for the year in question is 300,000 baht (net of all expenses and personal deductions for the sake of simplicity). His employment is terminated and he receives a lump sum of 1 million baht in addition to the annual salary of 3.6 million. He has been employed for seven years.

As the table shows, the ability to apply the special calculation to the lump sum will allow Mr A to save a substantial amount of money.

In applying the special calculation, certain conditions must be met. For example, where the lump sum is "paid by the same person on many occasions, irrespective of whether they are the same category of payments" (emphasis added), the special tax calculation will be applicable only to the amount the employee receives in the first year that the payments are made.

Here's where it gets interesting. Many employees receive severance pay and a payment from a provident fund when their employment ends. If employment is terminated at the end of the year and the employee receives severance pay immediately but receives the provident fund payment in the following year, can the special calculation apply to the latter as well?

The Revenue Department's answer has always been negative. However, the courts hold a different view.

The Supreme Court in 2004 ruled on a case involving an employee who was laid off on Dec 30, 1998, and received severance pay immediately, followed by the provident fund payment on Feb 25, 1999. He applied the special tax calculation to both the severance payment (for the 1998 tax return) and the provident fund payment (for the 1999 return). The Revenue Department claimed he owed more taxes for 1999 as he was not entitled to the special calculation for the provident fund payment.

The court ruled as follows: "It was the provident fund, not the employer, that made the payment in dispute to the employee. Thus, the severance payment and the payment from the provident fund had not been 'paid by the same person'."

For this reason, the court did not apply the "first year" condition to the case, and the employee was allowed to apply the special calculation on the payment from the provident fund, even though he received it in a different year.

Nevertheless, the Revenue Department has refused to change its stance. It maintains that under the Civil Procedural Code, the court ruling binds only the counterparties in the case. Hence, it has continued to assess taxpayers who fail to comply with the "first year" condition.

For instance, a revenue ruling issued in 2008 dealt with terminated employees who received severance pay immediately on termination, but needed to keep their accounts in the provident fund until they could find new jobs.

This was done so that they could count the years of employment continuously between their old and new jobs to maximise provident fund benefits. This is allowed under a rule issued by the Securities and Exchange Commission, provided that one obtains new employment within one year.

In this case the Revenue Department said that because the employees could not find new jobs within one year and the provident fund had to make its payment in the year after the severance pay was made, the employees would be barred from applying the special tax calculation to the provident fund payments.

Similar arguments have been going on for almost two decades between taxpayers and the taxman. Again last year, the Supreme Court reiterated its view, in another case involving an employee who had received severance and provident fund payments in different years. And exactly as it had done in 2004, it said that the "first year" condition of the Revenue Department was not applicable to this situation, as the provident fund payment was not made by the employer.

That's two strikes against the Revenue Department in the country's highest court. We are now waiting to see if it grasps the idea and ends the practice of causing additional injury to terminated employees.

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By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th