Wage Income Tax in East Timor

Wage Income Tax is imposed on the taxaxble wage in respect of employment in Timor-Leste. Public Ruling 2001/3 specifically defines employment as the provision of personal services below in Timor-Leste.

1. In the course of an employer and employee relationship

2. As director of a company

3. As the holder of a public office or

4. As an official of the government of Timor-Leste posted overseas

Employers are required to withhold wage income tax from the wages of the employees and pay it to the National Directorate of Domestic Revenue (NDDR). The wage income tax is a final tax on wage income, meaning the employee is not required to declare the wage in the annual income tax return.

For Timorese tax resident, the tax-free threshold for wage income tax is $500, meaning that the first $500 of the wage income is tax-free, and will be taxed on wage above that amount. Below is an offcial example:

Restaurante Ai-Funan employs Helen as a waitress and pays her wages of $120 per month. Helen is a resident of Timor Leste. The amount of Helen’s wage income tax is Nil (0% of $120)

Helen is a resident of Timor-Leste, and her wage is below the tax-free threshold of $500. Therefore, her employer is not required to withhold wage income tax on her wage.

Isabelle is employed by Ai-Kameli Furniture as a manager. Her monthly wage is $700 dollars. Isabelle is a resident of Timor Leste. The monthly amount of wage income tax to be deducted from Isabelle’s wage is calculated as follows

Total wage = $700
	Tax rate	Tax payable
$0-500	0%	$500*0% = 0
Above $500 ($700-$500 = $200)	10%	$200 * 10% = $20

Isabelle is a tax resident of Timor-Leste, and her wage is above the tax-free threshold of $500. Since the first $500 is tax-free, her employer is only required to withhold wage income tax on $200 ($700-$500).

Yendi is a non-resident employee and is the staff manager at the Futures Hotel and Restaurant. His monthly wage is $400. The amount of wage income tax is $40 ($400 * 10%)

Yendi is not a tax resident of Timor-Leste. Despite the fact that his monthly tax is below the tax-free threshold, his employer is required to withhold 10% on his total wage because he is not a tax resident of Timor-Leste.

Under the TDA, some employees are exempt from wage income tax

• Wages of an employee who is a citizen of a foreign country received in the employee’s capacity as a public servant of the government of a foreign country provided the income is subject to income tax in that country; and

• Wages of an employee who is an employee of the United Nations or its specialized agencies.

There are meaningful tax implications in respect of wage income tax. If planned correctly, it could significantly increase the tax efficiency of your company.