After Thailand had already lowered the general corporate tax to 20%, a new framework for the support measures provided by the country’s Board of Investment (BOI) has been in place since since January 2015. As usual, it is binding and comprehensive. Because it goes into more detail than the previous version, a more thorough analysis will be worthwhile. In addition, the country is also offering new tax incentives as a platform for commercial enterprises.
By Gunter Denk:
The Thai Board of Investment (BOI) and its funding guidelines have been regarded as exemplary within South-East Asia for many years. There can be no doubt that in recent decades its clear rules have made a significant contribution to the economic blossoming of Thailand. In January 2015, the “Seven-Year Investment Promotion Strategy 2015-2021” came into force. And, once again, the BOI is making a positive impact, because just as German laws are known for their detailed regulations and their pursuit of absolute justice, this new strategy is well thought-out and offers foreign investors concrete rewards for their involvement in the country. However, entrepreneurs need to be prepared to deal with difficulties created by the authorities in the implementation of the new rules. At least initially.
Whereas in the past the taxation and other incentives were relatively easy to understand, under the new system they have been differentiated into categories and are initially geared exclusively to the benefits the investor can provide to the country. For this purpose the planned activities are classified very precisely.
In terms of tax incentives Thailand is still continuing to offer its investors up to eight years’ exemption from corporation tax (CIT) and import duties on equipment and materials. In addition, for each “activity” which is worthy of support an individual determination will be made as to whether the company involved is to receive both of the above benefits or only one of them, whether it will apply for eight, five or three years, and whether the tax savings on the total amount of capital expenditure will be limited by a ‘cap’.
Accordingly all activities are being classified into six groups (A1-A4 and B1 / B2), each with a different combination of tax and customs exemptions. Investors whose activities are classified as of a low technical level in the groups B1 / 2, will no longer receive any tax incentives. However, the exemption from import duties on raw materials, or possibly for machinery too, will still apply. Regardless of the nature of the project, all investors will benefit from relaxed conditions for granting visas and work permits for foreigners. With special regard to the coveted “work permits”, relief can be granted from the strict regulations that require an amount of 2 million baht (approximately 56,000 euros) and four jobs for Thai employees for each foreigner However, care is required here: the complicated procedure for applications to the employment and immigration authorities will not be lifted.
Gunter Denk (Bangkok) is founder and president of Sanet ASEAN ADVISORS, a consulting firm with six affiliate companies and liaison offices in Southeast Asia. With his teams, the qualified legal lawyer supports Western companies in the structuring and implementation of investments in ASEAN countries. He is the author of numerous books and publications on the subject.
The branch of industry is more important than the location of the investment
Whereas in the past regional factors and the value of the investment were roughly equal when it came to eligibility for funding, under the new rules the quality of the investment or the project carry significantly more weight than the location of the “activity” within the country.
Decisive for the eligibility and the amount of the funding is first and foremost the extent to which the project will strengthen the competitiveness of the country and promote average incomes among employees within the industry. As a result, industries which are not important for the competitiveness of the country and which do not have reasonable income opportunities have been removed from the funding programme. The country is simply no longer interested to the same extent in “screwdriver factories”.
Seven sectors will benefit from Thailand’s investment promotion in future:
- Agriculture and agricultural products
- Minerals, ceramics, and raw materials and metals
- Light industry
- Metalworking, machinery and transport equipment
- Electronics and electrical appliances
- Chemicals, paper and plastics
- Services and public facilities
These fields are further divided into 250 sub-activities, which are assigned to the six groups to receive investment support. The classifications from A1 to B2 are clearly defined in a catalogue and depend closely on whether the funding objectives of the investment promotion will be achieved. The level of support which the activity will receive will be decided by factors such as innovation, investment in research and development, agricultural value, importance for the middle class, and contribution to the growth of the service and industrial sectors. Eco-friendly activities will receive special consideration, as will the use of alternative energies or the formation of clusters to increase regional value-added chains.
Anyone who has spent some time dealing with support measures under the BOI knows the famous “BOI Zones 1-3”. Each of the 77 provinces was assigned to one of three zones, and this determined the potential tax rebates. Often only a few kilometers to the east or west decided whether a company’s factory qualified for tax exemption or not. In some business parks the boundaries passed right through the facility, and the operators had to fight for exceptions to be granted for the “disadvantaged” areas of their site.
Metal processing is one of the seven sectors that will continue to benefit from Thailand’s investment promotion programme
Additional halving of corporation tax for another five years
This system is now a thing of the past. It is only in the 20 provinces with the lowest per capita income that additional incentives are provided; but even there only if the project can be assigned to an activity which qualifies for support. These usually include areas bordering Laos and Cambodia, or the mountainous region near the border with Myanmar.
As an incentive to settle there, after the eight-year tax-free period the corporation tax paid by investors will be halved for a further five years. Even if they aren’t in the highest group they can at least enjoy three years’ tax exemption and the additional option of writing off twice the the amount of actual expenditure on electricity, water and transport costs.
Investors who have made it into one of the six support groups can qualify for additional benefits if they incur expenditure which serves the country and its industry in a particular way. In addition to the already mentioned siting in one of the 20 poorest provinces, there are additional benefits for those who, for example,
- spend heavily on research and development, make donations to educational institutions or acquire patents or
- incur significant expenditure on technical training or technological support for (local) suppliers
- invest significantly in product design and packaging or
- locate in approved business parks.
If this expenditure exceeds a specifically-defined amount or a percentage of revenue, the company can qualify for an extension of the exemption from taxation or at least an increase in the “cap” on the maximum amount of the tax savings.
The objective: Creating an alternative commercial centre to Hong Kong
In addition, attractive promotional support is available for the service sector. With the funded activities of the International Trade Centre (ITC), Thailand wants to establish itself as an alternative ASEAN commercial centre to Hong Kong. For example, anyone who establishes a trading company in Bangkok, through which third-party transactions outside of Thailand or the business operations of affiliated companies can be carried out, can enjoy long-term tax reductions of up to 10% on trading profits . This scheme makes management staff even happier, because for them the top taxation rate of 35% and their personal income tax rate are cut to just 15%.
However, like much else in the new system it will still have to be seen how this new structure will be handled in practice, particularly by the “Revenue Department”. The bottom line is good news for investors, because the new funding system, also leaves little room for administrative arbitrariness or even corruption. The regulatory framework is coherent, legally binding and verifiable. The level of funding continues to be immensely attractive to investors. Unfortunately, however, it is also much more complex and can only be taken advantage of by courageous entrepreneurs and investors, with the help of expert advice. In turn, qualified local consultants will benefit.