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The Investment Regime in ASEAN Countries
Dr. Lawan Thanadsillapakul
Thailand recognises the contribution of foreign investment to the country's overall economy. Thailand has always sustained favourable attitudes towards FDI, and the National Economic and Social Development Plan sets principal development guidelines that the government must continue with liberalisation policies to facilitate private business operations both domestic and foreign investment (APEC: 1998, THA-1). The government will play only supporting, promotional and supervisory roles to investment in this country. The investment promotion policies clearly spell out the government's intention to promote the role of FDI in Thailand, particularly in areas where expertise is lacking(48). However, in order to gear development towards value-added industries and to promote remote areas, the government set some requirements to investors by granting incentives to investors, both domestic and foreign alike, in engaging the promoted industries.
Thailand has undergone a series of phases of evolution of the foreign investment regime. In the 1960s-1970s, the Thai government encouraged import-substitution industries so a significant volume of foreign investment was attracted to these industries. During the 1980s, a strong emphasis was placed on promoting exports to strengthen the country's foreign exchange position. Therefore, efforts were geared towards encouraging foreign companies to use Thailand as a production base for exports. Most export-oriented activities were labour-intensive. The 1990s have seen a shift to industrial deepening and broadening. The export boom in the 1980s was accompanied by a surge in the imports of capital goods, intermediate goods and raw materials. The government thus attempted to encourage more localisation, particularly in export industries. Foreign investments in supporting industries, value-added industries, and high technology industries have been actively encouraged. Efforts relying on market mechanism have been geared towards the creation of industrial linkages. An important theme of Thai investment policies in 1990s is industrial decentralisation, investment incentives have been granted to both local and foreign investors that accord their business in remote areas. Thai investment policy toward foreign investors is positive and encouraging, apart from the specific restricted business, foreign investors would be treated exactly the same as the domestic investors.
In Thailand, there are two major laws affecting foreign investment: the Investment Promotion Act of 1977(49), and the Alien Business Act of 1972(50). The BOI sets various minimum Thai ownership requirements and conditions for BOI grants. If the project produces for the Thai market, then generally at least 51% of the shares must be owned by Thai nationals. This does not apply to Zone III projects(51) as they may produce for the Thai market regardless of the foreign shareholding. On the other hand, if the project exports at least 50% of its products, foreigners may hold a majority of the shares; if 80% or more of total sales is to be exported, a completely foreign-owned project will be considered for promotion. For projects in the agricultural, animal husbandry, fishing, mining, mineral exploration or services industries, Thai nationals must hold at least 51% of the shares. However, in a project with more than Baht 1 million investment capital, foreigners may initially hold a majority of, or wholly own, the venture, provided that Thai nationals hold at least 51% of registered capital within five years from the date of operation(52).
Foreign investors may choose any of several forms of business organisation: sole proprietorship, partnerships, limited companies, joint ventures, and representative or regional offices(53). A foreign company can also register a branch in Thailand or incorporate a subsidiary in the country. Certain formalities need to be complied with according to the type of business to be conducted. Also certain licences and certificates of registration are required for specific activities. The licences or permits, which may well apply to a particular business are: factory licences(54), commercial registration(55), taxation registration(56), foreign business(57), and alien work permits(58). But there are no technology licensing requirements tied to the process of applying for an Alien Business Licence or investment promotion.
In addition to the Alien Business Law, there are several statutes, which impose conditions of majority ownership and management by Thai nationals in specific business sectors: commercial banking(59); finance and security business(60); life insurance(61); vessel operating(62); and recruitment agency(63). For certain other sectors, such as hotel operation and pharmaceutical dispensing, it is required that the individual holder of the licence be an individual Thai national.
However, Thailand welcomes foreign investment and sustains favourable attitudes towards FDI, and the government continues with liberalisation policies to facilitate private business operation. Nevertheless, the government's intention is to promote business areas where expertise is lacking, industries in remote areas, and industries that are important and beneficial to the country's economic and social development and to national security(64).
(48) BOI Thailand (1998) The Foreign Investment Regime: The role of BOI. Bangkok: BOI.
(49) The Investment Promotion Act of 1977 provides the legal framework for investment incentives granted by the Office of the Board of Investment (BOI). The BOI is given wide discretionary powers to encourage investment in the areas considered to be the most beneficial for Thailand's economic and social development. BOI incentives include tax privileges, relaxation of restrictions on foreign participation, business protection and a host of others.
(50) The most important law governing foreign participation in business in Thailand is the National Executive Council Announcement No. 281 B.E. 2515 (1972), which is generally referred to as the "Alien Business Law". This law limits the maximum alien ownership in certain business to less than 50% and requires certain licences before a 50% or more alien owned entity may engage in other activities.
(51) In order to encourage industrial development in regional areas, BOI will grant promotion status to investments in remote areas that are classified as zone III. All approved projects located in zone III are entitled to various exemptions, such as import duty exemption on machinery, raw materials, and other essential inputs, corporate income tax exemption, and double deduction from taxable income of water, electricity, and transport costs. Approved projects in zone III are also exempt from the minimum Thai national ownership requirement.
(52) The BOI was empowered to waive foreign ownership requirements during the years 1992-1996 for the following projects; transportation system infrastructure projects, public utility projects relating to the maintenance and restoration of environment, and projects related directly to the development of technology.
(53) Representative offices are intended to allow foreign companies to establish a liaison office to support and oversee activities of its head office. There are three types of representative offices provided for in the legislation: an international business office; a foreign bank office; and a finance, security or Credit Foncier office. Regional offices are intended to oversee activities of branches or subsidiaries throughout Southeast Asia on behalf of the head office. None of these types of offices may produce income. Regional offices are not allowed to earn income and they are exempt from Thai taxes and most annual filing requirements. But it is necessary to get approval from the Department of Commercial Registration to establish these types of offices.
(54) Factory licences are regulated by the Factory Act of 1992. Under the 1992 Act, it requires a licence to establish a factory in certain types of factories while the others are subject to the notification issued under the Act.
(55) The Department of Commercial Registration of the Ministry of Commerce is responsible for monitoring the Alien Business Law. The Office of the Board of Investment is in charge of monitoring the compliance of promoted companies with conditions stipulated in investment promotion certificates. Promoted firms have to report regularly to the Office of the Board of Investment.
(56) Taxation registration is required for all businesses that are required to collect VAT. Those enterprises must obtain a VAT registration certificate prior to commencement of a business whose projected gross annual revenue will exceed 600,000 Baht or within 30 days of the business exceeding this income. (Companies incorporated under Thai law are also required to pay corporate income tax on their profits. They may also be required to pay specific business tax depending on the type of business activity in which they engaged). Registered traders must file a monthly tax return and submit monthly remittances to the Revenue Department on or before the fifteenth day of the following month. The amount of VAT due must be remitted at the time of submitting the monthly VAT return, and registered traders are entitled to a tax credit for VAT paid to another VAT trader.
(57) Only those foreign legal entities engaged in business specified in the Alien Business Law are required to acquire an Alien Business Licence from the Ministry of Commerce. The Alien Business Law is applicable to foreigners or juristic persons that: (1) have majority foreign shareholding; (2) have at least one-half of the number of shareholders, partners or members of which are aliens; (3) have limited partnership or registered ordinary partnership having an alien as manager or managing partner. The Alien Business Law sets three categories of business activities where foreign legal entities and foreigners are (1) prohibited in category A., (2) permitted only with the Board of Investment promotion in category B. (3) implemented only with the permission of the Ministry of Commerce or Board of Investment promotion in category C. (Details of these categories are stated in the section of restricted sectors discussed below) The Alien Business Law does not apply to aliens engaged in business with the permission of the Royal Thai Government, or covered by an agreement between the Royal Thai Government and a foreign government which exclude certain activities, for instance under the agreement between Thailand and the US Thus American nationals, entitled to the protection under the Treaty of Amity and Economic Relations between the two, are not generally subject to the provisions of the Alien Business Law. There are , however, some business activities which the US-Thai Treaty does not cover, namely communications, transportation, fiduciary function, banking involving depository functions, the exploitation of natural resources and land, and domestic trade in indigenous agricultural products.
(58) Permission to work in Thailand is granted by the Alien Occupation Division of the Ministry of Labour and Social Welfare with the issuance of a work permits. On 30th June 1997, the Thai government established a 'one-stop' service centre to facilitate the issuance of relevant work permits and immigration authorisations. The centre's service can be extended to investors who meet certain investment criteria.
(59) The Commercial Banking Act B.E. 2505 (1962) requires that Thai nationals must hold not less than three quarters of the total issued shares in a commercial bank and that at least three quarters of the total number of directors must be Thai nationals.
(60) The Act on the Undertaking of Finance Business and Security Business and Credit Foncier Business B.E. 2522 (1979) and the Security and Exchange Act B.E. 2523 (1992) stipulate that the Thai ownership and management requirements for finance and Credit Foncier companies are the same as for commercial banks. But there are no such restrictions on foreign participation in securities business under this Act, although they are subject to the Alien Business Law.
(61) Life Insurance Act B.E. 2535 (1992) and the Casualty Insurance Act B.E. 2535 (1992) require that Thai nationals must hold not less than three quarters of the total number of shares sold and that at least three quarters of the total number of directors must be Thai nationals.
(62) Thai Vessel Act B.E. 2516 (1971) requires that: (i) at least 70% of the capital in a limited company, public limited company or partnership owning a Thai vessel be owned by a natural Thai person or by a wholly owned juristic entity, with all shareholders, directors, or partners of such entity must be Thai persons, organised under Thai law where the subject Thai vessel will trade in Thai territorial waters, and ; (ii) where the Thai vessel will specifically be used in international marine transport, at least 51% of the capacity in the company owning the Thai vessel must be owned by a natural Thai person or at least 51% by a wholly Thai owned company organised under Thai law with all of its shareholders and directors being natural Thai persons. The majority of the directors of such vessel owning company, and all of the unlimited liability partners in the case of a limited partnership, must also be Thai nationals. A Thai national person who, for and on behalf of an alien, holds title to a Thai vessel or capital of a juristic person owning a Thai vessel, will be subject to a fine not exceeding Baht 500,000 and imprisonment not exceeding five years. The juristic entity owning the vessel must be organised under Thai law and have its principal office in Thailand. It can be seen that the Vessel Act of 1971 has the most intricate method of imposing 'real' Thai ownership in a juristic owning a Thai vessel operating in Thai territorial waters. Doing Business in Asia: Thailand, 1998.
(63) Employment Provision and Employment Seekers Provision Act B.E. 2528 (1985) provided that recruitment agency work is reserved for Thai nationals under the Alien Business Law. In addition, both the manager of the establishment and any corporation formed as a recruitment agency must be of Thai nationality.
(64) Under the Investment Promotion Act, BOI may approve the promotion of investment projects in agriculture, animal husbandry, fishery, mineral exploration and mining, manufacturing and services when it considers that the products, commodities or services are either unavailable or insufficiently available in Thailand or are produced by an outdated process; are important and beneficial to the country's economic and social development, and to national security; and are economically and technologically appropriate, and have adequate preventive measures against damage to the environment.