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THAILAND REALIGNS FOR THE FUTURE WITH IHQ / ITC / SEZ

(source: Thailand Investment Review, July 2015)

In recent years, investors have noticed an increase in wage labor in Thailand and the shift of government policies towards attracting more modern industries; industries that are both environmentally sustainable and which support the drive to become an upper income country. While certain businesses, such as in the garment industry, have found neighboring countries to be more competitive and have opted to relocate labor intensive manufacturing facilities, it is true that Thailand still offers them an ideal location for investment in International Headquarters (IHQ) and International Trade Centers (ITC).

The new IHQ/ITC policy, adopted in the closing month of 2014, offers investors in all industries a means of employing the comparative advantages of the sub-region, capitalizing on the best each country has to offer. On 30 June 2015, the Board of Investment held a seminar entitled “Thailand: a Regional Trading and Modern Industry Hub” at the Centara Grand and Bangkok Convention Center at Central World, Bangkok. In his opening remarks to this event and keynote speech, Deputy Prime Minister M.R. Pridiyathorn outlined the evolution towards the IHQ/ITC policy, from the former Regional Operating Headquarters and International Procurement Office policy, and the expanded benefits and relaxed conditions that investors can now enjoy. He underlined the commitment of the new government to the IHQ/ITC policy, as well as the promotion of modern industries, all of which aim to make Thailand an upper income country.

For one thing, companies that depend on low margin low wage manufacturing can maintain their HQ in Thailand, where Bangkok offers among the lowest cost prime office space in the region, the government offers IHQ/ITC incentives, and a host of other benefits, while shifting their manufacturing to countries with lower wages.

What then, specifically, constitutes an IHQ? It is a company incorporated under Thai law that provides management or technical services, financial management, or supporting services such as general management, business planning, and business coordination, procurement of raw materials and parts, research and development of products and other similar activities. It can also include treasury centers and international trading centers. 

An investor locating in Thailand qualifies for both BOI and Revenue Department incentives, with each having the same definition of an IHQ. Investors can now get from the Revenue Department, among others, a corporate income tax exemption covering 15 accounting periods, inclusive of corporate income tax exemption for incomes received from overseas affiliated entities; royalties received from associated enterprises incorporated under foreign laws; dividends received from associated enterprises incorporated under foreign laws; capital gains received from the sales of shares in associated enterprises incorporated under foreign laws; income derived from the purchase and sales of goods overseas on the condition that such goods must not be imported into Thailand. In addition, companies are also offered reduced corporate income tax at 10 percent for incomes received from local affiliated entities; 15 percent personal income tax for expatriates; a specific business tax exemption for the gross receipts from lending to associated enterprises; final tax exemption on the interest income on loans to local and overseas affiliated entities, and a final tax exemption on dividends paid to foreign entities. Investors also have the choice to apply for incentives from the Revenue Department alone, BOI’s incentives, or they may apply for both.

It will be recalled that previously Thailand offered attractive benefits under its Regional Operating Headquarters promotion. But the IHQ offers additional expanded incentives, such as the expanded definition of an Associated Enterprise or the lower qualifications that accompany the IHQ promotion. For instance, to qualify for an IHQ a company must provide managerial, technical, supporting services to at least one offshore associated enterprise, not three as in the old plan. Also, under the new IHQ plan if a company fails to meet the qualifications in a given year it is only for that year that the incentive is lost.

An IHQ in Thailand and access to the region’s lower wage emerging economies offers investors the opportunity to capitalize on the best the AEC has to offer.

At the same time, the Thai government, in preparations leading up the AEC, is undertaking a significant investment in infrastructure that will strengthen connectivity and reduce logistics costs, while also putting in place a plan to promote Special Economic Zones along the border. Investments in one of these SEZs will receive maximum incentives and permission to use unskilled foreign labor.

As Deputy Prime Minister Pridiyathorn Devakula noted in his keynote address, if we think beyond our boundary and look to the sub-region of ASEAN, plus southern China, we have a bigger production base and a greater variety of products. Trading companies can be established to trade in high quality products from Thailand to supply high income markets and lower quality products from newly emerging economies to feed low income countries.

Companies located in Thailand can easily import goods from a neighboring country and sell them to another by utilizing our infrastructure, particularly the road network. To boost this potential, the government has a grand plan to improve the rail network and facilitate cargo transportation.

Thailand’s plan aims for 10 SEZs dotted along Thailand’s border with Myanmar, Laos, Cambodia and Malaysia. Already border trade currently accounts for 10 percent of the country’s total exports and is projected to grow by 20-25 percent in 2015.

13 target industries have been identified for the Special Economic Zones: agriculture and fisheries; ceramics; garments, textiles and leather; furnishings and furniture; gems and jewelry; medical equipment, automobiles and parts; electrical appliances and electronics; plastics; pharmaceuticals; logistics; industrial estates and tourism-related. Investments in these industries will qualify for maximum incentives from the BOI including an 8-year corporate income tax exemption, import duty exemption on machinery and raw materials, and an additional 50 per cent reduction on corporate income tax for 5 years. Other incentives include double deductions from the costs of transportation, electricity and water supply for 10 years; an additional 25 per cent cost deduction for installation or construction of facilities and other non-tax incentives.

Thailand is working to ensure that investors can tap into the full potential of the region, with Thailand as a manufacturing base for modern industries and other high-tech manufacturing, while moving less complex labor intensive manufacturing offshore with headquarters remaining in Thailand.

The IHQ/ITC scheme is a bold move to meet the needs of investors and to respond to the changing realities in the region, leaving Thailand well positioned to use its strengths and its geographic location, leaving Thailand still as the place to invest in Southeast Asia. 



 
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