By Sirirasi Gobpradit, Keerati Saneewong Na Ayudthaya, and Panya Sittisakonsin
Thailand is recognized as a top destination among the countries in Asia for foreign direct investment (FDI) and is usually chosen as a regional hub for multinational companies. According to the 2021 Best Countries Ranking by the US News & World Report, Thailand was ranked as the 17th best country for doing business out of 78 countries worldwide and the third best country in Asia. The scoring factors include: cheap manufacturing costs, favorable tax environment and transparent government practices.
Thailand’s current corporate income tax (CIT) rate of 20% is lower than the worldwide average corporate income tax rate of 23.85% as measured across 177 jurisdictions by The Tax Foundation in 2020. Also, the current VAT rate of 7% is lower than the average VAT rate in Asia of 12.61% as measured across 39 jurisdictions.
The Thai government has supported FDI through various vehicles. For example, businesses granted an investment promotion by the Board of Investment (BOI) or granted the status of an International Business Center (IBC) may qualify for tax and non-tax incentives. In addition, the fact that Thailand has concluded double tax treaties with more than 60 countries makes it even more attractive for cross-border transactions.
Currently, there are various tax incentives available to foreign investors. Two main schemes are the investment promotion granted by the BOI and the IBC status approved by the Revenue Department.
1. BOI incentives
To encourage the industrial development for projects that are deemed to be highly beneficial to Thailand and have high value-added benefits, the BOI is empowered to approve an investment promotion and grant both tax and non-tax incentives under the Investment Promotion Act. Industry groups that are eligible for tax incentives include: agricultural, bio and medical industries, advanced manufacturing industries, basic and supporting industries, digital, creative industries and high-value services.
Tax incentives for the BOI-promoted businesses vary depending on the activity, industry and project, which include:
- Import duty exemptions or reductions on imported machinery, imported raw materials and components
- A corporate income tax exemption on net profits for three to eight years from the date on which income is first earned, with permission to carry forward losses and deduct them as expenses for up to five years
- A corporate income tax reduction of 50% on net profits for up to five years after the corporate income tax exemption period
- Double deduction from the costs of transportation, electricity and water supply for corporate income tax purposes
- Exemptions from withholding tax on dividends derived from promoted projects during the corporate income tax exemption period or within six months from the date on which the corporate income tax exemption period expires
Additional corporate income tax incentives may be granted, depending on the types and ratios of eligible investment or expenditure for the promoted company. The corporate income tax exemption cap may be increased and the exemption period may also be extended for certain types of eligible investment or expenditures, such as research and development, advance technology training as well as product and packaging design.
All types of activities in the industry groups are eligible for non-tax privileges, such as the right to own land, the right to bring in foreign experts to work, and the right to make an outward remittance in foreign currency.
2. International Business Center (IBC)
An IBC is defined as a company established under the laws of Thailand carrying on the business of providing management services, technical services, support services or financial management services (under a treasury center licence granted by the Bank of Thailand) to affiliates or an operating business of an International Trading Center (ITC).
Key qualifications for obtaining tax privileges under the IBC scheme are as follows:
- The amount of paid-up capital on the last day of each accounting period shall be at least THB 10 million
- At least 10 employees, who possess knowledge and skills necessary for IBC business or at least five employees if the IBC operates financial management services only
- Minimum expenditure of IBC business paid to recipients in Thailand of at least THB 60 million in each accounting period
- Providing management services, technical services, support services or financial management services to the associated enterprises
- Other criteria can be prescribed by the Director General of the Revenue Department
Examples of tax incentives for IBCs include:
- Reduced CIT rates to 8, 5 or 3% of net profits, depending on the amount of expenditure in Thailand (THB 60 million, 300 million or 600 million, respectively)
- Exemption on CIT for dividend received from an affiliate
- Reduced personal income tax rate to 15% for expatriates working for an IBC
- Exemption on SBT for income from provision of financial management services to an affiliate
- Exemption on withholding tax for offshore affiliates receiving dividend or interest paid from an IBC
Please note that an IBC is also categorized as part of high-value services and is eligible to apply for non-tax benefits under the BOI scheme.
3. Incentives under the Laws and Regulations on Customs
The Customs Act, the Customs Tariff Decree and other related laws and regulations on customs provide a variety of customs privileges for importers and exporters, including:
- Duty drawback — enabling the refund of the customs duty paid on the imports of goods used in the production, mixture, assembly, packaging or any operation by any other method for the products being exported out of Thailand
- Tax compensation — providing tax compensation for goods as specifically indicated by the Committee which are manufactured in and exported out of Thailand
- Customs bonded warehouse — duty and tax deferral for goods imported and stored in the customs bonded warehouse until such goods will be brought out of the customs bonded warehouse for domestic consumption
- Customs free zone — duty and tax exemption for goods imported and stored in the customs free zone until such goods will be brought out of the customs free zone for domestic consumption
- Free trade zone under the Industrial Estate Authority of Thailand — providing non-tax privileges, e.g. right to bring in foreign skilled workers and experts with visa and work permit facilitation and right to own land in the industrial estate, in addition to the incentives of duty and tax exemption like the customs free zone
Furthermore, the Thai Customs Department also introduced the Special Economic Zone (SEZ) for granting special tax incentives and financial measures for 23 industry groups in the specific area of Thailand, and the Eastern Economic Corridor (EEC). The targeted industries are in the business of next-generation automotive, intelligent electronics, advanced agriculture and biotechnology, food for the future, high-value and medical tourism, automation and robotics, aviation and logistics, medical and comprehensive healthcare, biofuel and biomedical, digital, defense, and education and human resources development. The promoted zones of Chachoensao, Chonburi, and Rayong provinces enjoy a corporate income tax exemption on net profits for one to 10 years or reduced CIT rates, special personal income tax rate for foreign staff and foreign executives, special tax deduction rate, duty exemption on machinery, and raw materials for production and R&D, exemption of law on foreign currency exchange control, right to own land and properties for their business operation, visa and work permit facilitation, and simplified customs formalities for certain transactions.
4. Preferential Tariff Treatment Schemes
Thailand is one of the most active users of free trade agreements (FTAs) and, as of now, Thailand is a party of the following FTAs:
- ASEAN Trade in Goods (ATIGA)
- ASEAN – China
- ASEAN – Japan
- ASEAN – India
- ASEAN – South Korea
- ASEAN – Australia – New-Zealand
- ASEAN – Hong Kong
- Thailand – Australia
- Thailand – New-Zealand
- Thailand – Japan
- Thailand – Peru
- Thailand – Chile
- Thailand – India
With this, the imports of goods originating from a party to the FTAs aforementioned under the rules origin criteria of the FTAs will be entitled to preferential duty treatment in Thailand when fully complying with requirements under the related laws and regulations.
In addition, Thailand is also a member country to the Regional Comprehensive Economic Partnership (RCEP), which is the world’s largest trade pact comprised of 10 members of the Association of Southeast Asian Nations (ASEAN) and five of their largest trading partners, which are China, Japan, South Korea, Australia and New Zealand. The RCEP will be in force on January 1, 2022 and marks the first economic partnership among China, Japan, and South Korea. Thailand will strengthen its position of competitiveness as the global supply chain hub, manufacturing hub and distribution center of Asia Pacific and, particularly for the auto parts and automotive industry, plastics products, chemical products, and electronics. In the meantime, Thailand will benefit from cheaper products from trading partners, which may include raw materials for manufacturing purposes.
It should be highlighted that Thailand is also in the negotiation process with Pakistan, Turkey, Sri Lanka, and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) on free trade agreements. Likewise, Thailand is expected to resume the negotiation process of an economic partnership with the European Union (EU). This Thai-EU FTA would benefit Thailand in various aspects considering that in 2020 the EU was the fifth-largest trade partner of Thailand and the second-largest foreign investor in Thailand.
Despite successive waves of COVID-19 outbreak in Thailand in 2021, resulting in strict containment measures and reduced economic activity, the Thai government remains focused on maintaining foreign investor confidence and actively attracting more FDI. For example, in September 2021, the Cabinet approved various measures to boost the economy by attracting high potential foreign investment to Thailand, which include measures relating to work permit, work visa and personal income tax for expatriates. The authorities will proceed to issue relevant legislations accordingly.
About the Authors
Sirirasi Gobpradit is an associate in the Tax Practice Group at Baker McKenzie’s Bangkok Office. Her practice includes advising on general tax considerations for investments in Thailand, M&A transactions, business integration and restructuring, debt restructuring, EPC structure, real estate projects, project finance, and representing clients at all stages of tax disputes.
Keerati Saneewong Na Ayudthaya joined Baker McKenzie’s Tax Practice Group in 2013 and is in the International Commercial & Trade Practice Group. His practice in tax, customs and trade controversies ranges the full gamut including: audits, negotiation, settlements with relevant authorities, appeals and litigation.
Panya Sittisakonsin is a partner in the Tax Practice Group at Baker McKenzie’s Bangkok Office. He advises clients on highly complex tax structures, wealth management, family business planning and restructuring. He is also active in the International Commercial Trade Practice Group, and practices in the customs and supply chain areas.