Tax Incentives and FDI in Thailand

Chadin Rochananonda

Fiscal Policy Office

Ministry of Finance in Thailand

February 2006

Prepared for the International Symposium on FDI and Corporate Taxation: Experience
of Asian Countries and Issues in the Global Economy, sponsored by International and
Public School of Hitotsubashi University, held in Tokyo on February 17 and 18, 2006.
The author would like to thank Chanachai Prayoonsin and Popon Kangpenkae for useful
comments and Watcharee Sritongkul for helpful research assistance.
 Table of Contents

Pages

I. Introduction 3

II. The Thailand Tax Structure

A. Direct Tax V.S. Indirect Tax 4

B. The Composition of Tax Revenues 4
C. The Trend of Tax Revenues 5
D. Tax Reform 6

III. Corporate Income Tax

A. Taxable Person 9
B. Tax Calculation 10
C. Tax Rates 11
D. Withholding Tax 14
E. Tax Return and Payment 15

IV. The Situation of FDI in Thailand

A. Private Capital Inflows 16

B. FDI in Thailand 24

V. Policies to attract FDI (Tax Incentives and Special Privileges)

A. Statutory Tax Rates 26

B. Special Privileges granted by the BOI 28

VI. Effective tax rates in Thailand

A. Assumption 31
B. Data Description 32
C. Results and Economic Implications 34

VII. Conclusion 37

Bibliography 39

Appendix: Transfer Pricing Policies to Restrain Tax Avoidance Activities 40

2
I. Introduction

Foreign direct investment (FDI) creates more value for the host country than the flow of

capital. It is because FDI can transfer of technology, managerial expertise, and other intangible

assets from one country to another.

Over the past two decades, the Thai government has been actively promoting

the country as investment location. Many empirical studies have shown that tax rates and

incentives influence the location decisions of companies within economic areas, such as

the European Union and the Association of Southeast Asian Nations (ASEAN). Similarly,

the Thai government has been using tax incentives to promote regional investment, sectoral

investment, performance enhancement and transfer of technology.

In Thailand, the statutory tax rate on corporate income has long been 30 percent of net

profits. Due to several recent changes in investment tax incentives, many companies are able to

pay tax less than 30 percent.

The study purpose is to apply the effective tax rate, as the indicator of FDI policy,

to trace the direction of economic development and analysis the impact of tax incentives on

sectoral FDI.

The outline of the paper is organized as follows. Section II describes the Thailand tax

structure. Section III focuses on corporate income tax. Section IV discusses the situation of

FDI in Thailand. The FDI policy is Section V. Section VI describes empirical results and

economic implication. Section VII is a conclusion.

3
II. The Thailand Tax Structure

The revenue from taxation is the most important source of Thailand’s central

government. During the latest 10 years (1995-2004), tax revenue is averagely 90 percent of the

total revenues.

A. Direct Tax V.S. Indirect Tax

Taxes can be divided into 2 types, namely direct tax and indirect tax. The direct

taxes are personal income tax, corporate income tax and petroleum income tax. The indirect

taxes consist of value added tax, excise taxes (15 items), specific business tax, tariff duties and

stamp duties.

As typical developing countries, indirect taxes have played the major role in

providing the government revenue. It generated around 66 percent of tax revenue in 1995 and

declined subsequently to 62 percent in 2004. This reflects a rise in relative share of income tax

and taxes on consumption. After the crisis, the Thai economy grew continuously and taxpayers,

in particularly a corporation, also began to pay income tax after finishing the 5 years loss

carry-forward deduction.

Table 2.1 Share of Direct and Indirect Taxes in Total Tax Revenue (Percentage)
Tax 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Direct 33.9 35.5 35.3 31.6 33.1 34.9 34.9 35.1 35.4 37.3
Indirect 66.1 64.5 64.7 68.4 66.9 65.1 65.1 64.9 64.6 62.7
Source: Fiscal Policy Office (2005)

B. The Composition of Tax Revenues

Taxes on domestic goods and services consumption, comprising the value added tax,

excise tax (15 items) and specific business tax, have played the leading role in indirect tax

collections. They contributed on average 52 percent of total tax revenue during the last 10 years.

4
 The value added tax generated the most revenue of all taxes. It shared 27.5 percent

of the total tax revenue in 2004.

The second is excise tax which taxed on 15 items of goods and services with 23.9

percent of the total tax revenue.

Table 2.2 Share of Tax Revenues (Percentage)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
PIT
11.9 13.6 14.4 17 15.5 12.9 13.2 12.8 11.9 11.7
CIT
21.6 21.4 20.3 13.8 15.9 20.5 19.5 20.1 21.2 22.7
Value added tax
22.5 22.9 24.4 32.2 29.6 27.1 28 26.9 26.6 27.5
Specific business
tax 3.9 4.2 4.3 4.9 3.1 2.4 1.7 1.6 1.3 1.7
Excise tax
21.4 20.8 22.5 21.5 24 23.2 23.1 24.5 25 23.9
Customs duties
17.5 16 12.8 9.3 9.8 12 11.9 11.4 11.2 9
Others*
1.3 1.2 1.3 1.2 2 2 2.7 2.8 2.8 3.4
Total
100 100 100 100 100 100 100 100 100 100
Source: Fiscal Policy Office (2005)
(*) Others include petroleum income tax & stamps

C. The Trend of Tax Revenues

1. Risk factors of the Thailand taxation system

a. Declining in the tariff duties revenue

Due to the settlement in Free Trade Agreement between Thailand and trading

partners, the Thai government will oblige to reduce the tariff rates on the board. The revenue

from tariff duties has been declining subsequently. It is necessary to consider the new tax

sources to compensate such amounts.

b. Higher inflation

A rise in oil prices and domestic interest rates will put a pressure on

5
companies’ production costs and retail price while the real private consumption is shrinking.

The tax bases on corporate income and private consumption are, therefore, likely impacted.

c. Thailand’s competitiveness

Export is one of the engines to drive the Thailand economy. Latest export

data, Thai exports have recorded high growth but mostly from a higher price rather than

an increase in volume. This implies that Thailand’s export competitiveness has not increased

recently.

2. Tax trend in the future

According to the risk factors, we see that tax revenues tend to decline continuously

if we have not doing anything. The urgent tasks for the tax authorities are to reform the tax

system for finding the new revenue sources to compensate the losses and supporting the

economic growth and social restructuring.

D. Tax Reform

1. Objectives

a. To increase the Thailand’s competitiveness

b. To compensate the declining tax revenues

c. To support the macroeconomic objectives and the income distribution issues.

2. Tax measures

a. Income tax

To increase the country’s competitiveness on trade and investment,

the total income tax burden should not be different from that of Thailand’s competitors.

Personal and corporate income taxes are the key factor that the business persons mostly

consider them before investing.

6
 In Thailand, the personal income tax rate (37 percent) and the corporate income

tax rate (30 percent) are relatively high, compared with those of neighboring countries.

In Malaysia, for example, the PIT and CIT rates are 29 percent and 28 percent respectively.

b. Consumption tax

The value added tax rate at 7% current rate should be back to the ordinary rate

at 10 percent. Due to the government policy on stimulating the citizen’s consumption,

the VAT rate has been reduced temporarily since 2000. In addition, the sin tax should be

adjusted or adopted for discouraging consumption of some products.

c. Others

The new tax should be considered for the new revenue source or the reasons of

economic and social purposes such as the estate, gift tax, and environmental tax.

7
III. Corporate Income Tax

Corporate income tax (CIT) is a direct tax levied on a juristic company1 or

partnership which is established under Thai or foreign law and carries on business in Thailand

or derive certain types of income from Thailand. CIT plays the important role in Thailand’s tax

system. It generated 21.4 percent of the total tax revenue in 1996 and 20.3 percent in 1997.

After the country faced the economic crisis in 1997, CIT decreased significantly to 13.8 percent

in 1998. But now the share of CIT has recovered to the same level at 22.7 percent in 2004.

During the period of 1995-2004, the Tax to GDP is average 16.5 percent. The CIT to GDP is

average 3.3 percent after the PIT to GDP with an average 4.3 percent.

Table 3.1 The Proportion of Taxes to GDP (Percentage)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 MEAN
Tax/GDP 17.9 17.8 17.0 15.5 14.8 14.7 15.1 15.9 17.0 18.0 16.5
PIT/GDP 2.1 2.4 2.4 2.6 2.3 1.9 2.0 2.0 2.0 2.1 2.2
CIT/GDP 3.9 3.8 3.5 2.1 2.4 3.0 2.9 3.2 3.6 4.1 3.3
VAT/GDP 4.0 4.1 4.2 5.0 4.4 4.0 4.2 4.3 4.5 4.9 4.3
EXCISE/GDP 3.1 2.8 2.2 1.4 1.5 1.8 1.8 1.8 1.9 1.6 2.2
TARIFF/GDP 3.1 2.8 2.2 1.4 1.5 1.8 1.8 1.8 1.9 1.6 2.1
OTHERS/GDP 0.9 0.9 0.9 0.9 0.8 0.6 0.7 0.7 0.7 0.9 0.8
Source: Fiscal Policy Office (2005)

A. Taxable Person

Corporate income tax is levied on both Thai and foreign companies.

1. A Thai company means a company incorporated under the law of Thailand.

1
The term "juristic company or partnership" (hereinafter called "company") means a limited company,
a limited partnership or a registered ordinary partnership incorporated under Thai or foreign law as well as
an association and a foundation engaged in business producing revenue. The term also includes any joint venture
and any trading or profit-seeking activity carried on by a foreign government or its agency or by any other juristic
body incorporated under a foreign law.

8
A Thai company is subject to tax in Thailand on its worldwide net profits at the end of each

accounting period (12 months).

2. A foreign company means a company incorporated under a foreign law. Generally,

a foreign company is treated as carrying on business in Thailand if it has an office, a branch or

any other place of business in Thailand or has an employee, agent, and representative or go-

between for carrying on business in Thailand. There are three types of corporate income taxes

for a foreign company as follows:

a. A foreign company carrying on business in Thailand is subject to CIT only

for net profit –arising from or in consequence of business carried on in Thailand, at the end of

each accounting period.

b. However, a foreign company engaged in international transport is subject to tax

on its gross receipts. When a foreign company disposes its profit out of Thailand, such profits

will be subject to tax on the sum disposed. Profit also means any sum set aside out of profits as

well as any sum which may be regarded as profit.

c. A foreign company, not carrying on business in Thailand but deriving certain

types of income (i.e., service fees, interests, dividends, rents, professional fees) is subject to

corporate income tax on the gross amount received. It is collected in the form of withholding

tax by which the payer of income shall deduct the tax from the income at the rate of 10 % of

dividends and 15 percent of other type incomes (see Table 3.2).

B. Tax Calculation

To calculate CIT for a company carrying on business in Thailand, it is derived from

the company's net profits. A company shall take into account all revenues arising from or in

9
consequence of the business carried on in an accounting period and deduct them from all

expenses in accordance with the condition prescribed by the Revenue Code.

Regarding to dividend incomes, one-half of the dividends received by Thai

companies from any other Thai companies may be excluded from taxable income. However,

the full amount may be excluded from taxable income if the recipient is a company listed in the

Stock Exchange of Thailand (SET) or the recipient owns at least 25 % of the distributing

company's capital interest, provided that the distributing company does not own a direct or

indirect capital interest in the recipient company. The exclusion of dividends is applied only if

the shares are acquired not less than 3 months before receiving the dividends and are not

disposed of within 3 months after receiving the dividends

In calculating CIT, deductible expenses2 are as follows.

1. Ordinary and necessary expenses. However, the deductible amount of the

following expenses is allowed at a special rate:

a. 200 percent deduction of research and development expense

b. 150 percent deduction of job training expense

c. 200 percent deduction of expenditure on the provision of equipment for

the disabled

2. Interest, except interest on capital reserves or funds of the company;

2
Various items of non-deductible expenses are stated under Section 65 ter of the Revenue Code. Such items
include: (1) Personal expenses and gift. (2) Tax penalties, surcharges and criminal fines under the Revenue Code.
(3) Any artificial or fictitious expenses. (4) Consideration for properties owned and used by the juristic entity.
(5) Interest on capital, reserves, or funds of the juristic entity. (6) Any damage recoverable under an insurance or
contact of indemnity. (7) Any disbursement if the identity of its recipient cannot be proved by the payer. (8) The
portion of the purchase price of properties and the expenses in connection with the purchase or sale of properties
which exceeds a reasonable amount.

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 3. Net losses carried forward from the last five accounting periods;

4. Bad debts;

5. Donations of up to 2 percent of net profits;

6. Provident fund contributions;

7. Entertainment expenses up to 0.3 percent of gross receipt but not exceeding 10

million Baht;

8. Depreciation: Provided that in no case shall the deduction exceed the given

percentage of costs. However, if a company adopts an accounting method, which the

depreciation rates vary from year to year, the company is allowed to do so provided that the

number of years over which an asset depreciated shall not be less than 100 divided by the

percentage prescribed below.

C. Tax Rates

Generally, the statutory tax rate on corporation is now 30 percent of net profits.

However, the rates vary depending on types of taxpayers as follows.

1. Reduced rates of 15 percent to 25 percent are granted to small and medium-sized

enterprises (SMEs), companies listed on the Stock Exchange of Thailand, and companies listed

on the Market for Alternative Investment (MAI) with 20 percent of net profit for first 5

accounting period after listing.

2. A company established as Regional Operating Headquarter (ROH) providing

qualifying services to affiliated juristic companies or partnerships or branches are subject to tax

at a reduced rate of 10 percent of net profits.

11
 3. In stead of tax on net profits, foreign corporations engaged in the business of

international transportation are subject to tax at the rate of 3% of gross ticket receipts collected

in Thailand for transportation of passengers and 3 percent of gross freight charges collected

anywhere for transportation of goods from Thailand.

4. Foundations and associations engaged in business activities are subject to tax at

2 percent of income from business, commerce, agriculture, industry transportation and so on)

and 10 percent of gross business income from interest, dividend, capital gain, rental,

commission and professional fee. (see more details from Table 3.2)

Table 3.2 Tax Rates

Taxpayer Tax Base Rate

1. Small company3 - Net profit not exceeding 1 15%4

million Baht

-Net profit over 1 million Baht

but not exceeding 3 million 25%
Baht
30%
-Net profit exceeding 3 million
Baht

2. Companies listed in Stock Exchange of Thailand (SET) Net profits 30%

3. Companies newly listed in Stock Exchange of Thailand (SET) Net Profit 25%5

4. Company newly listed in Market for Alternative Investment - Net profit for first 5 20%
(MAI) accounting period after listing

- Net profit after first 5

accounting periods 30%

5. Bank deriving profits from International Banking Facilities Net profit 10%
(IBF)

3
Small company refers to companies with paid-up capital less than 5 million Baht at the end of each accounting
period.
4
The 15% applies for accounting periods beginning on or after 1 January 2004.
5
The reduced rate applies for newly listed companies (registered within 6 September 2001- 31 December 2005)
for accounting periods beginning on or after 6 September 2001.

12
6. Foreign company engaging in international transportation Gross receipts 3%

7. Foreign company not carrying on business in Thailand Gross receipts 10%

receiving dividends from Thailand

8. Foreign company not carrying on business in Thailand Gross receipts 15%

receiving other types of income apart from dividend.

9. Foreign company disposing profit out of Thailand Amount disposed 10%

10. Profitable association and foundation Gross receipts 2% or 10%

11 Regional Operating Headquarters (ROH) Net profit 10%

Source: Fiscal Policy Office (2005)

D. Withholding Tax

Certain types of income paid to companies are subject to withholding tax at source. The

withholding tax rates depend on the types of income and the tax status of the recipient. The

payer of income is required to file the return and submit the amount of tax withheld to the

District Revenue Offices within 7 days of the following month in which the payment is made.

The tax withheld will be credited against final tax liability of the taxpayer. The withholding tax

rates on some important types of income are described in Table 3.3.

Table 3.3 Withholding Tax

Types of income Withholding tax rate

1. Dividends 10%

2. Interest 15% on interest paid to foreign corporations not carrying business in Thailand

10% on interest paid to associations or foundations

1% on interest paid to Thai & foreign company carrying business in Thailand

3. Royalties 15% on royalties paid to foreign corporations not carrying business in Thailand

10% on royalties paid to associations or foundations

13
 3% on royalties paid to Thai & foreign company carrying business in Thailand

4. Advertising Fees 2%

5. Service and 15% on capital gains, service fees, professional fees and rent paid to foreign
professional fees corporations

5% on service fees and professional fees paid to non-permanent branch offices of

foreign corporations

3% on service fees and professional fees paid to domestic corporations or permanent

branch offices of foreign corporations

6. Prizes 5%

Source: Revenue department of Thailand (2005)

Note that government agencies are required to withhold tax at the rate of 1 percent on

all types of income paid to companies.

E. Tax Return and Payment

Thai and foreign companies carrying on business in Thailand are obliged to file their

tax returns (Form CIT 50) within 150 days from the closing date of their accounting periods.

Tax payment has to be submitted together with the tax returns. Also, any company disposing

funds representing profits out of Thailand is required to pay tax on the sum so disposal within

7 days from disposal date (Form CIT 54).

In addition to the annual tax payment, any company subject to CIT on net profits is

obliged to make tax prepayment (Form 51). A company has to estimate its annual net profits

as well as its tax liability and pay half of the estimated tax amount within 2 months after the end

of the first six months of its accounting period. The prepaid tax is creditable against its annual

tax liability.

Regarding income paid to foreign company not carrying on business in Thailand,

14
the foreign company is subject to tax at a flat rate in which the payer shall withhold tax at

source at the time of payment. The payer must file the return (Form CIT 54) and make the

payment to the Area Revenue Branch Office within 7 days of the following month.

IV. The Situation of FDI in Thailand

A. Private Capital Inflows

Private capital inflows to Thailand are separated into 2 categories, bank and

non-bank. The banking sector began to play an active role from 1993 onward after Bangkok

International Banking Facilities (BIBF) went into effect. The non-bank sector consists of

foreign direct investment6 (FDI), other loans, portfolio investment (PI), trade credits and others.

Overall, private capital flows responded very well to policy measures. Before 1993, when

BIBF credits were not available, most net inflows came in under the category of non-bank loans

(Table 4.1).

In 1993-94, the BIBF credits, which gave special privileges7 to borrowers, were

opted by various parties and caused increasing for the share of banks’net inflow until BIBF

considerably enlarged the short-term portion of Thailand’s external debt outstanding. Note that

6
Foreign direct investment (FDI) is overseas investment by multinational enterprises. It is defined more generally
as the acquisition of foreign assets over which the purchaser has a substantial degree of control (Van den Berg,
2004, p. 625).

According to BOT definition, Direct Investment reflects the lasting interest of a nonresident of an economy in a
resident entity. A direct investor may invest in the forms of equity capital, lendings to affiliates, or reinvested
earnings.
7
Tax privileges of BIBF
Normal BIBF
1. Corporate income tax 30% 10%
2. Specific business tax 3.3% 0%
3. Interest income withholding tax 10% 0%
4. Stamp duties 2% 0%

15
most of BIBF funds were channeled to the manufacturing sector, especially electrical

appliances, commerce, banking and finance.

In 1995, to discourage excessive BIBF inflow, the central authority decided to raise

the minimum level of out-in BIBF (representing funds from abroad for domestic usage from

US$ 500,000 to US$ 2 million), and then such measure curtailed the volume of BIBF net inflow

during 1995-96.

During the financial turmoil from 1997-1998, the country experienced net outflows

of both non-bank loans and BIBF because of exchange rate floatation. In contrast, both FDI

and PI were not at all affected by the crisis and the economic recession.

During that period, FDI grew in a remarkable degree according to a large number of

ongoing projects, which are long-term commitments, a number of mergers and acquisitions

occasioned by financial troubles. The increases in FDI helped cushion the private sector’s net

outflows in other capital categories. The influx of FDI was largely dominated by Japan,

Hong Kong, Singapore and the U.S. (see Table 4.2). Most of FDI flows were absorbed by the

industrial sector (e.g., electrical appliances, metal & non metallic, and chemicals), trade, and

real estate (see Table 4.3).

16
Table 4.1 Net Flow of Private Financial Account (Millions of US Dollars)
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

1. Bank 672 67 -533 -835 239 850 - 296 1,603 -253 1,934 3,604 13,894 11,239
1.1 Commercial bank 672 67 -533 -835 239 850 - 296 1,603 -253 1,934 - 4,051 3,807 3,097
1.2 BIBFs 0 0 0 0 0 0 0 0 0 0 7,655 10,087 8,142
2. Non-
Non- bank 794 1,779 680 480 644 2,938 6,244 9,380 10,574 7,582 6,712 -1,869 9,610
2.1 Direct investment 355 411 159 261 182 1,082 1,731 2,402 1,866 2,015 1,438 904 1,169
a. Foreign direct investment 356 412 160 262 354 1,106 1,780 2,542 2,033 2,151 1,732 1,326 2,004
Inflow 606 721 375 399 489 1,294 2,066 3,030 3,700 5,340 2,638 2,455 3,051
Outflow -250 -309 -215 -137 -135 -188 -286 -488 -1,667 -3,189 -906 -1,129 -1,047
b. Thai direct investment abroad -1 -1 -1 -1 -172 -24 - 49 - 140 -167 -136 -294 - 422 - 835
Inflow 0 0 0 0 0 0 0 0 8 2 22 17 30
Outflow -1 -1 -1 -1 -172 -24 -49 -140 -175 -138 -316 -439 -865
2.2 Others loans 183 1,029 63 -125 -619 188 1,842 4,535 5,661 2,846 - 2,432 -5,845 1,518
a. Foreign loans 183 1,029 63 -125 -619 188 1,842 4,535 5,661 2,846 - 2,429 -5,778 1,519
Inflow 1,514 2,960 1,890 1,836 1,078 1,792 4,021 7,282 13,618 14,547 18,211 17,505 21,381
Outflow -1,331 -1,931 -1,827 -1,961 -1,697 -1,604 -2,179 -2,747 -7,957 -11,701 -20,640 -23,283 -19,862
b. Thai loans 0 0 0 0 0 0 0 0 0 0 -3 - 67 -1
Inflow 0 0 0 0 0 0 0 0 0 0 14 2 37
Outflow 0 0 0 0 0 0 0 0 0 0 -17 -69 -38
2.3 Portfolio investment 15 -6 141 97 499 447 1,429 457 163 561 4,852 1,110 3,420
a. Equity securities 15 -6 141 97 499 447 1,429 457 48 456 2,687 - 394 2,254
Inflow 18 103 149 117 666 1,100 2,518 3,417 1,962 3,030 7,917 6,370 7,163
Outflow -3 -109 -8 -20 -167 -653 -1,089 -2,960 -1,914 -2,574 -5,230 -6,764 -4,909
b. Debt securities
securities 0 0 0 0 0 0 0 0 115 105 2,165 1,504 1,166
Inflow 0 0 0 0 0 0 0 0 341 377 3,042 2,625 2,948
Outflow 0 0 0 0 0 0 0 0 -226 -272 -877 -1,121 -1,782
2.4 Trade credits 18 -18 -70 -137 144 341 122 588 736 305 539 457 154
2.5 Others 223 363 387 384 438 880 1,120 1,398 2,148 1,855 2,315 1,505 3,349
Total 1,466 1,846 147 -355 883 3,788 5,948 10,983 10,321 9,516 10,316 12,025 20,849
Summary
FDI inflows 606 721 375 399 489 1,294 2,066 3,030 3,700 5,340 2,638 2,455 3,051
% 28% 19% 16% 17% 22% 31% 24% 22% 19% 23% 8% 8% 9%
Foreign investment inflows* 2,138 3,784 2,414 2,352 2,233 4,186 8,605 13,729 19,621 23,294 31,808 28,955 34,543
Source: Bank of Thailand (2005)
(*) Foreign investment inflows consist of FDI, foreign loans, equity securities and debt securities.
Table 4.1 Net Flow of Private Financial Account (Millions of US Dollars)
1996 1997 1998 1999 2000 2001 2002 2003 2004

1. Bank 5,003 - 5,717 -12,723 -10,617 -6,606 - 2,031 1,765 -2,381 1,659
1.1 Commercial bank 419 - 5,212 -3,272 -1,265 -2,596 -755 3,401 -1,295 1,894
1.2 BIBFs 4,584 -505 -9,451 -9,352 -4,010 - 1,276 - 1,636 -1,086 - 235
2. Non-
Non- bank 13,198 - 1,906 -2,760 -2,924 -3,164 - 1,877 - 7,479 -6,385 -2,373
2.1 Direct investment 1,455 3,180 5,019
5,019 3,218 2,761 3,702 882 1,460 782
a. Foreign direct investment 2,271 3,627 5,143 3,562 2,813 3,873 1,023 1,882 835
Inflow 3,941 5,141 6,981 5,307 6,256 8,958 7,489 7,690 7,583
Outflow -1,670 -1,514 -1,838 -1,745 -3,443 -5,085 -6,466 -5,808 -6,748
b.Thai
b.Thai direct investment abroad -816 -447 - 124 - 344 -52 -171 -141 - 422 - 53
Inflow 68 93 100 87 165 46 62 172 402
Outflow -884 -540 -224 -431 -217 -217 -203 -594 -455
2.2 Others loans 5,451 - 3,688 -3,713 -4,359 -4,509 - 2,786 - 2,200 -1,518 709
a. Foreign
Foreign loans 5,531 - 3,735 -3,769 -4,312 -4,495 - 2,797 - 2,226 -1,470 548
Inflow 24,852 17,860 9,996 6,817 4,697 4,626 5,767 6,748 5,473
Outflow -19,321 -21,595 -13,765 -11,129 -9,192 -7,423 -7,993 -8,218 -4,925
b. Thai loans -80 47 56 - 47 -14 11 26 - 48 161
Inflow 68 120 76 14 18 29 37 27 253
Outflow -148 -73 -20 -61 -32 -18 -11 -75 -92
2.3 Portfolio investment 3,488 4,550 422 391 106 -643 - 1,109 - 244 - 561
a. Equity securities 1,123 3,987 265 946 897 17 209 583 - 577
Inflow 7,261 21,376 6,761 5,114 4,766 1,492 1,472 6,241 5,077
Outflow -6,138 -17,389 -6,496 -4,168 -3,869 -1,475 -1,263 -5,658 -5,654
b. Debt securities 2,365 563 157 - 555 -791 -660 - 1,318 - 827 16
Inflow 6,254 3,381 382 128 289 1,014 1,137 334 1,041
Outflow -3,889 -2,818 -225 -683 -1,080 -1,674 -2,455 -1,161 -1,025
2.4 Trade credits -145 -382 - 411 619 -821 -470 235 197 467
2.5 Others 2,949 - 5,566 -4,077 -2,793 -701 - 1,680 - 5,287 -6,280 -3,770
Total 18,201 - 7,623 -15,483 -13,541 -9,770 - 3,908 - 5,714 -8,766 - 714
Summary
FDI inflows 3,941 5,141 6,981 5,307 6,256 8,958 7,489 7,690 7,583
% 9% 11% 29% 31% 39% 56% 47% 37% 40%
Foreign investment inflows* 42,308 47,758 24,120 17,366 16,008 16,090 15,865 21,013 19,174
Source: Bank of Thailand (2005)
(*) Foreign investment inflows consist of FDI, foreign loans, equity securities and debt securities.

18
Table 4.2 FDI Inflows Classified by Country (Million of US Dollars)
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
Japan 53.3 72.1 78.6 117.0 136.8 83.9 137.8 193.6 620.5 870.9 1165.1 790.7 436.2

% 12% 17% 19% 19% 19% 22% 35% 40% 48% 42% 38% 21% 8%
USA 61.9 129.3 64.7 63.3 162.1 107.0 68.0 85.0 128.8 211.7 255.5 255.5 515.8

% 14% 31% 16% 10% 22% 29% 17% 17% 10% 10% 8% 7% 10%
6/
EU 34.5 43.5 69.4 156.8 52.7 28.8 32.9 43.6 93.5 193.2 226.3 213.1 334.7
% 8% 10% 17% 26% 7% 8% 8% 9% 7% 9% 7% 6% 6%
8/
ASEAN 191.4 115.3 118.3 163.6 157.0 43.3 43.9 44.5 107.5 166.8 480.6 1308.3
1308.3 2075.4
% 42% 27% 29% 27% 22% 12% 11% 9% 8% 8% 16% 35% 39%
Singapore 183.5 113.9 117.2 155.9 153.0 40.7 42.5 43.0 104.0 160.9 458.7 1303.2 2054.3

% 41% 27% 28% 26% 21% 11% 11% 9% 8% 8% 15% 35% 38%
Others 7.9 1.4 1.1 7.6 4.0 2.6 1.4 1.5 3.5 5.9 21.9 5.1 21.1

% 2% 0% 0% 1% 1% 1% 0% 0% 0% 0% 1% 0% 0%
Hong Kong 101.2 41.0 43.4 68.2 132.8 90.9 87.7 53.8 155.8 258.0 370.0 819.0 1391.3

% 22% 10% 10% 11% 18% 24% 22% 11% 12% 12% 12% 22% 26%
Taiwan 0.1 0.5 0.1 1.2 1.9 6.3 5.1 26.9 124.4 199.2 297.8 120.0 112.1

% 0% 0% 0% 0% 0% 2% 1% 5% 10% 10% 10% 3% 2%

Korea, South 0.5 0.0 0.0 0.9 0.3 0.1 0.2 0.9 12.0 10.0 20.3 11.9 11.1

% 0% 0% 0% 0% 0% 0% 0% 0% 1% 0% 1% 0% 0%
China 0.0 0.0 0.0 0.0 0.1 3.7 1.4 2.6 7.6 6.1 4.5 1.7 1.7
% 0% 0% 0% 0% 0% 1% 0% 1% 1% 0% 0% 0% 0%
Canada 0.2 0.2 0.3 3.2 4.4 1.4 2.0 1.0 2.5 6.6 3.8 6.1 3.9
% 0% 0% 0% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0%
Australia 1.9 3.9 3.5 8.3 1.0 0.7 5.9 1.5 1.9 4.9 4.9 73.1 58.3
% 0% 1% 1% 1% 0% 0% 1% 0% 0% 0% 0% 2% 1%
Switzerland 3.6 1.0 4.2 4.1 5.3 3.3 12.0 31.8 22.3 48.0 35.9 48.5 35.0

% 1% 0% 1% 1% 1% 1% 3% % 2% 2% 1% 1% 1%
Others 3.4 15.2 32.6 19.5 66.5 5.7 2.4 3.9 17.3 90.7 165.4 52.1 364.6
% 0% 0% 10% 0% 10% 0% 0% 0% 0% 0% 10% 0% 10%
Total 452.0 422.0 415.1 606.0 721.0 375.0 399.0 489.0 1294.0 2066.0 3030.0 3700.0 5340.0
% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: Bank of Thailand (2005)
Table 4.2 FDI Inflows Classified by Country (Million of US Dollars)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Japan 404.0 341.5 619.0 808.0 1434.8 1652.9 919.9 1579.2 2263.4 1410.1 1751.3 1531.0
% 15% 14% 20% 21% 28% 24% 17% 25% 25% 19% 23% 20%
United States of
America 353.0 336.0 435.0 577.1 928.8 1579.3 773.7 1024.9 904.1 371.7 344.0 657.9
% 13% 14% 14% 15% 18% 23% 15% 16% 10% 5% 4% 9%
6/
EU 382.9 236.3 330.3 325.8 611.8 1398.3 1806.3 965.9 1335.3 1147.1 694.7 976.8
% 15% 10% 11% 8% 12% 20% 34% 15% 15% 15% 9% 13%
8/
ASEAN 155.7 328.3 378.7 861.3 939.9 1016.6 1210.7 1540.6 3597.0 3995.0 3980.1 3371.4
% 6% 13% 12% 22% 18% 15% 23% 25% 40% 53% 52% 44%
Singapore 146.2 311.1 346.1 822.5 904.0 982.7 1176.0 1504.4 3570.7 3976.8 3887.0 3114.6
% 6% 13% 11% 21% 18% 14% 22% 24% 40% 53% 51% 41%
Others 9.5 17.2 32.6 38.7 35.9 33.9 34.8 36.2 26.3 18.2 93.2 256.7
% 0% 1% 1% 1% 1% 0% 1% 1% 0% 0% 1% 3%
Hong Kong 253.8 422.3 386.2 342.0 619.5 567.5 278.8 438.7 219.0 141.0 488.3 399.7
% 10% 17% 13% 9% 12% 8% 5% 7% 2% 2% 6% 5%
Taiwan 90.6 116.9 116.2 166.8 241.0 189.6 155.7 225.4 117.3 92.4 103.6 148.0
% 3% 5% 4% 4% 5% 3% 3% 4% 1% 1% 1% 2%
Korea, South 14.6 13.2 13.9 25.1 34.8 81.0 7.4 4.6 25.4 45.0 30.4 40.2
% 1% 1% 0% 1% 1% 1% 0% 0% 0% 1% 0% 1%
China 9.9 4.3 5.2 6.0 3.7 6.1 4.1 8.0 1.9 20.3 21.6 9.3
% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Canada 7.1 4.7 0.7 1.2 4.2 3.2 3.7 10.6 4.1 17.8 17.5 7.3
% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Australia 9.4 17.4 29.0 41.4 122.6 44.3 13.8 40.0 13.5 15.5 30.9 105.8
% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Switzerland 15.9 29.3 37.5 56.2 176.0 199.0 68.9 80.4 47.3 50.3 84.8 89.8
% 1% 1% 1% 1% 3% 3% 1% 1% 1% 1% 1% 1%
Others 942.2 601.9 700.1 729.5 24.6 243.1 64.4 337.4 429.9 183.1 142.8 245.8
% 40% 30% 20% 20% 0% 0% 0% 10% 10% 0% 0% 0%
Total 2639.0 2452.0 3051.7 3940.3 5141.7 6980.7 5307.3 6255.6 8958.2 7489.2 7690.0 7583.0
% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: Bank of Thailand (2005)

20
Table 4.3 Inflows of FDI Classified by Sector (Millions of U.S. Dollars)
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Industry 55 132 119 121 182 78 109 218 732 1,014 1,309 1,035 806
Food & sugar 5 8 7 11 9 24 18 20 44 80 74 70 67

Textiles 2 0 21 3 31 3 4 40 54 43 72 48 68
Metal & non metallic 3 9 11 45 7 6 5 34 99 138 119 89 85
Electrical appliances 24 29 29 17 45 12 29 45 251 358 455 377 268
Machinery & transport equip 5 7 11 21 9 2 3 7 28 48 99 94 47
Chemicals 11 7 6 17 16 23 23 41 54 117 182 161 83
Petroleum products 0 68 31 0 59 0 0 0 80 37 123 15 52
Construction materials 0 1 0 1 0 1 0 0 1 3 1 8 15
Others 6 3 3 6 6 7 26 31 122 189 184 173 121
Financial institutions 229 126 122 198 225 105 96 63 178 169 456 1,659 2,834
Trade 48 36 39 87 106 62 90 84 164 313 558 359 348
Construction 41 60 39 36 46 62 52 53 75 154 142 135 579
Mining & quarrying 31 35 73 128 138 20 10 12 19 24 46 85 126
Agriculture 10 0 1 2 3 3 8 11 13 28 38 36 8
Services 24 28 17 27 14 24 28 30 45 65 82 77 94
Investment 0 0 0 0 0 0 0 0 0 0 0 0 20
Real estate 14 5 6 7 8 21 6 17 60 277 369 235 442
Others 0 0 0 0 0 0 0 0 8 21 31 78 84

Total 452 422 415 606 721 375 399 489 1,294 2,066 3,030 3,700 5,340

Source: Bank of Thailand

21
4.3 Inflows of FDI Classified by Sector (Million of US Dollars)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Industry 981 875 1,185 1,662 2,302 2,963 2,260 3,156 3,972 1,969 2,089 2,149
Food & sugar 54 61 44 51 252 87 125 105 114 38 123 217
Textiles 20 47 60 79 64 161 28 38 62 33 48 20
Metal & non metallic 106 53 103 161 231 445 400 251 390 312 237 250
Electrical appliances 202 214 470 507 737 540 900 1,101 1,438 619 558 296
Machinery & transport equip 70 44 178 181 487 818 511 726 646 393 606 751
Chemicals 230 147 121 231 242 324 128 536 391 242 140 59
Petroleum products 191 31 90 190 34 340 25 94 595 38 6 117
Construction materials 5 6 25 10 8 25 39 58 12 24 12 9
Others 103 271 92 251 246 223 104 246 325 269 360 430
Financial institutions 77 18 33 75 144 890 264 423 45 51 89 111
Trade 351 504 683 886 1,663 1,694 1,246 895 2,173 3,780 3,588 3,453
Construction 237 94 45 98 263 250 68 50 13 24 43 95
Mining & quarrying 130 63 58 39 55 155 96 70 1,878 197 177 194
Agriculture 18 1 11 3 2 1 2 1 2 1 26 5
Services 72 85 120 227 354 353 561 536 288 878 288 370
Investment 10 150 30 181 193 457 619 526 168 50 467 214
Real estate 753 657 885 768 116 29 158 113 146 98 232 198
Others 10 3 0 0 51 189 34 486 272 440 693 795
2,63
Total 9 2,452 3,052 3,940 5,142 6,981 5,307 6,256 8,958 7,489 7,690 7,583

Source: Bank of Thailand (2005)

22
 B. FDI in Thailand

Despite significant improvement in domestic saving mobilization, the gap between

saving and investment in Thailand still exists. The sufficient capital formation is necessary to

finance Thailand’s economic growth. The share of FDI in total foreign capital inflows in

1980’s was 20 percent and declined to 10 percent during 1990’s. After the baht was floated in

1997 until the present, FDI has become increasingly important source for investment until the

share of FDI in total foreign inflows surges to 40 percent. However, the FDI inflow has been

consistently increasing, the net flow of FDI has been fluctuating from year to year due to the

uncertainty of Thai economy and external factors (see Table 4.1). Note that the following

discussion is based on Table 4.2 and Table 4.3.

1980-1989

In the first half of the 1980’s, the flow of FDI in Thailand was relatively small and

fluctuated dramatically because of instability in both domestic and world economies. The flow

of FDI in Thailand started to expand at an exceptional extent after 1987 in accordance with

the rise in labor costs and the appreciation of the currencies of Japan and the Asian NIE’s.

That brought about relocating their production bases to Thailand and other developing countries.

During this period, the share of FDI from Japan in Thailand increased sharply from 33 percent

in 1986 to 48 percent in 1988.

1990-1996

The flow of FDI started to decline at the beginning of 1990’s due to the consequences of

the production base adjustment by Japan and the NIE’s and the insufficient in human resources

and infrastructure. The trend of FDI inflows had been influenced by the business cycle in Japan.

FDI from Japan was leveled at only 8 percent due to the uncertain economic situation in 1992.

Note that FDI inflows from Japan were approximately 16 percent during 1990-1996.
1997-2001

From 1997 to 2001, annual flows of FDI into Thailand averaged U.S. $ 6.5 billion a

year. After the baht was floated and financial crisis erupted in 1997, FDI inflows to Thailand

had increased in a great extent. That was largely attributed to a surge of problem companies

seeking takeover partners. With 38 percent depreciation of the baht, that bought about

increasing in purchasing power of foreign investors and encouraged acquisition.

In 1997, the stream of FDI into Thailand has dominated by Japan (28 percent), followed

the U.S. (18 percent), Singapore (18 percent), Hong Kong (12 percent), the EU (12 percent),

and Taiwan (5 percent). FDI inflows from the U.S. had declined during this period in

accordance with the economic boom in China. Note that FDI inflows primarily came into the

industrial sector accounted for an average 50 percent per year of the total FDI (e.g., electrical

appliances, machinery & transport equipment, and metal & non-metallic), and the trade sector

accounted for an average 25 percent per year of the total FDI.

2002 to Present

From 2002 to the present, the flow of FDI has been consistently increasing to an average

$ 7.5 billion a year in accordance with the economic recovery. Interestingly, the flow of FDI

into Thailand has been dominated by Singapore instead. In 2004, 41 percent of the total FDI

came from Singapore, followed by Japan (20 percent), the EU (13 percent), and the U.S.

(9 percent). Most FDI are mostly channeled into the trade sector and the industrial sector.

For the industrial sector, the inflow of FDI in the electrical appliance has been declining while

those in other industry sectors are relatively stable. By 2006, an upward trend of FDI inflows is

expected so as to finance the government mega-projects and to keep the balance of payment in

a good shape.

24
V. Policies to Attract FDI (Tax Incentives and Special Privileges)

Over the past two decades, the Thai Government has been actively promoting

the country as investment locations to attract scarce private capital and associated technology

and managerial skills so as to help achieve the development goals (modernization) by means of

liberalizing the laws and regulations for the admission, establishing of foreign investment

projects, and providing guarantees for repatriation of investment and profits. Tax incentives8

are also part of these efforts by reducing the tax burden of enterprises in order to induce them to

invest in particular projects or activities. As a result, the Thai government has increasingly

adopted measures to facilitate the entry of foreign direct investment (FDI) through the statutory

tax rate and the special privilege granted by the Board of Investment (BOI).

A. Statutory Tax Rates

(1) Corporate Income Tax

The standard company tax rate in Thailand is now 30 percent of net profits,

which is relatively high compared to those in Asian countries (see Table 5.1).

Table 5.1 The Statutory Tax Rates on Corporation in Asian Nations.

Thailand Hong Kong Indonesia Malaysia Philippines Singapore South Vietnam

Korea

Standard 30% 16% Progressive 28% 32% 22% 25% 28%

CIT Rates of
10, 15, 30%
Source: Fletcher (2002)

8
These are followed by reduction of corporate income tax, exemptions from import duties on capital equipment,
raw materials and semi-finished components, duty drawbacks, accelerated depreciation, specific deductions from
gross earnings for income-tax purposes, investment and reinvestment allowances and deductions from social
security contributions.

25
 (2) Withholding Taxes

Foreign companies are required to pay withholding tax on dividend, interest

and royalty at the rate of 10 percent.

There is no withholding tax on interest paid to non-resident individuals or

companies not carrying on business in Thailand on deposits or loans derived from operators of

the Bangkok International Banking Facilities (BIBF) solely for the purpose of extending loans

in a foreign country.

A rate of 10 percent applies to interest paid to non-resident individuals or

companies not carrying on business in Thailand on deposits or loans derived from operators of

the BIBF for extending loans in Thailand (see Table 5.2).

Table 5.2 Withholding Taxes

Types of income Withholding tax rate

1. Dividends 10 %

2. Interest 15 % on interest paid to foreign corporation not carrying business in Thailand

10 % on interest paid to associations or foundations
1 % on interest paid to in Thai & foreign company carrying business in Thailand

3. Royalties 15 % on royalties paid to company or partnership not carrying business in Thailand

10 % on royalties paid to associations or foundations
3 % on royalties paid to Thai & foreign company carrying business in Thailand

Source: Fiscal Policy Office (2005)

In fact, the current corporate tax rate in Thailand is at 30 percent of net profits.

However, several recent changes in corporate tax rates [e.g., 10 percent corporate tax rate for

Regional Operating Headquarter (ROH) and SMEs company tax rates], have taken place until

many companies tend to pay tax as low as 10 percent or 20 percent on their profits

(see Table 5.3).

26
Table 5.3 Tax Incentive Schemes
Types of companies Tax incentives

Regional operating 10% corporate income tax on net profits, interest and royalties for ROH
headquarters

SME companies Reduced company tax rates for small and medium enterprises (SMEs) are as
follows:
15% on net profits up to 1 million baht
25% on net profits of 1 to 3 million baht
30% on net profits above 3 million baht.

Listed companies Reduced tax rates for companies listed on the Stock Exchange of Thailand
(SET) and the Market for Alternative Investment (MAI) are as follows:

25% for companies listed on the SET from Sept 6, 2001 to Dec 31, 2005.
20% for companies listed on the MAI from Sept 6, 2001.

And, the reduced rate will applied for 5 consecutive accounting periods only.

Venture capital Corporate tax exemptions are granted to venture capital companies that
invest in SMEs.
companies investing
in SME’s Dividends received from SMEs and gains arising from the transfer of shares
in SMEs are granted exemption from corporate tax.

Source: The Board of Investment of Thailand (2005)

B. Special Privileges Granted by the BOI

In Thailand, the Board of Investment (BOI) has discretionary authority to grant

tax incentives as well as to facilitate in order to promote investment. Primarily, the BOI is

responsible for granting tax incentives as the following schemes.

1. Regional Incentives

Investment zones have long been used to support government goals in

decentralizing Thailand’s industrial base apart from the Bangkok Metropolitan Area by

granting tax incentives into three zones (i.e., Zone 1: Bangkok and 5 surrounding

provinces, Zone 2: the 12 provinces surrounding Zone 1, and Zone 3: the remaining provinces

27
(36 provinces and other provinces with lower development). To encourage projects in the less

developed areas, promoted projects located in Zone 1 receive the least generous tax privileges,

while those in Zone 3 receive the more generous tax privileges (see Table 5.4).

Table 5.4 Tax Privileges

Tax privileges

Zone 1 A corporate income tax exemption for 3 years, provided the project locates its factories in
industrial estates or promoted industrial zones

A 50% reduction in import duty on machinery to be used in the project

Exemption from import duty on raw materials used in the export products for 1 year.

Zone 2 A corporate income tax exemption for 3 years, which may be granted to 7 years, provided the
project locates its factories in industrial estates or promoted industrial zones.

A 50 % reduction in import duty of machinery to be used in the project

Exemption from import duty on raw materials used in export products for a period of 1 year.

Zone 3 a. A corporate tax exemption for 8 years.

b. Exemption from import duty on machinery to be used in the project
c. Exemption from import duty on raw material used in export products for a period of 5
36
years.
provinces
d. An additional 25% deduction for costs associated with developing certain infrastructure
facilities connected with the project
e. Extra privileges, provided the project locates its factories in industrial estates or promoted
industrial zone;
(1) 50% reduction in CIT for an additional period of 5 years.
(2) Double deduction from taxable income of transportation, electricity and water costs for
10 years from the first day of the first sales
(3) 75 % reduction in import duty on raw material used in the production for domestic
sales for a period of 5 years

Zone 3 a. A corporate tax exemption for 8 years with 50% reduction in CIT for an additional period
of 5 years.
22 b. Exemption from import duty on machinery to be used in the project
provinces c. Exemption from import duty on raw material used in export products for a period of 5
years.
d. An additional 25% deduction for costs associated with developing certain infrastructure
facility connected with the project
e. Extra privileges, provided the project locates its factories in industrial estates or promoted
industrial zone;
(1) Double deduction from taxable income of transportation, electricity and water costs for
10 years from the first day of the first sales
(2) 75 % reduction in import duty on raw material used in the production for domestic
sales for a period of 5 years

Sources: The BOI (2005)

28
 2. Sectoral Incentives

2.1 The BOI has identified certain priority projects in such areas as basic

transportation systems, public utilities, environment protection, technological development (e.g.,

machinery and equipment, vehicle parts, electronic appliances and computers). These projects

would automatically be entitled to:

a. Corporate income tax exemption for 8 years regardless of location.

b. Import duty exemption on machinery regardless of location.

2.2 Target Industries: The customized incentive scheme has been launched

to promote clustering-based investment. Different customized incentives packages are granted

to strategic industries (Skills, Technology, and Innovation – STI/ Hard Disk Drive - HDD/

Semi-conductors/ Software/ Automotive/ Mold & Die/ Iron & Steel/ Alternative energy/

Business Process Outsourcing/ Regional Operating Headquarters - ROH). Specifically,

additional period of corporate tax exemption should be granted, provided the project meets

investment condition for each industry.

3. Export Incentives and Free Trade Zones.

Manufacturing projects located in Export processing zones (EPZs),

Duty Free Zone (FZ), and Bonded warehouse are provided with tax incentives as follows:

a. Exemption from import duty on machinery and other equipment

b. Exemption from import duty on all raw materials

c. Exemption from VAT, excise tax and other surcharges

29
VI. Effective Tax Rates in Thailand

In recent years, there has been new empirical evidence that tax rates and incentives

influence the location decisions of companies within economic areas, such as the European

Union, the North American Free Trade Agreement (NAFTA) and the Association of Southeast

Asian Nations (ASEAN).

The statutory rate may be especially important in determining the incentive that arises in

shifting income between one jurisdiction and another. In Thailand, the statutory rate on

corporation is now 30 percent of net profits. With respect to its impacts on the incentive to

invest, though, it is well known that the statutory rate is a woefully inadequate measure.

It entirely misses the role of the base of the corporate income tax, including the depreciation

schedule, inventory allowance system, inflation adjustment, deductibility of categories of

business expenses, availability of credits for investment, and the existence of tax holidays.

In fact, there are several studies have conducted to find out the correct approach, such as

average effective tax rate9, to infer tax incentives to attract foreign investment. In this study, an

effective tax rate10 is used as “implicit” tax rate to infer economic incentives in Thailand.

A. Assumption

In fact, a number of studies examine the impact of taxes on foreign investment.

Many of them show that the impact differ greatly depending on the characteristics of the

multinational company. Guisinger (1985) states that the impact of tax rates on investment

decisions is generally higher on exported-oriented companies than on those seeking

9
An average effective tax rate is defined as corporate tax collections divided by some measure of economic (not
taxable) income of corporations, by sales or assets of corporations, or by overall national income.
10
An effective tax rate is defined as actual income tax paid divided by net taxable income before taxes expressed
as percentage.

30
the domestic market or location-specific advantage. Those firms, such as garment and

manufacturing, are operating in highly competitive markets with very slim margin. Those firms,

therefore, are often highly mobile and tend to compare taxes across alternative locations. Rolfe

(1993) mentions that manufacturing industries prefer incentives related to depreciable assets

because they use more fixed asset than do service industries. According to Allen, Morisset ,and

Pirnia (2001), there is growing evidence that low taxes may be a key factor for firms that are

operating not in one specific market but in multiple markets, such as internet-related business,

insurance companies and banks.

The purpose of this study is to apply the effective tax rate to investigate the situation

of FDI in 14 production sectors. And, those production sectors are classified into 3 groups:

(1) an export-oriented sector, (2) a cross-border sector (i.e., financial institutions and internet-

related business) and (3) a domestic-specific sector. In accordance with the concepts mentioned

from above, the different characteristics of the multinational company would bring about the

different impact of tax incentives on foreign investment. Therefore, effective tax rates on

the export-oriented sector and the cross-border sector tend to be lower than those on

the domestic-specific sector.

B. Data Description

Income tax expense and taxable income are used to calculate the effective tax rate.

The data source is from in the Stock Exchange of Thailand (SET), accounting for 283 listed

companies. In Thailand, most of the corporation incomes, approximately 60 percent, are from

companies listed in the SET. The estimation would represent a proxy of real effective tax rates

of Thai economy.

31
Table 6.1 The Empirical Results
FDI Inflow during Average FDI inflow of total
Group Sector ETR Company
2002-2004 amount from 2002-2004

Export-oriented 12% 101

(Labor-intensive industry) (14%)

Food 13% 32 Increase 2%

Textile 23% 15 Decrease 0%

Consumption 11% 19 Increase 5%

1
(Capital-intensive industry) (10%)

Electrical Appliance 26% 10 Decrease 6%

Machinery & Transportation 22% 10 Increase 8%

Electronic Components 6% 6 n.a. n.a.

Chemicals & Petroleum Product 6% Decrease/ Increase* 3%

Cross-border 12% 45
2
Financial institution 4% 31 Increase 1%

Communication 27% 14 n.a. n.a.

Domestic-specific 20% 137

Trade 26% 9 Stable 48%

Construction & Materials 12% 20 Increase 1%

3
Real Estate 17% 37 Fluctuate 2%

Mining & Quarrying 23% 15 Stable 2%

Services 20% 56 Fluctuate 7%

Overall 17% 283

Note:
(*) The flow of FDI in the chemical sector decreases, while the flow of FDI in the petroleum product sector increases.

32
 C. Results and Economic Implications

The results show that the overall effective tax rate is 17 percent, while the national

statutory tax rate on corporation is 30 percent of net profits. It is, therefore, obvious that many

tax incentives have been introduced to corporations in Thailand. The tax intensives, however,

are not evenly distributed. The Thailand government has been focusing tax incentives on the

export-oriented sector, particularly the capital-intensive industry.

As Guisinger’s mention, the impact of tax incentives on investment decisions is

generally high on the export-oriented sector. The study here is also relevant to those previous

studies. The effective tax rates on the export-oriented sector and the cross-border sector are

equal to 12 percent. Simultaneously, the effective tax rate on the domestic-specific sector is at

20 percent.

(1) Export-oriented sector

The export-oriented sector is classified into 2 groups: the labor-intensive

industry (e.g., food, textile and consumption) and the capital-intensive industry (e.g., electrical

appliance, electronic component, machinery & transportation, and chemical & petroleum

product).

The study reports that the overall effective tax rate (10 percent) on the capital-

intensive industry is lower than that on the labor-intensive industry (14 percent). It is likely that

the capital-intensive industry relies on more of tax incentives than the labor-intensive industry

does. For instance, the capital-intensive industry prefers to depreciable assets because they use

a lot fixed assets. Effective tax rates on the labor-intensive industry are 13 percent on food

industry, 23 percent on textile industry, 11 percent on consumption industry. For the capital-

intensive industry, effective tax rates are 26 percent on electrical appliance industry, 6 percent

on electronic components, 22 percent machinery & transportation, and 6 percent on chemicals

33
& petroleum products. This means that the Thai government tends to promote industries

producing intermediate products (i.e., electronic components, chemicals, and petroleum

products) rather than final goods (i.e., electrical appliances, machinery, and transportation).

As a result, we see that the Thai government seems to use several tax incentives

to attract FDI in the export-oriented sector, especially the capital-intensive industry (i.e.,

chemical & petroleum products and electronic components). In addition, the effective tax rate

could be a good indicator of market liberalization. With the high rate, we imply that machinery

& transportation and electrical appliances are not competitive enough.

(2) Cross-border sector

The study further shows that the effective tax rate on the cross-border sector

(i.e., financial institutes and communication industries) is 12 percent, the same level as the

export-oriented sector. The same effective tax rate is due to the fact that the cross border

sectors are operating is not in one specific market, but in many markets. The low tax rate on

the cross-border sector is a key factor on investment decisions.

However, the effective tax rate (27 percent) on communications is much higher

than that on financial institutions (4 percent). The higher effective tax rate may suggest that the

Thai government does not promote communications, especially telecommunications. With the

effective tax rate (4 percent) on financial institutions, the government tends to liberalize bank

and insurance industries, while communications are most likely controlled by the state-owned

government.

(3) Domestic-specific sector

Here, the domestic-specific sector is defined as the firms that are seeking

domestic markets. Tax incentives on this sector might not be the key factor on investment

decisions. The location-specific advantage, for example, seems more influences.

34
The overall effective tax rate on the domestic-specific sector is 20 percent, which is higher than

that on exported-oriented and cross-border sectors. In this study, the domestic-specific sector

consists of trade, construction & materials, real estate, mining & quarrying, and services.

The highest effective tax rate is on trade firms with a rate of 26 percent, while the lowest

effective tax rate is on construction & material firms with a rate of 12 percent.

Therefore, tax incentives do not have a crucial impact on investment decisions in the

domestic-specific sector. The average share of FDI inflows during 2002-2004 accounts for

48 percent. This means that the domestic market and the location seem to be a crucial factor on

investment decisions in the trade sector.

35
VII. Conclusion

The paper gives the overview of the Thailand tax structure and presents some useful

information about FDI tax incentives. The effective tax rates on 14 sectors are studied to

investigate the situation of FDI in Thailand and the impact of tax incentives on investment.

Thus, the study provides the economic implications as follows:

(1) The current corporate tax rate is at 30 percent of net profits. However, the effective

tax rate on corporation is at 17 percent due to recent changes in tax incentives on foreign

investment [e.g., 10 percent corporate tax rate on the Regional Operating Headquarter (ROH)

and the tax reduction on SMEs companies].

(2) The Thai government has applied tax incentives to attract capital flows into the

export-oriented industry and the cross-border sector (i.e., financial industries only). Therefore,

the tax incentive is the key factor for the export-oriented sector and the cross-border sector.

(3) The study further classifies the export-oriented sector into 2 groups: the labor-

intensive industry and the capital-intensive industry. The capital-intensive industry depends

largely on import goods, especially machinery. Foreign investors would consider to locate their

subsidiaries if the Thai government provides the comprehensive tax intensive programs (e.g.,

the depreciation schedule). The results show that the effective tax rates on electronic

components is 6 percent and that on chemical & petroleum products is 6 percent. The figures

are lower than those on electric appliances (26 percent) and machinery & transportation

(22 percent). This suggests that the current government policy tries to promote industry

producing intermediate goods rather than final goods.

(4) For the cross-border sector, the low effective tax rate (4 percent) on financial

institutions indicates the effect of liberalization. With the effective tax rate (27 percent) on

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communications, this implies that telecommunications have been controlled by the state-own

enterprises.

(5) With regards to the domestic-specific sector, the tax incentive is insensitive to

investment decisions. With 48 percent of total FDI, the effective tax rate on trade firms

(26 percent), for example, indicates that the tax incentive is not a key factor on investment

decisions, but the specific location or the domestic market.

(6) The future study can consider the estimation of some other indicators, such as

a marginal effective tax rate and an average effective tax rate. The estimation would offer

an alternative way to investigate the impact of tax incentives for FDI in Thailand.

37
Bibliography

A Guide to Thai Taxation (2005). Bangkok: Fiscal Policy Office.

Berg, H. V. D., (2004). International Economics . New York: Mc Graw Hill

Fletcher, K. (2002). Tax Incentives in Cambodia, Lao PFR, and Vietnam.

Washington, DC: International Monetary Fund.

Guisinger, S. (1985). Investment Incentives and Performance Requirement . New

York: Praeger.

FDI Inflows: 1980-2004. [Electronic database]. (2005). Bangkok: The Bank of Thailand.

Tax revenue in Thailand [Electronic database]. (2005). Bangkok: Fiscal Policy Office.

Tax incentives [Electronic database]. (2005). Bangkok: The Board of Investment.

Louis, T., Allen, J. N., Morisset, J., & Pirnia, N. (2001). Using Tax Incentives to
Compete for Foreign Investment, Are They Worth the Costs? (Occasional paper 15).
Washington, DC: Foreign Investment Advisory Service.

Rolfe, R. J., Rick, D., Pointer, M., & MaCarthy, M. (1993). Determinants of FDI
Incentive Preference of MNEs. Journal of International Business Studies 24(2), 335-56.

38
Appendix: Transfer Pricing Policies to Restrain Tax Avoidance Activities

In order to prevent the evasion of taxation caused by manipulated transfer pricing within

the MNEs, tax authorities can price goods and services by applying the provisions of Section 65

bis (4) (7), Section 65 ter, and Section 70 ter under the Revenue Code, Double Tax Agreements

between Thailand and other countries, as well as Standard Accounting No. 37 and 47. Moreover,

the Revenue Department recently issued Departmental Instruction No. Paw 113/2545, -

Subject : Corporate Income Tax - The Determination of Transfer Price based on the Market

Price, in order to provide tax officials with a standardized guideline on how to determine the

transfer price based on the market price.

In computing revenue or expenses for the purposes of determining the market price, one

of the following methods may be selected:

(1) Comparable Uncontrolled Price Method - By comparing to the price charged in a

commercial manner for consideration, provision of service, or interest between independent

contracting parties where the same categories and types of property are transferred, or types of

service or loan are provided under the same or similar conditions.

(2) Resale Price Method - By taking into account the consideration for the transfer of

property or service fee where the purchaser of goods or service resells to other persons who are

independent contracting parties and deducting it with an appropriate gross profit.

Appropriate gross profits shall be calculated by multiplying the above resale price of the

property or service by the gross profit margin derived from the transfer of the same

characteristics, categories or types of property or service to independent contracting parties.

(3) Cost Plus Method - By taking into account the cost of property or service, which is

sold to the purchaser of goods or service and marking it up with an appropriate gross profit.

39
 Appropriate gross profit shall be calculated by multiplying the above cost of property or

service with the gross profit margin derived from the transfer of the same characteristics,

categories or types of property or service to independent contracting parties.

(4) Other Methods - If methods (1), (2) and (3) cannot be applied in calculating

revenue or expenses in order to derive the market price of consideration, service fee or interest,

other methods that are internationally accepted and are commercially appropriate to the facts

and circumstances in respect of the transfer of property, provision of service, or lending of fund

may also be applied.

40