Thailand’s new investment promotion strategy

June 2014 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

Over the past 60 years Thailand has grown significantly through various strategic initiatives (starting with the Industrial Promotion Act of 1954) that have culminated in it being classified as an ‘upper-middle income’ economy by the World Bank in 2011. We have generally seen good but not stellar growth rates through those years (bar the blips which were seen through events such as the financial crisis of 1997) although it is notable that in more recent times rates have been lower than in the late 1980s and early 1990s. It has been proposed by many (including the Thai Board of Investment) that Thailand is caught in a middle income trap and will need to address a number of structural inadequacies in order to enable it to move onwards and upwards.

In an attempt to address this the Thai BOI has recently drafted a new investment promotion strategy which is currently awaiting approval, approval that has unfortunately been delayed due to the recent political tensions that have limited the current powers of the BOI. The draft attempts to move promotion incentives from a more simplistic and broad sector based incentive scheme to a more focused one which looks to prioritise certain activities. These could be seen as either ‘value adding’ or bringing technological advancements to Thailand as well as some other identified goals such as promoting green industries and/or sustainable growth.

As before there are seven categories of activities that are eligible for promotion: (i) agriculture and agro-industries; (ii) mining, ceramics and basic metals; (iii) light industry; (iv) metal products, machinery and transport equipment; (v) electronics and electrical appliances; (vi) chemicals, paper and plastics; and (vii) services and public utilities. However a significant number of activities within these categories have been deleted from the current list of eligible activities (approximately 80 activities have been earmarked for exit).

In general the activities that are being exited are considered to be: (i) low value-adding, low tech or have low complexity in the production process, such as consumer plastic products and paper articles; (ii) are labour intensive or have low linkages with other industries or are what are referred to as common businesses such as primary rubber and hydroponic cultivation (iii) are subject to environmental issues such as high energy consumption in the production process; or (iv) are subject to other issues, such as being a concession activity, e.g., hospitals.

In addition to excluding numerous activities, the new proposals include dividing incentives available to the remaining eligible activities into eight different categories ranging from category A1*, which enjoys the most generous corporate income tax benefits of eight years CIT exemption (with no cap), down to category B4 which benefit only from non-tax incentives. There are a total of 10 A1* promoted activities (eight of these being in the services category and two being in electronics). These are activities that are considered to be of great importance to the country’s economic restructuring and therefore need to be granted CIT exemptions to stimulate increased investment in these sectors.

Companies categorised as carrying out the following activities – (i) biotechnology, (ii) energy service companies, (iii) research and development, (iv) scientific labs, (v) calibration services, (vi) engineering design, (vii) technological estates and zones, (viii) vocational training centres, (ix) electronic design, and (x) manufacture of embedded software – will therefore enjoy maximum BOI/CIT incentives.

This list of activities clearly shows the direction that the country is trying to take in its bid to move away from being considered a low labour cost base of operations to being a value adding, creative and innovative country which is able to compete with its knowledge base and high-level skills.

We have seen other countries in the region achieve similar goals, South Korea and Singapore being excellent examples. In the case of South Korea, GNI per capita in the 1960s was in fact lower than that of Thailand’s. In 1968 the two counties were exactly equal (US$180) and from then on their paths have diverged to such an extent that South Korea’s is now more than four times greater than that of Thailand’s (2012: South Korea US$22,670 vs. Thailand US$5,210, based on World Bank data using the Atlas method).

South Korea has achieved this success partly through a series of five year economic plans which begun in 1962, and it is easy to see that Thailand is attempting to replicate this type of success perhaps through a series of similar programs (the current changes are being billed as a ‘Five-Year Investment Promotion Strategy’).

It is certain that changes are needed and the current proposals should be a step in the right direction; however, it is also certain that it will take a great deal more than a revised set of BOI incentives to drive through the types of changes that will be needed for Thailand to achieve high income status (currently classified as a GNI per capita of greater than US$12,615). Amongst other things educational reforms, further progress on income inequality and political stability will also be needed to see Thailand’s continued progress both in the region and on the world stage.

Mark Jayasinghe is a principal at BDO Advisory Limited. He can be contacted on +66 2 260 7290 or by email: mark.jayasinghe@bdo-thaitax.com.

Mark Jayasinghe

BDO Advisory Limited