International headquarters: third time’s the charm

Towards the end of last December, the cabinet passed resolutions representing the latest attempt to turn Thailand into an attractive location in which to establish an international headquarters (IHQ).

This is the third attempt in a little over a decade to lure multinational companies to Thailand. The first regional operating headquarters (ROH) rules were introduced in 2002, with a second set introduced in 2010. Neither was an overwhelming success — only about 150 headquarters were established over a period of 12 years. This compares unfavourably with the main regional centres of Singapore and Hong Kong, each of which is home to the headquarters of well over 1,000 companies. Even Malaysia outshines Thailand, with some 500 company headquarters.

A step in the right direction: Since the inception of the ROH rules, the international community has been invited to provide feedback on a number of occasions. It appears much of this feedback has now been heeded in preparing the new rules, which should be passed into effect sometime in the first half of this year.

Notable features of the new rules include:

– the extension of tax benefits to treasury centre (TC) and international trading company (ITC) activities;

– the introduction of an exemption from tax on capital gains on the sale of shares in affiliates;

– unrestricted exemption from tax on dividends received from outside Thailand;

– significantly reduced conditions to qualify for the tax benefits;

– the removal of the requirement that “qualifying revenue” account for at least half the total revenue.

These are all areas the international community had previously highlighted as being obstacles or constraints under the 2002 and 2010 rules.

Opportunities abound: The IHQ rules provide significant opportunities not only for foreign multinationals operating in the region but also for Thai companies, which are increasingly trading and investing outside Thailand.

Thai companies investing abroad have faced a number of obstacles to repatriating dividend revenue to Thailand without attracting double taxation. Subject to meeting certain conditions, such dividends may be exempt from further corporate income tax in Thailand. However, the rules are not sufficiently flexible to address investment in modern group structures.

For example, a Thai company investing in a British group held by a passive holding company would be subject to tax on dividends received from the British parent even if British corporate tax was paid by all the operating companies in the group. This outcome is anomalous, as dividends received directly from each of the operating companies would not be subject to further tax in Thailand.

Thai companies traditionally have addressed this obstacle by either holding revenue offshore or investing through a jurisdiction such as Mauritius. The new IHQ rules should now permit direct investment without the threat of additional tax or the cost of establishing offshore entities.

By providing an IHQ with unrestricted exemption from tax on dividends and introducing the exemption from tax on capital gains, the new rules have made Thailand a more competitive holding company location for multinationals. Both Singapore and Hong Kong have long provided similar exemptions.

The introduction of tax exemptions and reductions for TC activities offers the opportunity for using an IHQ for regional lending and cash management. As with investment structuring, traditional regional funding structures have used offshore companies for lending activities in order to avoid additional taxation in Thailand.

Perhaps most interesting are the opportunities offered by the new ITC rules. Singapore has attracted significant investment by reducing taxation on offshore trading activities. The ITC rules now provide tax exemptions for offshore trading and a tax reduction for certain export activities. As the requirements to obtain the benefits are less onerous than those in Singapore, Thailand should now be a very competitive location for such trading activities.

Shades of grey: Thailand ticks many boxes for multinationals looking to establish an ROH. It has significantly lower office rental, employment and living costs than its regional rivals. Existing infrastructure is good and likely to improve. It also is in a position to exploit its geographical location for cross-border trade

Set against these many benefits are a number of negative factors. According to a World Bank survey, Singapore and Hong Kong represent, respectively, the first and third easiest places in the world to do business. Thailand’s rank of 26th is poor in comparison. Many of the issues that cause Thailand to score poorly have been raised numerous times by the international community but are not addressed by the new rules, which consider only tax matters. These include:

– unnecessary bureaucracy around many aspects of establishing and operating a company;

– cumbersome procedures for obtaining visas and work permits and in particular the onerous 90-day reporting requirement;

– uncertainty about the interpretation of laws and regulations and difficulties in dealing with the Revenue and Customs departments.

The last point may be crucial to the success or failure of the IHQ policy. Multinationals dislike uncertainty, be it political uncertainty, economic policy or grey areas in the interpretation of tax laws. Added to this is the not-unnatural tendency of the taxation authorities to interpret tax rules in a way that maximises government revenue.