Tax Incentives and FDI in Thailand: Chadin Rochananonda
Tax Incentives and FDI in Thailand: Chadin Rochananonda
Tax Incentives and FDI in Thailand: Chadin Rochananonda
Chadin Rochananonda
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
A. Taxable Person 9
B. Tax Calculation 10
C. Tax Rates 11
D. Withholding Tax 14
E. Tax Return and Payment 15
A. Assumption 31
B. Data Description 32
C. Results and Economic Implications 34
VII. Conclusion 37
Bibliography 39
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
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
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
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
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.
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)
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
The second is excise tax which taxed on 15 items of goods and services with 23.9
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
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.
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
D. Tax Reform
1. Objectives
2. Tax measures
a. Income tax
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
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
the VAT rate has been reduced temporarily since 2000. In addition, the sin tax should be
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
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.
A. Taxable Person
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
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 net profit –arising from or in consequence of business carried on in Thailand, at the end of
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
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
B. Tax Calculation
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
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
the disabled
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.
10
3. Net losses carried forward from the last five accounting periods;
4. Bad debts;
8. Depreciation: Provided that in no case shall the deduction exceed the given
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
C. Tax Rates
Generally, the statutory tax rate on corporation is now 30 percent of net profits.
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
qualifying services to affiliated juristic companies or partnerships or branches are subject to tax
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
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)
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
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%
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
1. Dividends 10%
2. Interest 15% on interest paid to foreign corporations not carrying business in Thailand
3. Royalties 15% on royalties paid to foreign corporations not carrying business in Thailand
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
6. Prizes 5%
Note that government agencies are required to withhold tax at the rate of 1 percent on
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
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.
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.
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
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
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% 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
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
22
B. FDI in Thailand
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
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
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
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
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).
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).
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
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.
companies not carrying on business in Thailand on deposits or loans derived from operators of
1. Dividends 10 %
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
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.
tax incentives as well as to facilitate in order to promote investment. Primarily, the BOI is
1. Regional Incentives
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).
Zone 1 A corporate income tax exemption for 3 years, provided the project locates its factories in
industrial estates or promoted industrial zones
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.
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 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
28
2. Sectoral Incentives
2.1 The BOI has identified certain priority projects in such areas as basic
machinery and equipment, vehicle parts, electronic appliances and computers). These projects
2.2 Target Industries: The customized incentive scheme has been launched
to strategic industries (Skills, Technology, and Innovation – STI/ Hard Disk Drive - HDD/
Semi-conductors/ Software/ Automotive/ Mold & Die/ Iron & Steel/ Alternative energy/
additional period of corporate tax exemption should be granted, provided the project meets
Duty Free Zone (FZ), and Bonded warehouse are provided with tax incentives as follows:
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
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
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
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
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,
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
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
Cross-border 12% 45
2
Financial institution 4% 31 Increase 1%
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
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.
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
33
& petroleum products. This means that the Thai government tends to promote industries
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
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
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.
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
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
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.
(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)
(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
(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
36
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
(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
FDI Inflows: 1980-2004. [Electronic database]. (2005). Bangkok: The Bank of Thailand.
Tax revenue in Thailand [Electronic database]. (2005). Bangkok: Fiscal Policy Office.
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
In computing revenue or expenses for the purposes of determining the market price, one
contracting parties where the same categories and types of property are transferred, or types of
(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
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
(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,
(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
40