by Stephen Frost, Bangkok International Associates
Background The Foreign Business Act (1999) is the principal Act that regulates foreign ownership of businesses in Thailand. There is also separate industry–specific legislation that regulates foreign involvement in banking, insurance, telecommunications and other industries. American investors have special preferential rights to business ownership under the USA-Thailand Treaty of Amity (1966).
In March 2013, the Ministry of Commerce issued a regulation making changes to the categories of business activities that are regulated under the FBA. In this article, we consider those changes, the scope of the legislation and its interpretation by the Ministry of Commerce, and the likelihood of changes being made to the FBA in the light of international trade negotiations in which Thailand is currently involved.
The regulation Under the regulation, foreigners (basically meaning foreign individuals, foreign companies or majority foreign owned Thai companies) will no longer need a FBA license to operate the following service activities:
But since all these activities are still subject to licensing requirements under the Securities Exchange Commission Act, the Derivatives Act or other securities legislation, this is not a real case of liberalisation, but merely a reduction in the licensing requirements from two to one.
Review of the categories of regulated business since 1999 The 1999 Act contains a list of 43 regulated activities grouped into three schedules – the foreign ownership cap depends on the schedule in which the business is listed. Broadly speaking, around 99% of manufacturing activities are now open to 100% foreign ownership. In contrast, all service businesses are limited to 49% foreign ownership under the FBA or industry-specific legislation, unless there is a carve out on the grounds of substantial capital investment (e.g. in retailing, wholesaling or certain categories of construction) or a licence for majority foreign ownership is successfully obtained.
The USA – Thailand Treaty of Amity “Not yet ready to compete with foreigners?” American investors have special preferential rights to business ownership under the Treaty of Amity and Economic Relations, signed in 1966. Under this Treaty, American investors may own 100% of any category of business, except for seven specified areas: communications, transport, fiduciary functions, banking involving depository functions, the exploitation of land or other natural resources, or domestic trade in indigenous agricultural products. It can therefore be seen that they have preferential and more wide-ranging rights to business ownership under this Treaty, whilst all other nationalities are subject to the more onerous restrictions of the FBA.
Whilst Schedule 3 of the Foreign Business Act proclaims that the businesses it lists are those in which “Thais are not yet ready to compete”, in fact, Thais have been competing with American investors in all these sectors since 1966, thus such a declaration cannot be reconciled with preferential rights granted to one nationality only.
Problems in practice The Department of Business Development (part of the Ministry of Commerce) has since 1999, issued a number of rulings as to whether a particular business activity is caught by the FBA or not:
Note also that consent of the Bank of Thailand may also be required for such provision of security.
The interpretations above have been made in private rulings of the DBD. These are not law. They have not been tested in court. But in practice they are treated as law, when there is a strong case for saying that such services are sui generis, and that those who drafted the FBA did not contemplate that the ambit of the FBA should stretch so far, and as well as the particular arguments submitted above.
Lengthy application process If it has been decided to apply for a FBA license, the process involves drafting an application, and submitting this with documents in support. It can take three months or so for a decision to be made. Part of the reason for this is that the regulatory committee only meets one a month. Further queries may be raised. Additional documents may be requested and have to be prepared. The process is too long and is not business-friendly.
Note also the rules concerning foreign ownership of land may also impact on many businesses, including manufacturing or retailing. In general, ownership of land is prohibited to foreign companies or individuals, or majority foreign owned Thai companies. There are a number of exemptions:
Current international developments Thailand, as a member of ASEAN, is committed to participation in the ASEAN Economic Community, due to come into effect in December 2015. In general terms, Thailand is committed to opening up all business activities to 70% ASEAN ownership. If this proposal is implemented, then once again it will be hard to argue that “Thailand is not ready to compete” in service activities in favour of other countries. It is also likely that there will be increased pressure from e.g. European, Chinese, Japanese or Korean investors for liberalisation of the business ownership restraints that they will still face under the FBA which their ASEAN competitors will not.
In addition, Thailand has now commenced negotiations with the European Union for an EU-Thailand Free Trade Agreement. One of the factors underlying this, is that in 2015 Thailand will lose its GSP privileges for the export of goods to the EU. It is therefore in Thailand’s interest to negotiate some form of free trade agreement with the EU before that date. The scope of negotiations will extend to many areas, including trade in goods, intellectual property protection, sustainable development, the liberalisation of rules for investment in services and investment protection. It is not clear yet what the negotiating position of the EU will be.But it is certainly likely that the European Union will want a level playing field with the United States, and therefore request during the negotiations, as a minimum, the same access for EU investors in services as that which is granted to US investors.
The future is to liberalise services Thailand’s modern industrial revolution can be traced back to the 1970s and 1980s when, in particular, the Board of Investment was set up to offer tax breaks and other incentives to encourage foreign manufacturers (and in some cases, services businesses) to set up operations in Thailand.
Surely the time has now come for Thailand to adopt a less protectionist approach to foreign participation in services, and thereby to set off a second wave of foreign investment. The net result would be the creation of employment, the transfer of expertise, and increased tax revenue for the government. The time is surely right.
© Stephen Frost, Bangkok International Associates 2013