On December 11, 2018, the Board of Investment (BOI) issued two new announcements: one canceling the International Headquarters (IHQ) and International Trade Centers (ITC) categories of activities for investment promotion, and one introducing a new category called International Business Centers (IBCs). The IHQ and ITC categories had existed in some form for almost a decade (previously existing in slightly different forms as Regional Operating Headquarters and International Procurement Offices, until they were canceled and replaced by the IHQ and ITC categories for applications submitted in 2015 onward).
This change is intended to make investment in Thailand more attractive to the global community by implementing new international tax standards under the OECD’s Inclusive Framework on Base Erosion and Profit Shifting, which Thailand acceded to in June 2017. The framework encourages countries to adjust their tax measures to eradicate inadvertent “gaps and mismatches” in the tax regimes of different jurisdictions, effectively harmonizing tax rules between member jurisdictions. This is intended to prevent exploitation of these “gaps and mismatches,” which have long been used by savvy international tax structures that move capital from one jurisdiction to another, benefiting from favorable tax regimes along the way.
Although the new IBC category is, in principle, merely a combination of the old IHQ and ITC schemes, in practice there are some key new changes that investors—especially those familiar with the old IHQ and ITC schemes—should be aware of.
Eligible Activities for an IBC
As with the IHQ and ITC, the paid-up registered capital of an IBC must be at least THB 10 million.
Unlike the IHQ and ITC, an IBC is required to have at least 10 skilled employees. A limited exception is available to IBCs that only provide treasury center services to affiliated enterprises, for which the requirement is reduced to five. This is a new requirement and was not included under the IHQ or ITC categories.
IBC Privileges – Board of Investment
The BOI privileges available to IBCs are generally the same as those under the IHQ and ITC schemes, and are mostly non-tax incentive privileges, such as the right to operate a business with a foreign majority structure, favorable work permit terms for foreign expatriates, the right to own land, etc.
Companies that apply for IBC privileges also enjoy an import duty exemption for machines imported for use in research and development or for training purposes. How- ever, a privilege for import duty on raw or essential materials used in manufacturing of exported products would not be available for IBCs, nor would merit-based privileges.
IBC Privileges – Revenue Department
It is also possible for IBCs to benefit from tax incentives, although to do so they must notify the Revenue Department separately from their application with the BOI. To qualify as an IBC at the Revenue Department, in addition to meeting the requirements of the BOI, the applicant must spend at least THB 60 million, in each accounting period, to recipients in Thailand, and have paid-up capital of THB 10 million at the end of each accounting period. The applicant must also comply with any other criteria, methods, and conditions stipulated by the Director-General of the Revenue Department in the future.
If an IBC meets these requirements, it will be entitled to the following tax privileges:
- Reduced corporate income tax rate of 8%, 5%, or 3%, based on expenditures in Thailand of at least THB 60 million, THB 300 million, and THB 600 million, respectively;
- Exemption from corporate income tax on dividends received from an affiliate;
- Exemption from specific business tax for income received from treasury center functions;
- Reduced personal income tax rate of 15% for expatriates working for an IBC; and
- Exemption from withholding tax for offshore affiliates receiving dividends or interest paid from an IBC.
Impact on Existing IHQs and ITCs
Companies currently promoted under the BOI’s IHQ and ITC schemes will not be affected, and they will continue to enjoy the incentives under the BOI investment certificate granted to them. Those who registered with the Revenue Department as Regional Operating Headquarters (ROH1 and ROH2), IHQs, or ITCs may opt to convert to IBCs if they are qualified and meet the conditions, or continue to enjoy the tax incentives laid out by the precedent notification or announcement until the end of the relevant timeframe.
Overall, the new IBC may be less attractive than the precedent ROH, IHQ, and ITC frameworks as a result of the minimum expenditure requirements and other conditions. However, a foreign business license may still be a favorable option for companies that fail to meet the new requirements, and the benefit of harmonization between the Thai investment framework and the international community is likely to promote Thailand as a destination for international offices and domestic affiliates of international corporations. While the new framework may be inconvenient for some, the overall effect on Thailand as an FDI location will likely be beneficial.