by Peter Poleacov and Cynthia Pornavalai
Introduction
One of the major characteristics of the Thai government's foreign
policy in 2004 was the initiation of several bilateral free trade
agreements (FTA) with countries around the world. It reflects
the impatience with the slow trade liberalization progress at
the World Trade Organization, while the government is seeking
new markets in order to provide Thai exporters with new opportunities.
The FTAs will be a vital element in the balances of future international
trade and lead to the expansion of productivity in Thailand, which
is the world's twenty-third largest exporter with an export value
of about US$80 billion. While FTAs might boost exports and enhance
opportunities for big market players due to their strength to
capitalize on such liberalization, the question remains if the
small ones will also profit or not.
In addition to developments in international trade, several important
new laws and amendments were enacted by the Thai government in
2004, as described below. Furthermore, new tax incentives for
investors and anti-dumping actions highlighted last year's developments.
1. Real Estate
Deadline under the Condominium Act
In 1999, the Thai government amended the Condominium Act to allow
foreigners or foreign companies to own more than 49% of the individual
units in a condominium building under certain conditions for a
five-year period. A foreigner who purchased a condominium unit
under the above exemption before the deadline can continue to
hold the ownership. Furthermore, a foreign owner can sell and
transfer this condominium unit to another foreigner after the
deadline, if the foreign buyer complies with the basic requirements
under Section 19 of the Condominium Act.
Government revises land valuations
The Treasury Department announced the modification of official
land valuations to be more in line with market prices. Such valuations
are significant for calculating taxes and transfer fees for property
sales and serve as a benchmark for financial institutions and
developers in setting property values. In general, the new valuations
have increased by 14.44% from previous levels and will be used
until 2007. This adjustment will reflect the actual market conditions
more appropriately.
Specific business taxes
Specific business taxes for property developers went back to 3.3%
effective January 1, 2004. Since 2000, taxes had been held to
just 0.11% under a policy to help improve and stimulate the property
sector after the Asian economic crisis. The specific business
tax calculation is based on official value estimates or actual
market prices, whichever is higher.
2. Banking
According to the Bank of Thailand, at least ten new banks will
be set up over the next two years, while the total number of financial
institutions will fall to 42 from 58 under the new financial master
plan. Local and foreign financial institutions have been granted
until the end of July 2004 to apply for new licenses under the
master plan, which eliminates credit fonciers and finance companies
in favor of full-service or retail banking licenses. Authorities
say that the new regulatory system will enhance the competitiveness
of the Thai financial system and expand the availability of financial
services to the public.
3. Trade
FTA Thailand-Australia
The free trade agreement between Thailand and Australia was signed
on July 5, 2004 and came into force on January 1, 2005. It is
probably the most comprehensive of all Thai FTAs covering all
sectors and services. Under the agreement, Australia will open
its market more widely for many Thai products, with trade tariffs
cut to 0%. The agreement also provides better access for Thai
companies to invest in Australia in all sectors, except for businesses
that could be detrimental to Australian national security, such
as media, broadcasting and civil aviation. Thailand, on the other
hand, has agreed to eliminate tariffs on 50% of Australian imports
in 2005, including fuel and chemical products. The two countries
are required to eliminate import tariffs on almost all products
by 2010. The Thai-Australian agreement also increases the rights
of Australian individuals and companies to conduct business in
Thailand.
However, there might also be some disadvantages. Thai dairy farmers
protested, for example, against the Thai-Australian agreement,
expressing their fear of suffering from a flood of cheaper dairy
products from Australia in 2020. Research commissioned by the
Thai government predicts that under the FTA, dairy imports will
increase by 30% and the domestic price will drop by 30%. The Government
announced it would provide assistance to persons in the agricultural
sector by setting up a fund to help all agricultural sectors in
the long term. Prime Minister Thaksin Shinawatra acknowledged
some negative impacts might result from FTAs, but countered that
local production quality must be improved in order to enhance
competitiveness.
FTA Thailand-India
The new bilateral agreement with India has reduced import duties
on 82 products by 50% from September 1, 2004 as stipulated in
the early harvest scheme, and will decrease the tariff rates on
the same items a further 25% one year later. In September 2006,
the import duties on these goods, which include food and industrial
products, will be completely eliminated. However, import tariffs
on 5,000 products are still to be reduced. At present, India is
Thailand's twenty-second largest trading partner.
FTA Thailand-China
Prime Minister Thaksin Shinawatra revealed in February 2005 that
Thailand gained a trade surplus of Baht 8 billion with China in
2004, after the two countries began the "early harvest scheme"
under the Thailand-China FTA framework in October 2003. According
to this scheme, both parties agreed to cut import tariffs on certain
fruit and vegetable exports between them. Nevertheless, the Thai
government announced on August 3, 2004 that it had suspended talks
with China over extending the number of products listed under
the two countries' bilateral free-trade agreement in favor of
regional trade liberalization under the ASEAN-China FTA, as well
as to avoid duplicate negotiations. Both countries have expressed
willingness to return to talks in order to extend the list of
products after ASEAN countries and China reach a free-trade agreement.
FTA ASEAN-China
ASEAN (Association of Southeast Asian Nations) now groups Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines,
Singapore, Thailand and Vietnam. If it comes into force, the Chinese-ASEAN
agreement would become the world's largest FTA, with a total of
1.7 billion consumers and a combined gross domestic product (GDP)
of US$2 trillion. The proposed agreement is scheduled to commence
as of 2010. It is important in this context to point out that
China would no longer be treated as a non-market economy (NME)
under Article 14 of the Agreement on Trade in Goods, which is
based on the ASEAN-China FTA. This anticipates the ASEAN countries
have to accept the economic figures provided by China as real
evidence of purchase prices. This recognition as a full market
economy will have a considerable impact on anti-dumping actions
against China and trade disputes in future.
Still to come…FTA Thailand-USA
The United States is already Thailand's largest export market
and second largest foreign investor. According to some research,
the agreement between both countries could lead to an increase
in Thai exports to the U.S. by 5.4% and imports from the U.S.
by 5%. In contrast the U.S.-Thai FTA may also contain some undisclosed
risks. Thailand's financial sector could face a serious challenge
from U.S. competition if the two countries go ahead with their
proposed agreement, financial experts have warned. Some of them
believe that Thailand is not yet ready to compete against advanced
U.S. financial products.
FTA Thailand-New Zealand
The Thailand-Australia agreement will serve as a guideline for
the FTA negotiations with New Zealand. According to the proposal,
tariff reduction will cover all products by using tax rates on
June 1, 2004 as a basis. With the agreement coming into force,
tariffs will be entirely eliminated on raw materials and other
products that are ready for competition. Thailand will also open
its market in stages for natural persons of New Zealand to invest
in service sectors under certain restrictions. The investment
projects must involve the businesses that are promoted by the
Thai government and are favorable to the development of Thailand.
FTAs with other countries are still to come, including countries
like Japan, Peru and Bahrain. The Thai-Bahrain agreement may sound
less significant compared to other FTAs but it notes the Kingdom's
endeavor to enter into the Middle East.
4. Anti-dumping
Anti-dumping duty on shrimps exports
The U.S. Commerce Department announced on July 31, 2004 that it
would apply an anti-dumping duty to Thailand's shrimp exports
to the U.S. The U.S. earlier accused Thailand, China, India, Vietnam,
Brazil and Ecuador of unfair trade practices by selling their
shrimp products in the U.S. market below home market costs and
thus damaging American producers. Despite some predictions, Thailand
was assessed a final maximum duty of only 5.95%, significantly
less than the 25.76% against Vietnam and the 112.81% rate for
China. Furthermore, the higher duties assessed on other countries
provided Thailand's exporters an even better position towards
their competitors and boosted exports. The result was an increase
in Thailand's share of the U.S. market.
Anti-dumping duty on steel imports
In a favorable decision for local steel producers, the Commerce
Ministry announced on September 15, 2004 the reinstatement of
anti-dumping duties, first imposed in 2003, on steel imports from
fourteen countries. The anti-dumping duties range from 5.98% to
136.50% and will last for five years.
- Tilleke & Gibbins (T&G) successfully defended one
of Thailand's biggest shrimp exporters in an anti-dumping case
filed in the U.S. Whereas many were predicting a high anti-dumping
duty for Thailand, resulting in a decrease of exports, T&G's
success will likely make Thai exports in the U.S. cheaper than
most Vietnamese and Chinese exports, resulting in significantly
increased exports from Thailand, and thus an overall boost for
the Thai economy. Anti-dumping is a specialized field where
T&G commands an estimated 33% of the current market share
in Thailand.
5. Tax
Special corporate tax rate
A special corporate tax rate for companies recently listed on
the Stock Exchange Thailand (SET) was extended by the Thai government
to companies listed in the SET until the end of 2005. Companies
entering the SET can pay a rate of just 25%, with companies entering
the smaller Market for Alternative Investment paying just 20%,
compared with the normal corporate tax rate of 30%. The reduced
rate will be applied for five consecutive accounting periods.
New tax incentives for investors
The Thai government is also attempting to intensify long-term
growth in the capital markets and approved a series of new tax
incentives. The new measures grant allowances (deductions from
income) equal to the actual amount paid to purchase investment
units in qualified long-term equity funds and retirement mutual
funds. The new measures also waive capital gains taxes for investment
in retirement mutual funds for at least five years.
6. Acts and Amendments
Several amendments were announced in 2004, the most important
being:
Hotel Act, B.E. 2547 (2004)
The new law is expected to control demand and supply of hotel
rooms in particular areas and interdict non-hotel operators from
offering condominiums and serviced apartments as hotel services.
The operators have one year from May 2004 to register in the appropriate
category. Failure to do so could result in one year in jail and/or
a fine of up to Baht 20,000. Fines of Baht 10,000 a day can be
imposed on businesses that continue to operate illegitimately.
The Bankruptcy Act, B.E. 2547 (2004)
Along with enacting some minor changes, the adopted amendment
lessens the requirements for discharging a debtor from bankruptcy
under certain restrictions. A discharge will also be granted after
three years if the debtor has not committed dishonest acts or
has not already been bankrupt within three years before.
Accountancy Profession Act, B.E. 2547 (2004)
The reason for the promulgation of this Act was to promote the
accountancy profession under control of an authority, namely a
professional council, in order to develop accounting standards
and control professional ethics. The Act is anticipated to have
a positive effect on the quality and advance of the profession
itself. Furthermore, it should also promote the provision of reliable
corporate financial data, which is essential for managers, investors,
and authorities.
Compensation for Damage from Marine Navigation Act, B.E. 2547
(2004)
Before enforcing the Compensation for Damage from Marine Navigation
Act in 2004, no anterior regulation referred to the general compensation
of maritime damages. The Act will now enable the Thai law to be
in conformity with international maritime standards.
For
further information, please contact Ms.
Cynthia Pornavalai, Partner & Head of Banking and Finance
Group, Tilleke & Gibbins (cynthia.p@tillekeandgibbins.com).
August 2005
