Japan has been Thailand's largest foreign investor for a number of years. In the first half of 2013, the Board of Investment (BoI) approved Japanese investments of more than Bt260 billion, or 48 per cent of the total investments approved.
Increasing labour costs in China, risks arising from the political conflict between Japan and China and a growing Southeast Asian market have encouraged Japanese companies to increase their investment in Southeast Asian countries recently. This trend is often referred to as “China plus one”.
Thailand is a popular choice for Japanese companies looking to invest in Southeast Asia. One of the main reasons that Japanese investors choose Thailand is its support for industry.
The government has been supporting industry through the Investment Promotion Act BE 2520 (1977). Under the Act, the BoI can grant various incentives, including corporate income tax (CIT) exemption.
BoI privileges are very attractive for investors. CIT exemption enables the investor to offer competitive selling prices. But Japanese investors should remember that, once a company no longer meets the conditions set by the BoI, the company will be required to pay income tax. Thus, the competitive advantage will be lost.
For a manufacturing business to take advantage of CIT privileges, the company must file an application with the BoI. The application contains details of the investment, including the production process and equipment used in the process.
Once the agency approves the application and issues a BoI certificate, the promoted company must comply with the conditions specified under the certificate. Otherwise, the company will not be able to take advantage of the tax privileges.
In the case of income tax exemption, although the BoI grants the privilege, it is the Revenue Department that assesses whether the promoted company meets the conditions for exemption. The department audits promoted companies to assess whether they have properly complied with the conditions set by the BoI.
CIT exemptions are usually granted to manufacturing companies for income generated from the sale of manufactured goods. Often manufacturing companies not only produce goods for sale, but are also hired by customers to manufacture goods on their behalf.
Under a manufacturing service contract, an employer consigns the materials needed for manufacturing to the employee free of charge, and the employee receives a manufacturing service fee as consideration.
Contracts for the sale of goods and contracts for service provision fall into different income categories under the Revenue Code. So, a company that has a promoted manufacturing business needs to determine whether income from manufacturing services under a manufacturing service contract is also exempt from CIT.
According to ruling Kor Khor 0802/16357, dated September 13, 1994, issued by the Revenue Department, income tax privileges apply to the income earned by a promoted manufacturing business from manufacturing services for the production of goods of the same type as the promoted goods using the production lines specified in the BoI certificate.
Sometimes I come across a promoted company that produces goods that do not pass through the entire promoted production process. Is the income earned from the sale or manufacture of such products exempt from CIT?
The Revenue Department issued ruling Kor Khor 0702/8681, dated October 31, 2013, on manufacturing service income. The department ruled that when a promoted company produced goods using only three steps out of a six-step process, the partial production process did not meet the conditions set by the BoI.
Thus, the company was subject to CIT on the service income earned from manufacturing services using only part of the BoI-approved process.
I believe the Revenue Department would likely apply this interpretation to goods produced for sale by the promoted company itself.
Many investors may not realise that to enjoy income tax privileges, the company must use the entire production process approved by the BoI to manufacture the goods, but his is one of the general conditions prescribed in the BoI certificate.
If you’re not sure whether you qualify for income tax privileges, don’t wait for a Revenue Department investigation. Review the application filed with the BoI and check whether the tax-exempt income is from the sale of goods or manufacturing services using the entire production process specified in the application.
By doing so, you’ll avoid unexpected additional costs, such as tax, penalties and surcharges.