By Audray Souche – Partner; Deputy Managing Director Thailand (audray.souche@dfdl.com) & Kunal Sachdev – Legal Adviser (kunal@dfdl.com), DFDL
The global economic shift towards Asia and its growing economies have spurred multinational corporations to centralize global and regional functions. It has been over 12 years since the introduction of Thailand’s Regional Operating Headquarters (“ROH”) regime. To date only just over 120 companies exist operating as a ROH in Thailand; this number when compared to the likes of Singapore, Malaysia and Hong Kong is lagging behind.
Despite Thailand being considered, by the largest multinational corporations, to be a competitive, reliable and desirable location for doing business, we look to understand why the numbers of operating ROH’s in Thailand pales when compared to other countries. To date, Singapore and Hong Kong continue to be the preferred base for international companies to manage their regional operations.
Before getting to crux of the issue it is important to first understand what an ROH is and how the concept has been developed in Thailand.
A ROH in Thailand is a type of corporate entity established in the Kingdom of Thailand that provides managerial, administrative and technical support services for other affiliated companies operating in the region and wanting to set-up shop in Thailand. It is worth noting that the operations of an ROH are limited and as such will not be able to perform the usual business operations of its affiliates and related entities. The scope of works that ROHs are limited to include: (a) organizing administration and managing business planning; (b) sourcing of raw materials, parts and finished products; (c) researching and developing activities; (d) providing technical support; (e) marketing and sales promotion; (f) regional human resources training and development; (g) business advisory services (such as financial management, marketing, accounting etc); (h) investment feasibility studies and economic and investment analysis; and (i) credit management and control. To clarify, a ROH is not a “new” corporate entity, a common private limited company may be registered and participate in the benefits attached to an ROH.
ROH vs. Representation Offices and Regional Offices
A foreign corporation wishing to establish a “representative” presence in Thailand is permitted to choose between 3 distinct entities; a representation office, regional office or an ROH. ROH’s are often confused with representation offices and regional offices; the uniqueness of a ROH is the incentives offered by the Thailand Board of Investment (“BOI”) and the Revenue Department that are offered during its operations. Another distinction between the regional offices, representation offices and ROHs lies in where the company is incorporated; representation offices and regional offices do not require the incorporation of Thai company and can be incorporated under the law of a foreign country. Another notable difference between ROHs, representative offices and regional offices also lies in the scope of works permitted to be conducted by each.
Representative offices are able to (a) seek a source of goods or services in Thailand for the purchase or utilization by the head office; (b) check and control quality and quantity of goods purchased or contracted to be manufactured in Thailand by the head office; (c) give advice in respect of goods sold to the head office’s agents or customers in Thailand; (d) disseminating information concerning new goods or services of the head office (i.e. promotional activities; and (e) report to the head office on business developments or prospects in Thailand. It is worth noting that the operations of an ROH are limited and as such will not be able to perform the usual business operations of its affiliates and related entities.
ROHs are a type of business which enjoys the privilege of being promoted by the BOI. Under the promotion offered by the BOI, ROHs enjoy access to a vast array of tax and non-tax incentives which we will discuss at a later stage of this article.
The Evolution of Thailand’s ROH Regime
On 22 December 2001 the Royal Thai Government introduced the framework for a new legal classification for businesses in the Royal Decree No. 405, the Regional Operating Headquarters (ROH) regime. More recently, in 2010, the Royal Government of Thailand introduced a more evolved form of the ROH regime which was based on the characteristics of the ROH regimes in neighboring countries. The intention of the second scheme was to directly compete with those countries known as ROH hubs like Singapore, Malaysia and Hong Kong with the aim of offering the best tax incentives in the region.
The ROH scheme which was published in Royal Decree No.405 was Thailand’s first attempt at bringing this unique business entity into the country. The various incentives offered to ROHs operating in Thailand included a lower rate of corporate income tax levied on service income, interest income and royalty income. Other incentives included an accelerated depreciation on the purchase or acquisition of buildings used in carrying out the operation of the ROH.
In order to be eligible to operate as an ROH the intending company had to meet a few stringent requirements. The first requirement was that the ROH comp
any is required to be incorporated under the laws of the Kingdom of Thailand comprising of a paid-up capital of at least THB 10 million (US$307,980). There were additional requirements that the ROH had to provide its services to at least three related companies and branches of the ROH outside of Thailand. The final requirement to operate a ROH in Thailand was a requirement that the ROH had to earn at least one-third of its total income from related companies and branches of the ROH outside Thailand for the first three years, and thereafter, not less than 50% of its total income from related companies and branches outside Thailand.
The qualification requirements meant that the scheme was relatively unsuccessful in the long run due to its onerous requirements. Another reason for the limited success of the scheme, which saw only 80 companies registered during its eight year tenure, was that the incentives offered by Thailand were uninteresting when compared to the incentives offered in Malaysia, Singapore and Hong Kong;.
The Re-Vamped ROH Scheme 2
To address the criticism which followed the introduction of Scheme 1, the Royal Thai Government attempted to revamp their policy, making it more alluring to foreign investors and multinational companies without a presence in Thailand. The revised scheme was created with the aim of achieving the best tax incentives in the region.
Under the revamped scheme, the following tax incentives were offered:
– Exemption from corporate income tax on service income from related companies and branches of the ROH outside Thailand for a period of 10 years.
– Exemption from corporate income tax on dividend income received from all related companies and branches of the ROH for a period of 10 years.
– Exemption from withholding tax on dividends paid to any related companies or branches outside Thailand.
– 15% flat rate of tax on salaries paid to expatriate employees for hire of labor in Thailand for a period of eight years and tax exemption on salaries paid to expatriate employees for hire of labor outside of Thailand.
In order to qualify under the revamped ROH scheme, the company would still have to be incorporated under the laws of Thailand whilst comprising of a paid up capital of at least THB 10 million. The requirement to have the ROH provide its services to at least 3 related companies was brought down to only providing services to one related company during its first and second year of operations. During its third and fourth year of operations the ROH is required to provides services to at least 2 affiliates and finally in the fifth and subsequent years of operations the ROH is required to provides services to at least three affiliates.
Did the Thai government achieve its goal?
Given the additional incentives offered by the BOI and IEAT Thailand’s ROH scheme can be considered to be world-class and competitive to the ROH scheme offered by Singapore, Hong Kong and Malaysia. Still given the revamped ROH scheme why is it that Singapore continues to be the preferred base for international companies? Surely the long established island nation hub is susceptible to a little competition from its neighbor.
At the end of 2013, according to the Census and Statistics Department of Hong Kong, 1,379 regional headquarters were operating in Hong Kong whilst in Singapore, at the end of 2013; there were in excess of 1600 regional headquarters. Even when looking at the number for Malaysia (which is more recently becoming another favorite for multinational companies to base their regional presence in), there are in excess of 600 companies operating under the ROH scheme.
The incentives offered for the operation of an ROH in Singapore and Hong Kong are not very different to the incentives offered under the revamped Thai ROH scheme. In Singapore for example, the incentives include a concessionary tax rate of 15% for five years on incremental qualifying income from overseas. Not only do the Thai incentives compare, they seem to surpass the standards set by Singapore by exempting tax completely for 10+5 years on the net profit earned from providing services to foreign affiliates (offshore profits) whilst maintaining a flat 10% rate for a period 10+5 years for services rendered in Thailand (onshore profits).
All the ingredients are there for Thailand to compete with other regional hubs, only time will tell whether multinational corporations are able to see Thailand as a viable place to base their regional headquarters. For now, it seems that the reason Singapore is still preferred to Thailand must lie in other considerations multinational companies take before deciding where to locate themselves. Singapore, unlike Thailand maintains its reputation as the easiest place in Asia to conduct business; part of the reason it has dominated as a hub for many years has been because of the official language being English. Thailand is often criticized by international communities for the lack of English language in its education system; as the deadline for the AEC draws nearer the Thai government is expected to address these issues.
