Thailand FDI

Business conditions, not perks, are key to luring investments
Felipe F. Salvosa II
Business World
6 August 2009

Bangkok - ASEAN countries offer roughly the same types of incentives to lure foreign investors and the key to obtaining investment dollars is building an environment conducive to business, according to the investments board of one of the region's top investment destinations.

"Frankly speaking, incentives are overall the same. It's up to the conditions in each country. The most important thing is service from the government," said Winyoo Laopoonpittaya, director of the services and consulting division of Thailand's Board of Investments (BoI).

The Philippines lags behind Thailand and other major ASEAN economies in attracting direct investments.

In 2008, net foreign direct investments (FDI) to Thailand dropped by 12.5% to $9.8 billion as the global downturn reached its peak, but was still six-and-a-half times larger than that of the Philippines. Last year, the Philippines received $1.5 billion in net FDI, also behind peers Indonesia ($7.9 billion) and Vietnam ($8.05 billion).

Singapore is the largest recipient of FDI in ASEAN, with nearly $23 billion in 2008, followed by Thailand, and Malaysia which got $8.05 billion, statistics from the Association of Southeast Asian Nations showed.

Based on brochures given to investors, however, Thai perks edge out incentives given by the Philippines' own BoI.

Thailand allows up to eight years of income tax holidays and a 50% discount for five years thereafter, double deduction for utility expenses, and lower or zero import duties for machinery and raw materials.

The Philippines does not offer generous deductions from taxable income and allows only up to six years of tax holidays.

Thailand also has generous non-tax incentives such as allowing foreigners to own land and less red tape - visas and work permits are released in three hours. "It's not the cost [that matters], it's the business environment," Mr. Winyoo said. Amid a clamor among businessmen not to tighten up, a bill seeking to "rationalize" investment incentives has yet to gather pace in the Philippine Senate, and could be sent to the backburner with the election campaign just months away.Congress, though, has approved bills expanding the coverage of tax perks, granting generous incentives to tourism and renewable energy amid protests from the Finance department.

The incentives rationalization bill is supposed to correct "redundant" incentive programs and policies in Executive Order 226 or the Omnibus Investments Code,. The measure is expected to generate from P5 billion to P10 billion in annual revenues.

In July, a study by the IMF said longer tax holidays and a lower corporate income tax may attract foreign investors but do not necessarily lead to economic growth and higher capital investments.

The study said a 10-percentage-point increase in the corporate income tax tends to lower FDI by between 0.33 and 0.45 percentage points of gross domestic product (GDP).
Adding 10 years of tax holidays, meanwhile, raises FDI by about 1% of GDP.

What the Philippines could benefit from is duplicating Thailand's successful "zoning" scheme in granting incentives, where more perks are granted to investors in rural areas. The Thai BoI's 15-year-old zoning policy has helped spread the country's production base outside crowded Bangkok, Mr. Winyoo said. Zone 1 covers Bangkok while Zone 2 covers the capital's surrounding provinces. Zone 3encompasses the rest of the country. Investments in Bangkok are not eligible for the Thai BoI's 2009 incentives program.

In March, the Philippine House of Representatives passed its version of the bill on incentives, granting "locational" perks for 20 years to domestic enterprises setting up shop in the 30 poorest provinces. These include a reduced income tax, net operating loss carryover, value-added tax and duty refunds on capital equipment and raw material imports, accelerated depreciation, and double deduction for training expenses and research and development.

The Thai BoI is also focused on only a few "sectors of opportunity": alternative energy, cars and parts, machinery, and agriculture. Mr. Winyoo, however, noted that investments have again declined so far this year due to the global downturn. From January to April, investment pledges went down by 10% to $3.9 billion. The number of projects went down by 29% to 294 from 412 in the same period last year.

In 2008, the Thai BoI approved a small investment involving Filipino businessmen - Harmonic Technology (Thailand) Co. Ltd., for a five-million- baht "trade and investment support" project involving 10 workers. The company also has Japanese shareholders.