|August 12, 2000||atimes.com|
Choosing a regional base in Asean
Compiled by Tony Allison
This report covers the specific policies of Thailand, Malaysia, Singapore, the Philippines, Indonesia and Vietnam toward multinationals establishing a corporate presence in their respective countries.
Introduction: The principal agency responsible for providing incentives to stimulating foreign investment in Thailand is the Board of Investment (BOI), a government organization which falls under the Office of the Prime Minister.
The BOI is governed by the 1977 Investment Promotion Act and the agency is chaired by the Prime Minister, with economic ministers, senior civil servants, representatives of major private sector organizations, and academics serving as Board Members or Advisors.
The day-to-day investment promotion activities are carried out by the Office of the Board of Investment (OBOI) under the Office of the Prime Minister. The BOI is empowered to grant a wide range of fiscal and non-fiscal incentives and guarantees to investment projects which meet national economic development goals.
In addition to investment incentives, the BOI offers comprehensive business-related services to investors and potential investors. These services range from working with investors to help them obtain required licenses and permits, a wide variety of publications including a home page on the Internet, identification of promising investment projects and joint venture partners. In addition, the BOI offers assistance to Thai firms interested in investing overseas, especially in Indochina and Association of Southeast Asian nations countries.
Note: On August 1, 2000 the BOI introduced a major revision to its investment policies and incentives, including its drive to promote regional offices to locate in Thailand. For details of the new policy see: Thailand Board of Investment.
Types of business organizations
Thailand recognizes three types of business organizations:
Partnerships, of which there are three general types:
Joint ventures A joint venture is a group of persons (natural and/or juristic) entering into an agreement in order to carry on a business together. It has not yet been recognized as a legal entity under the Civil and Commercial Code. However, income from the joint venture is subject to corporate taxation under the Revenue Code, which classifies it as a single entity.
Other forms of corporate presence
Branches of foreign companies There is no special requirement for foreign companies to register their branches in order to do business in Thailand. However, most business activities fall within the scope of one or more laws or regulations which require special registration, either before or after the commencement of activities. Foreign business establishments must, therefore, follow generally accepted procedures. It is important to clarify beforehand what constitutes income subject to Thai tax because the Revenue Department may consider revenues directly earned by the foreign head office from sources within Thailand as subject to Thai taxes.
As a condition for approval of an Alien Business License to a branch of a foreign corporation, working capital amounting to a total of five million baht (US$125,000) in foreign exchange must be brought into Thailand within certain intervals over a four-year period.
The branch may be allowed to operate for a period of five years, unless a shorter period is indicated in the application as a result of a contract to be performed in Thailand. Extension of the original duration of the license to operate may be granted, provided the working capital required to be brought into Thailand is met.
Representative offices These offices of a foreign corporations may also be established to engage in limited "non-trading" activities, such as sourcing of goods or services in Thailand for its head office or inspecting and controlling quality of goods which its head office purchases in Thailand. Other activities can cover disseminating information about new products and services of its head office, and reporting to its head office on local business development and activities. The working capital contributions as discussed above in respect to branches apply.
Regional offices A regional office of a multinational corporation may also be established to coordinate and direct the operation of the branches and affiliates of the head office in the region on behalf of the head office.
A regional office has the ability to coordinate and supervise the company's branches and its affiliated companies in the region on behalf of the head office. The regional office may provide these branches and affiliated companies with:
Work Permits for aliens performing work in the regional office will be granted for up to five persons depending on necessity and volume of work in each particular case, and fees of not more than 1,000 baht per year (US$20) must be paid for a work permit or its renewal.
Conditions for permission to establish a regional office:
The regional office must not:
- Have the power to accept a purchase order or make a sales offer
- Negotiate or enter into business arrangements with any natural or juristic person within the Kingdom.
A permit to establish a regional office, valid for five years, can be granted after application with the Alien Business Section of the Department of Commercial Registration at the Ministry of Commerce. The fee is five baht per every 1,000 baht of registered capital, not to exceed 5,000 baht.
When a permit to establish a regional office is issued, it may be subject to the following conditions:
Regional trade and investment support offices In April 1996 the BOI announced that the establishment of trade and investment support offices would become a new category of activities eligible for investment promotion. Projects in this category are eligible for BOI non-tax incentives, including:
- Foreign currency exchange
- Legal affairs
- Civil engineering.
Note: Exceptions may be granted by permission from the Department of Commercial Registration or concerned government agencies
Eligibility for regional trade and investment support offices: Applicants must be either companies established under Thai law, or companies planning to establish under Thai law.
Conditions for regional trade and investment support offices:
Introduction: Investors seeking a manufacturing license, either foreign or local, are screened by the Malaysian Industrial Development Authority (MIDA) to determine whether they are consistent with the Second Industrial Master Plan (1996-2005) and government strategic and social policies. MIDA is the government's principal agency for the promotion and co-ordination of industrial development in the country, including foreign investments and especially those in the manufacturing sectors .
Applications for investment in other sectors are handled by relevant regulators. For example, a multinational seeking a representative office in the banking sector must apply to Bank Negara Malaysia (the central bank).
Investment regulations are specified in the Promotion of Investments Act 1986 and the Industrial Coordination Act 1975. On acquisitions, mergers and takeovers, the Securities Commission and the Foreign Investment Committee implement the regulations specified in the Malaysian Code on Take-overs and Mergers. The Foreign Investment Committee also formulates policy guidelines for foreign participation in the non-manufacturing sector.
Types of business organizations
A foreign company or a multinational company can conduct business in Malaysia through any one of the following ways:
Representative office (RO)
in the manufacturing and trading sector A foreign company which intends to set up a RO in this sector must obtain approval from the Ministry of International Trade and Industry. An RO is one that is established in Malaysia to perform permissible activities for its head office/principal and it must be totally funded from sources outside Malaysia. It is not required to be incorporated or registered under the Companies Act 1965.
Permissible activities: Planning or coordinating of business activities; gathering and analysis of information or undertaking feasibility studies pertaining to investment and business opportunities in Malaysia and in the region; identifying sources of raw materials, components or other industrial products; research and product development; as a coordination center for the corporation's affiliates, subsidiaries, agents in the region; and other activities which will not result directly in actual commercial transactions.
Forbidden activities: Engage in any trading (including import and export), business or any form of commercial activities; lease warehousing facilities (any shipment/transhipment or storage of goods shall be handled by a local agent or distributor); sign business contracts on behalf of the foreign corporation or provide services for a fee; or participate in the daily management of any of its subsidiaries, affiliates or branches in Malaysia.
Companies wishing to undertake business activities may do so by locally incorporating a company under the Companies Act 1965.
The number of expatriates allowed depends on the functions and activities of the RO. Expatriates can only be considered for the managerial and technical levels. The duration of the work permit is on a two year basis and it is renewable.
Representative office (RO) in the banking sector
A foreign institution which intends to set up a RO in this sector must obtain the prior written approval of the Central Bank, Bank Negara Malaysia. A foreign institution is defined as one which carries on any business outside Malaysia, which corresponds, or is similar to a banking business, finance company business, merchant banking business, discount house business, money-broking business, building credit business, credit token business, development finance business, factoring business and leasing business.
A RO of a foreign institution in the banking sector is an office established in Malaysia to perform permissible activities for its head office/principal. It must be totally funded from sources outside Malaysia.
Permissible activities: Supplying trade and other economic and financial information on Malaysia to overseas interests and vice versa; assisting Malaysian exporters in finding new markets through the services of their international offices and vice versa; assisting foreign interests in establishing joint-venture companies in Malaysia; and seeking opportunities for their respective banks to provide and to participate in the management and syndication of foreign currency loans to the Malaysian corporation, including identifying Malaysian companies which require offshore financing.
The RO is subject to the following conditions: Not permitted to conduct banking or any other form of business in Malaysia; engage in activities which are representational in nature and serve as a contact/liaison point; appointment of any expatriate Chief Representative or Assistant Representative should be in consultation with Bank Negara Malaysia. Only one expatriate is allowed at all times, except in the initial years of operation; and submit to Bank Negara Malaysia reports of its activities on a half-yearly basis, that is, at the end of June and December each year.
International procurement centers (IPC)
An IPC is defined as a company which undertakes procurement and sale of raw materials, components and finished products for its group of companies in Malaysia and abroad. Locally incorporated companies can apply for IPC status which allows benefits such as exemption from current regulations on foreign equity ownership in the wholesale and retail trade, and permission to open foreign currency accounts to retain export proceeds.
A company granted OHQ status is one which provides certain services to its offices or related companies outside Malaysia. These services include management and administrative services, treasury and fund management services, financial advisory services, research and development, training and personnel management.
An OHQ enjoys a concessionary tax rate of 10 percent on income, interest and royalties derived from the services rendered, and can freely obtain credit facilities in foreign currency for its treasury and fund management operations, as well as open foreign currency accounts to retain export proceeds and other receivables.
Locally incorporated companies, Malaysian or foreign-owned, which have a sizeable network of companies outside Malaysia can apply for OHQ status.
Introduction: Since the mid 1960s Singapore has had a defined economic strategy to attract foreign investment into the country. Consequently, the country's legal framework and public policies have always been foreign investor-friendly.
Foreign investors are not required to enter into joint ventures or give up management control to local interests. The Economic Development Board (EDB), the government's manufacturing investment promotion agency, screen investment proposals to determine their eligibility for various incentive schemes and to provide assistance. Those investments that do not meet the criteria are not given incentives, but they are not prohibited from proceeding. The EDB is a one-stop service that helps foreign investors avoid red tape.
Through the Monetary Authority of Singapore (MAS), the government provides generous tax incentives to encourage foreign financial institutions to invest in the country. Other incentives are administered by the Trade Development Board (TDB) and the National Science and Technology Board (NSTB).
Types of business organizations
A foreign investor planning to do business in Singapore may do so through any one of the following vehicles:
It does not have a legal personality separate from its head office and it cannot be used as a vehicle for carrying on business in Singapore. Its activities are strictly confined to that of liaison and promotional work, such as liaison with sales agents and customers, promoting market awareness and advertising, advising customers on the use of products or services, and providing market intelligence to its head office.
It cannot engage in business, conclude contracts, or open letters of credit. A representative office is usually set up when a foreign corporation wishes to establish a presence but does not initially intend to carry on business in Singapore until, for example, completion of its market feasibility study.
Application procedure: To establish a representative office of a foreign corporation engaged in the trading, manufacturing, or service industries, an application must be made to the Singapore Trade Development Board.
The TDB usually takes approximately three to four weeks to process the application, and approval, if granted, is renewable annually. Similarly, the Monetary Authority of Singapore deals with the establishment of representative offices of foreign corporations engaged in banking-related activities.
The SDB has an Approved International Trader Scheme (AIT) which is aimed at attracting major international businesses to use Singapore as their regional headquarters and to develop new markets and business niches. Companies with AIT status enjoy a concessionary tax rate of 10 percent on international trading activities in approved commodities and products.
Any of the incentives and concessions are administered by the Economic Development Board. Some of these incentives, which are stipulated under the Economic Expansion Incentives (Relief from Income Tax) Act 5 are as follows:
Approved foreign loan scheme An exemption from withholding tax on interest is granted where the exemption does not result in an increased tax liability to the lender in its country of residence.
Approved royalties A full or partial exemption (where tax is at a concessionary rate of 20 percent) of withholding tax is granted on royalties, technical assistance fees, and contributions to research and development costs payable to non-residents as long as there is no resultant increase in the liability to tax by the non-resident person in his county of residence.
Export of service Companies engaged in designated services for overseas projects are taxed at 10 percent of the qualified export services income for a maximum initial period of 10 years.
Under the Operational Headquarters Scheme, income arising from the provision in Singapore of approved services will be taxed at 10 percent. Other income from overseas subsidiaries and associated companies is also eligible for effective tax relief. This incentive is available for a period of up to 10 years with provision for extension. To qualify for this scheme, the subject corporation must have a sizable network of overseas companies in the Southeast Asian region and be well established in its home country and in its industry. This incentive is administered by the Monetary Authority of Singapore.
The Business Headquarters Scheme is usually available for companies which provide business, technical, and professional services out of Singapore. A company granted business headquarters status could be eligible for any of the tax incentives provided under the Economic Expansion Incentives (Relief from Income Tax) Act as outlined above and exempted from tax on dividend income received from offshore companies.
Introduction: The chief legislation governing foreign investment is the Foreign Investment Act (FIA) of 1991 as amended. It contains two "negative lists" which fully or partially restrict foreign ownership in a variety of sectors of the economy. List A restricts foreign investment in certain sectors because of constitutional or legal constraints, such as the mass media, retail trade and small scale mining. List B restricts foreign ownership (generally to 40 percent) for reasons of national security, defense, public health, safety and morals. Incentives for investors are administered by the Board of Investments (BOI).
Types of business organizations
Business entities in the Philippines are generally in the form of corporations, partnerships or proprietorships. Foreign firms may do business through a branch, a subsidiary, a representative office or a joint venture.
Branch. A branch is an extension of a foreign enterprise and therefore has no separate and independent legal personality. It carries out the business activities of the head office and derives income from the Philippines. Before a branch can engage in business in the Philippines, the parent company must register that branch with the SEC (Securities and Exchange Commission).
Subsidiary. A foreign corporation may establish a subsidiary in the Philippines which has a legal personality separate and distinct from that of its parent company.
Representative office. A representative office is one which deals directly with the clients of the parent company in the Philippines but does not derive income from the Philippines. It is fully subsidized by its office. It undertakes activities such as, but not limited to, information dissemination and promotion of the company's products as well as quality control. The representative office must register with the SEC. The SEC requires the representative office to initially remit into the Philippines at least US$30,000.
Regional headquarters of a multinational company is an administrative branch which principally acts as a supervision, communications and coordination center for the subsidiaries, branches or affiliates of a multinational company in the Asia-Pacific region. All its expenses are financed by the head office or parent company.
It differs from a branch office in that while a branch office of a foreign company carries out business activities of the head office and derives income from the host country, a regional office is not allowed to do business or earn income in the host county.
The activities of a regional headquarters are limited to supervisory, communications and acting as a coordinating center for its subsidiaries, affiliates and branches in the Asia-Pacific region. It is not allowed to deal directly with clients as a regular undertaking.
A regional headquarters is granted certain incentives (tax and duty-free importation of training materials, exemption from all local licenses, fees, dues, etc.) which are not enjoyed by branches or representative offices.
A multinational company is a foreign firm or entity that is engaged in international trade and has affiliates, subsidiaries or branch offices in the Asia-Pacific region, which is comprised of all countries bordering the Pacific ocean on the side of Asia, including Australia and New Zealand.
The foreign firm must remit into the Philippines the entire amount necessary to cover the operations of its regional headquarters in the Philippines but not less than US$50,000 annually or its equivalent in acceptable foreign currencies.
The foreign executives of the regional headquarters should each receive salaries and compensation in the Philippines equivalent to at least US$1,000 a month.
Introduction: Foreign Direct Investment, referred to as PMA (Penanaman Modal Asing), is governed primarily by the Foreign Capital Investment Law No. 1 of 1967, as amended by Law No. 11 of 1970. In 1998, however, the government introduced a new policy package on private investment, which is now recognized as the New Reformation Policies. Significantly, it delegated authority from the president to the Minister of Investment/Chairman of the Investment Coordinating Board (BKPM) to issue foreign investment approval up to US$.100 million. Previously, foreign investment approval, at any amount, was issued by the president. Foreign Investment approval of more than US$100 million is still issued by the President. The new law also re-instated "one-roof services" at the BKPM.
Types of business organizations
A domestic investment - PMDN (Penanaman Modal Dalam Negeri) - is the investment implemented within the country by an Indonesian enterprise. It can take three forms:
The government adopts two kinds of foreign investment, namely foreign investment through a joint venture between foreign and Indonesian partners, where the partnership may involve a legal entity or individuals; and foreign investment through 100 percent foreign shareholding.
Some foreign companies register a representative office in Indonesia. It may be licensed by either the Ministry of Trade or the Ministry of Public Works. A representative office registered under the former may not engage in business activities, but it may do promotional, information-gathering, quality control or procurement-type work. The representative may be an Indonesian company, an Indonesian individual or an expatriate. Work permits for expatriates are issued with the representative office license.
Regional Representative Office
A foreign company may establish a regional representative office (KPWA) in one of Indonesia's main cities. Its activity is limited to supervising and coordinating the business of its principal and branches, covering two or more countries in the region. This office is not allowed to make any transaction with companies or persons in Indonesia either for export or import or domestic trading. A regional representative office can:
Branch of a foreign company
The Foreign Investment Law provides that enterprises may operate as a branch in limited circumstances. These include construction and consulting services, certain specialized oil, gas and mining services, participation in various types of turnkey projects, and banking.
Introduction: The current Law on Foreign Investment in Vietnam was first promulgated in 1987 by Vietnam's National Assembly. It has since been amended twice, the most recent in 1996, and now it is considered one of the most favorable and liberal laws in the region.
Investors are required to obtain a license from the relevant state authority. By law, foreigners may invest in any sector of the economy. Lists of projects in which the government is calling for foreign direct investment are available from the Ministry of Planing and Investment (MPI), relevant ministries, local Peoples' Committees, Chambers of Commerce and Industry (VCCI) or most consulting firms.
The law on foreign investment allows three basic forms of investment: Joint ventures (JVs), 100 percent foreign-owned enterprises, and business cooperation contracts (BCCs). Representative offices are another option for companies with existing commercial ties with Vietnam.
Many companies interested in conducting thorough research and making a more gradual transition into the Vietnamese economy have set up representative offices in lieu of immediately forming some kind of partnership. The office cannot engage in direct business activities (such as executing contracts, making or receiving direct payments, and buying or selling goods). They can promote and demonstrate products and services, engage advertising agencies, identify and do analyses of buyers, and set up showrooms.
Basically, only those companies that have been in operation for more than five years, have prior economic relations with Vietnamese organizations or have a project for cooperation in Vietnam are granted license to set up an office. However, large and multinational companies that wish to set up representative offices to develop business with Vietnam may be permitted to do so even though they have no existing economic ties or projects.
Applications for representative offices, which must include an explanatory statement about why the office is necessary, are submitted to the Ministry of Trade (also known as the Ministry of Commerce), not the MPI, for approval. Banks submit their applications to establish a representative office to the State Bank.
Banking, auditing, law and insurance companies have the option of setting up branch offices. Legally, these are similar to 100 percent foreign-owned projects in that they set up a legally separate Vietnamese entity (or subsidiary) which is permitted to make money.
(Special to Asia Times Online)
Front | China | Southeast Asia | Japan | Koreas | India/Pakistan | Central Asia/Russia | Oceania
Business Briefs | Global Economy | Asian Crisis | Media/IT | Editorials | Letters | Search/Archive
Car Rentals at www.The-Car-Reservations-Desk.com Airline Tickets at www.The-Airline-Reservations-Desk.com Hotels at www.The-Hotel-Reservations-Desk.com
back to the top
©1999 Asia Times Online Co., Ltd.