Presented at The American Chamber of Commerce IT Committee on November 27, 2000 © Seri Manop & Doyle

For those of you who may new to Thailand the purpose of the Board of Investment, or BOI, is to encourage specific types of business projects in Thailand.

The BOI accomplishes this by granting these desirable projects investment incentives.

Incentives afford these projects distinct advantages both in terms of start up and operation. These incentives range from

However, in order to receive these incentives the project must qualify under the criteria set forth in one of the BOI Promotion Categories.

Today I will discuss the requirements of and the incentives available under 2 of these Promotion Categories. Software Development and E-commerce.

In doing so I will summarize

I will then briefly mention a new requirement concerning ISO certification, make a few closing remarks and take any questions you might have.

My main focus today will be on the tax incentives which are available under Software Development and E-commerce. I do this because

     I. Project Evaluation

The first step to obtaining BOI privileges is filing an application with BOI.

This application sets forth the Promotion Category under which privileges are sought and details concerning the project.

The factors used by BOI to evaluate projects filing under the categories of Software Development and E-commerce are quite similar.

These similarities include

   a. Evaluation Criteria

Applications for promotion are evaluated by BOI using a number of factors and criteria.

The primary criteria used by BOI when evaluating applications under the categories of Software Development and E-commerce is the same.

That is "Will the project contribute to creating a critical mass of software development in Thailand?".

I met with the Director of BOI Division 5 last month in preparation for this presentation.

Division 5 is the section of BOI responsible for processing Software Development and E-commerce applications.

The Director continually stressed how committed BOI is to encouraging software development in Thailand. He also emphasized that this was the primary factor used by BOI when evaluating applications under both categories.

I would, therefore, advise companies interested in applying for BOI promotion under either of these categories to incorporate language into the application demonstrating how the project will help to "Create a Critical mass of software development in Thailand" in order to maximize their chances in obtaining privileges.

Other relevant factors used by BOI officials when evaluating applications include

Based upon its evaluation of the application BOI will then determine whether to approve promotion of the project and, if so, what investment incentives to grant.

   b. Investment Zones

What investment incentives are available is largely dependent upon the project's physical location in Thailand.

BOI divides Thailand's provinces into 3 Investment Zones.

Generally, the level of investment incentives available to the project will be determined by which of the 3 Investment Zones it is located in.

Projects located in Zone 3 which includes 58 of the least developed provinces and are eligible to receive high level incentives.

Projects located in Zone 2 which is includes Rayong and Phuket and 10 other provinces are eligible to receive medium-level incentives.

Projects located in Zone 1 which includes Bangkok, and 5 other central provinces and are eligible to receive the low level incentives.

The BOI has made 1 exception to this system concerning projects located in the Software Park located in Bangkok on Vipawadee Road.

Projects located in the Software Park are afforded high-level privileges the same as projects located in Zone 3.

Understanding the Investment Zone system is essential because it allows the applicant to know the extent of the incentives potentially available before the application is filed.

For example,

Say a Software Development Project is located in Bangkok outside of the Software Park. That places the project in Zone 1.

Because the project is located in Zone 1 we have an idea of the level of privileges potentially available to the project.

SUCH AS

We know the maximum period of corporate income tax exemption for that project would be 3 years.

     II. Specific Requirements and Incentives Available

Although there are a number of similarities between BOI's evaluation criteria for Software Development and E-commerce there are also many distinctions between the 2 categories.

   a. Software Development

i. Promoted Activities

For Software Development the specific activities included under the category are

However, BOI limits activities covered by this category by prescribing conditions.

I just mentioned that Software Modification is one of the activities included under the Software Development category.

But there is a condition attached to this activity concerning software imported by the promoted project for modification.

The condition is that the resale price of the software after modification must be at least 4 times the software's price to import in order for the transaction to receive the benefit of BOI incentives.

For example,

Suppose your BOI Promoted Software Development project is granted exemption from corporate income tax.

This project purchases software from Oracal for 10,000 Baht for the purpose of modification and re-sale.

Your project modifies the software and sells it to a 3rd party for 30,000 Baht.

In this situation the income received from the sale to the 3rd party would not be exempt from calculation of corporate income tax.

Why? Because the BOI condition states that the re-sale price of the modified software must be at least 4 times the original purchase price of the unmodified software.

In our example the re-sale price of 30,000 Baht was less than 4 times the initial purchase price of the software, therefore, the transaction would not qualify for tax exemption.

If the modified software would have been sold for 40,000 baht or more the transaction would have qualified for tax exemption.

ii. Incentives Available

The following are guidelines concerning the tax incentives available for qualifying Software Development projects.

These guidelines are based upon the physical location of the project.

Software Development projects located in Investment Zone 1 (which includes Bangkok)and Zone 2 (which includes Rayong and Phuket) are eligible to receive

Software Development projects located in Investment Zone 3 (which includes the least developed provinces) or the Software Park located in Bangkok are eligible to receive

All non-tax incentives such as foreign ownership of land, increased number of work permits available, and simplification in transferring profits outside of Thailand are also available to Software Development projects regardless of location.

   b. E-commerce

E-commerce is a new Promotion Category introduced by BOI in August of this year.

BOI separates the E-commerce Category into 2 sub-categories.

Each of these 2 sub-categories has its own requirements and the investment incentives available are significantly different for each.

i. E-commerce Application Service Providers

Any project that offers the customer use of software applications on line would potentially qualify as an E-commerce Application Service Provider or ASP.

Here BOI draws a distinction between whether the project's customer pays for the use the application while on-line or whether the customer pays to download the software.

E-commerce ASP projects deliver a service, they do not sell a product.

If the customer is allowed to download software on line that transaction would not qualify under the E-commerce ASP category.

An example of an E-commerce ASP is a project to offer an electronic signature verification service online.

The following are guidelines concerning what incentives are available for qualifying E-commerce ASP's.

Like Software Development, these guidelines are based upon the physical location of the project.

Projects located in Investment Zone 1 (which includes Bangkok) and Zone 2 (which includes Rayong and Phuket) are eligible to receive

Projects located in Investment Zone 3 (which includes the least developed provinces) and the Software Park are eligible to receive

ii. E-commerce Users

E-commerce Users are those projects that use the Internet only as a medium to advertise and collect payment from the sale of products or services.

E-commerce User projects are only eligible to receive non-tax privileges.

Exemptions or reductions in normal corporate income tax and import duties rates are, therefore, not available for under this category.

The policy behind not granting tax incentives for E-commerce Users is rooted in BOI's primary goal in promoting E-commerce.

"To create a critical mass of software development in Thailand"

Because E-commerce User projects do not contribute to "Creating a critical mass of software development" they do not qualify to receive tax incentives.

Amazon.com is an example of an E-commerce User project.

If Amazon.com was a project in Thailand and it applied for BOI privileges under the category of E-commerce it would be classified as an E-commerce User project.

The reason for this is that Amazon.com only uses the Internet as a medium to advertise and receive payment for its real business- the sale of books.

Accordingly, it would not qualify to receive tax incentives from BOI.

However, all non-tax incentives such as foreign ownership of land, increased number of work permits available, and simplification in transferring profits outside of Thailand are also available to E-commerce Application Service Provider projects regardless of location.

     III. ISO Requirement

I wanted to briefly mention a new requirement affecting all projects promoted since August 1st.

All of these newly promoted projects must obtain ISO 9000 or similar international certification within 2 years of the project startup date or the project's granted period of corporate income tax exemption will be reduced by 1 year.

So for example

Say a project located in Phuket is granted privileges under the category of Software Development.

As I stated earlier Phuket is located in Investment Zone 2, therefore, the maximum period of corporate income tax exemption for the project would be 5 years.

Under the new ISO requirement, this project must obtain ISO 9000 or similar international certification within 2 years of the project's startup date or the period of the project's tax exemption would be reduced from 5 years to 4 years.

     IV. Closing

In closing, I think it is important for companies considering whether to apply for promotion under Software Development or E-commerce to remember

There are some clear benefits available for projects qualifying under these 2 categories.

I also believe the officials at BOI Division 5 understand the necessity of providing significant investment incentives to projects qualifying under these 2 categories.