BOI promotion: How to get started?
In this post we will review how to prepare yourself for a BOI application. We will use for this post the example of an investor that want to invest in the manufacturing sector. Note that most of our comments are generals and will also apply if you invest into another sector of activity.
Finally, we will review the list of the information that an investor will have to provide to the BOI within the context of a factory business. Here again most of the information listed will be the same for other kind of businesses but for the question which are very specific to your activity.
Chicken or Egg?
Alike the ancient philosophers who were asking “Which came first, the chicken or the egg?” the first question a foreign investor interested to apply for a BOI promotion should ask himself is “which came first, registering a Thai company or applying for a BOI?”.
While the BOI allows investors to apply for a promotion before to register their Thai company we believe that there are many advantages in setting-up your Thai company before to file the application for the BOI.
The first reason is practical. If you apply for a BOI promotion as a foreign company you will have to provide your foreign companies corporate documents and other documents that you may have to translate or that you may have to notarize.
Using a Thai company will reduce this kind of administrative formalities.
Another advantage is timing. The BOI process will take a few months. Instead of being inactive you might as well use those few months to lease a factory, starts the fitting, import and install the machinery and productions lines and in other words do everything you will need to be ready to operate once you receive your BOI application.
Should you use a lawyer to assist you with the BOI application?
As I already said in a previous post using a lawyer is not a necessity. BOI officers are fluent in English and other languages, they are helpful and the BOI administration is very efficient. So indeed you could save you some legal fees and do the application process on your own.
The risk in not using a lawyer is that you may not understand what BOI promotion really means. A lot of foreign investors view the obtaining of the BOI license as the end of the process. In truth it is just the beginning because to obtain a BOI license is like a marriage. The BOI will keep an eye on what you are doing and you will from time to time have to notify the BOI prior or after accomplishing certain formalities.
Secondly, foreign investors are so eager to obtain the BOI that they tend to overstate their objectives, profits or the amount of their investment. This is a mistake. Indeed, it is important to understand that the BOI will expect you to fulfill the commitments you took in your application. Therefore do not embellish your application.
Thai lawyers are used to deal with administrations such as the BOI and they will have a better idea than you of what exactly are the expectation of the BOI within the context of your investment.
The Tax Holiday issue
Another issue with the BOI promotion is that many foreign investors take the word “tax holiday” too literally.
I mean that, yes you will get a formidable incentive on a tax point of view especially if you invest into a priority activity. But the tax holiday will generally be in relation to the company corporate income tax and import duties in relation to import of machineries or raw materials used for export. Despite the tax holidays the company will still be subjected to withholding tax and to VAT when applicable. In other words the tax holiday is not absolute.
Another point is that while the BOI and the Revenue Department are two agencies of the Thai government they have completely different objectives and alike cats and dogs they do not always get along well.
The BOI purpose is to attract as much foreign investment as possible and to do this it will grant foreign investors tax benefits. Obviously the Revenue Department objective is to assure that your company paid as much taxes as possible and to say that the Revenue Department do not like “tax holiday” is an understatement. The paradox being that the companies that are granted a tax holiday by the BOI are the companies that are the most scrutinized by the Thai tax administration. Overall we recommend you to surround you with proper advice prior to start your BOI application and also after to assist you with the implementation
The BOI application
What kind of information will you have to provide in order to file an application for the BOI?
For each type of investment the BOI will have general and specific requirements. General requirements will be the one that are asked to every investor whatsoever the nature of their investment. Specific requirements will be those that are in relation to the specific business activities you want to exercise.
- Personal details of the person signing the application
- Contact Details of the company on behalf of which the applicant is filling the application
- Status of the company ( Limited Company, Foundation, Cooperative, Public Limited Company)
- Is the company in Thailand registered or not?
- Contact details of the company in Thailand (if already known)
- List of the shareholders that will hold at least 10% in the BOI promoted company and their contact details
If the company already exists will it increase its capital to fund the project or not?
If the investor will set up a new company what will be the paid up capital?
Sources of the funds that will finance the project: Paid-in share capital, Retained earnings, Domestic loans, foreign loans, credit from suppliers (domestic or foreign) including contact details of the lenders.
Percentage of foreign and Thai shareholding (if any) with contact details of the shareholders (that own more than 10%)
The investor will have to provide an investment breakdown. For example for a factory project the break down will include:
(i) Cost of construction (or rent for a period of longer than 3 years)
(ii) Cost of machinery (or rent for a period of longer than 1 year)
(iii) Cost of installation
(iv) Cost of test-run
Total (For an expansion project, combine costs from #1 to #4)
(v) Preliminary expenses
(vi) Value of other assets
Total (For a newly-established company, combine costs from #1 to #6)
(vii) Cost of land
(viii) Cost of expertise
(ix) Working capital
Grand Total (Combine all costs)
Details of the factory site if known at the time of the application
Details regarding nature of the project:
You will also have to provide information as to the nature of your project.
(i) Production capacity according to project investment including maximum annual production capacity and hours of operation
(ii) Projected production of products listed for the first three years with details per year per project.
(iii) Production Process (if manufacturing) or Development process (if software). In the case of a factory you must detail each steps of the manufacturing operation and the main machine used at each step
(iv) Main machinery and other equipments to be used for the project. Information includes country of origin, quantity, and value. Please use CIF price for imported machinery & equipment and contracted price for machinery & equipment purchased locally. If you are importing used machinery aged over 10 years, you will have to fulfill additional requirements.
(v) Specific details regarding the nature of the product, including its use and Harmonized System (HS) code. (Please attach photos, illustrations or catalog.)
(vi) Environmental protection plan (including type of waste, quantity/year and treatment methods. Note that you project may be subjected to the obtaining of an Environmental Impact Assessment (EIA) approval or to an ISO certification.
Finally, if you are applying for an extension of an existing project you will be requested to furnish data on the actual performance of your company for the past three years, including employment and net profits realized by the existing operation.
Raw and essential materials:
(i) It will be necessary to provide information as to the type of raw materials that will be used in the production process: Information requested include the type, country of origin (imported vs locally produced), quality and value.
You will have to provide a breakdown per raw material, per year over a three years period.
You will have to give information as to the manpower that will be used in your project. A breakdown will have to be made between: management, technical specialists, supervisory staff, office and clerical staff, skilled and unskilled worker.
Then you will have to give information as to the number of Thai Vs foreign employees. You will also have to give an estimation of the number of employ that will be created when the project reaches full production.
Note: one of the reasons the BOI grants to foreign investors so many benefits is because of the transfer of know-how to Thai employees. As such, investors who are providing training to Thai employees including training period overseas is always more welcome than those who don’t. If you have the intent to provide such training to your Thai employees do not be shy about it. Present this aspect of your project to the BOI officer, it will be a plus in your favor
The BOI will also want you to provide your market plans:
(i) What your target is: Domestic sale % (Including indirect export) versus Export sale %.
(ii) Who your major customers are
Costs and profits:
Finally the BOI will request you to give an estimate of your projected productions costs and profits for the first three years of operation. In terms of revenue you will have to give projection of domestic Vs foreign income.Expenses will have to be broken down as follows:
(i) Raw and essential materials: here again you will have to distinguish between imported and locally produced raw materials
(ii) Labor Costs separating foreign and local costs
(iii) Public utilities (costs of water supply, electricity, telephone, etc)
(iv) Depreciation (must be calculated in accordance with depreciation standards of Thai revenue code)
(v) Sales and administrative expenses
(vi) Interests charges separating interests from foreign and locals loan
(vii) Technical fees or royalties (foreign vs local)
(viii) Other costs
Finally you will have to provide an estimation of what your ex-factory price and profit per unit will be at the third year of operation.
Our recommendations are as follows:
- Do not hide potential losses when preparing your application. If your business plan shows that you may expect losses during the first or two first years of exploitation just say so. The BOI officers are smart enough to understand that a new business may run at losses during the launch period.
- Do not sale “dream”. BOI officers are very pragmatic. Especially if you are investing into a priority sector. Priority means that Thailand deemed that it needs this kind of investment. Therefore any projects in relation to a priority activity will be considered providing that it is doable.
- Finally don’t overdo it. If you intend to limit your investment to a certain amount just say so. The only criterion is that the amount of your investment must be appropriate to the type of activity you are considering and to the size of your project.
As well do not overestimate your profits. While BOI officers might not be experts in your sector they have seen enough projects over the years to know what margins and profits might be expected for a business of your type and size.
Note: This post is an excerpt of Rene Philippe Dubout next book: “How to Invest Safely Into Thailand” to be published in January 2010
About the Author:
The author Rene-Philippe DUBOUT is a lawyer since 1990 when he was admitted to Geneva bar (Switzerland). He practiced as a litigator there for 10 years until he moved to Thailand in 1999. In 2002 he founded with a group of Thai lawyers Rene Philippe & Partners Ltd a local law firm that specialized in Cross Borders Investments and Real Estate. He has been lecturing in several Thai Universities and a speaker to numerous conferences and seminars. He is the author of a must read book:”How to Purchase Real Estate Offshore Safely: The Case of Thailand”.
© Copyrights 2009 – Rene Philippe Dubout – This article may be reprinted if information about the author, the websites, and the URLs remain intact
Originally posted 2009-08-05 14:36:44.