Thailand Board of Investment Tax Incentive: Problems or Solutions?

Chris Potranandana

LL.M. Candidate ’13 at UC Berkeley

Table of Content

Part 1: Introduction

Part 2: Background

a. History of BOI

b. Present Investment Promotion act

c. Process of applying for the BOI Promotion

d. Eligibility for the promotion

e. Numbers in reality

Part 3: Analysis

a. Does BOI tax incentive create the unfair competition?

b. Do BOI tax incentives inefficiently distort the allocation of resource?

c. Is it is true or not that BOI tax-incentive can bring the investment to the

country?

d. Is there any better way to for Thailand to run this tax incentive regime?

1. Eliminate BOI Tax incentive

2. Adopt uniform tax incentive regime

3. Broaden tax base to raise the revenue

Part 4: Conclusion
Part 1: Introduction

Nowadays, the economies of developing countries are booming while the

western economies have started to deteriorate since financial crisis in 2008. There is a

need for government in developing countries to adopt the most appropriate policy to

accommodate the change of the situation. One policy that is likely to be very effective is

tax policy. Especially, tax incentive is one of the most popular policies around the world

to attract the prospect capital that is moving across the country these days.

In order to attract foreign direct investment, Thailand chose this tax incentive

policy as a main mechanism for the last 5 decades. The country adopted these

principles under the form of Board of Investment (Hereafter BOI) privilege. This

certificate can provide huge benefits such as tax privilege, and foreign employment

privilege to a granted firm. As a result, BOI attracted foreign direct investment more than

293 and 488.1 billion baht in 2009, and 2010.1

If one looks at numbers only, one might perceive as a very beneficial policy for

the country since it has attracted a lot of capital around globe to invest in Thailand.

However, this paper argues this view largely ignores the fact that there are businesses

out there that do not get the promotion from BOI, and they have to compete in the same

market with more burden than those who have been granted for this privilege, and,

therefore, tax incentives hurt competition in the Thailand, and that hurt people and

economy of the country as a whole.

Moreover, this paper also examines how the BOI tax incentives distort might

distort the allocation of productive resource in the market. It will go over the result of
                                                                                                               
1
BOI website from http://www.boi.go.th/upload/content/1112_cer_en_13010.pdf
2
Chantaranimi P., Devil in a sacred Shrine, Manager Magazine, June 1988
3
Id.
4
Id.
5
Id
6
Shain M., Thailand Board of Investment: towards a more appropriate and effective rural investment
this action of the government since the incentives might divert investors to be in the

market that is not really the most efficient market of the country.

Lastly, the paper will look at the goal that BOI is trying to succeed, which is the

in-flow of the Foreign Direct investment. It will examine whether it is true or not that tax-

incentive can bring the investment to the country. Is there any better way to do that?

The alternative solution such as an uniform tax-incentive is also proposed in this paper.

Part 3: Background regarding Board of Investment

a. History of Board of investment

Board of investment, or commonly known as BOI, has been established for the

first time under Industrial Promotion Act B.E. 2497 (AD 1954). This is the time that

country was ruled by the military government. Field Marshal Plaek Phibunsongkhram is

the one who promulgated this act. However, according from manager magazine june

1988, it was initiated by USA, at that time since USA and Thailand have signed the

agreement of investment guaranteed of USA citizen on 1stSeptember 19542. It was the

first time that Thailand has open their markets for the private sector, especially foreign

investment, to be main parts that drive the economy. However, this act failed to achieve

its goal because there were only 6 out of 93 applicants that have been granted the

promotion.

World Bank has recommend some changes to the policies, and it was the

principles of Investment Promotion Act B.E. 2503 (1960) and these principles have still

existed in the current act3 . The recommendations in the report are

                                                                                                               
2
Chantaranimi P., Devil in a sacred Shrine, Manager Magazine, June 1988
3
Id.
 1. Tax exempt for the machinery

2. Tax exempt of the 5% of the revenue for 5 years.

3. Exempt or reduction of tax for imported raw material for 3 years

4. Reduction of export tax for the appropriate rate in order to help the export goods

to compete in the world market.

5. Prohibition or control of import goods

6. Allow foreign companies to repatriate their profits, or remit the capital back to

home countries in case of quitting the companies.

In 1957, there was another coup d’état in Thailand. This time, Field Marshall Sarit

Thanarat was the leader of the coup, and thereafter served as a prime minister of

Thailand for 6 years. Because of the push from USA and World Bank, Sarit promulgated

the first Investment Promotion Act BE 2503 (1960) 4 . In this period, Thailand has

achieved the two digits growth rate from 3.6% in 2500(1957), 11.04% in 2504(1961),

and even 13.8 in 2507(1964)5.

After that, the amended version of Invest Promotion Act was Invest Promotion

Act B.E. 2505(1962)6. They amended because the previous act only granted a partial

exempt of the import tariff for machinery. Therefore the second one amended that

provisions, but the principles still remain the same as the previous one7. Lastly, the

Investment Promotion act B.E. 2520 (1972) is currently in use. The main change of this

present law is that it gives more authority to the board, and the increase proportion of

                                                                                                               
4
Id.
5
Id
6
Shain M., Thailand Board of Investment: towards a more appropriate and effective rural investment
promotion act, Pacific Rim Law and Policy, 1994, at 144
7
See Chantaranimi P., supra note 2
people from political body in the board8. It was criticized that it had given too much

discretion to the board9. Moreover, Due to the change in tax structure, especially the

adoption of value added tax, the reduction and exemption in business tax was removed

from the act as well in the amended act in 1991.10 The act was amended again in 2001

due to the reform of the Bureaucracy structure by Thaksin Shinawatra government11.

b. Present Investment Promotion act

For the present Investment Promotion Act B.E. 2520, the paper discusses only

the main benefits of a promotion certificate. First, it discusses the non-tax incentive,

which is granted to the promoted firms, which is called promoted person in the act, and

then, it discusses the main points of this paper which are tax incentives.

The act has basically 4 main non-tax incentive for the companies that have been

granted the promotion certificate, which are as follows

§ Section 24 allows promoted person to bring foreign nationals to enter the

Kingdom for the purpose of studying investment opportunities12.

§ Section 25 allows promoted person to bring into the Kingdom skilled workers,

experts, spouses and dependents of those persons to work in promoted

activities. 13

§ Section 27 allows promoted person to own land in order to carry on the promoted

activity.14

§ Section 37 allows promoted person to take out or remit money abroad in foreign
                                                                                                               
8
Id.
9
Id.
10
See Shain M., supra note 6, at 144
11
Investment Promotion Act B.E. 2520 (1977), as amended by Investment Promotion Act B.E. 2534 No. 2
(1991) and Investment Promotion Act B.E. 2544 No. 3 (2001)
12
Id. Section 24
13
Id. Section 25
14
Id. Section 27
 currency.15

There are 7 tax incentives in the act, which are as follows

§ Section 28 and 29 grants promoted person exemption from or reduction of import

duties on machinery16.

§ Section 30 grants promoted person exemption from or reduction of import duties

for raw or essential materials17.

§ Section 31 and 34 grants promoted person exemption from or reduction of up to

eight-year corporate income tax from their net profit and dividends18.

§ Section 35 allows double deductions from the costs of transportation, electricity

and water supply19.

§ Section 35(3) allows promoted person to deduct additional 25 percent of the cost

of installation or construction of facilities20.

§ Section 36 grants promoted person exemption from or reduction of import duty

on raw or essential materials for use in production for export21.

This paper largely analyze the benefits of exemption in corporate tax since it is

the biggest amount of money that the companies gain, and it is the most likely reason

why companies seek for the BOI promotion.

c. Process of applying for the BOI Promotion

Section 17 grants the Secretary General of the Board the authority to prescribe

                                                                                                               
15
Id. Section 37
16
Id. Section 28, 29
17
Id. Section 30
18
Id. Section 31
19
Id. Section 35
20
Id. Section 35(3)
21
Id. Section 36 Id.
the rules, procedure and forms of applying for the promotion certificate. However, this

authority still subjects to section 16 that states that22

“The activities which are eligible for investment promotion by the Board are those

which are important and beneficial to the economic and social development, and

security of the country, activities which involve production for export, activities

which have high content of capital, labor or service or activities which utilize

agricultural produce or natural resources as raw materials, provided that in the

opinion of the Board, they are non-existent in the Kingdom, or existent but

inadequate, or use out-of-date production processes.”

However, in order to define which activities are “important and beneficial to the

economic and social development, and security of the country” or “activities which

involve production for export” or “activities which have high content of capital, labor or

service” or “activities which utilize agricultural produce or natural resources as raw

materials”, which activities are “non-existent in the Kingdom, or existent but inadequate,

or use out-of-date production processes” subjects solely by the board’s discretion. This

paper will examine the result and effect of this kind of process in the analysis section.

The following chart will demonstrate the process that the investors need to do in

order to obtain the promotion certificate.

                                                                                                               
22
Id. Section 16, 17
 Table 1 Process of applying for BOI promotion certificate

Souce: BOI website at http://www.boi.go.th/index.php?page=procedures

d. Eligibility for the promotion

The activities that will be eligible have to have the minimum level of investment

capital at least one million baht23 (around 33,000 dollars at 11/29/12.) Moreover, each

                                                                                                               
23
Board of Investment Announcement No. 10 / 2552 Types, Sizes and Conditions of Activities Eligible for
Promotion
kind of business subjects its own rules, which are the List of Activities Eligible for

Promotion prescribed by the board. The business has to comply with all of those

regulations and conditions in the list in order to be eligible to apply to be the promoted

activity. There are currently 6 lists of the eligible activities24, which are as follows

Section 1: Agriculture and Agricultural Products

Section 2: Mining, Ceramics and Basic Metals

Section 3: Light Industry

Section 4: Metal Products, Machinery and Transport Equipment

Section 5: Electronic Industry and Electric Appliances

Section 6: Chemicals, Paper and Plastics

Section 7: Services and Public Utilities

One should look at some particular businesses in order to understand the

aspects of these regulations, and, in addition, one will understand the thinking of the

Board of Investment more. To let the Board of Investment alone to create all of the

conditions for each business reflect Thai government perception about how to develop

the economy. For example, in order to gain the promotion in Hotel business, the

investor can choose either to have at least 100 rooms for the hotel or the minimum

investment (excluding cost of land and working capital) of not less than 500 million

baht25. For the Software business, projects that will be promoted must use software

development processes specified by the Software Industry Promotion Agency26. For

cars, the actual production of the factory has to be at least 100,000 units/year, and the

                                                                                                               
24
Please look at the appendix for all the lists provided here.
25
Id. at Section 7: Service and Public Utilities, List of Activities Eligible for Promotion (Information as of
February 2011)
26
Id. at Section 5: Electronic Industry and Electrical Appliance (Information as of February 2011)
amount of total investment during the first 5 years of corporate income tax exemption

have to be at least 15 billion baht, excluding cost of land and working capital. In

addition, the Board needs to approve the parts production investment plan and a parts

utilization plan27.

As one can see that these rules are based on the concept that government will

pick the right winner in order to develop Thailand’s economy. For example, in hotel

business, BOI want the hotels that have more than 100 rooms to invest in Thailand.

Therefore, BOI will give those incentives for the hotel that has more than 100 rooms. On

the other hand, that means BOI think that a hotel that have less than 100 rooms is not

good to Thailand as much as the hotel that have more rooms. This paper will examine

in the analysis section whether this concept is justified or not.

Numbers in reality

In order to understand this picture clearer, one should also look at the statistics of

submitted applications, approved applications, and number of promotions certificate that

issued. In 2011, there are 2,112 net applications submitted 28 . For all of these

applications, 1652 applications were approved29, and the issued promotion certificates

are 1526 certificates30.

From these numbers, one can see that the application approval rate is 78.22%. Some

                                                                                                               
27
Id. at Section 4: Metal Products, Machinery and Transport Equipment (Information as of February
2011)
28
BOI website, Net application submitted, retrieved November, 29 2012 from
http://www.boi.go.th/upload/content/1112_net_en_73921.pdf
29
BOI website, Application approved, retrieved November, 29 2012 from
http://www.boi.go.th/upload/content/1112_app_en_40585.pdf
30
BOI website, Promotion Certificate issued, retrieved November, 29 2012 from
http://www.boi.go.th/upload/content/1112_cer_en_13010.pdf
people look at this number and find it pretty impressive rate However, the value of the

total investment for the submitted application is 672,800 millions baht, while the total

investment of all approved applications are only 449,100 millions baht. This means

Thailand lost the investment in 2011 equals to 226,700 million baht that we suppose to

have them in our country due to the BOI discretions. Details are in tables below.

Table 2 Net application submitted31

Table 3 Net application approved32

                                                                                                               
31
See BOI website, supra note 28
32
See BOI website, supra note 29
 Table 4 Net Promotions certificate issued33

]3. Part 2: Analysis

a. Does BOI tax incentive create the unfair competition?

Obviously, the act has problematic rules and regulations, which are the

conditions of all the industries that can be promoted, and the discretion to promote the

activities. The first elements have a problem because the board can impose any

specifications that they perceive as the need of the country, and there will be firms that

cannot comply with rules; therefore, they will not gain any benefits. For example, BOI

can announce that software productions that follow the specified process as the

government agency required is “the activities that are important and beneficial to the

economic and social development.” In this example, some that can comply with the

conditions will benefit, and the rest of the companies, who cannot comply with the

conditions, will not be granted. The second problematic element is the discretion of the

board. Even if one software company has this specified process in their production, BOI

still have authority not to grant them a promotion certificate if BOI does not see this

activity as justified as section 17 of the Investment Promotion act.

                                                                                                               
33
See BOI website, supra note 30
 There are scholars arguing that non-uniform benefits such as tax incentives is

unfair to the other competitors in the market34. This is based on “"horizontal equity”

principle. For the meaning of this principle, Cordes stated that “A principle used to

judge the fairness of taxes, which holds that taxpayers who have the same income

should pay the same amount in taxes35.” The first approach is to compare firms within

the same industry, and it considers “unfair” if the tax regime favors one competitor more

than another. The second approach is to compare industries whether the tax treat

companies in the different industries the same or not. In this section we shall use the

first approach since if one use the second approach, due to the promotion of BOI is

several industries, the second approach test will be fail. There are some efforts to fix

this horizontal equity problem here in USA, such as removal of the tax advantage in

particular industry, but some are still existed. For example, congress equalized the tax

treatment of mutual and for-profit companies in savings and loans and insurance

industries while there is still a tax favor in the agricultural cooperatives.36

Hence, if the first approach measures is adopted, BOI tax incentive is obviously

unfair because, in the same industry, the tax system favor the one that has the specified

process of making new software than the others that do not have the process in

production, or even have the process, but it does not get the approval from the Board.

From the point that this tax incentive creates unfair competition in the market, as

these markets are mostly oligopolistic condition, an exit of each individual firm will affect

the price and quantity in market. Most of the promoted firms are big businesses. Some

                                                                                                               
34
Klein W., Income Taxation and Legal Entities, 20 U.C.L.A. L. REV. 13, 1972 at 58
35
Cordes J., Horizontal, equity, The Encyclopedia of Taxation and Tax Policy, Urban Institute Press,
1999 at 195
36
See Klein W., supra note 34 at 60
of the big promoted firms survive in the market because BOI decreases their cost to be

lower than the other competitors. Therefore, the new businesses, which do not get the

promotion, cannot enter the market since they see no prospect profit in the market to

gain. Therefore, promoted firms now survive under no pressure to compete in the

market. As a result, the quality of goods are not as good as it should be, and their price

are not competitive as it should be. As Thai industry are filled up with these weak

industries, the economy will not grow since the private sectors, which are the heart of

the economy, are not in the market because they are competitive and efficient, but it

exists only because BOI sees them as necessary to our country, and therefore

subsidize them.

One obvious example of this infant industry is Phoenix Paper company. It was

promoted under the name “United Pulp and Paper”. In 1980s, the paper companies

around the world have decreased their price over time, and Phoenix could not compete

with the competitors. At this point, BOI has given Phoenix several privileges in order to

make them survive in the market such as corporate tax exempt, import tariff to protect

the company, and import quota due to phoenix sale performance. Therefore, Phoenix

acted as a monopoly in a paper markets. Thai consumer had to use an over price and

low quality papers for years. If it were not because of BOI privilege, Phoenix would not

stay in the business for long.

b. Do BOI tax incentives inefficiently distort the allocation of resource?

 BOI tax incentive is one of the kinds of non-uniform investment incentive, which

deteriorate the allocative efficiency in market.37 Allocative efficiency is the concept that

all the firms in the economy only produce at lowest cost, and the benefits of the

produced goods are valued the most to the consumers.38 In other words, allocative

efficiency occurs when firm’s marginal cost equals marginal benefit of society39. For

example, recently BOI secretary general has given the interview said that BOI will

promote more labor-intensive industry to make Thailand remain competitive in the world

market. 40 Therefore, some capital will induce more capital to go to labor intensive

business as BOI suggest since their tax-induced cost will be cheaper to produce.

However, no one can really prove that creating more labor-intensive industries will be

the best bet for Thai economy at present. In other words, the labor-intensive industry

might be at the point that it is the most efficient, which means their marginal cost is

lowest. Promotion to the industries will encourage industries to produce more goods,

which would rather be inefficient for the economy as a whole if firms continue to

produce more. The inefficiency happens because the use of income tax creates a tax

bias that favors the labor-intensive industry; therefore, the tax bias will cause an

inefficacy in the allocation of labor.41

                                                                                                               
37
Gugl E. and Zodrow G., International Tax Competition and Tax Incentives in Developing Countries, The
challenges of tax reform in a global economy. - New York, NY, 2006, at 167
38
Gode D.,What Makes Markets Allocationally Efficient?, The quarterly journal of economics. – Oxford,
1997, at 603
39
Maley S. and Welker J., Pearson Baccalaureate Economics for the IB Diploma, Prentice Hall, 2011 at
34
40
Maierbrugger A., A Helping Hand for Investors, March 6, 2012, retrieved November 28, 2012 from
http://investvine.com/a-helping-hand-for-investors/
41
Gordon R.and Hines J. Jr. ,“International Taxation”, NBER Working Papers, National Bureau of
Economic Research (NBER). 2002
c. Is it is true or not that BOI tax-incentive can bring the investment to the

country?

Tax incentive is one of factors that investor value, but firms also looks at other

qualifications of a particular country. The study from Harvard business school found out

that firms rather pay their attention to the country that has a cheaper combination of

cost, proximity to the market, and skilled set for the labor in that country42. Only 25% of

the survey said they moved their production abroad because of lower tax rate,

specifically to tax regime, investors also move their investment out of a particular

country because of complexity the uncertainty to the future tax code43.

In addition , there are red tapes that come with the BOI benefits. These red tapes

increase the cost of the companies, and create additional burden for their investment.

Consequently, it may deter the investor to build their productions in Thailand. For

example, Section 14 of the investment promotion act, which mandates promoted

companies to disclose their information, and allow BOI to fully monitor the companies,

can discourage the company to seek for the promoted status in order to gain the

benefits44.

Another point that signal that BOI tax incentive might not be the most efficient

way to bring investment to the country is the problematic bureaucratic system for BOI.

Due to bureaucratic uncertainty played important roles here. Because of red tape such

as excessive regulatory power and arbitrary discretion, such as section 14 (monitoring

power) and section 16 (approval power), some anticipated investors that value these

                                                                                                               
42
Porter M., Rivkin J., Prosperity at risk – findings of Harvard Business School’s Survey on U.S.
Competitiveness, at 15, retrieved 27 November 2012 from
http://www.hbs.edu/competitiveness/pdf/hbscompsurvey.pdf
43
Id. at 16
44
See Shain M., supra note 6, at 163
actions might decide not to even bother to apply the promotion certificate. Therefore,

their decisions to invest in Thailand will depend on other factors, such as logistic

system, level of labor skills, or size of the potential market, instead of tax incentive.

d. Is there any better way to for Thailand to run this tax incentive regime?

Yes, this paper propose the alternative solution such as eliminating tax incentive,

imposing uniform tax incentive, broadening the tax base might be a better solution to

attract foreign capital and develop sustainable growth economy.

1. Eliminate BOI Tax incentive

Political players, investors, and academia have suggested to dissolve BOI for

decades since they conceive BOI as an adverse components for development. In 1990,

Prime minister Chatichai Choonhavan proposed to dissolve BOI because he perceived

BOI as obstacles to the investment45. These obstacles are red tape, regulations, and

arbitrary discretion among investors46. The proposal of eliminating tax incentive is still in

the debate nowadays. In 2010, Mr. Satit Rangkasiri, the director general of the Revenue

Department, discussed eliminating the tax exemption for corporate tax for those BOI

promoted companies47. He believed that cancelling the tax privileges can help Thailand

bring more revenue in order to low the tax rate of the country in the future48. In 2011,

Mr. Payungsak Chartsutipol, Chairman of the Federation of Thai Industries also

                                                                                                               
45
Mephokee S., Critical Times for Thai Board of Investment, JAPAN ECON. J., 1991
46
Id.
47
Revenue Department’s Tax reform Proposal: Canceling BOI to gain the base revenue, Thairath
Newspaper (November, 18 2010) retrieved from http://www.thairath.co.th/content/eco/127830
48
Id.
suggested to change BOI role from granting tax incentive to a center to coordinate

private sectors and the government regarding trade and investment49.

For the academic point of view, Nipon Poapongsakorn, President of Thailand

Development Research Institute, which is a leading economic research in Thailand also

proposed eliminating BOI tax incentive in order to low the overall rate for corporate

tax. 50 He also pointed out that lowering the corporate tax rate will help small and

medium business to compete in the market more.51 In 1994, the more substantive paper

by Shaine suggested both of the solutions. He stated that “Their potential inequities

and bureaucratic inefficiencies along with their costliness and marginal effectiveness

make them an undesirable policy instrument52.”

However, he proposed, instead of granting promotion on the case-by-case

discretionary basis, the promotion should in the form of automatic incentive53. His policy

recommendation works by setting up the regional office, and let those regional offices

specified the guidelines for promoted project with respect to the local needs.54 Incentive

can be in a form of infrastructure oriented or a subsidy to infrastructure55. If any projects

meet the guideline, it will automatically be granted incentives. He argued that, with

these methods, the uncertainty and inefficiency of the centralized bureaucracy problems

will be solved, and the local will be benefit from the incentive that they created by

themselves since they know more about the local deficiency than the centralized
                                                                                                               
49
Private Sector suggests BOI to cancel the tax subsidy, Thaipost Newspaper (July 22, 2011) retrieved
from http://www.ryt9.com/s/tpd/1196457
50
TDRI suggests canceling capital tax, BOI; Toyota met with Chaiwut, Thaipost Newspaper (February 25,
2011) retrieved from http://tdri.or.th/archives/download/news/tp2011_02_25.pdf
51
Id.
52
See Shain M., supra note 6 at 178
53
Id. at 176
54
Id. at 176-177
55
Id. at 179
government56. However, it should note that Shaine see main problems of Thailand are

not problems regarding lacks of investment, but lacks of Infrastructures in the rural area,

and shortage of skilled labors.57 It seems that he is more interested with development

with the rural areas, which is beyond the scope of this paper. With respect to his

proposal, this paper agrees with his solution of eliminating the tax incentive granted

BOI. However, his recommendations do not solve the problem of what the best tax

regime for attracting foreign investment. That is the reason we also suggest the

adoption of uniform tax incentive as a tool to attract foreign direct investment.

2. Adopt uniform tax incentive regime

This paper proposes that uniform tax incentive might be the best way to make a

shift from non-uniform tax incentive. In order to attract investment, countries still need

the attractive corporate tax rate although there are mixed evidence that stated low tax

rate will bring more investment58. Chirinko (1987) suggested the other macroeconomics

policies are factors that likely to determine the level of investment instead59. Moreover,

He (1999) also found that the effect of tax incentive is small60. However, recently, there

is some evidences suggested that investment responds positively to the reduction of

corporate taxation. In fact, a recent study found out that the relationship between

                                                                                                               
56
Id. at 176-177
57
Id. at 165-166
58
See Gugl E. and Zodrow G., supra note 37 at 2
59
Chirinko R.,"The Ineffectiveness of Effective Tax Rates on Business Investment: A Critique of
Feldstein's Fisher-Schultz Lecture," Journal of Public Economics 32, 1987 at369-387.
60
Chirinko R. et al, "How Responsive Is Business Capital Formation To Its User Cost?: An Exploration
With Micro Data," Journal of Public Economics 74, 1999, at 53-80.
corporate tax and the investment are very strong61.

For Thailand, in 2009, at 30% corporate tax rate, the revenue department

collected 392,172 million baht or 4.05% of the total GDP for corporate tax. At present,

we have 23% tax rate, and as the government announced that they are going to reduce

to 20% in the next year. As the working paper by IMF suggested that the trend of

corporate tax is decreasing all over the emerging and developing economies62 – a

group of countries that are Thailand’s competitors. The data of 27 countries shows that

the effective corporate tax rate has been decreased from 1995 to 2007; moreover, they

found that the tax revenue is largely increase. Therefore, it is a matter of which study is

more accurate. If the study of IMF is correct, we expect the corporate tax revenue to

rise soon.

Actually, there is an interesting incidence regarding the reduction corporate tax

policies in Thailand. Thai Publica, an alternative online news, found out that, in 2008,

Samak Sundraravej reduced corporate income tax rate from 30% to and 25 % for

companies in SET (a Thailand main stock market) for the first 300 millions baht net

profit, and 20% for the first 20 millions baht profit of the companies registered in MAI(an

Thailand alternative stock market for small and medium sized enterprises) for 3 years63.

At this point, because the reduced tax rate increase their performance in making profit,

they start to pay more tax. The tax revenue that collected the companies in the stock

                                                                                                               
61
Djankov S. et al, The Effect of Corporate Taxes on Investment and Entrepreneurship, American
Economic Journal: Macroeconomics 2 (July 2010), 2010, at 31–64
62
Abbas S. et al, A Partial Race to the Bottom: Corporate Tax Developments in Emerging and
Developing Economies, IMF working paper, 2012, at 20
63
Thai publica, Structure of Corporate Income Tax (1): reveal only 1.5 thousand companies that pay tax,
retrieved November 28, 2012 from http://thaipublica.org/2012/06/the-corporate-income-tax-1/
market increased for 4% in 2009, and 43.52% in 2010. Conversely, the revenue that

collected from the private companies that did not benefit from the policies perform ed

much worse at the same time. In 2009, there were a decrease of tax revenue from this

group for 25.03%, and, in 2010, the revenue went down for another 4.49%. For this

policy change, one can conclude that the reduction of corporate tax can raise tax

revenue. However, there might be the argument from the other side also. Since in the

real world, it is very difficult to control all the factors, in other words, to hold other factors

constant, there might be other factors that contributed to this positive change in

revenue.
 However, it is not that simple to determine

the most appropriate corporate tax rate – a

rate that attracts most investment and raises

most revenue at the same time. To find that

rate, one need to run econometric method,

which is beyond the scope of this paper.

However, we can still roughly look at the

trend of corporate the other healthy

economies. In this paper, we use OECD

(Organisation for Economic Co-operation

and Development) as a set of industrialized

countries. The trend of corporate tax among

OECD countries is decreasing over the past

decade. It decreased from 35.4% by 6.1%

during that time65. At present, the average

corporate tax rate is 25.9%, while the

group’s weighted average corporation rate is

29.3%65.

Table 5 Tax rates from OECD66

                                                                                                               
64
Stockdale C., The Eight Countries Taxing Business Most, fox business , retrieve November 28, 2012
from http://www.foxbusiness.com/economy/2012/04/09/eight-countries-taxing-business-most/
65
Id.
 More likely, moving Thailand corporate tax rate from 30% in 2011 to 20% in 2013

can signal that Thailand will try to keep up with the corporate tax reduction trend of

OECD and other emerging economies also. Corporate tax rate in OECD Countries are

provided here for reference and assisting readers to easily compare the corporate tax

rate between countries. From these evidences, this paper believes the country is

moving towards the right direction.

3. Broaden tax base to raise the revenue

Lowering the corporate tax is a promising way to keep up with our competitors.

However, broadening tax base should not be ignored since it might off set the reduced

avenue that was reduced in tax rate. One problem Thailand do have is lack of

participation in the tax system, and it makes our tax base very small. At present, there is

only 153,906 out of 327,127 that currently pay tax to the revenue department67. In this

number, 523 companies are in the SET (Stock Exchange of Thailand), and 153,383 are

private companies, while the rest, 173,221 companies, doesn’t pay any tax68. Some of

the companies here are small and medium businesses (SMEs) that do not pay tax due

to the tax exempt that the government has given for SMEs that their profits do not

exceed 150,000 Baht69. If Thailand can collect tax from those companies that is not

currently pay any tax, the country might find their revenue remain the same or even
                                                                                                                                                                                                                                                                                                                                                                   
66
Rogers S., Corporation tax rates around the world. How much do companies pay?, Retrieved
November 26, 2012 from http://www.guardian.co.uk/news/datablog/2011/feb/21/corporation-tax-rates-
world
67
Thai publica, supra note 63
68
Id.
69
Thai publica, Personal Income Tax Structure (3): 11.7 working people, 2 million pay tax, retrieved
November 30, 2012 from http://thaipublica.org/2012/04/personal-income-tax-structure-demolished3/
increase.

The problem has come to what the country can do to broaden tax base. One

benefit that Thailand will gain if they implement our policy recommendations is the tax

revenue from the BOI promoted companies. In 1990, Thai government lost revenue

from BOI promoted companies more than 10 billion baht (approximately 400 million US

dollars at that time)70. A more recent official document showed that Thai government

lost 201,928 million baht in revenue from BOI tax privilege. In this amount, 142,313

million baht are loss from corporate income tax exempt and 59,615 million baht are loss

from custom tax exempt. With this data, an economist in the Office of Fiscal Policy,

Ministry of finance even strongly criticized “With this amount of money (201,928 million

baht), Thailand can even cancel personal income tax, and no citizen in Thailand needs

to pay tax anymore, and the government is even have outstanding balance around 12.5

billion baht left71.”

Part 4: Conclusion

In conclusion, this paper believes that the current BOI tax incentive should be

removed due to several disadvantages of the policy. First, privilege such as the tax

holiday hampers the competition in the country. Due to its special tax rate, the promoted

firms gain a huge advantage over the other businesses, which do not have the

promoted status, in the market. As a result, the government have created the unfair
                                                                                                               
70
See Shain M., supra note at 153
71
Ananapibut P., Chapter 3: AEC and the challenge for Thailand’s tax reform, Office of fiscal policy,
retrieved November 30, 2012 from
http://www.fpo.go.th/FPO/modules/Content/getfile.php?contentfileID=1341
competition in the market, and that can reduce the social welfare in the country since

those promoted business will gain more surplus, and they are not efficient. Secondly,

BOI tax incentive deteriorate allocative efficiency in the market since the limited

resource will flow to the industry that BOI try to promoted, which we do not know

whether that is the most efficient sector to allocate the resource or not. Thirdly, BOI

might not even attract the foreign direct investment because there is a clear evidence

that investor choose to invest in particular country not only because of tax factors, and it

even deters the investors not to come and invest in the country due to their excessive

rules and regulations, and the transparency and uncertainty of the public official in BOI.

Alternatively, we propose that Thailand should move their system to the uniform

tax incentive regime, meaning that they should lower the tax to support every

investment instead of letting BOI choose kinds and types of business that they like to

encourage. For the concern of losing revenue if we lower the tax in every single sector,

we propose that the country should broaden their tax base in order to gain more

revenue. Cancelling BOI, and collect the money from the rest of the company in the

market will likely to create enough revenue for spend.

Last words, proposal of Elimination of BOI has been in academia debates for

several decades despite the concrete evidence that cancelling this agency will create a

much vibrant environment for businesses in Thailand. However, it is never been

implemented. One explanation cause is because of these big businesses that currently

receive the privilege have been lobbied the government for decades too. The author

hope that soon public will realize what they lost from this policy, and thereafter they will

start to push this agenda to be implemented in the society.

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