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Update September 2015


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Update by Natrakorn Paewsoongnern
 
 
 

Paul Gambles
Co-founder of MBMG Group

 

Update August 29, 2015

Strong Dollar can help and hinder

The US Dollar is particularly strong at the moment – especially against emerging markets currencies. Whilst currency exchange tends to ebb and flow like any other market, this may just be more than a short-term trend.
Just like stock-picking, playing the short-term markets has never been an interest of mine. I’ve always found it a risky business that not even a seasoned trader can rationalize. So when currency markets sway one way or the other on a given day, I take note merely to see if a pattern is emerging.

Chart 1 Source: Oanda

With that in mind, the last recent months have seen the US Dollar become increasingly strong in exchange for currencies in emerging markets. For example, in August two years ago a single greenback would buy you 31 Thai Baht; nowadays you’ll get close to 35 THB.
This is no flash-in-the-pan – these drops in value have been consistent and prolonged. Asian emerging market currencies, compared with August 2013, reveal the extent of the USD’s strength (see chart 1). In fact, the last three months alone have seen huge shifts for the Thai Baht (6.49% down), Malaysian Ringgit (7.02%) and Korean Won (8.64%).
Apart from making a meal out and a shopping spree in Thailand even cheaper for my American friends, this prolonged strength has opened up other opportunities.
On a macro scale, emerging market economies become more competitive in such situations, as their exports are cheaper once translated into USD. For corporate and private investors, this can also be a time to invest in the likes of Thailand, Korea and Taiwan; be it in tangible items, such as property, or in anticipating the local currency to get stronger at a later date.
However, the length of the Dollar’s strength is making governments nervous, as they worry prolonged weakness against the greenback will provoke inflation.1 Given that the US and other major economies have extremely low levels of inflation themselves, price rises in emerging market economies could deter foreign investment from entering into the country.
The timing couldn’t be worse: global growth is decelerating – the US economy contracted by 0.7% year-on-year in Q1 20152 and growth in China – the world’s second largest economy – is slowing,3 whilst its government is trying everything (in vain) to control the economy and markets.4
Future prospects don’t look that good for emerging markets either. US Federal Reserve Chair Janet Yellen has stated that she expects the Fed to raise its base interest rate this September5 – the rate has been close to zero for almost seven years. This move could attract global investors who were staying out of low-yield America, for apparently higher-risk, higher-yield emerging markets.6
Added to that, commodity prices, which have helped emerging-market economies in recent years, have been on the slide for several months (see chart 2). The slowdown in China, a major buyer of commodities7, has exacerbated this bleak outlook.

Chart 2 Index: 2005=100
Source: IMF Commodity Market Monthly, July 2015

Of course, like other markets, nothing is forever. Asian emerging market currencies may seem like they are in free-fall against the US Dollar now but the Korean Won and Taiwanese New Dollar are in fact at similar levels to five years ago.
Outside of Asia, governments are intervening to try and correct the slide of their currencies. Mexico, South Africa and Turkey have either increased interest rates or announced an end to quantitative easing. Inadvertently, that could well stave off the threat of debt deflation in itself and move towards a brighter economic future;8 yet it may also redress the balance with the USD.
Having said that, it would be wrong for governments and central banks to concentrate purely on the exchange rate with the US Dollar. The US is still the world’s largest national economy in terms of nominal GDP9, so its currency cannot be ignored; yet it’s also important to get a sense of perspective by looking at neighbouring trading partners’ currencies.
The Thai Baht has been week of late vis--vis the Ringgit and Filipino Peso. As with the USD value, rather than merely looking at the currency charts, it’s important to examine the economy as a whole if we are to understand the long-term perspective. In June, the Bank of Thailand lowered its forecast for the country’s 2015 growth from 3.8% to 3% flat.10 However, as I mentioned recently,11 I believe Thailand has better economic fundamentals than Malaysia or the Philippines and that in the longer term it looks better placed. That said, a currency roller coaster ride could be on the cards. A short-term reversal of the stronger Dollar is a distinct possibility; yet any form of liquidity or market crisis could see a dramatic return to far greater Dollar strength than we’ve seen lately. That could come before calm ultimately descends and the Baht makes a sustained recovery from levels much weaker than today.

Chart 3 Source: Oanda

As for the USD: not even the Federal Reserve can accurately predict what will happen – despite its belief to the contrary.12 The eventual rise in the base interest rate may attract investment in the short term but, like quantitative easing, the move may prove to be merely a walking stick for stock and currency markets rather than full rehabilitation. After all, a strong currency should not be confused with a strong economy – people want Dollars for a variety of different reasons.
In fact, a strong Dollar may prevent US growth. On the back of the stock market crash in China and concerted attempts by Chinese policy makers to weaken the RMB (“widen the band”), the USD recently took a sharp rise in value against the RMB. It’s too early to say whether this will last. If it does, it’s worth noting that a bit less than 20% of US imports come from China.13 Thus a strong Dollar vs. RMB won’t help move the American economy from its bear minimum rate of inflation or its stagnant levels of economic activity – which is exactly what needs to happen for the US economy to avoid ‘turning Japanese’, as Steve Keen – my colleague at IDEA Economics – puts it.14

Footnotes:
1 http://www.bloomberg.com/news/articles/2015-07-31/angst-levels-rise-as-emerging-market-currency-dive-gathers-steam
2 http://blogs.wsj.com/briefly/2015/05/29/why-u-s-gdp-shrank-at-a-glance/
3 http://www.wsj.com/articles/china-first-quarter-growth-slowest-in-six-years-at-7-1429064535
4 http://www.mbmg-investment.com/in-the-media/inthemedia/54
5 http://www.bloomberg.com/news/articles/2015-07-31/angst-levels-rise-as-emerging-market-currency-dive-gathers-steam
6 ibid
7 http://www.businessinsider.com/r-china-becomes-worlds-top-crude-buyer-despite-economy-stuttering-2015-5
8 See Steve Keen’s 2015 Outlook, for further details see www.ideaeconomics.org
9 IMF World Economic Outlook, April 2015
10 http://www.aseanbriefing.com/news/2015/06/26/thailand-economic-growth-to-be-curtailed-in-2015-2016-to-be-brighter.html
11 http://www.mbmg-investment.com/in-the-media/inthemedia/54
12 http://www.zerohedge.com/news/2015-05-25/ron-paul-rages-janet-yellen-right-she-can%E2%80%99t-predict-future
13 US Census Bureau, 2013
14 Steve Keen’s 2015 Outlook, IDEA Economics, www.ideaeconomics.org

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


Update August 22, 2015

In Gold we Trust?

Gold prices recently hit a five-year low. So what’s happened to the precious metal and how are its chances of recovery?
How the mind plays tricks. If I think of summers in my youth, an image of cricket in the sunshine springs to mind. Then, on the occasions I visit my native Yorkshire in the summer months, I realise once more how few sunny days there really are there. At least the standard of cricket’s back to where it was though!

Chart 1 Source: World Gold Council.

Next to the mythology of long English summers, we can file the old adage that gold is valuable. Whether this comes from legends of gold rushes, bullion bars stored at Fort Knox or personal jewellery collections, it’s fair to say that the precious metal carries with it a certain mystique. Probably because of its historical role it sometimes appears to be treated as a currency. For example, its purchasing power is often charted against the US Dollar, the Yen, Sterling and the Euro.
That goes some way to explaining the noise made in the press when gold recently fell to its lowest US Dollar price since March 2010: 37% down on its high point in late 2011. The headlines included It’s time to rethink your approach to gold1, Gold loses its glitter2 and A Gold Flash Crash happened Yesterday3. Not highly emotive stuff I concede; yet I can’t imagine similar headlines for other commodities such as bauxite, frozen orange juice or pork bellies.
The old faithful
The thing is, gold is old school: a quasi-currency trusted by those who haven’t quite accepted the abandonment of the gold standard by central banks, governments, politicians and the financial system which occurred, in instalments, from the 1920s to 1971.4 This lack of confidence is understandable given events since the Global Financial Crisis hit in 2008. By late 2011, concerns about debt levels in the US and Europe pushed the price of gold up to new heights.5
The downs follow the same logic: once other investments – such as stock market or house prices – boom, the price of gold drops. This happened at least eight times in the 20th century6 and, judging by the trends in the S&P 500 and US house price index over the last three years, is happening now.
So what next?
It’d be easy to declare that gold will rise again in the near future, merely because it’s so low now. However that would be facile.
It’s fair to say that things have become a little more complicated in recent years with the advent of cryptocurrencies, such as Bitcoin. These currencies compete for some of gold’s investors, as they also offer an alternative to conventional currency exchange markets and are used to hedge against inflation.7
That doesn’t necessarily mean that the days of trading in gold are numbered, though. A bit like the group Nick Cave & the Bad Seeds, gold may never again reach previous heights of popularity but it will likely maintain a decent number of hard-core fans.
Added to that, floating gold investors start to come back once fears return that markets have started to take a downturn. My feeling is that such an event may not be far away – in fact I think it’ll be more of a nosedive than a downturn. The above charts don’t just indicate potential trends in gold prices; quickly rising stock and house prices indicate we’re in bubble territory. However, any initial stock sell-off may as likely as not also drag gold down too in its earliest phase. It may take the realization of the severity of the correction to become apparent before divergence favours gold.
This is because, whilst private debt in the US has dropped somewhat in recent years, it is still alarmingly high. Not only that, America looks like it will follow the Japanese vicious cycle of debt deflation;8 meaning that as profits and salaries don’t increase, nor does the capacity to pay off debt.
One widespread misconception is that gold is a hedge against inflation. This is wrong on 2 counts: 9
* Gold is actually a poor hedge against most levels of inflation; historically it performs well only during periods of extremely elevated inflation; stocks and property tend to be better hedges against other levels of inflation.
* Gold is historically a strong performer during debt deflation.
(See chart 2.)

Chart 2

In keeping markets on life support, the Federal Reserve has kept the base interest rate at 0.25% since 2008, as well as ploughing a colossal USD 4 trillion into its QE programme.10 Now the Fed is hoping that it will soon be able to raise its rates11 in September this year. At that point we’ll have some inclination as to how well the markets – and more importantly the global economy – will hold up without artificial support.
A significant prolonged drop in stocks, house prices and other markets could cause another financial crisis and, this time around, the Fed will be out of ammunition. Not only that, given the huge drop in value in the Shanghai and Shenzhen stock markets, the Chinese economy may not be positioned to come to the rescue as it did in 2008.
All that means that the crisis could be much more prolonged than the GFC, causing some investors to rush desperately back to gold.
When this will happen and whether gold will actually provide any protection is impossible to predict.

Footnotes:
1 Livemint.com
2 Citywire
3 moneymorning.com
4 http://www.marketwatch.com/story/why-gold-is-falling-and-wont-get-up-again-2015-07-20?mod=MW_story_ recommended_default&Link=obnetwork
5 http://money.cnn.com/2011/08/22/markets/gold_prices/
6 http://www.marketwatch.com/story/why-gold-is-falling-and-wont-get-up-again-2015-07-20?mod=MW_story_ recommended_default&Link=obnetwork
7 http://www.forbes.com/sites/louiswoodhill/2013/04/11/bitcoins-are-digital-collectibles-not-real-money/
8 Steve Keen’s 2015 Outlook, www.ideaeconomics.org
9 Claude B.Erb, CFA AND Campbell R. Harvey, The Golden Dilemma, Financial Analysts’ Journal, Volume 60 Issue 4, July/August 2013 DOI: http://dx.doi.org/10.2469/faj.v69.n4.1
10 http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-5
11 http://money.cnn.com/2015/06/17/news/economy/federal-reserve-interest-rate-janet-yellen/

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


Update August 15, 2015

What effect do foreign crises have on SE Asia? Part 2

From last week: In contrast to Greece’s total lack of control over economic policy, the Chinese government thinks it’s in complete charge. The government has gone all-out to limit the effects of the crash, cutting interest rates, halting scheduled IPOs, threatening to arrest short sellers and allowing speculators to use their houses as collateral for marginal loans. Whether this constitutes assistance or interference is a matter of debate. Word is that the government will keep throwing ever more kitchen sinks at the problem until the markets behave more the way it wants them to. However, what Beijing doesn’t seem to realise is that even with all that power to control markets, it is merely papering over the cracks. The fundamental problem that many governments – not only China – are failing to recognise is that private debt is so elevated as to pose an impediment to sustainable growth.
ASEAN currency impact
Against this backdrop, a positive resolution to either or both of the Greek and Chinese issues would be expected to boost pro-cyclical ‘risk-on’ currencies like the Baht, Rupiah, Peso or Ringgit.

THB:MYR

Chart 1 Source: XE.com

The Thai Baht has suffered disproportionately to most neighbours over varying terms – falling by 14% against the Malay currency from this time last year to April 2015 (see chart 1); although it bounced strongly off those lows, before giving back most but not all of that bounce. It’s also had a rough few weeks against the likes of the Peso as well (see chart 2).

THB:PHP

Chart 2 Source: XE.com

In Malaysia, specific local factors, such as the recent financial scandal1 are more likely to generate relative direction versus the Baht; but with Peso and Rupiah it seems that markets are paying greater heed to Thailand’s weaker growth outlook.
This is a very short-term perspective – greater current account challenges remain for both the archipelago nations than for Thailand.
Whilst I remain concerned about Thai growth, I can see much better fundamentals here and I think these will have a medium to long-term effect that is more significant than the short-term growth forecast differentials. This is particularly because I feel all three countries may miss their revised official growth targets to the downside, a problem that would have a greater impact on countries where growth is a key determinant in currency valuation.
James Sullivan of Coram remains a believer in the longer term ASEAN growth story and sees ASEAN assets as offering less distorted medium term valuations than in developed economies that are more divorced from fundamental realities:2
The vast majority, if not all major stock markets, have been huge beneficiaries of loose monetary policy. Without QE led policy, I have little doubt markets would still be far below their previous peaks.
Three primary reasons have made equities the least worst asset class:
1) Currency debasement has supported corporate earnings
2) Cheap liquidity has been in abundance
3) Negative real rates
…QE has been wide reaching, and reached parts of the market that other policy measures couldn’t reach. However, when one observes some of the extremities, there are clear laggards. The Emerging Markets have been left behind, and drilling down, few more so than the Association of South East Asian Nations – the ASEAN region…
The FTSE ASEAN index is up 12% over 5 years, compared to the MSCI World Index and the S&P which are up 87% and 118% respectively (see chart 3):

Chart 3 Source: Coram Asset Management

Sullivan goes on to summarise the medium term attractions of ASEAN:
The unification of the 10 member states, higher growth rates, a younger population, modest debt to GDP ratios and ‘undervalued’ currencies all add up to a quite enticing investment opportunity. Not without risk and potential volatility, but with a medium term outlook, it appears to offer something rather exciting. Certainly something different from the rather saturated safe(r) haven developed markets...
(See chart 4)

Chart 4

From a UK perspective the relative attractions are apparent, especially as Sullivan shares my views that the UK economy and currency are on very thin ice because of the extreme levels of private debt, the ever more fragile housing bubble and the record current account deficit:
When we then consider the UK current account deficit is the greatest since records began, surely as part of a multi asset portfolio we should be diversifying our currency exposure also?
...It isn’t without risk - both equity and currency risk is apparent - but when we consider Sterling is a multiyear high (5 plus years) against the Singapore Dollar, the Malaysian Ringgit, the Indonesia Rupiah and strong against the Baht and Peso, the currencies themselves offer something different… However, the consequence of a $9 trillion carry trade unwind... remains the most unpalatable risk.
Sullivan is particularly drawn to my own main proxy for Thai Baht base portfolios, the Singapore Dollar, noting that even by such unscientific metrics as The Economist’s Big Mac Index3 (fast becoming the only part of that increasingly political polemic that’s worth reading regularly), SGD is 23% undervalued as the following Bloomberg PPP data also highlights (see chart 5).

Chart 5 Source: Coram Asset Management

All this means that, because of exchange rates, there may come an opportunity to buy reasonably-priced Thai assets at an effective discount. That said, I’ve long felt that the Baht could fall below 36 to the US Dollar in any relatively major global (or China-generated) crisis and below 39 to USD 1 in an extreme case.
Thus, notwithstanding that the Euro has the life expectancy of a pre-Thanksgiving turkey, that Sterling appears to be overvalued against just about anything, that China is likely to weigh around the necks of ASEAN and indeed Asian currencies like a dead albatross and that Baht looks like good medium to long term value relative to Peso, Ringgit & Rupiah, whether there is an attractive general opportunity in Thai assets right now really depends far more on events in Athens and Shanghai than in Bangkok. However, conditions still appear to be favourable to more value-driven, opportunistic, absolute return style managers, although in Thailand, as indeed elsewhere, they remain a very small minority.
Footnotes:
1 http://www.forbes.com/sites/riskmap/2015/07/21/a-scandal-in-malaysia-spurs-credibility-crisis/
2 All markets are equal, but some markets are more equal than others – Client note by James Sullivan of Coram Asset Management
3 http://www.economist. com/content/big-mac-index


Update August 7, 2015

What effect do foreign crises have on SE Asia? Part 1

By 1911, The Great Lafayette was such a renowned illusionist that when an oriental lantern from the set caught fire during a performance, the audience thought it was part of the act. In fact the fire destroyed the stage and killed Lafayette along with two of his assistants.1
In recent weeks, it has seemed to me that an illusionary trick has been taking place. Whilst everyone was concentrating on events in Athens and Frankfurt, the Chinese stock market was crashing before our eyes.
A global shock
For a 3-week period in late June and early July, the Shanghai and Shenzhen stock exchanges plummeted with share values dropping by a third. Whilst few foreign investors were directly exposed to these markets2 - only 1.5% of Chinese shares are owned by foreigners – it is impacting the global economy. After all, China is the world’s second largest economy: some 2 times greater than third-placed Japan. Added to that, it’s also first-placed USA’s main export and import partner, representing 7.6% of America’s export market and just under 20% of its imports.3

This had been coming: as I pointed out in an Update in June,4 China has long appeared to be on the way towards Japanese-style debt deflation (see chart), as the government attempts to artificially boost demand by making borrowing cheaper for the debt-addicted private sector.
In fact, the stock market crash wasn’t as rapid as it may have appeared. Between 12th July 2012 and 9th July 2015, the two Chinese markets lost an estimated USD 3.25 trillion in value.5 Put into context, the Greek state owes international creditors around USD 237 billion6 - some 12 times less (although of course it’s not so much Greece’s debt per se that has ever concerned me, so much as the wider ramifications of the failure of the inane self-serving Euro project).
Cede or impose control: it makes little difference
I’ve felt for a while that ASEAN currencies are susceptible in any kind of global economic, liquidity or capital market crisis; such as those that are very much on the horizon, despite short term attempts to kick cans further down respective roads, in China and Greece.
While a politicians’ compromise may have been reached to keep Greece in the Eurozone for now, I wouldn’t rule out a return to the Drachma in the not-so-distant future. A full-blown Euro exit would exert further downward pressure on Southeast Asian currencies, as any flight to safety by investors would favour the US Dollar. We appear to have returned to the situation I previously outlined, where the world is in a risk-on pro-Dollar/risk-off pro-Euro et al cycle. Beyond this, such discrimination as there is tends to favour those currencies with apparently attractive short-term prospects such as the Sterling, without looking at deeper fundamentals. Maybe the interest-rate-increase corner, into which we expect the Fed to have trapped themselves before the year end, will lead to some reappraisal of this.
In contrast to Greece’s total lack of control over economic policy,7 the Chinese government thinks it’s in complete charge. The government has gone all-out to limit the effects of the crash, cutting interest rates, halting scheduled IPOs, threatening to arrest short sellers and allowing speculators to use their houses as collateral for marginal loans.8 Whether this constitutes assistance or interference is a matter of debate. Word is that the government will keep throwing ever more kitchen sinks at the problem until the markets behave more the way it wants them to. However, what Beijing doesn’t seem to realise is that even with all that power to control markets, it is merely papering over the cracks. The fundamental problem that many governments – not only China – are failing to recognise is that private debt is so elevated as to pose an impediment to sustainable growth.9
To be continued…

Footnotes:
1 http://www.scotsman.com/news/the-magician-whose-greatest-illusion-was-death-1-465747
2 http://edition.cnn.com/2015/07/08/asia/china-stocks-explainer/
3 US Census Bureau
4 China flatters to deceive… and it’s a worrying deception, MBMG IA Update, June 2015, http://www.mbmg-investment.com/in-the-media/inthemedia/49
5 ibid
6 http://www.reuters.com/article/2015/06/28/us-eurozone-greece-debt-factbox-idUSKCN0P80XW2015062
7 Euro Summit SN 4070/15, 12th July 2015 http://www.telegraph.co.uk/finance/economics/11736779/Greece-is-being-treated-like-a-hostile-occupied-state.html
8 http://www.forbes.com/sites/jessecolombo/2015/07/19/is-chinas-stock-market-crash-over/
9 China flatters to deceive… and it’s a worrying deception, MBMG IA Update, June 2015, http://www.mbmg-investment.com/in-the-media/inthemedia/49


Update August 1, 2015

IHQs & ITCs: New incentives for Thailand or just a change of letters?

On 1st May a Royal Decree was published,1 implementing incentives for companies establishing their international headquarters (IHQ) and international trading centres (ITC) in Thailand. The idea behind the scheme is to attract businesses to establish their headquarters or a trading hub in Thailand, thus bringing more tax revenues, skilled jobs and know-how to the Land of Smiles.

I recently attended a breakfast meeting in Bangkok, whose theme was how Thailand could become an ASEAN hub. It included an excellent introduction to this new incentive scheme. Such incentive schemes are nothing new, of course. The previous major initiative launched in 2002 was the Regional Operating Headquarters scheme. This was designed to attract Thai and foreign multinationals to set up a regional hub to support operations around Southeast Asia. In 2010, more incentives were introduced and qualification criteria were relaxed. This was accompanied a year later by the International Procurement Centre (IPC) scheme, which offered incentives for businesses interested in using Thailand merely as a trade hub, rather than a full-blown regional office.

Neither the ROH nor IPC status was particularly successful. Qualification to set up an IPC meant meeting stringent requirements and the overall package wasn’t as attractive as that of neighbouring counties.2 The scheme consequently expired in 2013, after just two years.3 By the end of 2014, there were fewer than 300 businesses with an established ROH in Thailand.4

Now the acronyms have changed to IHQ and ITC but how do the incentives differ?

IHQs: Less restrictive

The new IHQ scheme is more far-reaching than its ROH predecessor. It covers four main business activities: management services, technical services, support services and financial management services.

The fiscal year minimums of THB 10 million paid-up registered capital and THB 15 million spend remain intact. However, the new scheme is less restrictive in its qualification requirements. Under the ROH regulations a Thai-based HQ had to serve at least three ‘associated enterprises’; for an IHQ, that number has been reduced to just one.

Incentives

Tax incentives for a registered IHQ cover corporate income tax, personal income tax and the specific business tax.

In short, the new IHQ scheme offers:
* Tax exemption on capital gains from transferring overseas shares
* Specific business tax exemption on loans made to associated companies
* Corporate income tax exemption on income from associated companies based overseas
* Corporate income tax reduction to 10% on income from associated companies in Thailand
* Personal income tax reduction to 15%
* Tax incentive period extended to 15 years
* Staff education requirements removed
* THB 30 million capital expenditure requirements removed
* No longer any conditions on the overseas to domestic income ratio
* Reduction in the penalty for non-compliance
The last of these changes means that if an IHQ ceases to comply with the minimum requirements, it will now only lose its tax incentives for that particular accounting period; not right from day one, as before.

ITC: incentive to trade

The international trading centre scheme is designed to provide incentives for Thai-based businesses trading with firms located overseas.

The scheme offers tax incentives for the first 15 accounting periods of the ITC’s existence. A corporate tax exemption applies to income derived from buying and selling goods overseas, as long as they don’t enter Thailand. Also, no corporate tax will be payable on income from services provided to companies located outside Thailand.

As for personal income tax, expatriates working at the ITC will be entitled to a 15% reduction. Again, this applies for the centre’s first 15 accounting periods.

In order to encourage ITCs to trade internationally, the scheme allows an overseas firm, with no business operation in Thailand and receiving dividends and/or interest from an ITC, to be exempt from tax without time limit.

Ask an expert

Only time will tell how these schemes will work in practice and how attractive they will be to firms. On the face of it, the IHQ and ITC regime looks like an improvement on its predecessors. However, that all depends on the individual company and the activities it undertakes. It’s therefore worth asking an independent expert whether these schemes fit in with your firm’s requirements and objectives.

Thailand may not ever be able to compete with the likes of Singapore on purely tax grounds; however, the country can offer so much more as a place to do business. This is the philosophy which we need to apply when it comes to attracting businesses to set up in Thailand.

Footnotes:
1 Royal Decree No. 586 of 1st May 2558 (2015)
2 http://www.dbriefsap.com/bytes/ThailandSummary-newIHQregime.pdf
3 http://www.nationmultimedia.com/business/New-tax-incentives-for-international-headquarters—30254167.html
4 http://www.nationmultimedia.com/business/Next-move-Thailand-as-HQ-and-trading-hub-of-Asean-30249545.html

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

 


 
HEADLINES [click on headline to view story]

Strong Dollar can help and hinder

In Gold we Trust?

What effect do foreign crises have on SE Asia? Part 2

What effect do foreign crises have on SE Asia? Part 1

IHQs & ITCs: New incentives for Thailand or just a change of letters?
 

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