What to know about Thai customs free trade zones

Thailand has become a major trading hub for the south-east Asia region in recent years, with many multinational corporations setting up within its borders. This has helped it become a major manufacturing nation, with such goods accounting for 86 percent of its total exports.

To encourage further investment in the nation, the Thai government has established several customs free trade zones around the country. These offer major incentives such as tax breaks for importers and exporters in the manufacturing sector. So what do businesses need to know about these zones?

Thailand's Free Zone Scheme looks to encourage firms to conduct manufacturing operations within the country's borders, with finished goods able to be used both domestically and for export. Foreign-based firms can set up in one of these locations to take advantage of generous incentives.

The Thai government notes these arrangements aim to address disadvantages faced by domestic manufacturers compared with their foreign counterparts. Local businesses must normally pay a higher duty rate on parts, materials, or components imported for use in a manufacturing process, whereas imports of finished products are taxed at a lower rate.

Free Zones seek to correct this imbalance by treating products made in such areas as if they were manufactured abroad for the purpose of tariff assessment. "At the same time, the country benefits because a zone manufacturer uses Thai labor, services, and inputs," the Thai customs department stated.

The primary type of Free Zone for foreign companies are the Special Economic Zones (SEZ). These offer benefits such as exemptions from import duties and VAT on imported products, as well as corporate tax holidays. They are intended mainly for export activities, and as such are typically found near the country's borders and biggest ports of entry and exit.

There are ten SEZs around Thailand. These are located in the provinces of:

• Chiang Rai
• Narathiwat
• Tak
• Nong Khai
• Trat
• Kanchanaburi
• Mukdahan
• Songkhla
• Sa Kaeo
• Nakhon Phanom

Firms that wish to set up operations in an SEZ must be primarily focused on export and import and are required to apply for a Free Zone License from the relevant regulating authority.

The second type of Free Zone is Industrial Estates. As the name suggests, these are focused on industrial activities, with companies able to buy land for warehouses, storage facilities, and other support infrastructure, as well as recruit overseas workers. There are 62 industrial estates around Thailand, with 12 of them being administered directly by the Industrial Estate Authority of Thailand (IEAT) and the rest operated jointly with private sector investors.

Companies setting up in IEAT-administered zones enjoy exemption or refund of customs import duty, value-added tax (VAT) and excise tax on imported equipment and raw materials, while tax benefits in other regions will depend on the authority managing it.

There are numerous benefits to businesses of establishing operations in a Thailand free zone. Some of the major advantages include those listed below.

One of the most significant benefits is that imported items moved into or manufactured in a Free Zone for industrial or commercial operations are not subject to import taxes and duties. This includes machinery and parts, foreign merchandise and goods transferred from other Free Zones within Thailand.

Imported merchandise moved into or manufactured in a Free Zone is also not subject to VAT, excise taxes, alcohol tax (including tax stamp and fees under the Alcohol Act, Tobacco Act, and Playing-Card Act). Additionally, a zero tax rate is applied to calculate VAT for domestic merchandise moved into a Free Zone.

In addition to this, companies incorporated in a targeted industry within a Thailand SEZ are exempted from corporate income tax for the first eight years. Following this, they will enjoy an additional 50 per cent corporate income tax deduction for the next five years.

Operating in a Thailand customs free trade zone also makes it easier for businesses to export finished goods manufactured within these designated areas. This includes relief from duty on re-exported goods, as Free Zones are considered to be outside Thailand and Thai customs territory.

This means that when foreign merchandise is brought into a Free Zone, no taxes and duties are owed until the merchandise leaves the area and enters Thailand for consumption. If the imported merchandise is re-exported to other countries, no customs duty is charged.

Additionally, Free Zones offer companies relief from certain standard and quality control requirements, again provided any items manufactured using these goods are then re-exported. There is also no import tax or internal taxes and duties on scrap, waste and yield loss from imported components in a Thailand Free Zone.

Setting up operations in a Free Zone also provides multinational corporations with access to highly-skilled workers. Many foreign firms have invested in job training programs to upgrade the capabilities of their local employees, including managerial and technical skills. As well as boosting Thailand's employment market, this means new arrivals to these zones have access to a great pool of local talent.

What's more, Free Zones benefit from strong transport and communications infrastructure networks, including easy access to ports and airports, as well as warehousing, distribution and other storage facilities to support export and import activities.

In order to take advantage of these benefits, firms will need to apply for a license to operate in a Free Zone. You will need to specify which zone you intend to apply for, and each one will have its own eligibility requirements. Therefore, understanding these is a vital first step.

Applicants will need to demonstrate they have secure financial status in order to set up in a Free Zone, which will typically require financial statements, an upfront capital payment and a secured lease for warehousing or manufacturing space.

When applying for a license in an SEZ, they must also demonstrate their activities will be primarily export-oriented or will generate technology benefits. Any application should include a full business plan detailing the type of business, its purpose and objectives, a management and maintenance plan, sources of funding and, where relevant, future projections.