One year after the military coup of May 22, 2014, Thailand’s economy is struggling. Exports, the traditional engine of growth, contracted 4% year on year in the first four months of 2015, with particularly steep declines seen in the European and Chinese markets.

The country's GDP is now forecast to grow in the 3% to 4% range, one of the lowest growth rates in south-east Asia. Economists say that Thailand’s challenge is a structural one. The country needs to move away from labour-intensive, export-oriented industries towards more value-added products and services. Ironically, one of this government’s few positive moves in that direction has gone largely untrumpeted.

A better offer

On May 1, two royal decrees in Thailand were promulgated, offering new tax incentives and benefits for setting up international headquarters (IHQs) and international trade centres (ITCs) in the country. Deputy prime minister Pridiyathorn Devakula, who oversees the economy, has been heralding the move for months. “We need more headquarters to come to Thailand and turn Thailand into a trading country,” he told a seminar in late 2014. “We aspire to be the trading country of the region.”

The current 'trading country' of the region is Singapore, which has been providing generous tax incentives to operational headquarters (OHQs) for multinational corporations (MNCs) since 1992. Singapore expanded its incentives to include finance and treasury centres in 2000 and regional headquarters (RHQs) and IHQs in 2003. Although numbers are hard to come by, Singapore has clearly taken the lead in attracting MNC headquarters.

Thailand, by comparison, having tried to attract RHQs since 2002, has secured “about 200”, according to government sources. Thailand’s previous tax incentives for IHQs and some clauses under the previous schemes (such as a threat to force the return of all tax savings dating back to the headquarter's start-up date if a company failed to meet the agreed upon conditions) could not match Singapore’s.

The new incentive scheme, which went in to effect on May 1, has brought Thailand more on a par with Singapore. For instance, IHQs are offered tax exemptions on income earned by one or more associate company outside the country, and a 10% flat rate on domestic income, as long as it is the same or more than their income earned abroad. The personal income tax on expatriates is set at 15%, and is good for 18 years. Conditions on training local staff have been dropped. The penalty for non-compliance is now just repayment for one accounting period, instead of dating back to day one.

The tax incentives are similar for ITCs, which is a new category for Thailand. “The revenue department issues two different royal decrees [for IHQs and ITCs] because it is possible that some companies wanted to do trading without the headquarter function,” says Chatchawat Krieng Suntikul, a partner at local tax and accounting specialist Mazars.

Competition heats up

Singapore is not the only south-east Asian country that Thailand must compete with to attract IHQs. The Malaysian ministry of international trade and industry issued guidelines in April for MNCs seeking to establish or expand their presence in the region through a 'Malaysian principal hub'. A three-tier tax incentive structure is part of the package, with rates ranging between 0% and 10%.

“Malaysia aspires to move up the global value chain by attracting the best MNCs to locate their RHQs in Kuala Lumpur,” said a brief on the new package by the Kuala Lumpur-based division of global consultancy PricewaterhouseCoopers.

The million-dollar question for both Thailand and Malaysia is what can they offer MNCs, other than tax incentives, which are already offered by Singapore and Hong Kong? “I think the only pure OHQs are in Singapore and Hong Kong, and by that I mean they have no other activities in the country,” says David Sandison, an international tax specialist for the Singapore office of professional services provider Grant Thornton. “Countries such as Thailand and Malaysia will only attract OHQ activities if they already have substantial reasons to be there in the first place.”

Many Japanese corporates have already invested heavily both in Thailand and Malaysia, so is that market worth watching as the competition for IHQs heats up in the coming months. “I think Japanese companies in the industrial sector and service sector are very interested in starting IHQs in Thailand because they are already here,” says a spokesperson for Japan External Trade Organisation in Bangkok.