In fiscal year 2006/07 (October-September) the interim government is planning to run a small budget deficit equivalent to around 1.7% of GDP (based on official GDP projections). There is unlikely to be any major departure from budgeted spending plans when they come into effect.

Following a better than expected third-quarter performance, when GDP rose by 4.7% year on year (owing in part to the positive impact of changes in inventories), the Economist Intelligence Unit has revised upwards its estimate of GDP growth in 2006, to 4.8%.

Background: Thailand's constitutional monarchy has helped to provide political continuity, despite frequent bouts of government instability and military coups. Before the 1997-98 Asian financial and economic crises, Thailand enjoyed a long period of rapid economic growth, supported by high levels of foreign investment.

Political structure: There have been 18 military coups since the absolute monarchy was abolished in 1932. The most recent coup took place on September 19th 2006, when the caretaker Thai Rak Thai (TRT) administration, led by Thaksin Shinawatra, was removed from power. The coup leaders, known as the Council for National Security (CNS), declared that military intervention was necessary to restore national unity, and for this they gained the support of the king, Bhumibol Adulyadej. The CNS, which maintains a firm grip on power under an interim constitution, installed a retired general, Surayud Chulanont, to act as prime minister for a one-year transitional period, during which a new constitution will be drafted and fresh elections held.

Policy issues: The Thaksin administration (2001-06) used expansionary fiscal policy in an attempt to enhance economic growth. In its first term there was a focus on boosting rural incomes and development, but infrastructure development was declared the priority for the second term. Although General Surayud has pledged to follow a policy of "self-sufficiency", focusing on good governance, his government will not completely do away with some of the Thaksin administration's initiatives. The Bank of Thailand (the central bank) targets inflation, but is also active in exchange-rate management. Medium-term policy objectives include the restoration of a solvent banking sector and poverty reduction.

Taxation: Corporate tax for newly listed companies is 25% for the first five years. Existing listed companies pay 25% tax on profits up to Bt600m (US$14m) and 30% on profits above this level. Value-added tax is currently 7%. Personal income tax rates rise to 37% on annual taxable earnings exceeding Bt4m.

Foreign trade: Thailand ran a merchandise trade surplus of US$3.2bn (fob-fob) in 2005, but posted a current-account deficit of US$3.7bn (equal to 2.1% of GDP) - the first such deficit since the 1997-98 financial crisis. The country has a diversified export base comprising agricultural commodities and manufactures, although 80% of exports now consist of manufactured goods, many of which are heavily dependent on imported inputs. Thailand is heavily reliant on imported oil.

The risk of widespread opposition to the military-backed government will remain limited, not least because the coup leaders have managed to gain the crucial support of King Bhumibol Adulyadej. But if the interim administration comes to be regarded as simply a puppet of the military, or if the military extends the timetable for returning power to an elected government beyond its target of October 2007, public opposition will intensify. This could force the military into taking repressive action and prolonging its hold on power.

Despite the widespread international condemnation of the military-led coup in September, Thailand is unlikely to suffer a sharp deterioration in its relations with its Western allies. However, if there are signs of slippage in the military's schedule to return power to the people, relations with the US, the EU and Australia could turn frosty.

State-owned banks have been used to finance populist fiscal policies, and there has been a steady accumulation of off-budget and long-term liabilities. The Economist Intelligence Unit does not expect a fiscal crisis in 2007-11, as a trajectory of steady economic growth is expected to be maintained, ensuring continuing growth in revenue receipts.

The Bank of Thailand (the central bank) can be expected to maintain a prudent monetary policy stance throughout the forecast period, but it will also retain the flexibility to ease monetary policy in the event of a dramatic economic slowdown (not our central forecast).

Foreign investment will be needed to help to finance infrastructure development, and there are likely to be additional tax and tariff incentives for foreign investors. However, the proposed liberalisation of key sectors will continue to prove politically controversial.

Thailand's annual GDP growth rate will average 4.6% in 2007-11, underpinned by private consumption and investment from 2007. Growth in the manufacturing sector, which accounts for 40% of GDP, will be uneven: certain niche industries, such as the automotive sector, will grow strongly, whereas the textile industry will lose competitiveness. The current account will be in deficit throughout the forecast period.
Source: http://www.economist.com/countries/Thailand/

The FBA governs the conduct of business by foreigners in Thailand. It prohibits foreigners and foreign owned enterprises from certain business activities in Thailand, and sets forth under what conditions a foreigner or foreign enterprise can conduct other business activities in Thailand.

The structure of the FBA is similar to that of N.E.C. Announcement No. 281. The FBA includes three lists of business activities. The first list contains activities that are completely prohibited to foreigners "for special reasons". The second list contains activities that are deemed to affect Thailand's national security, culture, natural resources or environment.

Foreigners will be allowed to engage in activities on List Two only with the permission of the Thai Cabinet. The third list contains activities that are deemed to be areas in which Thai businesses are not yet ready to compete with foreigners. These activities will be permitted to foreigners only with the approval of the Director-General of the Commercial Registration Department.

A foreigner will be permitted to engage in activities that do not appear on the lists, subject only to a minimum capital requirement of 2 million baht.

The business activities included in the lists under the FBA are different from, and less sweeping, than those included in the three annexes under the prior law.

Under the FBA, more business activities will be permitted without the need for a special license.

Another significant difference between the FBA and the prior law is that the FBA clearly contemplates the Director-General of the Commercial Registration Department granting Foreign Business Licenses to foreigners so that they can, subject to conditions, perform activities contained in List Three.

In practice under N.E.C. Announcement No. 281, Alien Business Licenses were generally only granted to foreigners to the extent necessary to allow the foreigner to carry out work under contract with the Thai government. Finally, "Representative Offices", which were specifically authorized under N.E.C. Announcement No. 281 are not provided for under the FBA.

The Commercial Registration Department no longer grants new licenses for Representative Offices, although an office currently operating can continue to do so until its license expires.

Exactly how permissive the Director-General of the Commercial Registration Department will be under the FBA remains to be seen.

As of September 14, 2000, regulations required in order to implement the FBA had not yet been issued. Time will tell whether this delay signifies a general reluctance to administer the law's provisions, or simply is the result of inevitable delays in the issuance of government regulations.

A foreigner contemplating establishing a business in Thailand should note that the Foreign Business Law is not the only Thai law affecting a foreigner's right to engage in business in Thailand. Many other laws establish restrictions on foreign ownership, including, for example, laws on banking, insurance, telecommunications and employment agencies. Those laws are not affected by the FBA.

Following is a summary of the provisions of the FBA. We hope it is useful in providing foreigners a general understanding of how the law works. As with any legal summary, however, it cannot replace a detailed analysis of the law and how it might affect a foreigner's specific business activities.

A: Foreigners Subject To The FBA

Under the FBA, the threshold question for determining whether or not an individual or entity is subject to the law's provisions is "what is a foreigner?". The FBA defines the following persons and entities as "foreigners":
1. An individual who is not a Thai citizen
2. company or partnership not registered in Thailand
3. A company or partnership registered in Thailand and:
Having half or more of its capital held by a Foreigner(s) under (1) or (2) above; or,
Having an individual under (1) above serve as managing partner or manager (for limited or registered ordinary partnerships only)
4. A company or partnership registered in Thailand having half or more of its capital held by foreigners under (1), (2) and (3)(a)

In simple terms, "foreigners" under the FBA include foreign individuals, foreign-registered companies, companies registered in Thailand but majority owned by foreigners and partnerships managed by foreigners.

The definition of "foreigner" is quite similar to that of an "Alien" under the old Alien Business Law. One notable difference is that the number of foreigners who hold shares is irrelevant under the FBA. Six of seven shareholders - the minimum number under Thai law - of a Thai-registered company can be foreign and the company would still not be considered a "Foreigner" so long as one Thai holds more than half of the capital of the company.

Under the previous law, if half or more of the shareholders were "Aliens", so too was the Thai-registered company, even if a Thai held a majority of the capital.

B. Foreigners "Excepted" From The FBA's Provisions

Not quite all foreigners are subject to the FBA. The FBA "excepts" certain foreigners.

We place "excepts" in quotes because at least some of the "excepted" companies are subject to certain of the FBA's provisions, especially so under draft regulations currently under consideration by the Thai government.

Excepted Businesses Include:

Foreigners operating under special treaties to which Thailand is a party. This is a reference to American individuals and companies operating under the Thai-U.S. Treaty for Amity and Economic Cooperation. Under the draft regulations, such companies would be subject to minimum capital requirements (see IV (A) below). Subjecting the so-called "treaty companies" to the minimum capital requirement appears a clear violation of the terms of the treaty. Moreover, as we read the law, subjecting treaty companies to any capital requirement beyond a minimum of 2 million baht violates the terms of the FBA itself. The fate of the proposed regulation remains to be seen.

Foreigners operating under privileges granted by the Board of Investment of the Industrial Estate Authority of Thailand.

Foreigners operating a business under temporary permission of the Thai government.

Foreigners operating a business under permission or rights granted under N.E.C Announcement No. 281 before March 3, 2000 (the FBA's effective date).

A. List One Activities

List One of the FBA contains activities that foreigners are prohibited from engaging in "for special reasons".

In general terms, the activities relate to sensitive areas such as publication and broadcasting of news, domestic agriculture, trading in Thai antiquities and national historic objects, casting of Buddha images and alms bowls and land trading.

B. List Two Activities

List Two contains activities that are deemed to affect Thailand's national security, culture, natural resources or environment.

These activities will be permitted only with the approval of the Thai Cabinet, and generally will require a minimum of 40 percent shareholding by Thais.

It might go without saying that a Foreigner's obtaining the approval the Thai Cabinet to engage in a business will not be easy.

Businesses included in List Two include firearms, domestic transportation, trading in antiques, Thai arts or handicrafts, production of specified handicrafts and similar products, and specified mining, farming and wood fabrication activities.

C. List Three Activities

List Three contains activities that are deemed to be areas in which Thai businesses are not yet ready to compete.

These activities will be permitted to foreigners only with the approval of the Director-General of the Commercial Registration Department.

Unlike activities under Lists One and Two, it is thought that a Foreigner might have a reasonable opportunity to obtain permission to engage in a List Three activity.

Moreover, List Three specifically identifies some activities that foreigners are permitted to engage in, and provides for the Director-General to issue regulations identifying additional service activities that foreigners will likewise be permitted to engage in (indeed, a draft regulation is being circulated in the Thai government identifying several such service activities (see III(F) below)).

D. Annual review of listed activities

The FBA requires that the content of the Lists be reviewed annually, and that appropriate revisions be made. If a Foreigner establishes operation of a business that is subsequently placed onto one of the lists, the Foreigner's business will be "grandfathered" and allowed to continue doing business provided it gives timely notice to the Commercial Registration Department.

E. Ability to engage in unlisted activities

If an activity is not included on one of the Lists, a Foreigner is allowed to engage in such activity without a Foreign Business License.

Essentially the only requirement is that the Foreigner have capital of no less than 2 million baht.

F. Proposed regulation permitting certain service activities

List Three provides that the Commercial Registration Department can issue regulations excepting certain types of service activities from the provisions of List Three.

Such service activities specified in a regulation will be treated as an unlisted activity and no Foreign Business License will be required.

Under a draft regulation not yet in force, the following service activities would be excepted from List Three:
Rental of property;
"Leasing business" as defined under the Thai Revenue Code;
Commercial banking;
Lending of money;
Insurance business;
Pawn shops;
Taking of property on deposit;
Warehousing;
Operation of schools;
Operation of entertainment halls;
Hair cutting, styling and operating beauty salons;
Photography and operating photo shops;
Operating laundries;
Tailoring and dressmaking

If a foreigner wishes to engage in a business activity in Thailand that is included on list two or three, the foreigner must obtain a foreign business license.

The FBA specifies that the licenses will be issued pursuant to regulations to be issued by the Commercial Registration Department.

As of 14 September 2000, the draft regulations were still under consideration. Applications for licenses are not yet being processed and the exact procedures are not yet known.

However, the provisions of the FBA and various draft regulations give us some guidelines for the criteria and procedures that will be forthcoming.

A. Minimum Capital Requirement:

The FBA provides that a foreigner applying for a foreign business license must meet minimum capital requirements that are to be contained in regulations issued by the Commercial Registration Department.

The law itself specifies that the minimum capital shall in no event be less than 3 million baht.

Under the provisions of draft regulations not yet in force, the minimum capital will be 25 percent of projected operating expenses during the first three years of business or 3 million baht, whichever is greater.

Under the terms of the draft regulations, these minimum capital requirements would also apply to "treaty companies" operating under the terms of the Thai-U.S. Treaty on Amity and Economic Protection.

Imposing the minimum capital requirement on treaty companies appears to violate the terms of the treaty, and probably even the terms of the FBA itself.

B. Maximum Foreign Shareholding For List Two Activities:

Under the FBA, at least 40 percent of the capital of a foreigner seeking a license to engage in an activity under List Two must be held by Thais. However, under special circumstances the percentage of Thai shareholding can be reduced to as low as 25 percent. Such reduction requires special approval from the Thai Cabinet.

C. Factors For Consideration In Granting A Foreign Business License

Not all applicants meeting the minimum capital requirement will be granted a foreign business license. The decision as to whether to grant the license will be at the discretion of the Thai Cabinet for List Two activities or the Director-General of the Commercial Registration Department for List Three activities. The following factors are to be considered in implementing the FBA:
the advantages and disadvantages to Thailand's safety and security;
economic and social development;
public order and good morals;
the art, culture and traditions of Thailand;
natural resource conservation;
energy and the environment;
consumer protection;
size of the proposed enterprise;
impact on employment;
technology transfer;
research and development

D. Procedures

The FBA provides that all applications for foreign business licenses be submitted to the Director-General on forms that will be prescribed by regulation.

The application will be then be taken under consideration by the Thai Cabinet or the Director-General Commercial Registration Department, as appropriate.

The consideration period should not exceed 60 days, however an extension of up to an additional 60 days can be granted.

The penalties prescribed for violations of the FBA include one-time fines ranging from 100,000 to 1,000,000 baht and daily fines of from 10,000 to 50,000 baht, as well as imprisonment for a period not to exceed three years.