Upcoming changes to free zone - for better or worse?

A free zone is considered an area outside of Thailand and it allows companies to import materials into Thailand without paying any duties or taxes.
Goods manufactured in a free zone that are sold to the market in Thailand can qualify for a “preferential” duty rate, usually an exemption, provided the goods meet the required 40-per-cent local content minimum.
So what is going to change when the new rules take effect in mid-June?
First, one of the major changes is the introduction of “essential production processes” that need to take place in the free zone. Under the old regulations, no specific essential production processes are required as long as goods are imported into the free zone for production, mixing, assembling, packing or other processing.
Under the new regulations, goods now need to undergo an essential production process in the free zone. In absence of this, the goods may no longer enjoy the preferential duty rate when released from the free zone.
This is a major change and could impact many companies, particularly those with assembly or mixing processes or other processes in the free zone that are not considered as “essential”.
Second, the new regulations seem to limit the use of raw materials to only local Thai raw materials and those imported from Asean countries when determining whether the goods meet the 40-per-cent threshold.
The old regulation allows the use of raw materials imported from countries with which Thailand has free trade agreements (FTAs) and does not limit this to Asean countries.
This limitation could impact free zone companies that have been sourcing materials from outside Asean and using them as “qualifying local content”. Third, under the new rules, more discretion is given to customs authorities in determining whether certain local raw materials can be used as qualifying local content for the 40-per-cent threshold.
Currently, this decision is made by various government agencies/institutes depending on the type of raw material. For example, certification of automobile parts as local raw materials is now done by the Thai Automotive Institute, while electronic parts are certified by the Electrical and Electronics Institute.
Under the new rules, certification will have to follow customs guidelines and regulations and customs will have the right to verify the correctness of the production processes in relation to the used local raw materials.
The new regulations also add a new definition of “profit”. Under the old rules, the regulations allowed including “profit” in the “domestic costs of production”, but do not give a clear definition of “profit” or any guidance on the acceptable profit level.
Under the new rules, the acceptable level of profit should be in accordance with generally accepted accounting principles.
Although it is still not clear what this means in practice, it seems that this may be based on the company’s financial statements and companies may probably need to obtain a third-party opinion, such as from their auditors, to “confirm” the acceptable profit level for free zone purposes in case of a challenge from customs.
Another rule has been introduced for the use of a preferential certificate of origin for goods stored in a free zone that are subsequently consigned to the domestic market. This issue has been a sensitive point of discussion in the past but it seems that the concept has now been accepted.
There will be a two-year transition from the old to the new regulations.
However, with less than two months to go before the regulations are implemented, companies in free zones need to take action now and analyse what kind of impact the new rules will have on their operations.
Various implementing guidelines and notifications are being finalised – particularly on the criteria for essential production processes and what is considered as sufficient processing for raw materials. It is expected that several public hearings will be organised this month or next.
Free zone companies need to review the proposed changes, assess the impacts and keep an eye on the latest news on public hearings and guidelines provided by government agencies to make sure that their concerns are heard and considered, especially once the definitions of essential production processes are released and companies may no longer qualify for the free zone privileges.
It is too soon to say whether the new rules are for better or worse, but if free zone companies don’t start acting now, it will likely be the latter.

Wiphawee Lertdhamtawee, |the author , is senior manager at |PwC Thailand