Intragroup services, foreign firms : What management should know
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FOR COST and efficiency reasons, it is common for the headquarters of multinational companies to provide a wide range of intragroup support services and centralised business functions to its affiliates, or designate an affiliate to do so.
In Thailand, many majority foreign-owned companies do this to be more efficient.
From our experience at PWC Thailand, management often come up with the ideas of common facility sharing (eg office space, utilities, canteens, or parking) and cross-affiliate employee arrangements (for which affiliate employees provide services to other affiliates, especially in administration, human resources, law, and accounting) to support business operations of the affiliates.
However, management may overlook their legal consequences.
From management’s standpoint, sharing facilities and using any excess capacity of affiliates are alternative remedies to increased operational costs, service duplication across affiliate members, and shortages of physical and communications infrastructure.
However, under the Foreign Business Act BE 2542 (1999) (FBA), the law that regulates the business operations of foreign investors in Thailand, foreign entities are prohibited from providing these types of intragroup services. This is because they are treated as a “service business” under the restricted List Three annexed to the FBA.
To provide these services to affiliates, foreign companies who provide them have to obtain permission from the Ministry of Commerce in the form of a foreign business licence (FBL). Alternatively, they can apply for an investment promotion license from the Board of Investment (BOI) and can then gain additional tax incentives offered by the Revenue Department.
Furthermore, the FBL is needed regardless of whether a service fee is paid or not.
This is because the economic benefit is apparent, the receiving affiliate would otherwise have to perform the activity itself or engage a third-party service provider.
Even if they are unaware of the possible legal consequences, the management of a foreign majority-owned company that provides a restricted service without an FBL risks being penalised. Under the FBA, violators are subject to financial penalties ranging from Bt100,000 to Bt1 million and/or imprisonment for up to three years.
A court may also order the violator to cease the restricted business operation, terminate the offending shareholders’ status or dissolve the company entirely, as the case may be.
Violation of a court order is further punishable by an additional fine of Bt10,000 to Bt50,000 a day throughout the period of the violation.
In a case where a foreign company is found guilty of this offence, any directors, shareholders, or persons authorised to act on behalf of the company, who are complicit or fail to reasonably act to prevent the violation can be punished with the same penalties as the violating company.
To effectively mitigate the risks for violating the FBA, management should track down each transaction made among the group companies and verify whether it falls under any of the restricted activities. In this regard, a compliance audit should ensure that all the business operations comply with the foreign business law.
Sukontharat Nobnom is manager, tax and legal division, PwC Thailand.
