(Translation) SPECIAL ECONOMIC ZONE…’S ROADMAP AND GOLDEN OPPORTUNITY TO KEEP AN EYE ON? Chotika Chummee and Srinarin Phaophongpaiboon

EIC has considered of Mae Sod, and Sadao as 3 pilot areas with high potentials to be developed as special economic zones (SEZ) as they are more prepared in terms of infrastructure than other areas and having had the production bases in trading and industrial sectors. Textile, food processing and other labour-intensive businesses shall benefit from the transfer of production bases to the special economic zones; meanwhile, service businesses and urban growth supporting businesses such as warehouses, distribution centers, logistics services, wholesale and retail of consumer products and public health services shall benefit from urban growth and investment promotion in SEZ. In July of this year, the Government has passed its resolution to approve the establishment of special economic zones (SEZ) initially in 5 border areas including (1) Mae Sod of Tak Province; (2) of Sa Kaew Province; (3) Trat Province; (4) Province; and (5) of (Sadao and Padangbezar Checkpoints) (Figure 1) with the primary goals of attracting FDI, creating jobs, extending modernity to local areas to reduce inequality, organizing border areas and increasing the country’s competitiveness to be prepared for the upcoming AEC in 2015; and solving problems of smuggling of agricultural products and illegal foreign labour into inner areas within the Country; whereas all of the 5 target areas (with the total area of approx. 1.83 million rai) are regarded as having potentials and preparedness in terms of infrastructure and labour and having advantages of geographical locations and rather outstanding production bases and having no severe calamities or problems of international security. Provided that businesses investing in SEZ shall be given with new privileges from BOI, including corporate income tax exempt for 8 years and 50% tax reduction for another 5 years (Figure 2). According to BOI policies of investment promotion, though BOI shall mainly support businesses using high technologies, researches and innovation and creation of added value rather than labour-intensive businesses; however, in this case, labour-intensive businesses situated in SEZ shall receive supports as prescribed by the Committee on the Special Economic Development Zone Policy (CSEDZP), including businesses which have the production base in each area such as textile industry, processed agricultural products, furniture, tourism or other border trade related industries such as warehouses, logistics, industrial estates, etc. Provided that CSEDZP has not yet announced types of businesses that shall receive the support in each area of SEZ; but, on 15th December 2014, it announced the privileges from BOI, including corporate income tax exempt for 8 years and 50% tax reduction for another 5 years, reduction of transport costs and electricity charges and water fees for 2 times, deduction of facility installation expenses by another 25% of the construction costs, exempt of import duty for machinery and raw materials used in re-export production, indulgence on the use of unskilled foreign workers and other non-tax related privileges such as land tenure of foreign investors and employment of foreign experts. -2-

Moreover, general businesses which are not included in the List of CSEDZP but situated in SEZ shall receive additional privileges such as exempt of corporate income tax for another 3 years but not exceeding 8 years; in case, such businesses have already received the privilege of exempt of corporate income tax exempt for 8 years, they shall receive 50% reduction of corporate income tax for another 5 years and other privileges as mentioned earlier; provided that it is expected that the types of businesses that shall receive the support in each area of SEZ shall be announced in January 2015, which shall create more clarity to investors. EIC evaluated that 3 of 5 pilot areas with high potentials to be developed as special economic zones (SEZ) as targeted, including Mae Sod District, Aranyaprathet District and Sadao District were more prepared in terms of infrastructure than other areas and already had the production bases in trading and industrial sectors; and in 2013, such 3 pilot areas had their total value of border trade of almost 600,000 million Baht per year or equal to approx. 65% of the total value of border trade of Thailand; whereas, Mae Sod District was most prepared to be developed as SEZ to support labour-intensive industries, businesses of warehouses and distribution centers and logistics services because there have been feasibility study, area surveys and preparation in such matter for a long time; and such areas were also significant gateways of trade, investment and tourism to Rangoon City and were also be able to directly connect the production with Economic Zone situated only approx. 10 kilometers away. These factors helped promote the potentials of these pilot areas to be developed as dual special economic zones in the future to strengthen the trading and investment between Thailand and Myanmar. Mae Sod District had its preparedness in terms of foreign workers from Myanmar, which were mostly unskilled labour to be supplied to labour- intensive industries such as textile, apparels and leather products. Moreover, with geographical advantages as the East-West Economic Corridor (EWEC), these areas were considered by EIC as having the potentials of growth in the future and to be developed and used for establishment of warehouses, distribution centers and logistics service provision. Similarly, Aranyaprathet District had the potentials to be developed as the production bases of labour-intensive industries, areas for wholesale and retail businesses, including businesses of transport and international warehouses because it was the Southern Economic Corridor (SEC) which could be connected to O’Neang Special Economic Zone and Srisophon Industrial Estate of and to the sea through Vietnam’s harbour and was considered as a significant supporting factor to businesses of transport and international warehouses. At the same time, Aranyaprathet District was well prepared in terms of labour from Cambodia to be supplied to industries of textile and apparels and agricultural product processing factories along the border and for raw materials from Cambodia, particularly cassava which can be processes, in Thailand, to cassava chips and tapioca starch for export. -3-

Moreover, it was found that during the past 5 years, the value of border trade through Aranyaprathet Checkpoint in Aranyaprathet District which was a busy trade area, particularly at Rong Kluea Market, grew by 28% per year and with the value of almost 60,000 million Baht in the previous year alone. Meanwhile, Sadao District was another area ideal for establishment of processing factories of agricultural products, particularly Para rubber and seafood; and also had its potentials to be developed as trade area and main gateway for export of products to , Singapore and Indonesia. Since Sadao District was situated close to Penang Port and Klang Port of Malaysia and also close to areas of heavy industry, Halal industry and Para rubber industry of Malaysia, enabling Thailand to conveniently export primary processed Para rubber to be supplied to downstream industries such as medical gloves, wheels or auto parts in Malaysia. More importantly, Sadao and Padang Besar Customs Houses were also checkpoints with the highest value of border trade of the Country. At present, the Thai authorities are preparing to extend the customs houses; and the proposal of the motorway project of the Expressway Authority of Thailand (Had Yai-Sadao Checkpoint Route) and the development of the double-track railway project (Had Yai-Padang Besar Route) was about to be approved to support the establishment of the special economic zone in 2015. At the same time, the private sector in the area has proposed the establishment of duty-free zones in the Special Economic Zone, emphasizing areas along borders at Sadao and Padang Besar Checkpoints, which shall consist of not only buildings for sale of products but also areas for commercial operation and restaurants to attract people from Thailand, Malaysia and Singapore to spend monies in the area. EIC agreed with the said concept because it would be very useful to the trends of trading, investment and tourism in order to support the formal declaration of AEC in 2015. Provided that when comparing the privileges on investment and preparedness of infrastructure with the special economic zones and industrial estates in neighbouring countries, it was that all of 3 pilot areas had their advantages to attract FDI. In 3 neighbouring countries which had joint borders with Thailand, it was found that only Cambodia that has given tax privileges to businesses investing in its country at the level equivalent to those given by Thailand to businesses situated in Thailand; whereas, the supported businesses in Cambodia shall receive the exempt of corporate income tax for 9 years, exempt of raw materials import duty, and the land tenure of foreign investors for 99 years, etc. Regarding this issue, Cambodia has become an area of direct competitor to Aranyaprathet District of Sa Kaew Province; however, when taking account of other infrastructures such as public utility systems (electricity, water supply), including road condition and routes for transport of products, it was found that Thailand was more prepared and had more potentials; whereas, EIC considered that Thailand would be able to attract foreign investors to invest in special economic zones better than a neighbouring country like Cambodia. However, one of the major obstacles that were expected to potentially delay investment of foreign investors was acquisition of land at proper prices since land prices have been dramatically adjusted since the announcement of establishment of SEZ in certain areas such as Mae Sod District; and it was recently found that land prices have increased by over 5 times and tended to increase continuously and rapidly; whereas, the high costs of land might not be worth investing and might impair the motivation of investors in the area and in different areas who have been prepared for investment. -4-

However, in order to achieve the prescribed goals, SEZ must improve infrastructure and integrate all operations at immigration checkpoints in order to support the expansion of trade and investment and to connect with the economy in the Region more effectively. Provision of privileges to investment promotion zones will result in more movements, more people, more transports and communication; therefore, the preparedness of infrastructure and public utility systems is absolutely necessary, particularly the infrastructure for transport; for examples, road expansion from 3 to 4 lanes from urban areas of each province to the border checkpoints, construction of motorways (Had Yai-Sadao Route), double-track railway from investment promotion zones to deep sea ports close to truck rest areas and renovation of Mae Sod Airport. Provision of waterworks system, electricity and communication and telecommunication systems in each province must be adequately available in order to keep up with the economic expansion in border trading cities. Since in this investment promotion, it shall emphasize the provision of support to labour-intensive businesses mainly in order to achieve the goals of facilitation and management of foreign workers and organization of border areas, the Government had its work plan to use one-day entry foreign workers by making one-day entry cards at the immigration checkpoints using smart card system and to take care of public health issues for foreign workers by making health insurance cards, etc.; whereas, the integrated and systematic service provision to the business sector and labour groups shall contribute to the rapid outcomes of special economic zone development and shall also create motivations and confidence to investors.

 Stimulating special economic zone investment through BOI privileges

Mukdahan  To organize border area. /Tak 3 special economic zones have the potential to Thailand The value of border trade in 2013 The value of border trade year 2013 30 Billion baht (20%)* attract investment. 46 Billion baht (15%)*  Maesot, Aranyaprathet and Sadao

Aranyaprathet/  This expected new investment around 13 billion baht in 2015 from…  Industrial estate The value of border trade in 2013  SME entrepreneurs in businesses of 60 Billion baht (28%)* logistics, Processed agricultural products, and labour intensive industry Klong Yai/Trat Songkhla

- Sadao border crossing point The value of border trade in 2013 27Billion - Padang Besar border crossing point baht (10%)*

The value of border trade year 2013 493 Billion baht (7%)*

Remark: *Compound Annual Growth Rate (CAGR) between 2009 - 2013 5 special economic zones cover total area of 36 Tambols, 1.83 million Rais or 2,932 square kilometers.

Source Data from Office of the National Economic and Social Development Bond (NESDB) and the Department of Foreign Trade -5-

Figure 2: Labour-intensive businesses situated in SEZ shall receive exempt of corporate income tax for 8 years and shall also receive 50% tax reduction for another 5 years; BOI Business Group Small Details Exempt of Exempt of Import Exempt of Import Other Non-tax Privileges in SEZ Business Corporate Duty for Duty for related privileges1 of Supporting Group Income Tax Machinery Machinery and Businesses2 Raw Materials Used in Re-export Production A: Businesses that received A1 Industries 8 Years    Exempt of tax privileges; emphasizing No amount corporate income knowledge bases of limits tax for 8 years A2 R&D and using 8 Years    + advanced technology No amount Exempt of 50% tax and complicated limits reduction for production processes another 5 years A3 Industries using 5 Years    + advanced technology No amount All other items of and having some limits non-tax related A4 production bases 3 Years    privileges B: Businesses that received B1 Supporting industries -    other non-tax related B2 using low and - - - privileges; uncomplicated technologies

1. Other non-tax related privileges include land tenure and import of foreign artisans and experts; 2. List of businesses supported by CSEDZP that have not yet been formally announced; businesses not included in the list of businesses to be additionally supported including 50% corporate income tax reduction for another 5 years (A1, A2) or exempt of corporate income tax for another 3 years (A3, A4, B1, B2); Source: Board of Investment (BOI)

 Businesses which will receive investment privileges in SEZ shall be types of industries with existing production bases and trades and labour-intensive SMEs; In the long term, foreign labour-intensive businesses shall transfer their production bases to SEZ along borders increasingly, thus, depending on the readiness of management from the public sector, including one-stop service, skilled labour development, convenience of transport of products from production bases to ports for export or transport to cities with lower costs or even factor of land prices because it was expected that the majority of investors shall be SMEs; therefore, the returns on investment shall be the key factor of selecting locations of businesses;  Downstream businesses from the industrial sector and border trade in the supported areas shall gradually have more demand such as residence business, construction materials business, energy business, wireless communication business, transport service, wholesale and retail business of consumer products, financial services with Thai entrepreneurs and with entrepreneurs in neighbouring countries, public health services, beauty business, educational service, particularly labour skills training and security service; provided that in areas of Trat Province, it was expected that tourism businesses and services shall receive more supports than the manufacturing industry; whereas, businesses with the increasing demand included excursion bus companies, tour agencies, hotels, restaurants, etc.; -6-

 At the same time, Thailand’s private sector must be prepared for business opportunities from the growth of special economic zones by starting to look for channels for business expansion, business partners or joint venture with local entrepreneurs to approach and expand markets in neighbouring countries that are growing rapidly, including development of effective business operation processes, development of product quality for competitiveness and growth to support the establishment of SEZ and formal declaration of AEC in the near future;

______Source: https://www.scbeic.com/th/detail/product/1166