17 Aug Doing Business – Challenges for Thai and American Companies
Challenges Thai Companies face in the US and American Companies Face in Thailand
Thailand and the US first signed a free trade treaty 184 years ago and continue to have a unique relationship. Both countries benefit from increased trade and eased foreign direct investment regulations. Thailand gives the US access to the ASEAN market and proximity to both China and India, and the US is a prime destination of Thai exports. However, changing economic and political climates as well as domestic law in both countries pose challenges to Americans wishing to do business in Thailand and Thais wishing to do business in the US. A summary from both perspectives is provided in four key areas: corporate, intellectual property rights, litigation, and immigration/employment.
1. American Companies Establishing in Thailand
Thailand ranked 46th globally in the World Bank’s 2017 Ease of Doing Business index. Some of its most troublesome aspects, starting a business and getting credit, improved greatly while perhaps the most cumbersome aspect, taxation, was the only ranking to have worsened since the previous year.
Starting a business in Thailand has several straightforward requirements regarding minimum capitalization, maximum percentage that may be foreign owned, and prohibited areas under the Alien Business Act that affect all alien businesses equally. American companies have the option to utilize the Treaty of Amity which allows for the company to remain 100% American-owned and to engage in business on the same basis as Thai companies. Although at first it appears to be the commonsense approach to become an Amity company, there are several important considerations. The first is that the Treaty includes its own restrictions such as a prohibition on banking, owning land, and engaging in the telecommunications industry, among others. There are also additional government fees associated with obtaining proper certification as well the cost of legal assistance to register as a Treaty company. To register as a Treaty company at least 51% of the company’s shareholders and board of directors must be Thai or American citizens. This may pose a problem to American companies with substantial foreign investors, and it may disqualify an American company that changes over time to be majority foreign-owned or have more foreign board members than American members. Finally, the Treaty has expired, but it is still maintained as the status quo. If Thailand ever signs a free trade agreement with the US, it will supplant the Treaty of Amity. This may not be likely any time soon, but relying on the Treaty always being available in its current iteration may be a risky strategy.
Getting credit in Thailand, especially as a small or medium-sized enterprise (SME), is still difficult. The World Bank’s methodology for ranking Thailand 82nd in obtaining credit rests heavily on a survey completed by lawyers assessing the state of bankruptcy and collateral and secured credit laws in Thailand. In this area, as well as the lack of information available by credit registries, Thailand lags behind other East Asian and OECD countries. This is not a unique problem that only American or foreign companies face though. Despite SMEs having a large impact on Thailand’s economy, they are still underserved by domestic financial institutions. This becomes problematic for an American SME planning to operate in Thailand as it will lack the requisite credit history to even apply for loans. If Thai financial institutions are still reluctant to lend to domestic SMEs, particularly in light of the long recovery after the 1997 Asian Financial Crisis and 2008 Financial Crisis, it is even more difficult to obtain loans as a foreign SME. The easiest option for an American SME is to obtain a loan in the US rather than Thailand if it does not have a qualifying Thai credit history.
Complying with Thailand’s tax requirements can also be challenging. It was the only ranking in the World Bank’s analysis to decrease from 2016 to 2017, and on average it takes 100 more hours per year to pay tax in Thailand than in OECD countries. Ensuring taxes are done properly requires a skilled accountant, but Thailand does have some benefits such as a lower corporate tax rate than the US, a more straightforward VAT system, and tax incentives for new businesses.
2. Thai Companies Establishing in the US
The tax system in the US can also be complicated for Thai companies. Overall compliance is more straightforward, but the US does not have a countrywide VAT. Sales tax rates vary by state and also by county or city within a single state. If a business is focused on sales then this may be an important consideration.
Regardless of the type of business, the corporate tax rate in the US is among the highest in the world at 40%. The current volatile political climate adds some uncertainty as well due to stated attempts to reduce the corporate tax rate. Whether the promises come to fruition or not probably does not justify a company waiting to start a business in the US. Trusted local counsel may also be required as laws vary from state to state. For example, incorporating in Delaware, a very small state that markets itself to corporations, may have certain advantages in reducing overall tax burden, but disadvantages such as additional costs of registering to do business in other states. The consideration of where to register a business and the unique requirements of doing business from state to state, as well as the dual federal/state legal systems, are complicating factors that make establishing a business in the US perhaps not as straightforward as in other countries.
Intellectual Property Rights (IPR)
For the previous decade, Thailand has been on the US Trade Representative’s “Special 301” Report of the Priority Watch List which designates it as a weak country for IPR protection. However, this designation does not affect Thai-US trade in any meaningful way. American companies that rely on protection of IPR are at a disadvantage in Thailand as enforcement is weak and often ineffective. Thailand has the framework to enforce IP such as the Specialized Intellectual Property and International Trade Court and the Department of Intellectual Property under the Ministry of Commerce. Although the US lacks the former, the federal court system combined with various federal law enforcement agencies do a much better job at preventing the infringement of IP.
On the criminal side, IP infringement in Thailand is often blatant. MBK shopping center in Bangkok was specifically mentioned in the latest “301 Report” in late 2016, and it was then raided half a year later. The Thai authorities are becoming sincerer as they have also increased raids targeting companies that use pirated software. The result of the increased raids remains to be seen, and the US Department of Commerce (DoC) has previously been skeptical of Thai law enforcement. Whether this is true or not, Thailand’s low position on the Corruption Perceptions Index may give American IP holders pause when entering the Thai market. The USTR did praise Thailand’s 20-year IP roadmap, and it contains provisions to incorporate more education and involvement of third parties such as landlords, to reduce IP infringement. By contrast, the US has a robust law enforcement regime and Thai companies relying on IP protection in the US likely have little concern of criminal infringement.
On the civil side, the US has undergone large changes relating to IP lawsuits that will likely result in decreased damage awards in the future. Unlike the US, Thailand has a specialized IP court. Although the more technically-qualified judges may be superior to their counterparts in the US, American companies should also consider that the US DoC has accused it of lacking transparency and granting damages that are too small to act as an effective deterrent. The opposite of this, of course, is that a Thai company operating in the US must be aware that juries, even after 2017 changes regarding proper venue in patent cases, may be prone to granting damages in the range of millions of dollars. A miscalculation in the US that results in a lawsuit can have severe financial ramifications that are drastically higher than in Thailand.
2. Patents and Trademarks
Both American businesses establishing in Thailand and Thai businesses establishing in the US face similar issues regarding patents and trademarks. Most notable is the backlog in both countries. Although registering bodies in both locations have an ostensible timeline, the reality is usually much longer due to the substantial number of patents that are filed. The sheer volume in the US causes delay whereas Thailand suffers from a lack of qualified examiners. Filing a patent or trademark in either county may be necessary for business, and face its own unique challenges, so it may not be overly burdensome when comparing one against the other. Undoubtedly, each system can vastly benefit from increasing efficiency. Legal fees are required and the higher cost in the US may pose a slight barrier, but they could still be significant in Thailand depending on the complexity of the patent.
Thailand has taken several steps to reform its patent system such as adding more qualified examiners. The US system has also undergone various changes from the establishment of the Patent Trial and Appeal Board to various changes regarding patentability. As Thailand updates its system to international standards, filing a patent or trademark should not be more burdensome than other countries. Several niche areas, such as pharmaceutical or fragrance, may be subject to different laws as compared to the US, but in general obtaining a patent in both countries can be a slow and expensive process.
The staggering cost and prevalence of litigation in the US can be a major source of lost revenue for any business. On the other hand, the legal system of Thailand can be unfamiliar to American companies and another source of expenditure. Thailand’s civil law system and no enshrinement of a guarantee to a trial by jury likely pose little barrier to American companies, but the refusal to recognize foreign judgments may. For this reason, any contract that requires agreement to litigate in a foreign venue has no value. Businesses may prefer to choose their own venue, but if a business seeks judgment against a Thai defendant only a Thai court can issue a binding decision. Foreign judgments may be used as evidence, but it is not a guarantee and would be a wasteful expenditure to litigate the same issue twice. Thailand is a signatory to the New York Convention and does recognize foreign arbitral awards. Arbitration clauses are favored in contracts with consumers, but even this aspect is complicated in Thailand. Obtaining a foreign arbitral award in Thailand requires bringing a separate court action and ensuring that the arbitration meets the court’s criteria and the notification and other processes involved do as well. An appeal may result and it is possible for years to lapse from the time of award at arbitration to the actual award of damages in Thailand. Another aspect for American consumer-facing businesses to consider is the arrival of class action lawsuits in Thailand. The law was amended in December 2015 to permit them for the first time, and although class actions have a much more established history in the US, it is a factor to now consider in Thailand.
Since businesses do not usually have a model of relying on large damage awards as a source of profit, then the much smaller awards at trial in Thailand should not deter American businesses from expanding. The opposite may deter Thai businesses from considering the US though. The US is not the most litigious country in the world (it ranks fifth), but it is one of the most expensive when it comes to liability costs. Almost every aspect pertaining to litigation can be extremely expensive in the US. Although some areas are similar to the Thai system, such as the unlikeliness of recovering attorney’s fees and the cost of filing fees, other aspects can have much larger consequences. Discovery in the US is much more encompassing than Thailand, which rarely compels it, and may impose steep costs on plaintiffs and defendants alike. In the event of a large disparity between parties, the threat of broad discovery can be imposed to force a settlement. Most cases in the US settle, but a plaintiff is calculating and will aim for the highest number possible that makes it just bearable when compared to going to trial. If a case goes to a trial with a jury, there can be large civil damages imposed and in some cases punitive damages, which are rarer in Thailand. Additionally, the dual state/federal system of American courts requires a greater familiarity of the legal environment. A Thai company must be sure to comply not only with federal law, but any state laws applicable to where its business is conducted.
The risks associated with doing business in the US do not only go against foreign companies. Some may prefer it as the legal system can be used offensively to achieve better results than at home. The World Bank’s rankings place the US higher in both enforcing contracts and resolving insolvency, so the risk of higher legal expenditure may come with the added benefit of more predictable results.
Immigration and Employment
1. American Companies Establishing in Thailand
Depending on the type of business, American companies may face several challenges. Two of the largest hurdles are bringing over foreign workers and finding domestic skilled labor. There are numerous requirements that make employing non-Thai workers challenging. Capitalization requirements, minimum tax payments, and a certain number of Thais employed per foreigner are just a handful of criteria that must be met before a foreign worker can be sponsored for a work permit. Additionally, certain areas are off limits entirely for foreign workers and running afoul of the labor law can be met with increasingly strict penalties. In addition to the recent increase in punishment for illegally employing foreigners or working illegally in Thailand, emergency decrees can change the law with little prior notification and leave ambiguities for businesses to resolve.
Using local employees may not be a viable option for certain businesses due to the lack of skilled labor in Thailand. Thailand has a twofold problem in that it lacks both employees skilled at vocational level as well as employees that are skilled in IT, engineering, and other technical fields. Combined with Thailand’s lackluster education performance and poor proficiency in English, finding local skilled talent can be just as difficult as bringing in a foreign worker.
2. Thai Companies Establishing in the US
Thai companies are not as restricted by immigration requirements in the US. Thai executives are eligible for an E1 treaty trader visa and an E2 allows a foreign investor to work in the US based on that investment. Both have no quota, but entering the American market and employing Americans may be more challenging. In 2014, inflow foreign direct investment in the US from Thailand was a mere $145,000,000. North America is a target region for Thai investment, but in 2014 only seven companies invested in North America, and by the next year it was six.
Thailand has a decently competitive economy, but it remains focused on exports and does not enjoy the same sort of government backing in foreign investments as its neighbor China. Perhaps for these reasons, its strategy has not included expanding into the US to utilize American employees to compete with other businesses in the American market domestically.
The US and Thailand have a longstanding economic relationship that has served both countries well for almost two centuries. Like any sort of foreign relationship, however, challenges inhere in different systems of law, education, business, and different languages and cultures. It is clear from the amount of business conducted between the two countries and the amount of investment in Thailand that these issues are not insurmountable, but many require a skilled team to advise on legal and financial issues. With a proper business plan and experienced professionals, business ventures in Thailand by Americans or in the US by Thais can be very successful.
The material contained herein is only provided for information purposes. No part thereof may be deemed to constitute legal advice or the opinions of this law firm or any of its attorneys. Whilst every effort has been made to verify the contents of the material contained herein, we do not represent, warrant, undertake or guarantee that the information contained in this newsletter is correct, accurate, or complete. Legal advice must be sought before acting on any information contained herein.
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