Cablegate: Foreign Business Act and Thailand's Gats

VZCZCXRO8228
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #0280/01 0160450
ZNR UUUUU ZZH
P 160450Z JAN 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC PRIORITY 4065
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBY/AMEMBASSY CANBERRA PRIORITY 6538
RUEHUL/AMEMBASSY SEOUL PRIORITY 2545
RUEHKO/AMEMBASSY TOKYO PRIORITY 8711
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 2924
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHBS/USEU BRUSSELS PRIORITY

UNCLAS SECTION 01 OF 02 BANGKOK 000280

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
COMMERCE FOR EAP/MAC/OKSA
TREAURY FOR OASIA
STATE PASS TO USTR FOR WEISEL AND POSNER

E.O. 12958: N/A
TAGS: EINV ETRD ECON TH
SUBJECT: FOREIGN BUSINESS ACT AND THAILAND'S GATS
COMMITMENTS

REF: A. BANGKOK 261

B. BANGKOK 152

BANGKOK 00000280 001.2 OF 002

1.(U) This is an action request. See para. 5.

2. (U) On January 15, a diplomatic note headed "Preliminary
Explanation on the Proposed Amendment to the Foreign Business
Act B.E. 2542" was received from the Ministry of Foreign
Affairs:

Begin text of diplomatic note.

The Ministry of Commerce of Thailand has been receiving
complaints, as well as requests, to investigate the various
cases of alleged violation of the Foreign Business Act B.E.
2542 ("the Act") that foreign persons hold shares in excess
of legally permitted percentage and/or abuse voting rights by
disguising themselves as 'Thai' business. This allegation
has led to formal investigations and commencement of legal
proceedings by relevant authorities.

Amendment of the Act was therefore unavoidable in order to
enable stricter compliance and to provide more effective
enforcement of this law, as well as to prevent circumvention
of its application and to provide clarification as to
elements constituting a 'foreign' business.

To this end, on 9 January 2007, the Cabinet approved, in
principle, the proposed amendment of the Act. The proposed
amendment is now under consideration by the Council of State.

The proposed amendment comprises the following three
components:
- Imposition of heavier fines on the conclusion that there is
a circumvention of the application of the current Article 36,
regarding the act of being 'nominee';
-Prohibition, for the purpose of considering that a business
is 'Thai' , of the use of preferential voting rights for and
by foreign shareholders to allow voting rights to reflect
true equity participation permitted under the Act;
-Provision of flexibilities by having grandfathering
provision and allowing a short period of one to two years for
adjustment by companies so as to fully comply with the new
Act as amended and to avoid business interruption.

The new Act is expected to strengthen our supervising
capacity and address previous loopholes, without being an
unnecessary obstacle in attracting FDI.

Furthermore, the new Act will not in any way affect foreign
business in the manufacturing industries, export businesses,
as well as all BOI-promoted businesses and those set up
pursuant to Thailand's international obligations/commitments.

End text of diplomatic note.

3. (SBU) An American lawyer with long experience dealing with
the FBA made three initial observations regarding the points
in the dip note. First, that changing the definition of
'alien' to include voting rights and not just shareholding is
a key change in the law - not simply closing a "loophole" -
and a tightening of limitations on inward investment. Second,
the statement that the amendments will "not in any way affect
foreign business in the manufacturing industries..." is
incorrect. This is because many such companies have
operations engaged in service, distribution or other critical
activities ancillary to their prime activity. Also, many such
companies have subsidiaries that own the land on which the
manufacturing plant is built. The subsidiary real estate
holding company would be captured under the amendments.
Finally, he noted that the definition of 'nominee', arguably
the key issue in this matter, is not addressed.

4. (SBU) In a meeting called by the EU mission and attended
by diplomats and chamber of commerce representatives
including the US, Australia, Japan, Germany, Norway, South
Korea, UK and Singapore, the EU Minister-Counselor for Trade
circulated the following draft letter for consideration with

BANGKOK 00000280 002.2 OF 002

the intention of it being signed by the various ambassadors
for delivery to Deputy Prime Minister Pridiyathorn:

Begin text of draft letter:

We would like to draw your attention to a matter of great
concern to the foreign business community related to the
"proposed Draft Amendment tot eh Foreign Business Act B.E.
2542", which was approved by the Thai cabinet on 9 January
2007, and to information given to us on its content. We may
wish to review to other aspects of the proposed legislation
at a later stage, once more complete information is made
available to us.

However, at this stage, we wish to draw your immediate
attention to a major element, namely the introduction of a
new restriction limiting foreign control of companies
(majority of voting rights). Besides its potential negative
impact on foreign investment, such a change would go beyond
the existing commitments undertaken by Thailand in its
schedule of Specific Commitments in the field of Trade in
Services under the GATS.

Indeed, according to this schedule of Specific Commitments,
Thailand has undertaken national treatment commitments for a
number of sectors, subject to one limitation only, which
reads as follows: "No limitations as long as foreign equity
participation does not exceed 49 percent."

It results that a company should be granted national
treatment provided it meets the foreign equity criteria.
Thus, the introduction of a new limitation based on the
control of the company would go beyond Thailand's current
commitments.

Therefore, we would like to urge you to renounce the use of
the control and voting rights of a company as a criteria to
define it as a foreign company subject to the limitations
under the FBA. Such a step would contribute to restoring the
confidence of the foreign business community in Thailand as
an open economy welcoming foreign investment respectful of
its international trade commitments.

End text of draft letter.

5. (SBU) Action Request. We seek guidance as to the relevance
of the GATS to Thailand's proposed amendments and, more
specifically, whether the proposed amendments would be
considered by the USG as a change in Thailand's commitments
under the GATS. If these are considered material changes, we
would appreciate Washington's views on what steps Thailand
must take to notify and implement such changes under the
applicable WTO procedures.
BOYCE

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