Since the global economic downturn, cash pooling has become an increasingly relevant option for multinational corporations (MNCs) as a cash management technique. In general, cash pooling is used when MNCs wish to reduce their external financing needs and allow one company, a “corporate treasury centre”, to manage inter-group financing.
As each group company normally has its own accounts, these separate accounts are “pooled” together and managed as one net account, allowing group companies to operate under a single financial policy. Through this method, each group company needs less cash and can decrease its working capital.
As cash pooling schemes are often implemented by MNCs with subsidiaries worldwide, in the case of foreign companies operating in Thailand that have cash pooling accounts set up outside Thailand, the following legal issues arise under Thai law.
Definition of “affiliated” or “group” companies. Foreign companies operating in Thailand – under the Board of Investment of Thailand (BOI) promotion – as the international headquarters (IHQ) of their group may carry out various financial-related services, including cash pooling in respect of loans, without being subject to usual restrictions under the Foreign Business Act (1999). Nevertheless, it must be noted that the IHQ is permitted to provide such financial services, including lending, to affiliated or group companies only.
Two or more companies are considered to be affiliated if: (1) one company has authority to control the appointment and removal of directors with total or primary authority over the other company; or (2) one company holds shares in the other company in excess of 50%. The term “group company” generally refers to a company with a lesser degree of ownership by the parent company, i.e., between 25% and 50% ownership.
Foreign business licence. Foreign companies, i.e., companies with at least 50% of total shares held by non-Thai nationals or a non-Thai entity, are prohibited from engaging in businesses in Thailand unless a foreign business licence (FBL) is granted by the Ministry of Commerce (MOC) or an exemption is applicable, such as BOI promotion. Included among prohibited businesses is generally any service business – except services relating to financial and investment consultation, and securities trading. In this case, cash pooling is deemed to be a type of service whereby a loan is made by a company to its affiliated or group company. So a foreign company without BOI promotion intending to engage in cash pooling will require an FBL.
Recently, government policy regarding cash pooling has become quite stringent, as in certain cases foreign companies used cash pooling techniques as a means to shift earnings out of Thailand. Therefore, the MOC will carefully examine information regarding the borrowing and the lending company, such as the financial status of the parties, the amount of the loan, the source of the loan (since it may only be made from retained earnings in Thailand), repayment terms, interest rates and market references.
Transfer pricing. Although there are no official transfer pricing regulations in Thailand, the Thai Revenue Code and the Thailand Transfer Pricing Guidelines require that the interest rate on such loans not be lower than market rate, unless there are “justifiable grounds”, otherwise revenue officers have the power to assess additional tax.
For companies based in Thailand, cash pooling is not a new concept. The most notable example of a Thai company using a corporate treasury centre is that of PPT Exploration and Production (PPTEP). As one of the first adopters of a cash pooling, it is estimated by their treasury team that US$300 million in working capital is available on a daily basis as multiple accounts are pooled together to increase liquidity and free up idle cash.
In April 2015, the Bank of Thailand, with support from the BOI and Revenue Department, formally introduced the concept of a corporate treasury centre through regulation relaxation that permits companies registered in Thailand to be eligible for status as a “treasury centre” with the ability to manage its group of companies payment, collections, foreign exchange as well as liquidity of its subsidiaries in Thailand and overseas. This concept was introduced in conjunction with the BOI’s efforts to rebrand the regional operating headquarters into the IHQ in which the treasury centre is listed as a sub-category.
As discussed, the legal issues regarding the practice of cash pooling by MNCs in Thailand are complicated and the advice of legal counsel is indispensable.
HARIT NA POMBEJRA is a partner at Silk Legal in Bangkok.
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