thecorporatetreasurer.com40 corporate treasurer AuguST / SepTember 2015

Thailand’s regional treasury centre lureThe country has provided more flexibility to treasury centres, and thrown in some trade and tax perks to boot. Ann Shi reports

A s part of a master plan to open up its capital account, Thailand’s central bank, the Bank of Thailand (BoT), has relaxed foreign exchange

(FX) related rules to lure companies to set up treasury centres (TCs) in the country. The changes were made effective in May.

Key moves included the removal of the one-year tenor cap for cross-border intercompany lending, simplified documentation for intra-group transactions, and easier management for FX bank accounts.

TC licences have been available in Thailand since 2004, but the response has been poor. Up to 2014, only three companies – Sony, Panasonic, and US glass producer Guardian Industries – had obtained licences.

Companies need an international headquarters (IHQ) licence, granted by the Revenue Department, to gain tax benefits such as zero tax on interest gains offshore, branch income, or capital gains, explained Nutt Lumbikananda, director of FX administration and policy department at the BoT.

Thailand also offers an international trading centre (ITC) licence that cuts the cost of buying and selling goods for exporters and manufacturers.

The Corporate Treasurer spoke to PTT Exploration & Production (PTTEP) and Thai Union Frozen Products (TUF), the most recent companies to obtain a licence, to learn why having a TC in Thailand benefits them. Both have also applied for the IHQ licence.

As Thailand’s national oil producer, PTTEP aims to double production and sales volumes in five years. PTTEP operates about 43 projects in more than 11 countries around the world, and around 42.2% of the company’s asset book value sits outside of Thailand.

pooling liquidityBy operating a TC, PTTEP is centralising the liquidity of about 20 wholly-owned subsidiaries globally, cutting out the time it takes to seek approval from the central bank for each cross-currency transaction and increasing the efficiency of cash utilisation, said Sira Srisuksai, manager of cash and liquidity management at PTTEP.

Through intra-company cash pooling and automated cash sweeping, PTTEP is now able to reduce the group’s overall minimum working capital requirement from approximately $300 million on a daily basis to about $150 million. And the freed-up cash can serve more expansion needs, Srisuksai said.

For an exploration and production (E&P) project, cash pooling “can eliminate the cash call process from our corporate account to project account by automating cash transfer, which can provide just-in-time funding and reduce idle cash sitting in the project account”, explained Srisuksai, adding that the company needed to create a separate project account designed for investment into E&P projects specifically.

Without cash pooling, the company had

sira srisuksai, pTTep

to forecast the expenses needed for an E&P project on a monthly basis, and then transfer the estimated cash amount from the corporate account to project account for payment to vendors. PTTEP can now make the payment to vendors from the project account first, and sweep the equivalent cash amount from the corporate account to the project account at the end of day.

In addition, acting as the single point of investment, PTTEP can utilise the group’s excess liquidity to invest in the projects deemed to bring higher returns to the group, Srisuksai added.

Visibility offshoreTUF’s group CFO Joerg Ayrle shares similar objectives. Setting up the global TC is primarily to improve visibility at the group level of its operations. It must also act as the hub for better liquidity management, reducing the company’s need for large cash buffers.

With multiple acquisitions, the frozen food conglomerate has gained market positions all over the world. In 2014, 44% of TUF’s total sales volume came from the US market, 29% from Europe.

To centralise its liquidity back to Thailand, TUF is aiming to implement the cash concentration of its European operations by the end of the third quarter of this year, and early next year in the US, said Yongyut Setthawiwat, Bangkok-based

thecorporatetreasurer.com AuguST / SepTember 2015 corporate treasurer 41

thailand

out with the old... thailand’s new treasury centre rulesgroup treasurer at TUF.TUF has multiple bank accounts across

Europe. Among others, it uses Rabobank in the Netherlands, Societe Generale in the UK, and Intesa Sanpaolo in Italy as its cash mandate banks.

Under its planned global TC setup, TUF has opened a foreign currency (FCY) current account with HSBC. Through this mechanism, HSBC will conduct multi-bank cash concentration for the company in Europe, and then remit the FCY current account net balance back to Thailand. The shortage or surplus of the account will be settled with a FX credit line that TUF has signed with HSBC in Thailand.

Setthawiwat estimated that after the implementation of liquidity centralisation, TUF can reduce its daily cash on hand down to $10 million at the group level, from the current figure of around $50 million. The company can use the freed cash to reduce its short-term debt, he added.

the good, the badUnder the new rules, a Thailand-based TC can now lend to its subsidiaries in the form of intercompany loans with tenors of more than one year – removing the one-year cap. Srisuksai said that as PTTEP is mainly involved in long-term business projects, it “therefore needs to structure its inter-company loans with an open tenor that does not specify the repayment date, which the BoT considers a long-term loan”.

However, Srisuksai does not believe the proposed relaxation on FCY deposit account management is helpful, as the group companies of a TC still have to separate their accounts. He did not believe easier access to baht borrowings would make a big difference either, as most multinationals – including PTTEP – are typically funded in US dollars and use it as their functional currency.

TUF’s Setthawiwat viewed the documentation relief on TCs – for underlying transactions of payment of goods, services and loans, and for letting a TC’s group companies keep their own documents on FX transactions – as beneficial in reducing administration.

Whatever your needs, be sure to understand the benefits and the limitations Thailand’s new TC rules offer. There’s no gain being caught hook, line, and sinker. n

* PTTEP announced on May 29, 2015 that it has established PTTEP Treasury Centre Company Limited, a subsidiary to solely operate as the TC entity, rather than under the PTTEP entity.

old rules (until april end) new rules (updated on June 20)

foreign currency deposit (fcd) account management

TCs need to segregate the FCD accounts opened with domestic financial institutions (FIs) into two types: one for foreign currencies earned from overseas sources; and one for domestic.

Allow TCs to have just one type of FCD account with domestic FIs to deposit FX from both foreign and domestic sources.

TCs can maintain the aggregate outstanding balance of $500 million for:• FCD (domestic sources)

opened with domestic FIs;• FCD opened with FIs abroad;

and• Debt securities investment

abroad.

TCs can purchase FX up to $500 million per year for the following purposes:• Deposit into the FCD opened

with domestic FIs without having documents of underlying transactions;

• Deposit with FIs abroad; and• Debt securities investment

abroad.TCs can maintain the aggregate outstanding balance of $500 million for:• FCD opened with FIs abroad;

and• Debt securities investment

abroad.

thai baht borrowings

TCs can borrow baht from foreign entities only in Vietnam and neighbouring countries.

TCs can also borrow baht from any group companies abroad – the parent company, subsidiaries and branches that authorise a TC to provide treasury management.

cross-border intercomany loan

TCs can lend to its group companies with tenors of up to one year.

TCs can carry out intercompany lending with tenors longer than one year.

fX hedging TCs can freely unwind hedging transactions for goods and services.

TCs can also unwind hedging derivatives for FX lending/ borrowing, as well as for direct investment to group companies.

document and reporting requirements

With documents proving underlying transactions, TCs can deposit up to $500 million or the equivalent in foreign currencies per year with a domestic FI for payment of goods and services and loans.

No underlying documentation is required.

TCs must keep their own documents of underlying transactions, as well as those of the group companies.

group companies of a TC are allowed to keep their own documents.

payment and netting

A TC is an agent of its group companies for collection and payment of trade and services, and can net those transactions.

A TC can also collect and pay FX-related returns on investment, international trade and services, including dividend and interest, and net those transactions.

Source: bank of Thailand