The Thai Government has announced an intention to amend the Foreign Business Act by changing the definition of "foreigner". The definition of foreigner currently includes Thai companies with a majority foreign shareholding. Under the new proposals, this definition will be extended to include companies that are currently treated as Thai, due to majority Thai share ownership, but where foreign individuals or foreign companies have more than half of the voting rights.
These proposals are not yet final. They may yet be amended in response to widely-debated concerns about the implications for future foreign investment. But much of this discussion has focused on economics and the private rights of existing foreign-controlled businesses. There has been less attention paid to the implications in terms of Thailand's commitments under international law. These implications are in fact significant, both in relation to Thailand's WTO obligations and in relation to obligations under international investment treaties.
WTO and the GATS
The General Agreement on Trade in Services ("GATS") is the WTO Agreement dealing with trade in all types of services, including services supplied via "commercial presence" in the territory of the host country. This includes commercial presence by setting up or acquiring legal persons in the host country.
The GATS requires member states to provide "market access" and "national treatment" (treatment that does not discriminate against foreigners) to foreign services and foreign service suppliers. However, WTO Members assume these obligations on an "opt-in" basis. This means that these obligations only apply to the extent that a WTO Member has accepted them with regard to specific service sectors. Thailand has made commitments in respect of many of the sectors which it restricts under the Foreign Business Act. The sectors for which the proposed new restrictions would appear to violate the GATS include: accounting; architectural services; engineering; computer services; advertising; oil and gas field services; agricultural services; certain telecommunication services; certain audiovisual services; construction; environmental services; certain financial services; tourism; and certain transport services.
Thailand is legally bound to provide full "national treatment" for companies with foreign ownership "as long as foreign equity participation does not exceed 49%", regardless of voting rights. If Thailand adds the voting rights requirement as a condition for receiving the same treatment as a Thai company, Thailand adds a condition that does not appear in its GATS commitments. In doing so, it violates its GATS obligations.
Press reports indicate that the Thai Government might seek to renegotiate its GATS commitments. Article XXI of the GATS provides a procedure for such renegotiation, but this requires agreement with other WTO Members on compensatory measures. Until now, this procedure has never been used and it would be a hugely controversial step for the Thai Government to use it for the wide range of services affected by the changes to the Foreign Business Act. Further, it seems that, in the ongoing Doha Round of trade negotiations, Thailand has offered to make additional commitments under GATS, rather than reneging on existing ones.
WTO dispute settlement is not available to private companies. However, private companies of EU origin can ask the European Commission to intervene on their behalf. Private companies can also file an official complaint under the EU Trade Barriers Regulation, which can prompt the European Commission to start WTO dispute settlement proceedings against Thailand. It should be noted that it is the European Commission that would negotiate compensatory measures if Thailand were to seek to use the procedure under Article XXI of the GATS. If this were to happen, therefore, it would be vital for the affected EU companies to explain the importance of their existing Thai businesses to the European Commission.
Bilateral and Regional Investment Treaties
Under the new proposals a company would no longer automatically qualify as Thai on the basis of Thai majority share ownership. If a non-Thai entity has voting control over a Thai company, the Thai company will now be classified as foreign. If a Thai company becomes a foreign company due to this change in definition, it will be required in some cases to restructure itself or to divest its business in restricted categories.
In such circumstances, some unhappy foreign investors may be able to bring a legal claim directly against the Thai Government, on the basis of investor protections contained in treaties between Thailand and the investors' home states. Thailand has entered into bilateral investment treaties with more than thirty countries, and a multilateral treaty among all ASEAN member states. These treaties provide investors with a number of important rights. They usually provide that foreign investments should receive fair and equitable treatment and full protection and security. They require prompt, adequate and effective compensation for direct or indirect measures that expropriate (or take away) an investment. And they require foreign investment to receive treatment not less favourable than investment of local companies. Investment is often defined very widely as "every kind of asset", including shares, stocks and interests in the property of companies.
The new proposals may amount to compulsory divestiture of investments in Thailand. In such cases, the Government could open itself up to claims for compensation under these treaties. In particular, where a government enacts a measure that substantially deprives an investor of the use, value and enjoyment of its investment, an investor may be entitled to compensation for expropriation. Furthermore, discrimination in favour of domestic companies and lack of a predictable framework for investment, contrary to the investor's legitimate expectations, may be regarded as a breach of the fair and equitable treatment standard. In addition, in circumstances where a change in the legal framework makes it impossible to continue to operate a business, this may amount to a breach of the commitment to provide full protection and security. Thailand's investment treaties generally allow investors to take such claims to international arbitration outside Thailand.