CAT forges revamped deal with Hutchison

The Nation (6 November 2007)

CAT Telecom and Hong Kong's Hutchison Telecom International have signed a memorandum of understanding to restructure their collaboration in the cellular service business.

The long-awaited move reflects CAT's efforts to improve the operating efficiency of its cellular flagship business.

The state agency posted an operating loss of around Bt657 million during the first nine months, excluding the concession fee contribution and revenue share of Hutchison-CAT. The loss was due to rising overall expenses and the injection of Bt400 million into its early-retirement programme.

Phisal Jorphochaudom, president of CAT, said the agency and Hutchison Telecom had already inked the deal, but he did not specify the date. However, a CAT source said the deal was signed on Friday.

CAT owns 26 per cent of Hutchison-CAT Wireless Multimedia, while Hutchison Telecom holds the rest. The company has marketed the Code Division Multiple Access (CDMA) 2000 1-x cellular service under the Hutch brand and under CAT's marketing contract.

Hutchison-CAT has leased the CDMA network of BFKT in 25 provinces to provide the service. BFKT is a wholly owned subsidiary of Hutchison Telecom.

CAT owns the CDMA network in 51 provinces, which it will soft-launch next month.

Phisal said that under the memorandum of understanding, CAT would become the sole owner of the two networks. BFKT will transfer its network ownership to CAT free of charge, so CAT can merge its own network with that of BFKT.

Then CAT will lease the merged network to Hutchison-CAT to provide the cellular service.

Hutchison-CAT will also apply for a licence to become a mobile-virtual-network operator from the National Telecommunications Commission to provide the service.

CAT will terminate the existing contract it granted to Hutchison-CAT to market the CDMA service via the network in 25 provinces.

The next step, according to the source, is for CAT to increase its stake in Hutchison-CAT to an expected 49 per cent on the cashless transaction.

Since its debut in 2003, Hutchison-CAT has built up to about 800,000 subscribers out of 40 million mobile-phone subscribers nationwide. CAT's CDMA network in 51 provinces currently has 28,000 subscribers after its test-launch of the service early this year.

Marut Buranasetkul, CAT's senior executive vice president, said CAT would use the new brand on the service to be provided by the merged network.

In the meantime, CAT might use the "CAT CDMA" brand first when it soft-launches the service on its own network in 51 provinces next month.

During the first nine months of the year, Hutchison-CAT shared revenue of Bt1.311 billion with CAT. The state agency's total revenue during the period was Bt34.85 billion, with Bt7.058 billion in net profit. Excluding concession fees, revenue will be Bt15.671 billion, with a net profit of Bt461 million.

Revenue from CAT's flagship overseas-call business stands at Bt7.159 billion in the first nine months, down from Bt7.324 billion over the same period last year, while its data communications business's revenue rose to Bt6.055 billion from Bt5.424 billion.

CAT's concession revenue jumped to Bt19.179 billion from Bt7.207 billion.

CAT needs concession fees

Bangkok Post (6 November 2007)

CAT Telecom would have performed poorly in the year to September if the state enterprise was not allowed to book concession revenue, raising fears about its viability in the future following sector reform.

For now, CAT Telecom can still book the concession revenue, and saw its profit jump 115% from the same period last year. Without that income, CAT's net profit would have risen a mere 3%, said CAT senior executive vice-president Jirayut Rungsrithong.

From January to September, CAT earned 34.85 billion baht in revenue and a 7.06 billion baht net profit, up 115% from the same period last year. Of the revenue, 15.67 billion baht came from its own operations and 19.18 billion baht from concession fees.

Without concession fees, CAT's net profit would have inched up 3%, or 461 million baht, from the first nine months of 2006, he said.

Concession fees actually skyrocketed 166% when compared with same period last year, he said. This was due to the adjustment of revenue-sharing under the concession agreements and the transfer of assets to CAT. The removal of the excise tax also led to higher fees.

On the operations side, Mr Jirayut said the company's net profit was depressed after paying staff on the early retirement programme and increased expenditures on telecom services. CAT's international direct-dialling service also saw revenue decline 2% to 7.16 billion baht, compared to 7.32 billion last year.

Earnings from CAT's data business rose 12% to 6.05 billion baht, he said. IDD contributed 21% of total revenues to CAT, while concession fees comprised 55%.

Dividend income a 'taxing' issue

Bangkok Post (6 November 2007)

Government policies have the potential to influence economic activity for good or ill. Examples of the latter include tax systems that impose excessive burdens on income-producing activities. Thailand's taxation of foreign dividend income, for example, contains anomalies that could subvert the purpose of the original legislation.

Most countries exempt domestic dividend income from tax on the grounds that the profits from which the dividend is paid have already been taxed. In addition, many countries provide tax relief for dividends from foreign investments, either through credits for tax paid in the foreign jurisdiction or by way of exemption. The exemption may be absolute, or subject to conditions including minimum holding periods and shareholding percentages.

Thai taxation of dividend income: Under Thai tax law, domestic dividends earned by Thai corporate shareholders holding a substantial (25%) shareholding are exempt from taxation provided a minimum holding period is met.

Foreign dividend income may be exempt under one of two regimes, each with different conditions. The 2002 Regional Operating Headquarters (ROH) regulation exempts foreign dividend income of a Thai ROH. The broader-based RD 442 (introduced in 2005) exempts from tax foreign dividend income for all Thai corporate entities.

RD 442 was intended to enhance the competitiveness of Thai enterprises investing abroad. It also ends the discriminatory tax treatment of foreign versus domestic dividend income, encourages repatriation of profits to Thailand and, along with the ROH legislation, promotes the use of Thailand as a favoured holding company location.

Barriers to achieving policy objectives: Certain technical and commercial realities have not been recognised in the drafting of the regulations, with the result that they may not be effective.

A Thai ROH, for example, is not the most attractive holding vehicle for outbound investments, as ROH status (and, therefore, corporate income tax and foreign dividend exemptions) depends on its annual qualifying offshore service/royalty income amounting to at least 50% of its total income.

The problem arises in a year that the ROH receives foreign dividend income. Its ''total income'' increases and, as a result, its normal offshore service/royalty income is not likely to meet the 50% threshold. The result is a triple hit to the taxpayer: not only would the foreign dividend income become taxable (if RD 442 conditions are also not met) but the ROH would lose its concessional 10% corporate tax rate privilege for the rest of its qualifying income, and its expatriate employees would lose their personal income tax privileges. It is, therefore, no surprise that a Thai ROH is very rarely used as a holding vehicle.

Another example of potentially favourable tax legislation missing its mark is the foreign dividend exemption regime. RD 442 states that dividends should be paid from the ''taxable net profits'' of foreign subsidiaries that have been subject to a corporate income tax of at least 15% in the paying jurisdiction. The 15% headline foreign tax threshold had the objective of discouraging the use of tax havens to make outbound investments. Curiously, the Thai ROH legislation does not deny tax-exemption to such ''tainted'' low-taxed income.

The lack of flexibility in RD 442 may, however, defeat its stated purpose of increasing the competitiveness of Thai enterprises. Many investment structures interpose domestic or foreign holding companies that are exempt from tax on dividend income. These companies may exist for a number of reasons, for example, to create a local tax group, to take advantage of a favourable double-taxation agreement, to enable consolidation of an investment or to facilitate reinvestment of funds. However, the existence of such a holding company between Thailand and the operating (taxpaying) company would result in otherwise tax-exempt dividend income becoming taxable in Thailand.

For example, a typical structure for China-bound investments would be to use a Hong Kong holding company in order to have access to the favourable double-taxation agreement between China and Hong Kong. While the operating company in China pays tax on its operating income at 25%, the dividends it pays to the Hong Kong holding company are tax-exempt in Hong Kong. As a result, when the holding company subsequently repatriates the China profits to Thailand, the dividends are taxed in Thailand at 30%, on the grounds that the dividends have not been subject to tax in Hong Kong, ignoring the fact that the operating income has been taxed in China.
If the operating company in China was held directly by the Thai parent, the dividends would be exempt from tax in Thailand but would be subject (post 2008) to a higher rate of withholding tax in China. The failure to accommodate the realities of transnational investment structuring therefore results in the ironic situation of the Thai investor being able to save Thai tax only at the expense of paying more tax in China.

In view of these anomalous outcomes, Thai authorities would be well advised to obtain feedback from parties experienced in transnational investment.

They could, for example, follow the example of Singapore, which has a foreign dividend exemption regime somewhat similar to RD 442. To be tax-exempt in Singapore, foreign dividends have to be paid from a country with a headline tax rate of 15% and have to be subject to some tax in that jurisdiction.

When faced with the same issues described above, tax authorities in Singapore took a pragmatic approach by permitting the exemption for foreign dividends routed to the Singapore parent through a holding company in a low-tax country, provided the taxpayer could establish that the profits giving rise to the dividend had been subject to a corporate income tax at a rate of 15% or more in some jurisdiction.

The ROH regime and RD 442 provide an opportunity for positioning Thailand as an investment hub and for increasing the competitiveness of Thai businesses. However, the failure to recognise the realities of structuring transnational investment may, unless amendments are made, frustrate the stated objectives of the regulations.PricewaterhouseCoopers' ninth annual tax and legal conference, ''Capitalising on Change'' takes place in Bangkok on Nov 26-27. To register, please visit www.pwc.com/th

Thavorn Rujivanarom is a lead partner and Prema Rao is a director at PricewaterhouseCoopers Thailand. We welcome your comments and question at leadingtheway

Executives predict more stability

Bangkok Post (6 November 2007)

Listed-company executives project economic growth next year to grow 4.4% thanks to greater stability in local politics.

Kobsak Pootrakool, executive director of the SET Research Institute, said that more than half of 110 companies listed on the Stock Exchange of Thailand surveyed agreed that politics would become more stable after the Dec 23 election.

About one-third of the firms, however, believed that little change would occur after the election, while 18% believed that greater instability could occur.

Dr Kobsak said 52 firms urged the new government to accelerate infrastructure megaproject investments; 44 wanted the government to boost economic growth through local consumption; and 18 said exports should be the top priority.

A strong three-quarters of the firms surveyed predicted economic growth to pick up six months after the election, with only 18% predicting little change and 7% forecasting a further downturn.
Overall, listed-company executives projected economic growth of 4% to 4.4% in 2008, with inflation projected at 2% to 3%.

According to the Bank of Thailand, economic growth this year is projected at 4%, down from 5% in 2006. Two-thirds of the listed firms said they planned to increase investments over the next 12 months, while 29% forecast no change in capital expenditures and 5% planned to cut spending.

Some 76 companies said they favoured new bank loans to finance investment, while 64 said they would use retained profits. Twenty companies planned corporate bond issues and 16 new share issues. Ten companies said they would borrow from foreign banks for new investment, while five favoured foreign bond issues.

''To raise fund through the SET or to increase capital is more difficult due to the relatively long process required. Borrowing from banks is still the easiest way to raise funds,'' Dr Kobsak said.
Listed firms agreed that rising oil prices in the global market would put pressure on material prices, leading some manufacturers to eventually hike sales prices to maintain margins.

Dr Kobsak said the recent runup in oil prices was likely to be temporary. New records were reached due to tensions between Iraq and Turkey and the onset of the winter season in the northern hemisphere.

''The factors that would affect investment plans the most are local economic growth, politics, interest rates, world economic trends, high oil prices and government investment,'' he said.

The stronger baht had helped 35% of the companies due to lower import costs, while another 32% said the currency had no impact on operations and another 18% cited some gains. Only 11% of the firms said the stronger baht was significantly negative to their operations.

Meanwhile, the Stock Exchange of Thailand posted sharp losses yesterday as most Asian markets ended lower on growing fears about the impact of the sub-prime mortgage crisis in the US.

Reports that the head of Citigroup had resigned and that the bank would take losses of up to $11 billion due to the sub-prime crisis shook regional markets. Hong Kong markets also tumbled after regulators announced further delays in allowing mainland Chinese residents to trade in the market.

The SET index closed yesterday at 872.86, down 21.48, in trade worth 19.16 billion baht. Foreign investors were heavy net sellers of 5.2 billion baht worth of stock, with retail investors net buyers of 4.8 billion and local institutions net buyers of 400.4 million.

Sukit Udomsirikul, assistant managing director of Siam City Securities, said the SET index could drop to 830 to 850 as foreign investors reshuffle their allocations to the region.

Recent comments by the US Federal Reserve that further interest-rate cuts in the US were unlikely due to the weak dollar were negative for the equities markets, he said.

SME confidence decreases in Sept

The Nation (6 November 2007)

Small and medium-sized enterprises (SMEs) showed a significant drop in confidence in September, the Office of Small and Medium Enterprise Promotion said yesterday.

Director-general Jhitraporn Techacharn said the Trade and Service Sentiment Index fell from 43.8 points in August to 41.3 points, due to sluggish domestic spending and higher prices for raw materials and oil. The third-quarter index also dropped, to 42.3 points.

Confidence in the Kingdom's economy slid from 32.3 points to 26.2, while confidence in business prospects dropped from 40.9 points to 35.1.

"They showed lower confidence, due to the poor economic conditions that hurt sales and profits," Jhitraporn said.

SMEs in all sectors showed lower confidence, with the largest drops in agriculture, retail trade and retail oil.

In the service sector, tourism and related industries showed the greatest decrease in confidence, due to heavy rains and flooding at tourist destinations and the One-Two-Go plane crash.

However, SMEs believe business will improve over the next three months, with the index reaching 48 points. The index is expected to rise across the board, but particularly for the wholesale, retail-trade and services sectors.

"The confidence index staying below the 50-point level indicates business prospects are not as bright as they should be," Jhitraporn said.

By region, the largest drop in September's index was seen among SMEs in the South, while those in the Northeast and North showed higher confidence than in August.

Analysts expect slight drop in AIS profit in third quarter

The Nation (6 November 2007)

Telecom analysts expect Ad-vanced Info Service (AIS) to post a slight decline in net profit in the third quarter, in line with the low call season.

The market leader with more than 22 million subscribers is however forecast to do better in the current quarter - the high call season - amid expected better consumer sentiment after the general election.

AIS is also expected to start booking interconnection revenue for the first time sometime next year. An analyst of one foreign brokerage house estimated AIS to post normalised profit of Bt3.45 billion in the third quarter, declining 5.1 per cent year on year and 6 per cent quarter on quarter, due to the seasonal factor.

According to the analyst, AIS has revised downward its net interconnection revenue to Bt3 billion per year from its previous estimate of Bt4 billion.

AIS has yet to book interconnection revenue, pending the green light from its concession owner TOT. The analyst said AIS was positive the state agency would grant permission to start recording such revenue in the first quarter next year.

Imposed last year by the National Telecommunications Commission, the regulations mandate telecom operators, which have already signed bilateral interconnection deals, to share voice and data revenue between the networks involved in the calls on a fair basis.

AIS, Total Access Commu-nication (DTAC), and True Move inked such deals last year.

TOT has opposed the regulations, as True Move and DTAC stopped paying the access fee to the state agency last November and have complied with the interconnection rules instead.

TOT has traditionally earned a combined Bt14 billion per year from three CAT Telecom mobile-phone concessions - True Move, DTAC and Digital Phone - which have paid the access fee to TOT to access different networks via TOT's facilities. According to Ayudhya Securities, AIS's net profit is predicted to drop 4 per cent on a quarterly and yearly basis to Bt3.523 billion in the third quarter, in line with the normal low season for calls.

Its combined monthly average revenue per user for prepaid and post-paid service is forecast to drop 7 per cent on a quarterly basis to Bt254. Overall revenue is estimated to be flat at Bt22.365 billion.

The company's performance in the last quarter is expected to pick up, given that this is the high call season and it is believed that call spending will surge when people are in a better frame of mind after the election.

AIS president Wichian Mektrakarn said late last week that the market sentiment is expected to turn better after the general election.

ACL Securities forecast that AIS's third-quarter net profit would dip 4.4 per cent year on year and 5.6 per cent quarter on quarter to Bt3.466 billion, due to the low call season and the economic slowdown. Overall is expected to remain unchanged on a yearly basis, but decline 4.2 per cent quarter on quarter to Bt21.718 billion. The brokerage believes AIS will start booking the interconnection fee during the first half of next year.