Cross-border transactions: how legal regulations shape international deals

Are there different types of cross-border transactions?

Yes, cross-border transactions can be classified into several types based on their nature. The most common types are:

• Trade transactions: The movement of goods or services across borders. This includes import and export activities, regulated under laws like the Customs Act. Thai companies engaging in trade with foreign entities must comply with local regulations regarding tariffs, duties, and customs procedures, as well as any applicable international trade agreements.

• Financial transactions: Cross-border financial transactions include the movement of capital or currencies between different countries. These transactions are governed by currency exchange laws, such as the Exchange Control Act B.E. 2485 (1942) in Thailand, and the rules set by the Bank of Thailand (BoT).

• Foreign direct investments (FDI): These transactions involve long-term investments in assets or companies in another country. FDI in Thailand, for instance, is regulated by the Foreign Business Act and the BOI (Board of Investment) Regulations, which impose restrictions on foreign ownership in specific sectors.

What are the key legal considerations?

Cross-border transactions involve multiple jurisdictions, which can lead to complex legal challenges. Here are some of the key legal considerations:

• Jurisdiction and applicable law

One of the central legal challenges in cross-border transactions is determining which country’s laws will govern the transaction. International agreements such as the United Nations Convention on Contracts for the International Sale of Goods (CISG) play a significant role in standardizing legal frameworks for international trade. However, in the absence of international agreements, the parties involved often must negotiate the applicable law.

In Thailand, conflict of laws principles outlined in the Thai Civil and Commercial Code (CCC) help determine the applicable law when disputes arise in cross-border transactions. For instance, if a Thai company enters into a contract with a foreign entity, the contract will often include a clause specifying whether Thai law or the law of another country will govern the agreement.

• Taxation

Cross-border transactions often give rise to tax liabilities in multiple countries, making compliance with local and international tax laws essential. Thailand has entered into Double Taxation Agreements (DTAs) with numerous countries to prevent companies from being taxed on the same income in two jurisdictions. These agreements outline which country has the taxing rights in the context of cross-border transactions. Companies must also consider VAT (Value Added Tax) regulations when conducting business across borders.

The Revenue Code of Thailand stipulates that income earned by foreign entities may be subject to withholding tax unless a relevant DTA provides relief. The rate of withholding tax varies based on the nature of the transaction (e.g., payment for services, royalties, or dividends) and the specific provisions of the DTA.

How do regulatory frameworks impact cross-border transactions?

Cross-border transactions must comply with a wide range of regulatory requirements, including those related to customs, foreign exchange, and competition law. Non-compliance can result in penalties or restrictions on the ability to conduct future transactions.

• Customs and Import-Export Regulations

Thailand’s Customs Act sets out the rules for importing and exporting goods, including the requirement for accurate declaration and proper documentation. Failure to comply with these rules can lead to fines, confiscation of goods, and other legal penalties. Companies engaging in cross-border trade should ensure that they meet all regulatory requirements, including tariffs, non-tariff barriers, and trade sanctions, where applicable.

• Exchange Control

Thailand’s Exchange Control Act imposes restrictions on the movement of currency into and out of the country. Companies conducting cross-border financial transactions must comply with these regulations, which require prior approval from the Bank of Thailand in certain cases, especially for large transactions or those involving foreign currencies. Cross-border transactions also often require reporting to the BoT to ensure compliance with foreign exchange laws.

• Competition Law

Cross-border mergers and acquisitions (M&A) may be subject to competition law in multiple jurisdictions. In Thailand, the Trade Competition Act B.E. 2560 (2017) regulates mergers that could potentially reduce competition in the Thai market. Companies planning cross-border M&A transactions must comply with these rules and obtain approval from the Office of Trade Competition Commission (OTCC) when necessary.

What role do international agreements play?

International agreements and treaties play a significant role in facilitating cross-border transactions by standardizing rules and providing legal protections for companies engaged in international business.

• Free Trade Agreements (FTAs)

Thailand has entered into numerous Free Trade Agreements (FTAs), including with ASEAN, Japan, and Australia. These agreements lower or eliminate tariffs and other trade barriers, making it easier for Thai companies to engage in cross-border trade. For example, the ASEAN Free Trade Area (AFTA) agreement promotes trade between Thailand and other ASEAN member states by reducing tariffs on goods and services.

• Bilateral Investment Treaties (BITs)

BITs provide legal protections for foreign investors and their investments. Thailand has entered into BITs with several countries to encourage cross-border investments. These treaties ensure that foreign investors receive fair and equitable treatment, protection from expropriation without compensation, and the ability to repatriate profits.

How are cross-border disputes resolved?

Given the complexity of cross-border transactions, disputes often arise regarding the interpretation of contracts, jurisdictional issues, and compliance with local laws. There are several mechanisms for resolving such disputes.

• Arbitration

International arbitration is one of the most common methods for resolving disputes in cross-border transactions. Thailand is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which ensures that arbitral awards made in one signatory country can be enforced in other signatory countries. The Thai Arbitration Institute and other arbitration bodies offer services for resolving cross-border disputes without resorting to lengthy court proceedings.

• Litigation

In cases where arbitration is not the preferred method, parties can turn to litigation. However, litigation involving cross-border transactions can be more complex due to the need to enforce foreign judgments in Thailand. The Thai Civil Procedure Code governs the enforcement of foreign judgments, but generally, Thai courts do not enforce foreign court judgments unless a treaty between Thailand and the relevant country allows for it.

Conclusion

Cross-border transactions are an integral part of doing business in the global economy, but they come with a host of legal considerations. Businesses engaging in cross-border activities must navigate different jurisdictions’ legal systems, tax laws, and regulatory requirements. By understanding the legal framework governing cross-border transactions in Thailand, including the Foreign Business Act, Customs Act, and Exchange Control Act, companies can mitigate risks and ensure compliance with both local and international laws. Additionally, international agreements such as FTAs, BITs, and the New York Convention play a pivotal role in simplifying these transactions and protecting businesses engaged in cross-border activities.