By Douglas Mancill and Nat Uawithya
The Policy Rationale Behind Thailand’s Credit Regulation
Negotiated terms between commercial parties of equal bargaining power are generally considered better than dictated terms. But regulatory authorities don’t always agree.
Last year Thailand’s Trade Competition Commission (“TCC”) promulgated a credit terms regulation (the “Regulation”) intended to protect small-to-medium size enterprises (“SME”) from what it considered to be predatory business practices in the form of unfair payment terms when SMEs are providing services or products to other, typically larger, business customers. A great deal of ink has been spilled over the details of this Regulation, the definition of an SME and speculation about possible exceptions to the Regulation’s “45-day rule”, but there has been little discussion about the policy rationale behind Regulation. This is unfortunate because understanding the policy rationale behind the Regulation is necessary to understanding and answering the most important questions about the Regulation. If the policy behind the Regulation is ignored, too many questions about the Regulation are answered with the cliché “decisions will be made on a case-by-case” basis.
In Broad Terms What does the Regulation Prohibit?
Credit (payment) terms for trade, manufacturing, or the provision of services generally cannot exceed 45 days. The 45 day period starts from the date when the product or service was delivered or completed as agreed. (There is no reference to the submission of documents, but normally an invoice, delivery slip, etc.. is submitted when a product is delivered or services are completed.) The Regulation was promulgated because businesses, particularly small Thai businesses, face serious cash flow problems when payment to them is unreasonably delayed.
Credit terms must also generally be fair, economically justified, and non-prejudicial. For example, a supplier or service provider with weaker bargaining power should not have to wait longer for payment than a supplier or service provider with stronger bargaining power. The Regulation prohibits other unfair trade practices, such as amending payment terms without prior notice. Simple contractual remedies might seem sufficient to prohibit or deter a unilateral change of terms, but in practice they often are not sufficient because the smaller party fears commercial retaliation by the larger party.
What sort of Businesses qualify as an SME under the Regulation?
For a manufacturing business, the term SME means a business that has no more than 200 employees or Thai Baht 500 million annual income.
For service, wholesale, and retail business, the term SMEs means a business that has no more than 100 employees or Thai Baht 300 million annual income.
The Exception to the 45-day rule
A longer credit term is only permitted when there is a business, marketing or economic rationale providing for that longer term. The Thai Trade Competition Commission will determine if a longer payment term falls within this exception on a “case-by-case” basis. This means the longer payment term is not solely discretionary and a persuasive, articulable and legitimate business, marketing, or economic reason is required to deviate from the default 45-day rule of the Regulation.
Commentators often expressed concern about SMEs unscrupulously using the Regulation to their advantage. This is often a red herring. One hypothetical imagines suppliers and service providers delaying their invoicing to rush payment or delay payment by customers beyond the 45-day period. But the plausibility of this hypnotical is questionable. Why would any reasonable supplier or service provider do this? Don’t they want to get paid sooner rather later?
Some commentators have suggested that a deviation is justified when a buyer is relying on a payment from a party farther up the supply or production chain to make payment to a party further down on the supply or production chain. This seems persuasive if it can be established. How can one party in a supply chain be expected to pay when it has not received payment from a party that it needs to pay others in the supply chain? It’s even more compelling when the parties involved knew about and agreed to these arrangements.
Penalties for Violating the 45-day rule
The penalties for violating the Regulation are serious and include an administrative penalty of 10% of revenue earned during the year when a violation occurred. The penalty is applied to revenue – importantly, not profit – that the party in violation of the Regulation earned in the year when the violation occurred. A penalty is assessed by and should be paid to the TCC rather than the aggrieved party.
In identifying what problems, the Regulation was intended to address and how it should be interpreted, a look at the policy rationale behind the Regulation is required. When deciding if payment terms should be regulated, the Bank of Thailand said that “credit term[s] ha[ve] a direct impact on the financial liquidity of the business sector, leading to debt problems and reduced competitiveness. If we look at the solutions from case studies abroad, it is found that many countries have set benchmarks for credit term periods for the business sector.”
The Bank of Thailand reports that credit terms in Thailand are among the longest in ASEAN and will likely get longer. The Bank of Thailand stated that: “In 2020, the credit term period that [Thai] SMEs receive from their [trade] counterparts doubled to 60 days on average, and in some businesses, it extended to 120 days, which is higher compared to the average of other Asia-Pacific countries such as Taiwan 45 days, Indonesia 34 days” and a shorter period for Singapore. Reuters reported on Thailand’s plan to set credit terms to help smaller businesses here.
The Bank of Thailand thinks the problem lies with larger purchasers of services and supplies in business-to-business transactions using their superior bargaining power to force SMEs in Thailand to agree to commercially unreasonable payment terms. The parties that are harmed from this behavior are not large multi-national companies (MNCs) but local Thai SMEs. It is therefore not surprising that the Regulation is designed to protect SMEs.
It is not yet clear if and precisely how the Regulation will be enforced. Unfortunately, the Regulations supersedes negotiated repayment terms and we therefore recommend strict compliance with the 45-day rule when possible. When it is not possible, parties should promptly consult with counsel, particularly lawyers that have substantial experience with economic policy issues. A simple black and white “analysis” is dangerous when dealing with a complex new Regulation of this kind that caries these sorts of substantial penalties.
 Trade Competition Commission Notification on Guidelines for the Assessment of Unfair Trade Practices with respect to Credit Terms for SME business operators, in goods or services, dated 24 May 2021