In the case of financial services, incorporation is also a relevant criterion, because foreign service suppliers often enter the domestic market by means of establishing a branch rather than a subsidiary. An exception is Malaysia, because the establishment of branches by foreignincorporated financial institutions is restricted by law. In the case of Laos, the Philippines, Thailand, and Vietnam, a rule of origin that expressly excludes branches leads to a marked reduction in the number of service providers eligible for FTA benefits.

To illustrate the importance of these two criteria, Table 4 presents the number of non-ASEAN service providers that are domestically owned and controlled, foreign owned and controlled, and branches of foreign-incorporated enterprises.

Most other criteria are relatively easily met—partly because they are already operational requirements under domestic laws. The number of years of establishment is generally not restrictive if kept at a minimum of 5 years because most foreign companies operating in the selected sectors have had commercial presence over a longer period of time. This reflects the fact that most ASEAN countries partially opened up their service markets in the 1990s or even earlier. At the same time, the simulation studies applied the different rules of origin criteria to established service providers only. A substantive business operations requirement would still be relevant in restricting the entry of shell companies that merely seek to exploit the trade preferences available under an FTA.

<u>Second, a rule of origin that incorporates a domestic ownership and control criterion raises non-</u> trivial implementation questions. In classifying service providers as domestically owned and controlled, the five country case studies mostly relied on information on direct (or immediate) equity holdings. Data on indirect equity holdings and ultimate shareholders are typically not available to the public. Thus, companies that may appear to be domestically owned and controlled may ultimately be foreign owned and controlled. The deviation between the origins of the immediate shareholders versus ultimate shareholders is likely to be prominent where restrictions on foreign equity participation prevail. Through multi-level equity holdings, foreign investors can manage to exercise corporate control of service providers, in the absence of a direct majority equity ownership.

Thailand is a prominent example of this phenomenon. In principle, foreign equity participation in most service sectors in Thailand is limited to a minority stake (see Table 2). However, foreign companies have managed to exercise control over companies that are directly majority owned by Thai natural or juridical persons. According to Nikomborirak and Tawannakul (2006), foreign controlled public companies—as revealed by the composition of the board of directors and the nationality of director(s) whose signature must accompany all legal documents binding a company—accounted for 17.48 per cent of the market capitalization of the Stock Exchange of Thailand (SET). However, only 2.39 percentage points of the 17.48 percent figure represent direct foreign equity holdings. Interestingly, the circumvention of statutory ownership restrictions does not only involve multi-level equity holdings, but also share ownership by Thai “nominees” who act on behalf of foreign persons. Even though such nominee arrangements are against Thai laws, they appear to have been common practice in Thailand—as is illustrated by the landmark sale of Shin Corporation, the flagship company of the business empire of former Thai Prime Minister Thaksin Shinawatra (see Box 2).

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