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The Investment Regime in ASEAN Countries
Dr. Lawan Thanadsillapakul
ASEAN countries still maintain an approval procedure for foreign investment, but they have mostly introduced the 'one stop service' concept and implement strict time limits to process applications. Some have enacted new laws that explicitly welcome FDI. Indonesia eliminated the minimum capital requirement, introduced a 'one stop service' and a greater regional autonomy for approval. Malaysia introduced a Promotion of Investment Act(4). The Philippines enacted a new foreign investment law , and Thailand has permitted the foreign ownership of land . I will deal with the different types of controls separately, although there is inevitably some overlap in practice. The following sections will focus on ASEAN national investment laws, country by country, to provide the actual national laws and regulation governing foreign investment. The four main areas are discussed i.e. entry approval procedure, company administration and control; ownership limits and restricted sectors; performance requirements; and investment incentives. I will firstly make a survey of all actual ASEAN countries' national laws and regulations. We will find that the pattern of ASEAN national investment laws, and the rationale behind such laws and regulations are all the same that are also based on the same economic theoretical approach (discussed below). I will provide an analytical conclusion at the end of these sections.
Entry Approval Procedures, Company Administration and Control
ASEAN countries have long had a policy of screening foreign investments in order to ensure that all investments do no harm and fully contribute to their economies in accordance with their economic development plan (see Table 2 summary of ASEAN countries' investment measures, p. 276), so they stipulate approval procedures and require foreign investors to report or notify their business activities to the government. Registration of a company is sometimes required as a pre-requisite for seeking promotion approval from the government. Conversely, in some cases a corporation will be registered only if it is granted promotion approval from the relevant authority. There are some conditions to fulfil prior to receiving the approval.
Indonesia has an approval and investment review process applicable to foreign investors. The criterion for approving FDI will be considered by the types and forms of business. The first will be based on a negative investment list(7) (the FDI must not engage in business prohibited by the negative list), the second will require foreign investors to form business firms in according to the laws which can be registered as a joint venture. Moreover, any company that wishes to do business categorised as important to the state and public services, such as port services, and generation and transmission as well as distribution of electric power for public use, telecommunications, atomic energy reactors and mass media, must do so through a joint venture where the share of the Indonesian partners shall be at least 5% of the entire paid up capital of the company at the time of establishment.
In Indonesia, a foreign-owned business must be incorporated under the Indonesian law(8) in the form of PT (perseroan terbatas)(9) and it is called a "foreign company" (perusahaan penanaman modal asing) in order to distinguish it from domestic companies. The formal requirements for the establishment of a subsidiary of a foreign company is that it should be a joint venture(10) with one or more national corporations. A company in which the percentage of the foreign-owned equity is 51% or more, has to appoint a local agent as its distributor(11). Moreover, a foreign-owned company cannot be registered under Indonesian law if it is involved in the business areas closed to foreign investors(12). The Capital Investment Co-ordinating Board (BKPM) has the authority to approve/reject all foreign investments. It will examine the investment proposal, then issue a temporary letter of approval to all relevant administrative or regulatory bodies. If any such body considers that there is a problem with the proposed foreign investment then it would be rejected. If not, a temporary approval letter will be submitted to the President, who then issues a decree of approval. Soon after the Presidential decree is issued, the BKPM will issue eight permits(13) to the company which give it the opportunity to start its business. The regional BKPM or the regional government will issue four other permits which are a location or site permit; a land right (a right to build, or to use land); a building permit; and a permit to comply with regulations as required by the Public Nuisance Ordinance for all business. Foreign companies also have to comply with the Environment Act of 1982(14). After that, general control(15) of foreign investment is exercised by the Deputy for Supervision of Implementation Controls of the BKPM(16).
Indonesia's foreign investment legislation and regulations could be changed, amended or replaced at any time by other legislation or regulations, and theoretically, they could be changed retroactively. In most ASEAN countries this has never occurred. However, recent changes have been made in Indonesia in respect of tax holiday facilities for foreign investment, which have affected foreign investors who were running their business before the new legislation came into force.
Indonesian law requires divestment of foreign ownership of companies. During the first stage, the newly established foreign company may have foreign equity up to 85% or 95% for a business with an export orientation. But the local equity has to be increased to 20% in the first five years of commercial operation and to 51% in the following ten years. This fadeout or divestment requirement is still in force but it is temporarily waived by the Short Term Measures which ASEAN countries allow 100% of foreign equity in the company. It is also notable that according to the government regulation, foreigners may buy shares on the share market, but not shares of companies that sell goods directly to consumers. And finally, a foreign capital investment licence shall not, generally, exceed 30 years(17).
At present, the Indonesia government will continue to review all regulations related to investment(18). By creating prudent macro economic policy, and highly stable economic growth, political and social stability and the commitment of the Indonesian government to continue deregulation, the Indonesian investment climate will be more favourable, attractive and conducive to accommodate FDI flows from around the world. Indonesian comparative advantages in natural and human resources, market potential, as well as its strategic location, can combine comfortably with foreign capital and technology to provide goods and services for mutual benefit.
(4) The Promotion of Investment Act 1986 provided an investment promotion package for foreign investors such as Pioneer Status for the company, Investment Tax allowance, Industrial adjustment allowance, Abatement of adjusted income, Export allowance, Export Credit Refinancing Scheme, Double deduction of expenses for promotion of exports, Double deduction of export credit insurance premiums, Industrial building allowance, Incentives for research and development.
(5) Foreign Investments Act of 1991 R.A 7042 as amended by R.A 8179.
(6) Foreigners (and even Thai ladies married to a foreigner) may not own land outright, but only limited rights (e.g. a 30-year lease). However, the Land Code provides that aliens may acquire land by virtue of the provisions of a treaty giving the right to own immovable properties and subject to the provisions of this Code, and subject to limitations on rights over land for religious purposes. Under the 1999 amended Land Code aliens may now acquire land for residence, commerce, industry, agriculture, burial, public charity or religion under the conditions and procedures prescribed in Ministerial Regulations and with the permission of the Minister. The Thai Cabinet recently approved (a) a draft amendment Bill to the Land Code that would allow foreigners to own not more than I Rai (1,600 sqm.) of land for residential purpose with the approval of the Ministry of Interior, and (b) a draft Bill on Condominium that would allow foreigners as much as 100% ownership of condominium in certain projects, subject to various conditions. Also the Industrial Estate Authority of Thailand Act allows aliens, at the Authority's discretion, to own land within an estate area so as to enable them to carry on their business activities. There are two categories of industrial estate: general industrial zone and export processing zones. Also under Petroleum Act of 1971 oil concessionaires are allowed to hold land. There is also discretion available to the Board of Investment (BOI) when granting a promotion certificate under the Investment Promotion Act to permit an alien to hold land for the purposes of carrying on business.
(7) Law No. 1 of 1967 concerning Foreign Investment, and established by the President Decree No. 54 of 1993 which replaces the negative investment list year 1992. Also see APEC Committee on Trade and Investment (CTI) (1998) Guide to the Investment Regime of the APEC Member Economies. Singapore: APEC.
(8) Art. 3 of The Foreign Investment Act. And also Art. 7 of the Compulsory Registration of Companies Act No. 3, 1982 provided that agents and subsidiaries of foreign companies must comply with the same procedure for incorporation as local companies established under the Act.
(9) The Ministerial Regulation and the Circular letter issued by the Ministry of Justice on 26th April 1967 "Establishment of a PT". Circular J.A. 5/31/24, 26th April 1967, and Art. 35 to 36 of the Commercial Code, which regulated the fee for establishing a PT by a foreign company. However, there is no regulation which mentions how much money must be paid in total to the Indonesian government on incorporation of such a company. The rule just provided that it has to form a PT. In practice, the most expensive component of the whole cost is charged by the notary, who charges a fee on the basis of a percentage of the authorised capital of the company to be incorporated.
(10) For a foreign partner, the government's guideline states that a minimum foreign capital investment is US$ 250,000 as long as the joint venture company is in the labour intensive export oriented economic sector and operates a large enterprise.
(11) There is a special restriction relating to foreign control of business in Indonesia. Foreign controlled export or import business cannot exist in Indonesia. Thus foreign companies are not allowed to trade into or out of Indonesia even trade within Indonesia is prohibited and they need to appoint a local agent for marketing. However, foreign companies established under the Foreign Capital Investment Act can import machinery, equipment or materials for their own use, but not for trade.
(12) Art. 6 of the Foreign Investment Act stipulates areas of the economy which are closed to foreign investment if it involves full foreign control. These areas are those which are essential to the state and governing the life and the living condition of the public such as: port, harbours; production, transmission and distribution of electric power to the public; telecommunications; shipping; aviation; supplying of drinking water; public railways; development of atomic energy; mass media; and industries performing a vital function in national defence, such as the production of arms, ammunition, explosives, and war equipment.
(13) The eight permits are as follows: the permanent letter of approval; a licence for processing raw materials; an identification number for conducting limited import and export; a licence for limited domestic purchase; a product or services trading licence; a tax and duty exemption permit; a work permit for foreign expatriates; a right of exploitation if the foreign venture involves agricultural and fishing activities.
(14) The 1982 Act conferred authority for protection of the environment on the Ministry of Population, Management and Environment, which co-ordinates with the Ministry of Health, the Ministry of Industry, and the Ministry of Internal Affairs. All of these bodies will examine and assess the environmental impact of a proposal and provide input to the co-ordinating Ministry. Normally proposals are accepted subject to negotiation between the government and the investors. Regarding pollution standards, Indonesia has not promulgated any general standards in relation to air, land or water pollution. Discharges are allowed based on the negotiation between government and the polluters. It is notable that there are no incentives under Indonesian Law for establishing non-polluting plants or encouraging non-polluting activities. Since Indonesia lacks clear regulations on environment protection and control of emissions relies on negotiation between government and the polluters, the system is inefficient and may lead to bribery and corruption. Doing Business in Asia: Indonesia, 1998.
(15) Apart from the general function of control and supervision stipulated by the Presidential Decree No. 35, there are procedures for the control and management of the foreign investors through a policy of encouraging the gradual 'Indonesianisation' of foreign investment companies. However, it is generally agreed that this policy has not been successful. Doing Business in Asia: Indonesia, 1998.
(16) The President decree of the Republic Indonesia No. 35 of 1985, Art. 15 provided that "It shall be the duty of the Deputy of Implementation Controls to assist the Chairman in the control and supervision of the implementation of investment which have been already approved by the government". Art. 16 of this Decree provided that the BKPM can control and supervise the implementation of investments which are already approved by the government; the use of facilities enjoy by the investors; resolve the problems appearing in the implementation of investment; study and evaluate reports and input on foreign investment submitted to BKPM and investigate those report; and prepare executive reports of BKPM's performance either regularly or occasionally for special purposes.
(17) Law No. 1 of 1967 on Foreign Capital Investment and Circular J.A.5/31/24; 26thApril, 1967.
(18) ASEAN Secretariat (1998) Compendium of Investment Policies and Measures in ASEAN Countries. Jarkarta: ASEAN.