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The Investment Regime in ASEAN Countries
Dr. Lawan Thanadsillapakul
Most ASEAN countries grant both tax and non-tax incentives extensively in order to attract foreign investment. However, incentives must be approved by the relevant authority, thus foreign investors are subject to registration or licensing as well as the approval process discussed above. General features of incentives granted by ASEAN countries are tied to particular commodities, geographical areas, or export of goods produced, and generally based on discretion. Thus besides the objective of attracting FDI, incentives have also been used as tools to enhance economic development. The main objectives of the ASEAN countries in promoting investment are: to strengthen ASEAN's industrial and technological capability, to use domestic resources, to create employment opportunities, to develop basic and support industries, to earn foreign exchange, to contribute to the economic growth of regions or remote areas, to develop infrastructure, to conserve natural resources, and to reduce environmental problems(88). Therefore investment promotion is always in line with the investment regime, and promotion of trade. For instance, the promotion of the electronics industry is to support the export of electronic goods to world markets. The following is a brief summary of incentives provided by ASEAN countries.
In Indonesia, the efforts in investment promotion are always in line with promotion in trade, thus the investment regime and policies on trade are complementary(89). Indonesia, like most ASEAN countries, promotes manufacturing industries aiming at increasing exports, and also enhancing investment. In order to ensure the security of foreign investment, the Indonesian government not only provides investment incentives to investors but also guarantees the free transfer abroad of all company profits, proceeds from sale of shares, compensation in the case of nationalisation and repatriation of remaining investment capital in the case of liquidation as well as fees and payments to expatriates without any restriction (this protection has been provided in the BITs as discussed in section 4.5.2 below).
The government of Indonesia provides investment incentives in various ways. They are:
(1) exemption or reduction of import duty on importation of main machinery, equipment, spare parts and auxiliary equipment, and raw materials; (2) exemption or reduction from income tax on the importation of capital goods and raw materials; (3) exemption from transfer of ownership fee for ship registration deed/certification made for the first time in Indonesia, but not more than two years after commercial operation; (4) deferment of payment of VAT on the importation of capital goods directly related to the production process; (5) postponement of VAT and sales tax on luxury goods and materials needed to manufacture export products.
For firms which export no less than 65% of their production, additional incentives are permission to import whatever materials which are required regardless of the availability of comparable domestic products, and drawback of import duty and surcharges of imported goods and raw materials used in production, or on imported components of identical goods and materials purchased locally from an importer or another local producer. The same facility also applies to imports that are exported without processing. The Indonesian government also provides non-tax incentives. Losses may be carried forward for 5 to 8 years and the depreciation rate for depreciable assets ranges from 5% to 50%.
Considered from the incentives provided and the requirements for obtaining such incentives, it clearly shows that the Indonesian investment regime aims to attract FDI in particular areas, as mentioned, export-oriented industries, manufacturing industries and sophisticated technology industries in order to up grade the country's technology. This, in return, promotes industrialisation of the country.
Malaysia has given investment incentives in manufacturing and agricultural sectors, as well as the tourism industry. This means Malaysia promotes more general industrial sectors. In Malaysia, many tax and non-tax incentives may be granted to a promoted investment. These include exemption from income tax(90) for "the pioneer status" company, an investment tax allowance, a reinvestment allowance, an export credit refinancing scheme, double deduction of export credit reinsurance premiums, double deduction for promotion of exports, and an industrial building allowance. There are also packages of incentives granted to research and development in industry. There are various allowances and deductions as well as tax exemptions. Other incentives are deduction for capital expenditure on approved agricultural projects, incentives for the tourism industry, and tariff protection.
In the sector of manufacturing industries, exemption from import duty on raw materials, machinery, components; drawback of excise duty on parts, ingredients or packaging materials; drawback of sales tax on materials used in manufacture; exemption from import duty and sales tax on machinery and equipment, as well as drawback of import duty, are granted.
All incentives granted would facilitate the operation of business/industry so FDI in Malaysia would gain advantages from these varieties of incentives in addition to other comparative advantages of this country such as low-cost labour and natural resources. Malaysia emphasises a technological up-grading policy and recently has created and promoted a "Mega-City"(91) which is well equipped with sophisticated technology providing superb infrastructure for industry and commercial business. These efforts Malaysia also facilitate regional investment liberalisation, and provide a favourable investment environment to foreign investors who intend to invest in the region.
The Philippines government adopts two major thrusts for the country i.e. global excellence and competitiveness and people-empowerment and human development(92). The Philippines BOI has set as its objective the development of internationally competitive industries in order to attain these twin goals. Thus emphasis is being given to increasing the production capacity and enlarging the markets of export products. Additionally, the Philippine government is identifying and promoting new export products that would take advantage of the country's strategic location to attract foreign investment. Therefore, many investment incentives have been granted to foreign investors.
In the Philippines, the Omnibus Investment Code of 1987 grants preferential tax and other benefits to all companies in preferred areas of investment, as identified in the investment priorities plan (IPP). Additional incentives are available to projects locating in less developed areas, to enterprises registered with the Export Processing Zone Authority (EPZA), and to multinational enterprises establishing headquarters in the Philippines(93). Fiscal incentives include:
an income tax holiday, tax and duty free importation of capital equipment, deduction for labour expenses, tax credit on domestic capital equipment, exemption from contractor's tax, tax credit on domestic breeding stock and genetic materials, access to bonded manufacturing and trading warehouse systems, exemption from taxes and duties on imported supplies and spare parts for consigned equipment, exemption from wharfage dues and any export tax, duty imposed and fees (APEC: 1998, RP-26).
Non-fiscal incentives provided include the simplification of custom procedures, unrestricted use of consigned equipment, and employment of foreign nationals. Additional incentives for less developed areas enterprises are granted to those companies located in such areas. 100% of the cost of necessary and major infrastructure and public facilities constructed can be deducted from taxable income, and deductions may be carried over to subsequent years until the total amount is deducted. Deduction for labour expenses is also doubled.
Firms registered with the EPZA are entitled to all the incentives given to firms registered with BOI, and they are also entitled to special tax treatment on merchandise within the zone; exemption from local taxes, licences, and fee; exemption from real estate taxes on production equipment and machinery not attached to real estate; exemption from the 15% branch profits remittance tax on profit remitted by a branch to its head office; exemption from SGS inspection.
The Philippines government has adopted a new investment policy to encourage the entry of foreign investment into the country by allowing non-Philippine companies and individuals to invest in almost any type of business (subject only to negative list, which is gradually reduced)(94). For those who invest in preferred and pioneer industries, there are incentives such as income tax breaks, tax free importation of equipment, and additional labor expense deduction, among others. These more favourable regulations clearly facilitate the implementation of open regionalism.
(88) It is worth noting that in fact ASEAN countries all encourage a high standard of environmental protection, evidenced by the requirements for investors to comply with environmental law. If any investors, both local and foreign investors, comply strictly with environment law or have special environmental protection technology they would be entitled to special incentives. Moreover, if any investors fail to comply with environmental law or are involved in activities dangerous to the environment they might be refused the right to operate or even be denied incorporation.
(89) ESCAP (1995) Publication of the Regional Seminar on "Investment Promotion and Enhancement of the role of the Private Sector in Asia and the Pacific", held on 26-30 January, 1993, at Dhaka, Bangladesh. Bangkok: ESCAP.
(90) For the manufacturing sector, a company given pioneer status will be granted partial exemption from the payment of income tax. It will only have to pay tax on 30% of its statutory income (APEC: 1998, MAS-15). High technology industries given pioneer status will be entitled to full tax exemption. Malaysia, Ministry of International Trade and Industry (MITI) (1999) Information on Investment in Malaysia, government announcement, as of December 1999.
(91) For instance, investment in the multimedia super corridor located in Mega City will be granted tax and non-tax incentives: be provided a world-class physical and information infrastructure; allowed unrestricted employment of knowledge workers from overseas; ensured freedom of ownership of companies; allowed freedom of sourcing capital globally for MSC infrastructure and freedom of borrowing funds; provided competitive financial incentives including no income tax for up to 10 years or an investment Tax Allowance, and no duties on the import of multimedia equipment; become a regional leader in intellectual property protection and cyberlaws; ensured no censorship of the Internet; provided globally competitive telecommunication tariffs; tendered key MSC infrastructure contracts to leading companies willing to use the MSC as their regional hub; and provided a high-powered implementation agency to act as an effective one-stop super shop to ensure the MSC meets company needs (MITI: 1999).
(92) See Far East Bank and Trust Company (1999).
(93) TNCs establishing headquarters in the Philippines are entitled to a withholding tax of only 15% on gross income received from the regional or area headquarters, tax and duty free importation of personal and household effects, travel tax exemption, multiple-entry visa of the foreign expatriates. The regional headquarters are entitled to exemption from income tax and contractor's tax, exemption from all kinds of local licences, fees, and duties, tax and duty free importation of training and conference materials, importation of motor vehicles for expatriate executives and their replacement every three years.
(94) Far East Bank and Trust Company (1999) Doing Business in the Philippines. Manila: Far East Bank and Trust Company.