The
Investment Regime in ASEAN Countries
Dr.
Lawan Thanadsillapakul
Singapore
The
government of Singapore actively encourages foreign investment. The principal
investment incentives are consolidated in the Economic Expansion Incentives
Act and are administered primarily by the Economic Development Board (EDB)
(APEC:1998, SIN-5). EDB was set up in 1961 as a one-stop agency to spearhead
Singapore's industrialisation drive through investment promotion in manufacturing.
Presently, Singapore is more advanced than any other ASEAN country in
its industrialisation and its high technology industries. TNC networks
from all over the world have established in this country so that further
its economic progress and encourage inflows of trade and investment into
the country even more. Being a free economy, Singapore has already liberalised
its investment regulations and comprehensively provides investment incentives
to both local and foreign investors.
In
Singapore, as mentioned, the Economic Development Board (EDB) administers
tax incentives under the Economic Expansion Incentives Act, which provides
incentives in various categories. A pioneer status company is entitled
to the exemption of 27% tax on profits arising from pioneer activities
and the tax relief period is 5-10 years. Expansion incentive gives exemption
of 27% on profits in excess of the pre-expansion level, and the tax relief
period is up to 5 years, with provision for extension. The investment
allowance incentive exempts taxable income of an amount equal to a specified
proportion of new fixed investment (up to 50%). Operational headquarters
will be granted the incentive that income arising from the provision in
Singapore of approved services will be taxed at 10%, and other income
from overseas subsidiaries and associated companies may also be eligible
for effective tax relief, and this incentive will be up to 10 years with
provision for extension. Export of services will be entitled to 90% of
the qualifying export income being exempted from tax and the tax relief
period is 5 years, with provision for extension. Post-pioneer incentives
will be granted to the company by reducing the corporate tax rate to 15%
for up to 10 years. The venture capital incentive is that if losses are
incurred from the sale of shares, up to 100% of equity invested can be
offset against the investor's other taxable income. The international
direct investment incentive is that if losses are incurred from the sale
of shares or liquidation of the overseas company, up to 100% of equity
invested can be offset against the investor's other taxable income. The
approved foreign loan scheme gives exemption from withholding tax on interest,
and the approved royalties provision gives full or partial exemption of
withholding tax on royalties. Also, double deduction for research and
development expenses is granted to approved projects.
Actually,
investment incentives granted by Singapore are similar to those given
by other ASEAN countries but with a more open economy and more liberalised
investment regime without restriction on FDI entry and foreign equity,
Singapore gains more advantages in attracting foreign investors. This
can be seen from the huge inflows of FDI and the trade volume of this
country (Asia Pulse Pte Ltd: 1999) despite its small size. The economic
success of Singapore helps encourage other ASEAN countries to follow suit,
especially when the AIA has been fully implemented. A country with a more
liberalised investment regime, like Singapore, will attract non-ASEAN
investors to establish themselves in the country.
Thailand
Two
major laws affecting foreign investment are the Investment Promotion Act
of 1977 and the Alien Business Law of 1972. The Thai government has consistently
maintained favourable attitudes towards foreign investment. There are
no prohibitions or restrictions an foreign investment per se. But
foreign investors may be subject to the Alien Business Law when it is
applicable(95).
Under
the Investment Promotion Act, the Board of Investment (BOI) may approve
the promotion of investment projects in agriculture, animal husbandry,
fishery, mineral exploration and mining, manufacturing and services when
it considers that the products, commodities or services:
(1) |
are either unavailable or insufficiently available in Thailand or
are produced by an outdated process; |
(2) |
are important and beneficial to the country's economic and social
development, and to national security; or |
(3) |
are economically and technologically appropriate, and have adequate
preventive measures against damage to the environment.
(Investment Promotion Act 1977, Art. 16) |
Apart
from the Alien Business Law Act 1972, all industries are open to foreign
investors, and if they reach the criterion set forth by the BOI they will
be approved to be "promoted projects" entitled to incentives.
In Thailand, tax incentives are available to both local and foreign investors.
Major incentives include tax holidays, exemption or reduction of import
duties on machinery, and exemption or reduction of taxes on imported raw
materials.
The
magnitude of incentives granted depends on the location of investment
projects in order to implement the industry decentralisation policy. Decentralisation
is one of the aims of the Eighth National Economic and Social Development
Plan of Thailand. Thailand has encountered the problem of urbanisation,
and all development has centred in Bangkok and the central area. Therefore,
the decentralisation policy has been adopted, and this can be realised
through the creation of job and the allocation of industries to peripheral
and remote areas for bringing in those areas of technology, jobs, and
a high standard of living so that development would be evenly distributed
throughout the Kingdom. BOI has implemented this policy by encouraging
the location of investment in peripheral and remote areas, in doing so
investment will be given more privileges and incentives (The Council of
Ministers, 1997: The National Social and Development Plan).
In
order to encourage industrial decentralisation, the country is divided
into three zones with varying degrees of incentives. Remote areas are
granted more incentives. In Zone I, Bangkok and neighbouring provinces,
the promoted investment is entitled to 50% of import duties on machinery
for projects exporting not less than 80% of production, exemption of corporate
income tax for three years for projects exporting not less than 80% of
output and located in industrial estates or promoted industrial zones,
and exemption of import duties on raw materials for one year for projects
exporting not less than 30%. In Zone II, provinces in the central part
of Thailand outside zone I, promoted investment is entitled to 50% reduction
of import duties on machinery, and exemption of corporate income tax for
three years, extendable to 7 years for projects located in industrial
estates and promoted industrial zones, and exemption of import duties
on raw materials for one year for projects exporting not less than 30%.
In zone III, which is the rest, the promoted investment is entitled to
exemption of import duties on machinery, exemption of corporate income
tax for 8 years, exemption on import duties on raw materials for five
years for projects exporting not less than 30%, and 75% reduction of import
duties on raw materials used in manufacture for local distribution for
5 years.
In
order to encourage industrial development in underdeveloped regional areas,
the BOI offers tax incentives to existing activities, which may or may
not have been promoted, if they relocate from the central to other regional
areas. Relocating operations will receive the standard non-tax and tax
incentives, exemption from corporate income tax, double deduction from
taxable income of water, electricity and transportation costs, and deduction
from net profit of 25% of the cost of installation or construction of
the project's infrastructure facilities. As technological development
is one of the most important policy objectives, additional tax incentives
are granted to projects that invest in research and development activities.
This
clearly shows that the investment policy of Thailand is geared towards
the national economic and development policy. Therefore, the government
encourages both appropriate and high technological industries, export-oriented
industries, investment with high standard of environmental protection
measures, and investment located in remote areas. Considering from these
conditions we can see that a certain level of screening is maintain in
this country. However, the Short-term Measures and the AIA scheme that
Thailand has committed will ensure that Thailand will liberalise its investment
regime further and open up all industries to both ASEAN and non-ASEAN
investors. This is evidenced by the passages of new regulations by Thai
government such as to reduce negative list in the Alien Business Law Act(96);
to allow 100% of foreign equity shareholding(97);
dramatically open industries(98), especially
services sector such as banking, insurance, telecommunication(99);
This shows that Thailand further liberalises investment regime to implement
the open regionalism.
Overview
ASEAN
countries have used investment incentives to attract FDI. Moreover, they
use them as instruments to compete with each other among ASEAN countries
to attract FDI as well. This encourages foreign investors to take advantage
of incentive shopping. Generally, however, these have taken the form of
tax benefits rather than government grants (which are more often available
in the richer developed countries). Competition in the granting of incentives
among ASEAN countries may distort the efficient allocation of investment
and further distort trade and investment flows in the region, or at least
such incentives are just a windfall fortune for foreign investors since
they are likely to invest in that country no matter whether incentives
are granted or not. Also the use of operational restrictions is usually
done as a condition of investment incentives.
In
the area of market access, the liberalisation process of ASEAN countries
has been selective and is focused mostly on export-oriented industries.
A number of countries have increased the level of foreign participation
in certain sectors and allowed foreign participation in previously restricted
or sensitive sectors. For instance, Indonesia changed to a negative list,
reduced the sectors subject to the requirement of 100% equity, and substantially
relaxed divestment requirements. The Philippines also increased the number
of sectors open to foreign investment, and now allows foreign investors
to lease private land for 50 years, and has suspended the nationality
requirement in the case of ASEAN Projects or investment by ASEAN nationals.
Thailand now allows wholly-owned foreign businesses to operate investments
in basic infrastructure, public utilities development and transportation
systems (ASEAN Secretariat, 1998a; CCH Asia Limited, 1998).
In the area of operational
restrictions, governments have not been too eager to act unilaterally
on this issue. However, some of the operational restrictions, such as
local content requirements, are included in the TRIMs provisions, which
require changes to national laws. In response to obligations under the
TRIMs, restrictions have been reduced. In addition to the notification
of investment measures, which all ASEAN countries have to comply with
under the TRIMs agreement, they have also liberalised other aspects. Malaysia
reduced its withholding tax on technical fees and royalties from 15% to
10%, and allowed exporters to keep a portion of export proceeds in a foreign
currency account in Malaysia. The Philippines allowed greater participation
by foreign investors in domestic economic activities, and also liberalised
the land lease restriction and foreign exchange controls. Thailand abolished
restrictions on the establishment of assembly plants and liberalised foreign
exchange controls.
In
conclusion, the investment regimes of ASEAN countries clearly show that
all ASEAN countries carefully screen foreign investment, especially in
controlling equity and ownership participation of foreign investors. Generally,
they prefer a minority of foreign investors(100),
and particularly certain business areas have been closed to foreign investment
or subject to approval from authority in certain industries that reach
the set requirements. Investment incentives are granted under terms and
conditions that comply with the countries' economic and development plans.
So the policy of ASEAN countries is to welcome foreign investment as long
as it meets the set requirements of the countries. ASEAN countries open
the door but hang curtains to prevent dust and flies from entering. Thus
investment liberalisation in ASEAN countries before the Asian crisis was
subject to domestic laws and regulations as well as economic policy. Therefore,
under such circumstances it was unlikely that ASEAN countries would unilaterally
extend national treatment to foreign investors. It was not until recently
when ASEAN launched the AIA scheme that NT and MFN treatment could be
granted to both ASEAN and non-ASEAN investors. Also the short-term measures
dramatically alter national laws especially in two areas, i.e. allowing
100% foreign equity ownership and providing attractive investment incentives,
both tax and non-tax incentives.
Considering
the actual national laws and the development of investment regulations
of ASEAN countries, it can be seen that ASEAN countries have cautiously
liberalised their investment regimes. They still maintain FDI entry-screening
measures, while encouraging inflow of foreign investment in particular
areas by granting investment incentives. Under such circumstances, it
seems that the process of open regionalism would progress at a slow pace
if it relied solely on investment liberalisation at a national level.
However, the Asian crisis in 1997 prompted ASEAN countries to actively
liberalise investment regulation. This can be seen from the adoption of
the Short-term Measures and the AIA scheme that dramatically changes the
ASEAN countries' investment policy and laws. Consequently, the national
and regional investment liberalisation complementarily facilitates and
reinforces the process of open regionalism.
It
is important to understand the pattern of investment liberalisation of
countries in this region that is based on the trade-oriented investment
approach(101), which means compensating
the propensity for foreign investment to generate an excess demand for
imports, by increasing exports. Trade-oriented FDI is welfare improving
in both home and host countries because trade-oriented FDI implies investment
in industries in which the home country has comparative disadvantages,
so that investment has been shifted to a host country which has comparative
advantages. The host country can be viewed as a production base (where
cost of production is lower than in home countries), and the products
can be distributed at a lower price both in the local and global market.
This would accelerate trade between the two nations, and promote beneficial
industrial restructuring in both countries. This can explain the pattern
of FDI in ASEAN countries from developed countries, which was initially
directed towards natural resource development in which home countries
have comparative disadvantages, and towards some manufacturing sectors
in which home countries have been losing their comparative advantages.
FDI from developed countries in ASEAN countries has been regarded as export-oriented,
occurring in less sophisticated and more labour-intensive industries,
and with a higher share of local ownership. This FDI pattern interacted
with the development of ASEAN countries' national investment laws, which
facilitated the export-push policy of these countries. Therefore, ASEAN
countries have employed a targeted industry strategy to screen FDI, and
offered incentives to promote export-oriented industries. Investment liberalisation
in these countries thus accompanies this policy, i.e. enhancing exports
and encouraging trade flows from within and outside the region. This process
fits well with open regionalism and also it fits well into the market
mechanism and investment patterns.
_______________________________________________________________
(95) The
Alien Business Law is applicable only to natural persons and juristic
persons who are: (1) a juristic person with majority foreign shareholding;
(2) a juristic person, at least one-half of the number of shareholders,
partners or members of which are aliens; (3) limited partnership or registered
ordinary partnership having an aliens as managing partner or manager.
The Alien Business Law sets three categories of business activities where
foreign legal entities defined above are (1) prohibited (category A);
(2) Permitted only with the Board of Investment promotion (category B);
(3) implemented only with the permission of the Ministry of Commerce of
Board of Investment promotion (category C). However The Alien Business
Law does not apply to aliens in business with the permission of the Royal
Thai Government, or covered by an agreement between the Royal Thai Government
and foreign government which excludes certain activities. (BOI, 1999:
10), Alien Business Law Act 1972, Annexes attached to the Announcement
of the National Executive Council (Alien Business Law Act 1972).
(96)
The Foreign Investment Law 1999 has replaced the Alien Business Act Law
1972, and it reduces the negative list prohibited to foreign investors,
mainly in commercial and service sectors (11 business).
(97)
Thailand's commitment under the Short-term Measures is incorporated into
national law by the Decree on relaxing ratio of foreign equity holding,
1 December 1998 (The Office of the Board of Investment, BOI Announcement).
(98)
Thailand's commitment under AIA is incorporated into national law by the
Decree on open up industries to foreign investors, 1 December 1998. The
Office of the Board of Investment, BOI Announcement).
(99)
Enforced by the Financial Institutions Law 1999 (Ministry of Finance,
Announcement as of December 1999) also see Memorandum of Economic Policies
of the Royal Thai Government.
(100)
This means that indeed ASEAN countries as well as many developing Asian
countries relied on FDI only to a moderate degree in the past. Investment
was mainly financed by domestic savings, which were exceptional high by
international standards (ranging from 25 to 35% of GDP), perhaps caused
by the restriction of foreign ownership. Nevertheless, the rise of foreign
investment flows into the region has increased the need for capital on
the part of local investors in the increasing projects that encountered
the restriction of foreign equity. Therefore local investors had to turn
to offshore loans since onshore loans bear higher interest than offshore
ones. This in the end increased foreign debt to ASEAN countries in the
private sector. The financial crisis in ASEAN countries was partly caused
by the heavy offshore loans of investors in these countries.
(101)
See Lizondo, Saul (1992: 15). |