Transparency of the Regulatory System

Brunei’s regulatory system is generally seen as lacking in transparency. There is little to no transparency in lawmaking processes, nor is there any available information on whether impact assessments are made prior to proposing regulations. Each ministry is responsible for coordinating with the Attorney General’s Chambers to draft proposed legislation. Legislation does not receive broad reviews and few outside of the originating ministry are able to provide their input. The Sultan has final authority to approve proposed legislation. Laws and regulations that are in effect are readily accessible on the Attorney General’s Chambers website: http://www.agc.gov.bn/Theme/Home.aspx .

International Regulatory Considerations

Brunei is an active member of ASEAN, through which it has concluded FTAs with Australia & New Zealand, China, India, Japan and South Korea. Brunei became a WTO member in 1995 and a signatory to the General Agreement on Tariffs and Trade (GATT) in 1993.

Legal System and Judicial Independence

Brunei’s constitution does not specifically provide for judicial independence, but in practice the court system operates without government interference. Brunei’s legal system includes two parallel systems: one based on common law and the other based on Islamic law. In 2016, recognizing the importance of protecting investors’ rights and contract enforcement, Brunei established a Commercial Court.

In 2014, Brunei implemented the first phase of its Sharia Penal Code (SPC), which expanded existing restrictions on minor offenses—such as eating during Ramadan—that are punishable by fines or imprisonment. On April 3, 2019, Brunei commenced full implementation of the SPC, introducing the possibility of barbaric punishments in certain situations such as stoning to death for rape, adultery, or sodomy, and execution for apostasy, contempt of the Prophet Muhammad, or insult of the Quran. The punishments require different standards of proof from the common-law-based penal code. For example, four pious men must personally witness an act of fornication to support a sentence of stoning.

Laws and Regulations on Foreign Direct Investment

The basic legislation on investment includes the Investment Incentive Order 2001 and the Income Tax (As Amended) Order 2001. The Investment Incentive Order 2001 supports economic development in strategically important industrial and economic enterprises and, through the Ministry of Finance and Economy, offers investment incentives through a favorable tax regime. Although Brunei does not have a stock exchange, government plans to establish a securities market are reportedly underway.

Foreign ownership of companies is not restricted, although under the Companies Act, at least one of two directors of a locally incorporated company must be a resident of Brunei, unless granted an exemption from the appropriate authorities.

Business Registration

All businesses in Brunei must be registered with the Registry of Companies and Business Names at the Ministry of Finance and Economy. Except for sole proprietorships and partnerships, foreign investors can fully own incorporated companies, foreign company branches, or representative offices. Foreign direct investments by multi-national corporations may not require local partnership in setting up a subsidiary of their parent company in Brunei. However, at least one company director must be a Brunei citizen or permanent resident of Brunei. Brunei’s “one-stop-shop” website for investments and business start-ups can be found here: https://business.mofe.gov.bn/SitePages/Home.aspx .

The Business License Act (Amendment) of 2016 exempts several business activities (eateries, boarding and lodging houses or other places of public resort; street vendors and stalls; motor vehicle dealers; petrol stations including places for storing petrol and inflammable materials; timber stores and furniture factories; and retail shops and workshops) from needing to obtain a business license.

Competition and Anti-Trust Laws

Brunei’s Competition Order, published in 2015 to promote and maintain fair and healthy competition to enhance market efficiency and consumer welfare, entered into force on January 1, 2020. The Sultan also announced the establishment of the Competition Commission in 2017 to oversee and act on competition issues that include adjudicating anti-competitive cases and imposing penalties on companies that violate the Competition Order.

Expropriation and Compensation

There is no history of expropriation of foreign owned property in Brunei. There have been cases of domestically owned private property being expropriated for infrastructure development. The government provided compensation in such cases and provided claimants with due process regarding their disputes.

Dispute Settlement

ICSID Convention and New York Convention

Brunei is a member state to the convention on the International Center for Settlement of Investment Disputes (ICSID Convention) and a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Legislation related to dispute settlement is covered under Brunei’s Arbitration Order 2009.

Investor-State Dispute Settlement

In 2016, Brunei’s Supreme Court announced the establishment of a commercial court to deal with business-related cases. More information about Brunei’s judiciary system is available through the judiciary website: http://www.judiciary.gov.bn/Theme/Home.aspx .

International Commercial Arbitration and Foreign Courts

In May 2016, Brunei’s Attorney General’s Chambers announced the establishment of the Brunei Darussalam Arbitration Center (BDAC). BDAC delivers services and administration for arbitration and mediation to fulfill the needs of domestic and international users in relation to commercial disputes as a resolution alternative to court proceedings.

The International Arbitration Order (IAO), which regulates international and domestic arbitrations, came into effect in February 2010. More information about Brunei’s Attorney General’s Chambers is available on its website: http://www.agc.gov.bn/Theme/Home.aspx .

Bankruptcy Regulations

In 2012, amendments to Brunei’s Bankruptcy Act increased the minimum threshold for a creditor to present a bankruptcy petition against a debtor from BND 500 to BND 10,000 (USD $350 to USD $7,060) and enabled an appointed bankruptcy trustee to direct the Controller of Immigration to impound and retain the debtor’s passport, certificate of identity, or travel document to prevent the debtor from leaving the country. The amendment also requires the debtor to deliver all property under the debtor’s possession to the trustee. Information about Brunei’s bankruptcy laws is available on the judiciary’s website: http://judiciary.gov.bn/SJD%20Images/Bankruptcy%20leaflet.pdf .

Investment Incentives

Companies involved in the exportation of agriculture, forestry, and fishery products can apply for tax relief on export profits. Tax exemption may be available for pioneer industry companies. For non-pioneer enterprises, the tax relief period is eight years and up to 11 years for pioneer enterprises.

In 2015, the government reduced the corporate income tax rate in Brunei from 20 percent to 18.5 percent.

Sole proprietorships and partnerships are not subject to tax. Individuals do not pay any capital gains tax, and profits arising from the sale of capital assets are not taxable. Brunei has double-taxation agreements with the United Kingdom, Indonesia, China, Singapore, Vietnam, Bahrain, Oman, Japan, Pakistan, Malaysia, Hong Kong, Laos, Kuwait, Tajikistan, Qatar, and United Arab Emirates. Under the Income Tax (Petroleum) Act, a company is subject to taxes of up to 55 percent for any petroleum operation pursuant to production sharing agreements.

Darussalam Assets is a private limited company established in December 2012 under the purview of the Ministry of Finance and Economy to spur the growth of government-linked companies (GLC) through active ownership and management of its GLC portfolio based on commercial principles, in line with Brunei’s 2035 development vision. More info on Darussalam Assets may be found at their website .

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2017, Brunei announced the creation of its first Free Trade Zone, Terunjing Industrial Park, a 235-acre site located between two main highways near Brunei International Airport and Muara Port.

Darussalam Enterprise (DARe), under the Ministry of Finance and Economy, works closely with other relevant government agencies to facilitate the implementation of investors’ projects. DARe oversees and manages 26 industrial parks across Brunei.

Performance and Data Localization Requirements

The Brunei government seeks to increase the number of Bruneians working in the private sector. Brunei’s Local Business Development Framework seeks to increase the use of local goods and services, train a domestic workforce, and develop Bruneian businesses by placing requirements on all companies operating in the oil and gas industry in Brunei to meet local hiring and contracting targets. These requirements also apply to information and communication technology firms that work on government projects. The Framework sets local content targets based on the difficulty of the project and the value of the contract, with more flexible local content requirements for projects requiring highly specialized technologies or with a high contract value. In 2019, senior officials stated an intent to extend local hiring targets to additional sectors of the economy.

Expatriate employment is controlled by a labor quota system administered by the Labor Department and the issuance of employment passes by the Immigration Department. Brunei allows new companies to apply for special approval to expedite the recruitment of expatriate workers in select positions. According to the Ministry of Home Affairs, the special approval is only available to new companies for up to six months and covers businesses such as restaurants and retail stores. The special approval cuts the waiting time for a quota from 21 days to seven.

Brunei has not announced any specific legislation pertaining to data storage and data localization requirements.

Real Property

Mortgages are recognized and enforced in Brunei; however, only Bruneian citizens can own landed property in Brunei. Foreigners and permanent residents can only hold properties under long-term leases. Most banks are reluctant to grant housing loans to foreigners and permanent residents. Brunei’s Department of Economic Planning and Development does not publish FDI data for real estate. Each transfer of ownership in Brunei requires the approval of “His Majesty in Council” which is a council of officials representing the Sultan. This process can be lengthy and opaque.

As of September 2016, the Brunei government announced land code amendments that allowed non-citizens to own properties under the Land Strata Act title for a maximum of 99 years without the means of powers of attorney. Amendments to the Land Code are being considered to ban past practices of proxy land sales to foreigners and permanent residents using power of attorney and trust deeds. The amendments to the Land Code have made powers of attorney and trust deeds no longer recognized as mechanisms in land transactions involving non-citizens. The government may grant temporary occupation permits over state land to applicants for licenses to occupy land for agricultural, commercial, housing or industrial purposes. These licenses are granted for renewable annual terms.

Intellectual Property Rights

Brunei’s intellectual property rights (IPR) protection and enforcement regime is still in development but is increasingly strong and effective. The country was removed from the U.S. Trade Representative’s Special 301 Report in 2013 and has stayed off in recognition of its improving IPR protections, increasing enforcement, and efforts to educate the public about the importance of IPR.

Brunei finalized and adopted the Copyright (Amendment) Order 2013 in December 2013, a development long requested by the U.S. government. The amendment enhanced enforcement provisions for copyright infringement by increasing the penalties for IP offenses; adding new offenses; strengthening the enforcement powers of the Royal Brunei Police Force and the Ministry of Finance and Economy’s Customs and Excise Department; and allowing for sanctioned private prosecution. The amendments are designed to deter copyright infringements with fines of BND 10,000 (USD 7,400) to BND 20,000 (USD 14,800) per infringing copy, imprisonment for a term up to five years, or both. The new penalty is up to four times more severe than the previously existing penalty. Enforcement agencies are authorized to enter premises and arrest without warrant; to stop, search, and board vehicles; and to access computerized and digitized data. The amendments further allow for admissibility of evidence obtained covertly and protect the identity of informants. Statistics on seizures of counterfeit goods are unavailable.

Brunei established the Brunei Intellectual Property Office (BruIPO) in 2013 under the Attorney General’s Chambers. The establishment of BruIPO expanded the country’s Patents Registry Office’s (PRO) ability to accept applications for trademarks registration in addition to patents and industrial designs.

In September 2013, Brunei acceded to the Geneva (1999) Act of the Hague Agreement Concerning the International Registration of Industrial Designs to protect IP from industrial designs, making it the second ASEAN Member country, following Singapore, to accede. The accession emphasized Brunei’s commitment under the ASEAN Intellectual Property Rights Action Plan 2011 – 2015. Brunei has also publicly committed to acceding to other World Intellectual Property Organization’s (WIPO) treaties including the Madrid Protocol for the International Registration of Marks, the WIPO Performances and Phonograms Treaty (WPPT), and the UPOV Convention 1991 for the protection of New Varieties of Plants (PV).

(WPPT), and the UPOV Convention 1991 for the protection of New Varieties of Plants (PV).

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at: http://www.wipo.int/directory/en/  

Capital Markets and Portfolio Investment

In 2013, Brunei signed a Memorandum of Understanding (MOU) with the Securities

Commission Malaysia (SCM) designed to strengthen collaboration in the development of fair and efficient capital markets in the two countries. It also provided a framework to facilitate greater cross-border capital market activities and cooperation in the areas of regulation as well as capacity building and human capital development, particularly in the area of Islamic capital markets. In March 2019, the Minister of Finance and Economy II announced a USD $292 million national budget, which will fund infrastructure, technology, and socio-economic studies related to the implementation of Brunei’s own stock exchange.

Money and Banking System

Brunei has a small banking sector which includes both conventional and Islamic banking. The Monetary Authority of Brunei Darussalam (AMBD) is the sole central authority for the banking sector, in addition to its role as the country’s central bank. Banks in the country have high levels of liquidity, good capital adequacy ratios, and well-managed levels of non-performing loans. A handful of foreign banks have established operations in the country such as Standard Chartered and Bank of China (Hong Kong). In March 2018, HSBC officially ended its operations in Brunei after announcing its planned departure from Brunei in late 2016. All banks fall under the supervision of AMBD, which has also established a credit bureau that centralizes information on applicants’ credit worthiness.

The Brunei dollar (BND) is pegged to the Singapore dollar, and each currency is accepted in both countries.

Foreign Exchange and Remittances

Foreign Exchange

In June 2013, the Financial Action Task Force (FATF) announced that Brunei would no longer be subject to FATF’s monitoring process under its global Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) compliance process. Brunei’s Mutual Evaluation Report cited Brunei’s significant progress in improving its AML/CFT regime and noted that Brunei had established the legal and regulatory framework to meet its commitments in its Action Plan regarding strategic deficiencies that the FATF identified in June 2011.

Remittance Policies

Any person or company providing services for the transmission of money must be licensed by the Brunei government. Only Brunei citizens may hold remittance licenses. Local financial institutions such as Bank Islam Brunei Darussalam (BIBD) and Standard Chartered Bank provide remittance services. Remittance companies require the customer’s full name, identification number, address, and purpose of the remittance. They are also required to file suspicious transaction reports with AMBD.

Sovereign Wealth Funds

The Brunei Investment Agency (BIA) manages Brunei’s General Reserve Fund and their external assets. Established in 1983, BIA’s assets are estimated to be USD $60-75 billion. BIA’s activities are not publicly disclosed and are ranked the lowest in transparency ratings by the Sovereign Wealth Fund Institute.

Brunei’s state-owned enterprises (SOEs), managed by Darussalam Assets under the Ministry of Finance and Economy, lead key sectors of the economy including oil and gas, telecommunications, transport, and energy generation and distribution. These enterprises also receive preferential treatment when responding to government tenders. Some of the largest SOEs include the following:

The telecommunications industry is dominated by government-linked companies Telekom Brunei (TelBru), Data Stream Technologies (DST) Communications, and Progresif Cellular. In 2019 the government consolidated the infrastructure of all three companies under a state-owned wholesale network operator called Unified National Networks (UNN).

Royal Brunei Technical Services (RBTS), established in 1988 as a government owned corporation, is responsible for managing the acquisition of a wide range of systems and equipment.

Brunei National Petroleum (PB) is the national oil company owned by the Brunei government. The company was granted all mineral rights in eight prime onshore and offshore petroleum blocks totaling 20,552 sq. km. PB manages contracts with Shell and Petronas, which are exploring Brunei’s onshore and deep water offshore blocks. The government continues to modify PB’s role in the oil and gas industry. In 2019, the government established Petroleum Authority as the oil and gas sector’s regulatory body, a function which had been filled by PB.

Royal Brunei Airlines started operations in 1974 and is the country’s national carrier. The airline flies a combination of Boeing and Airbus aircraft.

Privatization Program

Brunei’s Ministry of Transportation and Info-Communication has made corporatization and privatization part of its Strategic Plan, which calls for the Ministry to shift its role from a service provider to a regulatory body with policy-setting responsibilities. The Ministry is studying initiatives to privatize a number of state-owned agencies, including the Postal Services Department and public transportation services. These services are not yet completely privatized and there is no timeline for privatization. Guidelines regarding the role of foreign investors and the bidding process are not yet available.

Responsible business conduct is a relatively new concept in Brunei, and there are no specific government programs encouraging foreign and local enterprises to follow generally accepted corporate social responsibility (CSR) principles. However, there is broad awareness of CSR among producers and consumers, and individual private and public sector organizations have formalized CSR programs and policies. There are no reporting requirements and no independent NGOs in Brunei that promote or monitor CSR.

Since 1982, Brunei has enforced the Emergency (Prevention of Corruption) Act. In 1984, the Act was renamed the Prevention of Corruption Act (Chapter 131). The Anti-Corruption Bureau (ACB) was established in 1982 for the purpose of enforcing the Act. The Prevention of Corruption Act provides specific powers to the ACB for the purpose of investigating accusations of corruption. The Act authorizes ACB to investigate certain offences under other written laws, provided such offences were disclosed during the course of ACB investigation. Corrupt practices are punishable under the Prevention of Corruption Act, which also applies to Brunei citizens abroad. Brunei is a member of the International Association of Anti-Corruption Authorities.

In 2019, Brunei was ranked 35th of 180 countries worldwide in Transparency International’s corruption perception index. U.S. companies do not generally identify corruption as an obstacle to conducting business in Brunei. The level and extent of reported corruption in Brunei is generally low. In January 2020, however, the government convicted two former judges with embezzling large sums from the court system. The Sultan has made repeated statements to the effect that corruption is unacceptable.

Apart from the Anti-Corruption Bureau, there are no international, regional, local, or nongovernmental organizations operating in Brunei that monitor corruption.

Brunei has signed and ratified the UN Anticorruption Convention.

Resources to Report Corruption

Government Point of Contact:
Name: Hjh Suhana binti Hj Sudin
Title: Acting Director
Organization: Anti-Corruption Bureau Brunei Darussalam
Address: Old Airport Berakas, BB 3510 Brunei Darussalam
Tel: +673 238-3575
Fax: +673 238-3193
Mobile: +673 8721002 / +673 8130002
Email: info.bmr@acb.gov.bn

Brunei is an absolute monarchy and has no recent history of political violence. Sultan Hassanal Bolkiah is an experienced and popular monarch who rules the country as Prime Minister while also retaining the titles of Minister of Finance and Economy, Minister of Defense, and Minister of Foreign Affairs. The country experienced an uprising in 1962 when it was a British protectorate, which ended through the intervention of British troops. The country has been ruled peacefully under emergency law ever since. Brunei has managed to avoid demands for political reform by making use of its hydrocarbon revenues to provide its citizens with generous welfare benefits and subsidies.

Brunei relies heavily on foreign labor in lower-skill and lower-paying positions, with approximately 25 percent of the labor force coming in from abroad to fulfill specific contracts. The largest percentage of foreign workers work in construction, followed by wholesale and retail trade, and then professional, technical, administrative and support services. Most unskilled laborers in Brunei are from Bangladesh, Indonesia, and the Philippines, and enter the country on renewable two-year contracts.

The skilled labor pool includes both foreign workers on short-term visas and Bruneian citizens and permanent residents, who often are well-educated but who generally prefer to work for the government due to generous benefits such as bonuses, education allowances, interest-free loans, and housing allowances. In 2019, the Labor Force Survey stated that approximately 33.8 percent of the labor force was employed in the public sector. In 2016, the Department of Labor under the Ministry of Home Affairs introduced an improved Foreign Workers License process with stricter policies to create more employment opportunities for Brunei citizens.

While the law permits the formation of trade union federations, it forbids affiliation with international labor organizations unless there is consent from the Minister of Home Affairs and the Department of Labor. Under the Trade Unions Act of 1961, unions must be registered with the government. The government prohibits strikes, and the law makes no explicit provision for the right to collective bargaining. The law prohibits employers from discriminating against workers in connection with union activities, but it does not provide for reinstatement for dismissal related to union activity.

All workers, including civil servants other than those serving in the military and those working as prison guards or police officers, may form and join trade unions of their choice without previous authorization or excessive requirements. The only active union in the country, which is composed of Brunei Shell Petroleum workers, appears to have had minimal activity in recent years. There are no other active unions or worker organizations.

Various domestic laws prohibit the employment of children under age 16. Parental consent and approval by the Labor Commission are required for those under age 18. Female workers under age 18 may not work at night or on offshore oil platforms. The Department of Labor effectively enforces laws related to the employment of children. There were no reports of violations of child labor laws.

The law does not set a minimum wage. The public sector pay scale covers all workers in government jobs. Wages for employed foreign residents are wide ranging. Some foreign embassies set minimum wage requirements for their nationals working in the country.

Government data indicated approximately 74,268 foreigners live in Brunei, although government officials have publicly stated the number as over 100,000. Foreign workers receive a mandatory brief on labor rights from the Department of Labor when they sign their contract. The government also inspects workplaces and maintains a telephone hotline for worker complaints. Immigration law allows prison sentences and caning for workers who overstay their work permits and for workers who fall into irregular status due to their employers’ negligence.

There are no DFC or other investment insurance programs in Brunei.

*Host country data available at depd.gov.bn 

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

U.S. Embassy Commercial Section
Simpang 336-52-16-9
Jalan Duta BC 4115
(+673) 238-4616
+637 238-4616 ext. 2232
BSBCommercial@state.gov

Transparency of the Regulatory System

Regulatory and legal transparency continue to pose significant challenges for foreign investors in Burma. Most regulations relevant to foreign businesses are developed at the national level by the following ministries: Commerce; Planning, Finance, and Industry; Investment and Foreign Economic Relations; and Agriculture, Livestock, and Irrigation.

In the past, all regulations were subject to change with no advance or written notice, and without opportunity for public comment. Ministries are not legally obligated to share regulatory development plans with the public or conduct public consultations, though some ministries now hold limited public consultation before finalizing bills for parliamentary consideration or issuing new regulations. For instance, the government solicited public comments on the 2016 Investment Law, including the drafting of the rules and regulations, which went through three rounds of public consultations. In another example, the government conducted public consultations on the Gemstone Policy.

The Burmese government does publish new regulations and laws in government-run newspapers and “The State Gazette.” The Burmese government also publishes information online and has established websites through which businesses can access trade information and also sometimes posts new regulations on government ministry’s official Facebook page.

Foreign investors can appeal adverse regulatory decisions. The relevant ministry drafting the regulation has the mandate to appoint a regulatory body to manage a grievance system to resolve legal disputes and/or establish enforcement mechanisms. For instance, under the Myanmar Investment Law, the Myanmar Investment Commission (MIC) serves as the regulatory body and has the authority to impose penalties on any investor who violates or fails to comply with the law. Investors have the right to appeal any decision made by the MIC to the government within 60 days from the date of decision.

Public finance and debt obligations, exclusive of contingent liabilities are public and transparent. Budget reports are published on the Ministry of Planning, Finance, and Industry (MOPFI) website (https://www.mopfi.gov.mm/en/content/budget-news ). Burma has issued the annual Citizen Budget in the Burmese language since FY 2015-16. The Ministry of Planning, Finance, and Industry has published quarterly budget execution reports, six-month-overview-of-budget-execution reports, and annual budget execution reports on its website since FY 2015-16. However, details regarding the budget allocations for defense expenditures are not transparent. The Burmese government also publishes its debt obligation report on the Treasury Department’s Facebook page. (See: https://www.facebook.com/pages/biz/Treasury-Department-of-Myanmar-777018172438019/ ).

For more information on Burma’s regulatory transparency see: http://rulemaking.worldbank.org/en/data/explorecountries/myanmar 

International Regulatory Considerations

Burma has been a member of the Association of South East Asian Nations (ASEAN) since July 1997. As an ASEAN member state, Burma’s regulatory systems are expected to conform to harmonization principles established in the ASEAN Trade in Goods Agreement (ATIGA) to support regional economic integration. Such principles include the removal of unnecessary technical barriers to trade; addressing relevant non-tariff measures among ASEAN member states; facilitation of trade; and upgrading of regulation to ensure safety, consumer health, environmental protection, consumer protection and meeting other social objectives. In an example of ASEAN regulatory harmonization, Burma officially joined the ASEAN Single Window in March 2020 with the launch of the National Single Window Routing Platform, which streamlines the import process by adopting the ASEAN Certificate of Origin Form D.

The Ministry of Commerce’s National Trade Portal and Repository contains all of Burma’s laws, processes, forms, and points of contact for trade.  This portal increases transparency in Burma and also meets Burma’s requirements under Articles 12 and 13 of the ATIGA. The Trade Portal can be found at: http://www.myanmartradeportal.gov.mm/index.php  .

While Burma is not currently in compliance with WTO notification requirements, the government has developed a WTO notification strategy that could increase the number and quality of notifications.

Legal System and Judicial Independence

Burma’s legal system is a unique combination of customary law, English common law, statutes introduced through the pre-independence India Code, and post-independence Burmese legislation. Where there is no statute regulating a particular matter, courts are to apply Burma’s general law, which is based on English common law as adopted and modified by Burmese case law.  Every state and region has a High Court, with lower courts in each district and township. High Court judges are appointed by the President while district and township judges are appointed by the Chief Justice through the Office of the Supreme Court of the Union. The Union Attorney General’s Office law officers (prosecutors) operate sub-national offices in each state, region, district, and township.

The Attorney General enforces standards of due process in the criminal justice system and provides the government’s law officers with a mandate to act as an independent check in the criminal justice system. The Ministry of Home Affairs, led by a minister appointed by the Commander-in-Chief but reporting to the President, retains oversight of the Myanmar Police Force, which files cases directly with the courts. While foreign companies have the right to bring cases to and defend themselves in local courts, there are general concerns about the impartiality and lack of independence of the courts.

In order to address the concerns of foreign investors regarding dispute settlement, the government acceded in 2013 to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). In 2016, Burma’s parliament enacted the much-anticipated Arbitration Law, putting the New York Convention into effect and replacing arbitration legislation that was more than 70 years old. Since April 2016, foreign companies can pursue arbitration in a third country. However, the Arbitration Law does not eliminate all risks. There is still a limited track record of enforcing foreign awards in Burma and inherent jurisdictional risks remain in any recourse to the local legal system. The Arbitration Law, however, brings Burma’s legislation more in line with internationally accepted standards in arbitration.

Certain regulatory actions are appealable and are adjudicated with the respective ministry. For instance, according to the Myanmar Investment Law, investment disputes that cannot be settled amicably are “settled in the competent court or the arbitral tribunal in accord with the applicable laws.” An investor dissatisfied with any enforcement action made by the regulatory body has the right to appeal to the government within 60 days from the date of administrative decision. The government may amend, revoke, or approve any decision made by the regulatory body. This decision is considered final and conclusive.

Laws and Regulations on Foreign Direct Investment

The Myanmar Investment Commission (MIC) plays a leading role in the regulation of foreign investment and approves all investment projects receiving incentives outside of the special economic zones, which are handled by the SEZ’s Central Working Body. Regulation of joint ventures between foreign investors and SOEs is the responsibility of the relevant line ministries.

The Myanmar Investment Law outlines the procedures the Myanmar Investment Commission must take when considering foreign investments. The MIC evaluates foreign investment proposals and stipulates the terms and conditions of investment permits. The MIC does not record foreign investments that do not require MIC approval. Many smaller investments may go unrecorded. Foreign companies may register locally without an MIC license, in which case they are not entitled to receive the benefits and incentives provided for in the Myanmar Investment Law. More information on the MIC can be found at: http://www.dica.gov.mm/en/apply-mic-permit .

There is no “one-stop-shop” for investors with the exemption of Special Economic Zones which can provide “one-stop-shop” service. However, in 2015 the General Administration Department established One Stop Shops (OSS) to facilitate tax payments and assist in obtaining other required permits. As of April 2019, the government has opened 316 One Stop Shops in 72 townships across the nation.

Competition and Anti-Trust Laws

A Competition Law was passed on February 24, 2015, and went into effect on February 24, 2017. The objective of the law is to protect public interest from monopolistic acts, limit unfair competition, and prevent abuse of dominant market position and economic concentration that weakens competition.

The Myanmar Competition Commission serves as the regulatory body to enforce the Competition Law and its rules. The Commission is chaired by the Minister of Commerce, with the Director General of the Department of Trade serving as Secretary. Members also include a mixture of representatives from relevant line ministries and professional bodies, such as lawyers and economists.

The law classifies four types of behavior as punishable violations: acts restricting competition (applicable to all persons); acts leading to monopolies (applicable only to entrepreneurs); unfair competitive acts (applicable only to entrepreneurs); and business combinations such as mergers. The law also restricts the production of goods, market penetration, technological development, and investment, although the government may exempt restrictive agreements “if they are aimed at reducing production costs and benefit consumers,” such as reshaping the organizational structure and business model of a business so as to improve its efficiency; enhancing technology and technological advances for the improvement of the quality of goods and service; and promoting competitiveness of small- and medium-sized enterprises.

Burma is not party to any bilateral or regional agreement on anti-trust cooperation.

Expropriation and Compensation

The 2016 Myanmar Investment Law prohibits nationalization and states that foreign investments approved by the MIC will not be nationalized during the term of their investment. In addition, the law stipulates that the Burmese government will not terminate an enterprise without reasonable cause, and upon expiration of the contract, the Burmese government guarantees an investor the withdrawal of foreign capital in the foreign currency in which the investment was made. Finally, the law states that “the Union government guarantees that it shall not terminate an investment enterprise operating under a Permit of the Commission before the expiry of the permitted term without any sufficient reason.”

Dispute Settlement

ICSID Convention and New York Convention

Burma is not a party to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID). In 2016, the Burmese parliament enacted the Arbitration Law, putting the 1958 New York Convention into effect (see international arbitration below).

Investor-State Dispute Settlement

To date, Burma has not been party to any investment dispute or dispute settlement proceeding at the WTO.

Under the 2016 Arbitration Law, local courts must recognize and enforce foreign arbitral awards against the government unless a valid ground for refusal to enforce exists. Valid grounds for refusal include: one or more parties’ inability to conclude an arbitration agreement; the invalidity of the arbitration agreement, lack of due process, the award falls outside the scope of the arbitration agreement; the arbitration was not in compliance with the applicable laws; or the award is not in force or has been set aside.

International Commercial Arbitration and Foreign Courts

The 2016 Arbitration Law is based on the UNCITRAL Model Law (Model Law), addressing arbitration in Burma as well as the enforcement of a foreign award in Burma. For example, the provisions relating to the definition of an arbitration agreement, the procedure of appointing arbitrator(s) and the grounds for setting aside an award are mirrored in the Arbitration Law and the Model Law; however there are some differences between these two laws. For instance, while parties are free to decide on the substantive law in an international commercial arbitration, the Arbitration Law provides that arbitrations seated in Burma must adopt Burmese law as the substantive law. According to the Arbitration Law, foreign arbitral awards can be enforced if they are the result of a commercial dispute and were made at a place covered by international conventions connected to Burma and as notified in the State Gazette by the President. If the Burmese court is satisfied with the award, it has to enforce it as if it were a decree of a Burmese court. While observers note that there are still issues to be resolved, the Arbitration Law brings Burma’s legislation much closer to international arbitration standards and legislation.

Bankruptcy Regulations

In February 2020, the government of Burma passed the new Insolvency Law, which replaces the Insolvency Act of 1910 and the Insolvency Act of 1920. The new law adopts the United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency, providing greater legal certainty on transnational insolvency issues.

The legislation establishes an effective insolvency regime that addresses both corporate and personal insolvency, with a focus on protecting micro, small and medium-sized enterprises (MSMEs). With regards to personal insolvency, the new law encourages debtors to enter into a voluntary legally binding arrangement with their creditors. This agreement allows part or all of the debt to be written off over a fixed period of time. The law also provides equitable treatment for creditors by enabling an efficient liquidation process to ensure creditors receive maximum financial recovery from the property value of a non-viable business.

The new law establishes the Myanmar Insolvency Practitioners’ Regulatory Council to act as an independent regulatory body and assigns DICA the role of Registrar with the authority to fine individuals contravening the law. In addition, the court with legal jurisdiction can order an individual to make good on the default within a specified time.

Investment Incentives

In January 2020, the Ministry of Investment and Foreign Economic Relations (MIFER) announced tax exemptions for investments made in five priority sectors in all 14 states and regions in Burma as well as the capital territory. The tax exemption period is three, five, or seven years depending on the location. For a list of priority sectors by state and regions, please see MIFER’s website at: http://www.mifer.gov.mm/region 

Myanmar Investment Commission permit and endorsement holders are entitled to tax incentives and the right to use land. With a MIC permit, foreign companies can lease regional government-approved land for periods of up to 50 years with the possibility of two consecutive ten-year extensions.

The government has no established mechanism to provide joint-financing or any other type of fiscal support for infrastructure development.

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the Myanmar Special Economic Zones Law, investors located in an SEZ may apply for income tax exemption for the first five years from the date of commencement of commercial operations, followed by a reduction of the income tax rate by 50 percent for the succeeding five-year period. Under the law, if profits during the third five-year period are re‐invested within one year, investors can apply for a 50 percent reduction of the income tax rate for profits derived from such re‐investment. In August 2015, the government issued new rules governing the SEZs, including the establishment of on-site One-Stop Service centers to ease the approval and permitting of investments in SEZs, incorporate companies, issue entry visas, issue the relevant certificates of origin, collect taxes and duties, and approve employment permits and/or permissions for factory construction and other investments.

Performance and Data Localization Requirements

Foreign investors must recruit at least 25 percent of their skilled employees from the local labor force in the first two years of their investment. The local employment ratio increases to 50 percent for the third and fourth years, and 75 percent for the fifth and sixth years. The investors are also required to submit a report to MIC with details of the practices and training methods that have been adopted to improve the skills of Burmese nationals.

Foreign investors may appoint expatriate senior management, technical experts, and consultants, but are required to submit a copy of the expatriate’s passport, proof of ability, and profile to the MIC for approval. Foreign investors have not cited onerous visa, residence, work permit, or similar requirements asa barrier to their mobility or that of their employees.

Foreign investors are not required to use domestic content in goods or technology. Burma is currently developing laws, rules and regulations on information technology (IT) and data protection standards, but does not currently have requirements for foreign IT providers to turn over source code and/or provide access to surveillance. Burma has no data localization laws.

Real Property

The Myanmar Investment Law provides that any foreign investor may enter into long-term leases with private landlords or – in the case of state-owned land – the relevant government departments or government organizations, if the investor has obtained a permit or endorsement issued by the Myanmar Investment Commission (MIC). Upon issuance of a permit or an endorsement, a foreign investor may enter into leases with an initial term of up to 50 years (with the possibility to extend for two additional terms of ten years each). The MIC may allow longer periods of land utilization or land leases to promote the development of difficult-to-access regions with lower development.

In September 2018, the Burmese government amended the Vacant, Fallow, and Virgin Lands Management Law and required occupants of these landsto register at the nearest land records office within a six-month period. The six-month deadline was intended to offer clear title to lands for investment and infrastructure construction. However, controversy exists over which lands have been designated as vacant, fallow or virgin, and whether the notification or registration period was sufficient.

A continuing area of concern for foreigners involves investment in large-scale land projects. Property rights for large plots of land for investment commonly are disputed because ownership is not well established, particularly following a half-century of military expropriations. It is not uncommon for foreign firms to face complaints from local communities about inadequate consultation and compensation regarding land.

Burma passed the Condominium Law in 2016, which allows for up to 40 percent of condominium units of “saleable floor area” to be sold to foreign buyers.  Condominium owners shall also have the shared ownership of both the land and apartment.  In 2017 the Ministry of Construction passed the Condominium Rules, implementing and clarifying provisions of the Condominium Law. One clarification per the rules is that state-owned land may be registered as condominium land (Rules 20 and 21).

In accordance with the Transfer of Immovable Property Restriction Law of 1987, mortgages of immovable property are prohibited if the mortgage holder is a foreigner, foreign company or foreign bank.

Intellectual Property Rights

Burma is a member of the World Trade Organization (WTO) and is obligated to provide intellectual property protection and enforcement consistent with the “Trade-Related Aspects of Intellectual Property (IPs) Agreement.” The WTO, however, has delayed required implementation of TRIPS for Least Developed Nations – including Burma – until 2021.

Burma’s current intellectual property (IP) protection and enforcement system does not meet international standards. While Burma’s Parliament passed four intellectual property laws in 2019 – the Trademark Law, Industrial Design Law, Patent Law, and Copyright Law – these laws have not yet entered into force at the time of this writing. The Burmese government is in the process of drafting implementing regulations and setting up an IP Office to administer the laws. Once in effect, the laws will likely improve intellectual property protection, and enforcement measures against intellectual property rights infringement. In March 2020, the government formed an IP Central Committee, chaired by a Vice-President, to oversee the IP Department. Establishing the committee is widely viewed as an important step in further developing Burma’s IPR protection regime.

The new Trademark Law introduces a “first-to-file” system from the previous “first-to-use” system. Trademark holders who previously used or registered their trademarks under the old system will need to re-register their trademarks under the new law. The new law also includes protections for “well-known” trademarks. Geographical indicators will also be protected through registration under the new law. The new IP Office anticipates receiving thousands of trademark applications from owners of existing trademarks during a six-month soft-opening period. With the anticipated workload and other issues, implementation of the other three IP laws will likely be delayed.

The Myanmar Police Force’s Criminal Investigative Department (CID) investigates and seizes counterfeit goods, including brands, documents, gold, products, and money, but not medicines. The CID provides evidence before presenting the case to the courts. The CID currently does not record the value of the amount seized. Industry has also identified Bangladesh, Myanmar, and Sri Lanka as emerging sources of counterfeit oncology drugs.

Burma is not listed in the USTR’s Special 301 report or the notorious market report.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

For Intellectual Property Rights issues in Burma, please contact:

Kitisri Sukhapinda, Regional IP Attaché
U.S. Patent and Trademark Office
American Embassy Bangkok, Thailand
Tel: (662) 205-5913
Email: kitisri.sukhapinda@trade.gov

Capital Markets and Portfolio Investment

The Burmese government has gradually opened up to foreign portfolio investment but both the stock and bond markets are small and lack sufficient liquidity to enter and exit sizeable positions. In July 2019, the Securities and Exchange Commission announced that foreign individuals and entities are permitted to hold up to 35 percent of the equity in Burmese companies listed on the Yangon Stock Exchange. As of March 2020, six companies are listed on the exchange. The Securities Exchange Law came into effect in 2013, establishing a securities and exchange commission and helping clarify licensing for securities businesses (such as dealing, brokerage, underwriting, investment advisory and company representation).

Burma has a very small publicly-traded debt market. Banks have been the primary buyers of government bonds issued by Burma’s Central Bank, which has established a nascent bond market auction system. The Central Bank issues government treasury bonds with maturities of two, three, and five years.

Burma enacted the Foreign Exchange Management Law in 2012 in order to improve foreign exchange management and to broaden international economic relations and cooperation. Domestic businesses and investors are able to obtain loans from local and foreign banks. According to the Myanmar Investment Law and Foreign Exchange Management Law, foreign investors need the approval of the Central Bank of Myanmar (CBM) to take a bank loan. The Central Bank allows loans with a maximum maturity of three years. The CBM also allows overdraft lending. Instead of using traditional loans, borrowers can take out overdrafts with collateral which can be rolled over every year without a maturity date. As per CBM regulations, banks are required to clear overdraft facilities within three years; otherwise such overdrafts will be classified as non-performing loans (NPLs).

Money and Banking System

There is limited penetration of banking services in the country but the usage of mobile payment systems is growing rapidly. An estimated 25 percent of the population has access to a savings account through a traditional bank. As of April 2020, Burma’s banking sector consisted of four state-owned banks, 27 domestic private banks, 17 foreign bank branches, and three foreign bank subsidiaries. The banking system is fragile with a high volume of non-performing loans. Financial analysts estimate that NPLs at some local banks account for 40 to 50 percent of outstanding credit.

The 2013 Central Bank of Myanmar Law made the Central Bank an independent institution headed by a Minister-level governor. The Central Bank of Myanmar (CBM) is responsible for the country’s monetary and exchange rate policies as well as regulating and supervising the banking sector.

The government has gradually opened the banking sector to foreign investors. The government began awarding limited banking licenses to foreign banks in October 2014. In November 2018, the CBM published new guidelines that permit foreign banks with local licenses to offer “any financing services and other banking services” to local corporations. Previously, foreign banks were only allowed to offer export financing and related banking services to foreign corporations.

In November 2019, the CBM announced that foreign banks will be allowed to apply for licenses to operate subsidiaries or branches. Under new directives, any foreign bank applying for a subsidiary license would be allowed to provide wholesale banking services at the start of operation. From January 2021, foreign banks with a subsidiary license will be allowed to offer retail banking services. The CBM will allow existing foreign bank branches to convert to subsidiaries starting from June 2020. In January 2020, the CBM announced foreign banks would be permitted to hold more than 35 percent of the capital in joint ventures with domestic banks.

No U.S. banks have correspondent relationships with Burmese banks.

Foreigners are allowed to open a bank account in Burma in either U.S. dollars or Burmese kyat. To open a bank account, foreigners must provide proof of a valid visa along with proof of income or a letter from their employer.

Foreign Exchange and Remittances

Foreign Exchange

According to Chapter 15 of the Myanmar Investment Law, foreign investors are able to convert, transfer, and repatriate profits, dividends, royalties, patent fees, license fees, technical assistance and management fees, shares and other current income resulting from any investment made under this law. Nevertheless, in practice, the transfer of money in or out of Burma has been difficult, as many international banks have internal prohibitions on conducting business in Burma given the long history of sanctions and significant money-laundering risks. The majority of foreign currency transactions are conducted through banks in Singapore.

Under the Foreign Exchange Management Law, transfer of funds can be made only through licensed foreign exchange dealers, using freely usable currencies. The Central Bank of Myanmar (CBM) grants final approval on any new loans or loan transfers by foreign investors. According to a new regulation in the Foreign Exchange Management Law, foreign investors applying for an offshore loan must get approval from the CBM. Applications are submitted through the Myanmar Investment Commission by providing a company profile, audited financial statements, draft loan agreement, and a recent bank credit statement.

Since February 5, 2019, the Central Bank calculates a market-based reference exchange rate from the volume-weighted average exchange rate of interbank and bank-customer deals during the day.

Remittance Policies

According to the Myanmar Investment Law, foreign investors can remit foreign currency through authorized banks. Nevertheless, in practice, the transfer of money in or out of Burma has been difficult, as many international banks have internal prohibitions on conducting business in Burma given the long history of sanctions and significant money-laundering risks. The majority of foreign currency transactions are conducted through banks in Singapore.

The difficulties presented by the formal banking system are reflected in the continued use of informal remittance services (such as the “hundi system”) by both the public and businesses. In November 15, 2019, the Central Bank of Myanmar adopted the Remittance Business Regulation in order to bring these informal networks into the official financial system. The regulations require remittance business licenses to conduct inward and outward remittance businesses from the Central Bank of Myanmar.

Sovereign Wealth Funds

Burma does not have a sovereign wealth fund.

State-owned enterprises (SOEs) in Burma are active in various sectors, including natural resource extraction, print news, energy production and distribution, banking, mobile telecommunications, and transportation. SOEs employ approximately 145,000 people, according to a 2018 report by the Natural Resource Governance Institute. The 1989 State-Owned Economic Enterprises Law does not establish a system of monitoring enterprise operations, hence detailed information on Burmese SOEs are difficult to obtain. However, according to commercial statements, the total net income of all SOEs during fiscal year 2018-19 was approximately USD 1.1 billion. The top profit-making SOEs are found in the natural resource sector, namely the Myanma Oil and Gas Enterprise, Myanma Gems Enterprise, and Myanma Timber Enterprise. Within Burma, there are 32 SOEs that are managed directly by six ministries without independent boards.

State-Owned Enterprises enjoy several advantages including serving in some cases as the market regulator, preferential land access, and access to low-interest credit. According to the State-Owned Economic Enterprises Law, SOEs wield regulatory powers that provide SOEs a significant market advantage, including through an ability to recommend specific tax exemptions to the Myanmar Investment Commission on behalf of private sector joint-venture partners and to monitor private sector companies’ compliance with contracts. In addition, the law stipulates that SOE managers have sole discretion in awarding contracts and licenses to private sector partners with limited oversight. SOEs can secure loans at low interest rates from state-owned banks, with approval from the cabinet. Private enterprises, unlike SOEs, are forced to provide land or other real estate as collateral in order to be considered for a loan. SOEs have historically had an advantage over private entities in land access because under the Constitution the State owns all the land.

Privatization Program

In May 2016, the government formed a privatization committee on SOEs, which is headed by a Vice-President, to examine measures such as public-private partnerships (PPP) to develop and operate infrastructure as well as to sell-off inefficient state-owned factories. The Minister for Planning, Finance, and Industry serves as secretary of the commission. Privatization can take the form of system-sharing, public-private partnership, private-private partnership, franchise, joint-venture, and sales of assets in line with international standards. In October 2017, the government sought to privatize state-owned factories in the ceramic, garment, plastic, and stainless-steel sectors, according to state media. According to government data and media reports, 55 state-owned factories have been restructured under various PPPs as of November 2019. The privatization committee does not have a website describing its current activities but general information in the Burmese language about the committee can be found at: https://www.mopfi.gov.mm/my/page/planning/committee/638 .

There is growing awareness of standards for responsible business conduct in Burma. Responsible business principles are cited in the Myanmar Investment Law and the Myanmar Sustainable Development Plan. Many privately-owned companies, particularly those seeking foreign investment, are increasing transparency and are striving to meet international standards of responsible business conduct. There remains, however, significant variance among companies and sectors. The Myanmar Centre for Responsible Business advises foreign investors to closely engage local partners to ensure they (as well as their contractors and supply chains) meet international standards for responsible business conduct.

Companies operating in Burma’s conflict zones or partnering with military-owned firms face significant reputational risk. Both foreign and domestic companies have been cited by international organizations and NGOs for supporting or enabling human rights abuses in Burma, including in reports by the United Nations Fact-Finding Mission on Myanmar.

Burma became a candidate country in the Extractive Industries Transparency Initiative in 2014.

The Burmese government has continued to prioritize fighting corruption, and resources have been allocated to facilitate the growth of the Anti-Corruption Commission (ACC) into an institution vested with the authority to lead that fight. In 2018, the government amended its anti-corruption law to give the ACC authority to scrutinize government procurements. The ACC has used that authority to initiate criminal cases even in the absence of victim complaints, leading to cases against several high-ranking and some mid-ranking officials for financial impropriety and abuse of office. Family members of politicians can also be prosecuted under the anti-corruption law, though office holders face higher penalties. The ACC opened branch offices in Yangon and Mandalay in 2019, as it continues to increase its investigative capacity.

Some companies are legally required to have compliance programs to detect and prevent bribery of government officials. Under Burma’s Anti-Money Laundering Law, law firms, banks, and companies operating in the insurance and gemstone sectors are required to appoint compliance officers and conduct heightened due diligence on certain customers.

There have also been non-legislative actions to counter corruption. Burma does not have laws to counter conflicts-of-interest in awarding contracts or government procurement. However, the President’s office has issued orders to prevent conflicts-of-interest for construction contracts and several ministries have put in place internal rules to avoid conflicts-of-interest in awarding tenders. In the private sector, some of Burma’s largest companies have developed anti-corruption policies, which they have published on-line.

Enforcement of Burma’s anti-corruption laws remains a challenge. While there have been efforts to reduce some opportunities for higher-level corruption, the lack of transparency regarding military budgets and expenditures remains a substantial impediment to reforms. In addition, a large swath of the economy is engaged in illegal activities beyond the control of the government. These include the production, transportation and distribution of narcotics, and the smuggling of jade, gemstones, timber, wildlife, and wildlife products. NGOs are working with the government to assist in fighting corruption in these areas, but lack any formal role in conducting investigations. There are efforts to promote accountability for government officials, but the lack of resources for key government functions, including law enforcement and civil service salaries, remains a driver for low-level corruption. In its 2019 Corruption Perceptions Index, Transparency International rated Burma 130 out of 175 countries. Investors might encounter corruption when seeking investment permits, during the taxation process, when applying for import and export licenses, and when negotiating land and real estate leases.

Burma signed the UN Anticorruption Convention in 2005, and ratified it on December 20, 2012.

Burma is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Anti Corruption Commission
Cluster (1), Sports’ Village, Wunna Theikdi Ward,*
Nay Pyi Taw
Phone: + 95 67 810 334 7
Email: myanmaracc2014@gmail.com
http://www.accm.gov.mm/acc/index.php?route=common/home 

* A new Anti Corruption Commission head office is currently under construction. However, the above address is still used for all official communications until the new office becomes operational.

The government is sensitive to the threat of terrorism and is engaged with international partners on this issue. There is no evidence to suggest that international terrorist organizations have operational capacity in Burma or are actively targeting Western interests. Additionally, crime in Burma is low compared to other countries within the region. While violence or demonstrations rarely target U.S. or other Western interests in Burma, several ethnic armed groups are engaged in ongoing civil conflict with the Burmese government, which occurs almost exclusively in the ethnic states.  On October 15, 2015, the Burmese government and eight ethnic armed groups (EAGs) signed a Nationwide Ceasefire Agreement (NCA). Two additional armed ethnic groups joined the NCA in February 2018. However, several ethnic armed groups, including the most powerful ones, have not signed the NCA and some signatories continue to fight with the military and other EAGs.

While most of the major cities are considered safe, several areas of the country, particularly within some of the ethnic states, routinely see conflict between the government and EAGs, as well as inter-ethnic violence between EAGs. Combatants use landmines, improvised explosive devices, small arms, and other weapons. These incidents generally target government security forces, but there have been collateral casualties among the civilian population. The continued use of landmines by the Burmese military and EAGs in the north, northeast, and southeast continue to routinely result in civilian casualties. Civilians have also been killed as a result of clashes between the military and the EAGs, as well as inter-ethnic conflicts.

On August 25, 2017, a Rohingya insurgent group attacked about 30 security outposts in northern Rakhine State. The government characterized this event as a terrorist attack, and Burmese security forces launched clearance operations throughout northern Rakhine State. Hundreds of Rohingya villages were burned, and there were widespread, credible allegations of abuses by security forces. An estimated 730,000 Rohingya fled to Bangladesh, and tens of thousands of non-Rohingya are displaced inside Rakhine State. In November 2017, the U.S. Secretary of State determined that the situation constituted ethnic cleansing. Violence has not spread to other areas of Burma as a result of the crisis in Rakhine State although, as noted above, certain states in Burma continue to experience ethnic or religious violence. Burma has a minority Muslim population, and violence between Buddhists and Muslims did occur in other parts of the country in 2013 and 2014 following intercommunal violence in Rakhine State in 2012. Since late 2018, there has been a marked increase in violence as a result of the ongoing conflict between the Burmese security forces and fighters from the Arakan Army (AA), an ethnic Rakhine, largely Buddhist, EAG. A number of townships in northern Rakhine and southern Chin States are currently off limits for U.S. government travel due to the violence from this conflict.

Burma plans to hold national elections in late 2020. Following decades of military rule, Burma elections were considered to be generally free and fair in November 2015, which the Aung San Suu Kyi-led National League for Democracy won. The military still retains considerable political power under provisions of the 2008 constitution, including 25 percent of all seats in parliament at both the national and region/state level.

Burma’s labor costs are low, even when compared to most of its Southeast Asian neighbors. Skilled labor and managerial staff are in high demand and short supply, leading to high turnover. According to the government, 70 percent of Burma’s population is employed in agriculture. The military’s nationalization of schools in 1964, its discouragement of English language classes in favor of Burmese, the lack of investment in education by the previous governments of Burma, and the repeated closing of Burmese universities from 1988 to the mid-2000’s have taken a toll on the country’s work force. Most people in the 15- to 39-year-old demographic lack technical skills and English proficiency. In order to address this gap, Burma’s Employment and Skill Development Law went into effect in December 2013 and is being revised. The law provides for compulsory contributions on the part of employers to a “skill development fund,” although this provision has not been implemented.

The military’s nationalization of schools in 1964, its discouragement of English language classes in favor of Burmese, the lack of investment in education by the previous governments of Burma, and the repeated closing of Burmese universities from 1988 to the mid-2000’s have taken a toll on the country’s work force. Most people in the 15- to 39-year-old demographic lack technical skills and English proficiency. In order to address this gap, Burma’s Employment and Skill Development Law went into effect in December 2013 and is being revised. The law provides for compulsory contributions on the part of employers to a “skill development fund,” although this provision has not been implemented.

From the World Bank’s 2014 “Ending Poverty and Boosting Prosperity in a Time of Transition” report on Burma, 73 percent of the total labor force in Burma was employed in the informal sector in 2010, or 57 percent if one excludes agricultural workers. Casual laborers represented another 18 percent, mainly from the rural areas. Unpaid family workers represent another 15 percent.

In October 2011, the Burmese government passed the Labor Organization Law, which legalized the formation of trade unions and allows workers to strike. As of April 2019, roughly 2,900 enterprise-level unions have been formed in a variety of industries ranging from garments and textiles to agriculture to heavy industry. The passage of the Labor Organization Law engendered a labor movement in Burma, and there is a low, yet increasing, level of awareness of labor issues among workers, employers, and even government officials. Still, at present, the use of collective bargaining remains limited. Strikes are increasingly common, though they are not currently a significant deterrent to foreign investment.

The Burmese government continues to bring the legal system into compliance with international labor standards. In recent years, the government has passed a number of labor reforms and amended a range of labor-related laws, such as the Shops and Establishment Law, the Payment of Wages Law, and the Occupational Safety and Health Law. In 2019, Parliament also passed the Settlement of Labor Disputes Law. Under this law, parties to labor disputes can seek mediation through arbitration councils. All stakeholders have a say in the selection of arbitration mediators. If arbitration fails, disputes enter the court system. Parliament approved Burma’s ratification of an international treaty to abolish child labor in the country (Minimum Age Convention 138) in December 2019. The ratification process is ongoing. A mechanism to submit forced labor complaints became operational in February 2020.

In November 2014, the governments of the United States, Burma, Japan, Denmark, and the International Labor Organization (ILO) formally launched the Initiative to Promote Fundamental Labor Rights and Practices in Myanmar (Initiative) and held the fourth Stakeholder’s Forum in February 2020. The overarching goal of the Initiative is to promote a culture of compliance with fundamental labor rights. The Initiative is intended to cultivate relationships between business, labor, and civil society stakeholders and the Burmese government.

In November 2016, the U.S. government reinstated Burma’s Generalized System of Preferences (GSP) trade benefit in recognition of the progress that the government had made in protecting workers’ rights. The U.S. government reauthorized the GSP program globally in March 2018 through December 31, 2020.

Employers may face some restrictions in firing or laying off workers. Under Burmese law, certain employers must provide notice to the Ministry of Labor, Immigration, and Population when laying off workers. Employers also must provide warnings before firing a worker for breach of an employment contract. Fired or laid-off workers can collect unemployment insurance if they and their employer made contributions before termination.

Burma does not waive labor laws to attract foreign investment, though there is some ambiguity as to which labor laws apply in Special Economic Zones. This issue has yet to be definitively adjudicated.

There is high potential in Burma for additional DFC investment particularly in the ICT, retail, and agricultural sectors. The DFC’s predecessor organization, OPIC (Overseas Private Investment Corporation), focused its portfolio investments in Burma on the telecommunication and microfinance sectors. In May 2013, OPIC signed an Investment Incentive Agreement with Burma.

* https://www.dica.gov.mm/sites/dica.gov.mm/files/document-files/yearly_country_4.pdf 

** Accurate statistical data is limited in Burma, although this capacity is also being developed.

* According to http://data.imf.org/CDIS 

Table 4: Sources of Portfolio Investment
Data not available.

Geoffrey D. Chin, Economics Professional Associate
U.S. Embassy/110 University Avenue/Kamayut Township 11041/Rangoon, Burma
Telephone: 95 (0)1 7536 509
Email Address: chingd@state.gov

Transparency of the Regulatory System 

In general, Cambodia’s regulatory system, while improving, still lacks transparency. This lack of transparency is a result of the lack of legislation and limited capacity of key institutions, and is exacerbated by a weak court system. Investors often complain that the decisions of Cambodian regulatory agencies are inconsistent, arbitrary, or influenced by corruption. For example, in May 2016 in what was perceived as a populist move, the government set caps on retail fuel prices, with little consultation with petroleum companies. And, in April 2017, the National Bank of Cambodia introduced an interest rate cap on loans provided by the microfinance industry with no consultation with relevant stakeholders. In the past years, investors have expressed concern as well over draft legislation that has not been subject to stakeholder consultations.

Cambodian ministries and regulatory agencies are not legally obligated to publish the text of proposed regulations before their enactment. Draft regulations are only selectively available for public consultation with relevant non-governmental organizations (NGOs), private sector or other parties before their enactment. Approved or passed laws are available on websites of some

Ministries but are not always up to date. The Council of Jurists, the government body that reviews law and regulations, publishes a list of updated laws and regulations on its website.

International Regulatory Considerations 

As a member of the ASEAN since 1999, Cambodia is required to comply with certain rules and regulations with regard to free trade agreements with the 10 ASEAN member states. These include tariff-free importation of information and communication technology (ICT) equipment, harmonizing custom coding, harmonizing the medical device market, as well as compliance with tax regulations on multi-activity businesses, among others.

As a WTO member, Cambodia has both drafted and modified laws and regulations to comply with WTO rules. Relevant laws and regulations are notified to the WTO legal committee only after their adoption. A list of Cambodian legal updates in compliance with the WTO is described in the above section regarding Investment Policy Reviews.

Legal System and Judicial Independence 

Although the Cambodian Constitution calls for an independent judiciary, both local and foreign businesses report problems with inconsistent judicial rulings, corruption, and difficulty enforcing judgments. For these reasons, many commercial disputes are resolved through negotiations facilitated by the Ministry of Commerce, the Council for the Development of Cambodia, the Cambodian Chamber of Commerce, or other institutions. Foreign investors often build into their contacts clauses which dictate that investment disputes must be resolved in a third country, such as Singapore.

The Cambodian legal system is primarily based on French civil law. Under the 1993 Constitution, the King is the head of state and the elected Prime Minister is the head of government. Legislative power is vested in a bicameral parliament, while the judiciary makes up the third branch of government. Contractual enforcement is governed by Decree Number 38 D Referring to Contract and Other Liabilities. More information on this decree can be found at www.cambodiainvestment.gov.kh/decree-38-referring-to-contract-and-other-liabilities_881028-2.html.

Laws and Regulations on Foreign Direct Investment 

Cambodia’s 1994 Law on Investment created an investment licensing system to regulate the approval process for foreign direct investment and provide incentives to potential investors. In 2003, the government amended the law to simplify licensing and increase transparency (Amended Law on Investment). Sub-decree No. 111 (2005) lays out detailed procedures for registering a QIP, which is entitled to certain taxation incentives, with the CDC and provincial/municipal investment subcommittees.

Information about investment and investment incentives in Cambodia may be found on the CDC’s website.

Competition and Anti-Trust Laws 

A draft antitrust and competition law is near completion and may be finalized in 2020. Once enacted, it will be enforced by Cambodia’s Import-Export Inspection and Fraud Repression Directorate-General (CAMCONTROL).

Expropriation and Compensation 

Land rights are a contentious issue in Cambodia, complicated by the fact that most property holders do not have legal documentation of their ownership because of official policies and social upheaval during Khmer Rouge era in the 1970s. Numerous cases have been reported of influential individuals or groups acquiring land titles or concessions through political and/or financial connections and then using force to displace communities to make way for commercial enterprises.

In late 2009, the National Assembly approved the Law on Expropriation, which sets broad guidelines on land-taking procedures for public interest purposes. It defines public interest activities to include construction, rehabilitation, preservation, or expansion of infrastructure  projects, and development of buildings for national defense and civil security. These provisions include construction of border crossing posts, facilities for research and exploitation of natural resources, and oil pipeline and gas networks. Property can also be expropriated for natural disasters and emergencies, as determined by the government. Legal procedures regarding compensation and appeals are expected to be established in a forthcoming sub-decree, which is under internal discussion within the technical team of the Ministry of Economy and Finance.

projects, and development of buildings for national defense and civil security. These provisions include construction of border crossing posts, facilities for research and exploitation of natural resources, and oil pipeline and gas networks. Property can also be expropriated for natural disasters and emergencies, as determined by the government. Legal procedures regarding compensation and appeals are expected to be established in a forthcoming sub-decree, which is under internal discussion within the technical team of the Ministry of Economy and Finance.

The government has shown willingness to use tax issues for political purposes. For instance, in 2017, a U.S.-owned independent newspaper had its bank account frozen purportedly for failure to pay taxes. It is believed that, while the company may have had some tax liability, the action taken by Cambodia’s General Department of Taxation, notably an inflated tax assessment, was politically motivated and intended to halt operations. These actions took place at the same time the government took steps to reduce the role of press and independent media in the country as part of a wider anti-democratic crackdown.

Dispute Settlement 

ICSID Convention and New York Convention 

Cambodia has been a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) since 2005. Cambodia is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) since 1960.

Investor-State Dispute Settlement 

International arbitration is available for Cambodian commercial disputes. In March 2014, the Supreme Court of Cambodia upheld the decision of the Cambodian Court of Appeal, which had ruled in favor of the recognition and enforcement of an arbitral award issued by the Korean Commercial Arbitration Board of Seoul, South Korea. Cambodia became a member of the World Bank’s International Center for Settlement of Investment Disputes in January 2005. In 2009, the International Center approved a U.S. investor’s request for arbitration in a case against the Cambodian government, and in 2013, the tribunal rendered an award in favor of Cambodia.

International Commercial Arbitration and Foreign Courts 

Commercial disputes can also be resolved through the National Commercial Arbitration Center (NCAC), Cambodia’s first alternative dispute resolution mechanism, which was officially launched in March 2013. Arbitral awards issued by foreign arbitrations are admissible in the Cambodian court system. An example can be drawn from its recognition and enforcement of arbitral award issued by the Korean Commercial Arbitration Board in 2014.

Bankruptcy Regulations 

Cambodia’s 2007 Law on Insolvency was intended to provide collective, orderly, and fair satisfaction of creditor claims from debtor properties and, where appropriate, the rehabilitation of the debtor’s business. The Law on Insolvency applies to the assets of all business people and legal entities in Cambodia. The World Bank’s 2020 Doing Business Report ranks Cambodia 82 out of 190 in terms of the “ease of resolving insolvency.”

In 2012, Credit Bureau Cambodia (CBC) was established in an effort to create a more transparent credit market in the country. CBC’s main role is to provide credit scores to banks and financial institutions and to improve access to credit information.

Investment Incentives 

Cambodia’s Law on Investment and Amended Law on Investment offers varying types of investment incentives for projects that meet specified criteria. Investors seeking an incentive – for examples, incentives as part of a qualified investment project (QIP) – must submit an application to the CDC. Investors who wish to apply are required to pay an application fee of KHR 7 million (approximately $1,750), which covers securing necessary approvals, authorizations, licenses, or registrations from all relevant ministries and entities, including stamp duties. The CDC is required to seek approval from the Council of Ministers for investment proposals that involve capital of $50 million or more, politically sensitive issues, the exploration and exploitation of mineral or natural resources, or infrastructure concessions. The CDC is also required to seek approval from the Council of Ministers for investment proposals that will have a negative impact on the environment or the government’s long-term strategy.

QIPs are entitled to receive different incentives such as corporate tax holidays; special depreciation allowances; and import tax exemptions on production equipment, construction materials, and production inputs used to produce exports. Investment projects located in designated special promotion zones or export-processing zones are also entitled to the same incentives. Industry-specific investment incentives, such as three-year profit tax exemptions, may be available in the agriculture and agro-industry sectors. More information about the criteria and investment areas eligible for incentives can be found at the following link .

Foreign Trade Zones/Free Ports/Trade Facilitation 

To facilitate the country’s development, the Cambodian government has shown great interest in increasing exports via geographically defined special economic zones (SEZs). Cambodia is currently drafting a law on Special Economic Zones, which is now undergoing technical review within the CDC. There are currently 23 special SEZs, which are located in Phnom Penh, Koh Kong, Kandal, Kampot, Sihanoukville, and the borders of Thailand and Vietnam. The main investment sectors in these zones include garments, shoes, bicycles, food processing, auto parts, motorcycle assembly, and electrical equipment manufacturing.

Real Property 

Mortgages exist in Cambodia and Cambodian banks often require certificates of property ownership as collateral before approving loans. The mortgage recordation system, which is handled by private banks, is generally considered reliable.

Cambodia’s 2001 Land Law provides a framework for real property security and a system for recording titles and ownership. Land titles issued prior to the end of the Khmer Rouge regime (1975-79) are not recognized due to the severe dislocations that occurred during that time period. The government is making efforts to accelerate the issuance of land titles, but in practice, the titling system is cumbersome, expensive, and subject to corruption. The majority of property owners lack documentation proving ownership. Even where title records exist, recognition of legal titles to land has not been uniform, and there are reports of court cases in which judges have sought additional proof of ownership.

Foreigners are constitutionally forbidden to own land in Cambodia; however, the 2001 Land Law allows long and short-term leases to foreigners. Cambodia also allows foreign ownership in multi-story buildings, such as condominiums, from the second floor up. Cambodia was ranked 129 out of 190 economies for ease of registering property in the 2020 World Bank Doing Business Report.

Intellectual Property Rights 

Infringement of intellectual property rights (IPR) is prevalent in Cambodia. Counterfeit apparel, footwear, cigarettes, alcohol, pharmaceuticals, and consumer goods, and pirated software, music, and books are examples of IPR-infringing goods found in the country.

Though Cambodia is not a major center for the production or export of counterfeit or pirated materials, local businesses report that the problem is growing because of the lack of enforcement. To date, Cambodia has not been listed by the Office of the U.S. Trade Representative (USTR) in its annual Special 301 Report.

Cambodia has enacted several laws pursuant to its WTO commitments on intellectual property. Its key IP laws include the Law on Marks, Trade Names and Acts of Unfair Competition (2002), the Law on Copyrights and Related Rights (2003), the Law on Patents, Utility Models and Industrial Designs (2003), the Law on Management of Seed and Plant Breeder’s Rights (2008), the Law on Geographical Indications (2014), and the Law on Compulsory Licensing for Public Health (2018).

Cambodia has been a member of WIPO since 1995 and has acceded to a number of international IPR protocols, including the Paris Convention (1998), the Madrid Protocol (2015), the WIPO Patent Cooperation Treaty (2016), The Hague Agreement Concerning the International

Registration of Industrial Design (2017), and the Lisbon Agreement on Appellations of Origin and Geographical Indications (2018).

To combat the trade in counterfeit goods, the Cambodian Counter Counterfeit Committee (CCCC) was established in 2014 under the Ministry of Interior to investigate claims, seize illegal goods, and prosecute counterfeiters. The Economic Police, Customs, the Cambodia Import-Export Inspection and Fraud Repression Directorate General, and the Ministry of Commerce also have enforcement IPR enforcement responsibilities; however, the division of responsibility among each agency is not clearly defined. This causes confusion to rights owners and muddles the overall IPR environment. Though there has been an increase in the number of seizures of counterfeit goods in recent years, in general such actions are not taken unless a formal complaint is made.

In early 2020, the U.S. Patent and Trademark Office concluded an MOU with Cambodia on accelerated patent recognition, creating a simplified procedure for U.S. patents to be registered in Cambodia.

For additional information about treaty obligations and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles at this link .

Capital Markets and Portfolio Investment 

In a move designed to address the need for capital markets in Cambodia, the Cambodia Securities Exchange (CSX) was founded in 2011 and started trading in 2012. Though the CSX is one of the world’s smallest securities markets, it has taken steps to increase the number of listed companies, including attracting SMEs. It currently has five listed companies, including the Phnom Penh Water Supply Authority, Taiwanese garment manufacturer Grand Twins International, the Sihanoukville Autonomous Port, Phnom Penh SEZ Plc, and Sihanoukville Autonomous Port.

In September 2017, the National Bank of Cambodia (NBC) adopted a Prakas on Conditions for Banking and Financial Institutions to be listed on the Cambodia Securities Exchange. The Prakas sets additional requirements for banks and financial institutions that intend to issue securities to the public. This includes prior approval from the NBC and minimum equity of KHR 60 billion (approximately $15 million).

Cambodia’s bond market is at the beginning stages of development. The regulatory framework for corporate bonds was bolstered in 2017 through the publication of the Prakas on Public Offering of Debt Securities, the Prakas on Accreditation of Bondholders Representative, and the Prakas on Accreditation of Credit Rating Agency. The country’s first corporate bond was issued in 2018 by Hattha Kaksekar Limited. Four additional companies have since been added to the bond market: LOLC (Cambodia) Plc., Advanced Bank of Asia Limited, Phnom Penh Commercial Bank Plc, and RMA (Cambodia) Plc. RMA, which issued its bonds in early 2020, was the first non-bank financial institution to be listed. There is currently no sovereign bond market, but the government has stated its intention of making government securities available to investors by 2022.

Money and Banking System 

The National Bank of Cambodia (NBC) regulates the operations of banking systems in Cambodia. Foreign banks and branches are freely allowed to register and operate in the country. There are 44 commercial banks, 14 specialized banks (set up to finance specific turn-key projects such as real estate development), 74 licensed microfinance institutions, and seven licensed microfinance deposit taking institutions in Cambodia. NBC has also granted licenses to 12 financial leasing companies and one credit bureau company to improve transparency and credit risk management and encourage more lending to small-and medium-sized enterprise customers.

Prior to the COVID-19 pandemic, Cambodia’s banking sector experienced strong growth. The banking sector’s assets, including those of MFIs, rose 21.4 percent year-over-year in 2018 to 139.7 trillion riel ($34.9 billion), while credit grew 24.3 percent to 81.7 trillion riel ($20.4 billion). Loans and deposits grew 18.3 percent and 24.5 percent respectively, which resulted in a decrease of the loan-to-deposit ration from 114 percent to 110 percent. The ratio of non-performing loans remained steady at 2.4 percent in 2017.

The government does not use the regulation of capital markets to restrict foreign investment. Banks have been free to set their own interest rates since 1995, and increased competition between local institutions has led to a gradual lowering of interest rates from year to year. However, in April 2017, at the direction of Prime Minister Hun Sen, the NBC capped interest rates on loans offered by micro-finance institutions (MFIs) at 18 percent per annum. The move was designed to protect borrowers, many of whom are poor and uneducated, from excessive interest rates.

In March 2016, the NBC doubled the minimum capital reserve requirement for banks to $75 million for commercial banks and $15 million for specialized banks. Based on the new regulations, deposit-taking microfinance institutions now have a $30 million reserve requirement, while traditional microfinance institutions have a $1.5 million reserve requirement.

In March 2020, the National Bank of Cambodia (NBC) issued several regulations to ensure liquidity and promote lending amid the outbreak of COVID-19. They include: (1) delaying the implementation of Conservation Capital Buffer (CCB) for financial institutions; (2) reducing the minimum interest rate of Liquidity-Providing Collateralized Operations (LPCO); (3) reducing the interest rates of Negotiable Certificate of Deposit (NCD); (4) reducing the reserve requirement rate (RRR) from 8 percent (KHR) and 12.5 percent (USD) to 7 percent (KHR and USD) for 6 months starting from April, 2020; and (5) reducing the liquidity coverage ratio.

Financial technology (Fintech) in Cambodia is still at early stage of development. Available technologies include mobile payment, QR code, and e-wallet accounts for domestic and cross-border payments and transfers. In 2012, the NBC launched retail payments for cheques and credit remittances. A FAST payment system was introduced in 2016 to facilitate instant fund transfers. The Cambodian Shared Switch (CSS) system was launched in October 2017 to facilitate the access to network ATM and POS machines.

In February 2019, the Financial Action Task Force (FATF), an intergovernmental organization whose purpose is to develop policies to combat money laundering, cited Cambodia for being “deficient” with regard to its anti-money laundering and countering financing of terrorism (AML/CFT) controls and policies and included Cambodia on its “grey list.” The government has committed to working with FATF to address these deficiencies through a jointly-developed action plan, although progress to date appears minimal. Should Cambodia not address the deficiencies, it could risk landing on the FATF “black list,” something that could negatively impact the cost of capital as well as the banking sector’s ability to access the international capital markets.

Foreign Exchange and Remittances 

Foreign Exchange 

Though Cambodia has its own currency, the riel (denoted as KHR), U.S. dollars are widely in circulation in Cambodia and remain the primary currency for most large transactions. There are no restrictions on the conversion of capital for investors.

Cambodia’s 1997 Law on Foreign Exchange states that there shall be no restrictions on foreign exchange operations through authorized banks. Authorized banks are required, however, to report the amount of any transfer equaling or exceeding $100,000 to the NBC on a regular basis.

Loans and borrowings, including trade credits, are freely contracted between residents and nonresidents, provided that loan disbursements and repayments are made through an authorized intermediary. There are no restrictions on the establishment of foreign currency bank accounts in Cambodia for residents.

The exchange rate between the riel and U.S. dollar is governed by a managed float and has been stable at around one U.S. dollar to KHR 4,000 for the past several years. Daily fluctuations of the exchange rate are low, typically under three percent. In the past several years, the Cambodian government has taken steps to increase general usage of the riel but, as noted above, the country’s economy remains largely dollarized.

Remittance Policies 

Article 11 of the Cambodia’s 2003 Amended Law on Investment states that QIPs can freely remit abroad foreign currencies purchased through authorized banks for the discharge of financial obligations incurred in connection with investments. These financial obligations include: payment for imports and repayment of principal and interest on international loans; payment of royalties and management fees; remittance of profits; and, repatriation of invested capital in case of dissolution.

Sovereign Wealth Funds 

Cambodia does not have a sovereign wealth fund.

Cambodia currently has 15 state-owned enterprises (SOEs): Electricite du Cambodge, Sihanoukville Autonomous Port, Telecom Cambodia, Cambodia Shipping Agency, Cambodia Postal Services, Rural Development Bank, Green Trade Company, Printing House, Siem Reap Water Supply Authority, Construction and Public Work Lab, Phnom Penh Water Supply Authority, Phnom Penh Autonomous Port, Kampuchea Ry Insurance, Cambodia Life Insurance, and the Cambodia Securities Exchange.

In accordance with the Law on General Stature of Public Enterprises, there are two types of commercial SOEs in Cambodia – one that is 100 percent owned by the state, the other is a joint-venture in which a majority of capital is owned by the state and a minority is owned by private investors.

Each SOE is under the supervision of a line ministry or government institution and is overseen by a board of directors drawn from among senior government officials. Private enterprises are generally allowed to compete with state-owned enterprises under equal terms and conditions. SOEs are also subject to the same taxes and value-added tax rebate policies as private-sector enterprises. SOEs are covered under the law on public procurement, which was promulgated in January 2012, and their financial reports are audited by the appropriate line ministry, the Ministry of Economy and Finance, and the National Audit Authority.

Privatization Program 

There are no ongoing privatization programs, nor has the government announced any plans to privatize existing SOEs.

There is a small, but growing awareness of responsible business conduct (RBC) and corporate social responsibility (CSR) among businesses in Cambodia despite the fact that the government does not have explicit policies to promote them. RBC and CSR programs are mostly commonly found at larger and multinational companies in the country. U.S. companies, for example, have implemented a wide range of CSR activities to promote skills training, the environment, general health and well-being, and financial education. These programs have been warmly received by both the general public and the government.

A number of economic land concessions in Cambodia have led to high profile land rights cases. The Cambodian government has recognized the problem, but in general, has not effectively and fairly resolved land rights claims. The Cambodian government does not have a national contact point for Organization for Economic Cooperation and Development (OECD) multinational enterprises guidelines and does not participate in the Extractive Industries Transparency Initiative.

Corruption remains a significant issue in Cambodia for investors, and is a widespread practice. An increase in foreign investment from investors willing to engage in corrupt practices, combined with sometimes opaque official and unofficial investment processes, has served to facilitate an overall rise in corruption, already at high levels. In its Global Competitiveness Report 2019, the World Economic Forum ranked Cambodia 134th out of 141 countries for incidence of corruption. Transparency International’s 2019 Corruption Perception index ranked Cambodia 162 of 180 countries globally, the lowest ranking among ASEAN member states.

Those engaged in business have identified corruption, particularly within the judiciary, customs services, and tax authorities, as one of the greatest deterrents to investment in Cambodia. Foreign investors from countries that overlook or encourage bribery have significant advantages over foreign investors from countries that criminalize such activity.

Cambodia adopted an Anti-Corruption Law in 2010 to combat corruption by criminalizing bribery, abuse of office, extortion, facilitation payments, and accepting bribes in the form of  donations or promises. Under the law, all civil servants must also declare their financial assets to the government every two years. Cambodia’s Anti-Corruption Unit (ACU), established the same year, has investigative powers and a mandate to provide education and training to government institutions and the public on anti-corruption compliance. Since its formation, the ACU has launched a few high-profile prosecutions against public officials, including members of the police and judiciary, and has tackled the issue of ghost workers in the government, in which salaries are collected for non-existent employees.

donations or promises. Under the law, all civil servants must also declare their financial assets to the government every two years. Cambodia’s Anti-Corruption Unit (ACU), established the same year, has investigative powers and a mandate to provide education and training to government institutions and the public on anti-corruption compliance. Since its formation, the ACU has launched a few high-profile prosecutions against public officials, including members of the police and judiciary, and has tackled the issue of ghost workers in the government, in which salaries are collected for non-existent employees.

The ACU, in collaboration with the private sector, has also established guidelines encouraging companies to create internal codes of conduct prohibiting bribery and corrupt practices. Companies can sign a Memorandum of Understanding (MOU) with the ACU pledging to operate corruption-free and to cooperate on anti-corruption efforts. Since the program started in 2015, more than 80 private companies have signed a MOU with the ACU. In 2018, the ACU completed a first draft of a code of conduct for public officials, which has not yet been finalized.

Despite the passage of the Anti-Corruption Law and creation of the ACU, enforcement remains weak. Local and foreign businesses report that they must often make informal payments to expedite business transactions. Since 2013, Cambodia has published the official fees for public services, but the practice of paying additional fees remains common.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Cambodia ratified the UN Convention against Corruption in 2007 and endorsed the Action Plan of the Asian Development Bank / OECD Anti-Corruption Initiative for Asia and the Pacific in 2003. Cambodia is not a party to the OECD Convention on Combating Bribery.

Resources to Report Corruption 

Om Yentieng President, Anti-Corruption Unit
No. 54, Preah Norodom Blvd, Sangkat Phsar Thmey 3,
Khan Daun Penh, Phnom Penh
Telephone: +855-23-223-954
Email: info@acu.gov.kh

Transparency International Cambodia
#13 Street 554, Phnom Penh
Telephone: +855-23-214430
Email: info@ticambodia.org

Foreign companies have been the targets of violent protests in the past, such as the 2003 anti-Thai riots against the Embassy of Thailand and Thai-owned commercial establishments. More recently, there were reports that Vietnamese-owned establishments were looted during a January 2014 labor protest. Authorities have also used force, including truncheons, electric cattle prods, fire hoses, and even gunfire, to disperse protestors. Incidents of violence directed at businesses, however, are rare. The Embassy is unaware of any incidents of political violence directed at U.S. or other non-regional interests.

Nevertheless, political tensions remain. After relatively competitive communal elections in June 2017, where Cambodia’s opposition party won nearly 50 percent of available seats, the government took steps to strengthen its grip on power and eliminated meaningful political activity. In September 2017, the head of the country’s leading opposition party was arrested and charged with treason, and in November 2017, the same opposition party was banned. In July 2018, Prime Minister Hun Sen won a landslide victory, and his ruling party swept all 125 parliamentary seats, in a national election that was criticized by the United States as being neither free nor fair. The government has also taken steps to limit free speech and stifle independent media, including forcing independent news outlets and radio stations to cease operations. While there are few overt signs the country is growing less secure today, the possibility for insecurity exists going forward, particularly if a large percentage of the population remains disenfranchised.

The global COVID-19 pandemic has had significant impact on Cambodia’s labor sector, the full extent of which are not yet known. Cambodia’s garment and manufacturing sector, which is heavily reliant on global supply chains for inputs and on demand from the United States and Europe, is experiencing severe disruptions due to COVID-19. The government estimates that as of May 2020, 180,000 of Cambodia’s approximately 1 million factory workers have been furloughed. In addition, approximately 90,000 of Cambodia’s 1.3 million migrant workers returned from abroad (mostly from Thailand) due to COVID-19 related job losses.

Cambodia’s labor force includes about 10 million people. A small number of Vietnamese and Thai migrant workers are employed in Cambodia, and Chinese-run infrastructure and other businesses are importing an increasing number of Chinese laborers, who typically earn more than their Cambodian counterparts. Given the severe disruption to the Cambodian education system and loss of skilled Cambodians during the 1975-1979 Khmer Rouge period, there are few Cambodian workers with higher education or specialized skills. Around 55 percent of the population is under the age of 25, a fact reflected in Cambodia’s young workforce. The United Nations has estimated that around 300,000 new job seekers enter the labor market each year. The agricultural sector employees about 40 percent of the labor force. Some 37 percent of the non-agricultural workforce, or 2.2 million workers, are in the informal economy. The pandemic has caused mass suspensions and layoffs across all non-agricultural sectors.

Unresolved labor disputes are mediated first on the shop-room floor, after which they are brought to the Ministry of Labor and Vocational Training. If conciliation fails, then the cases may be brought to the Arbitration Council, an independent state body that interprets labor regulations in collective disputes, such as when multiple employees are dismissed. Since the 2016 Trade Union Law went into force, Arbitration Council cases have decreased from over 30 per month to fewer than five, although that number began to increase again in 2019 due to regulatory changes.

Cambodia’s 2016 Trade Union Law (TUL) erects barriers to freedom of association and the rights to organize and bargain freely. The ILO has stated publicly that the law could hinder Cambodia’s obligations to international labor conventions 87 and 98. To address those concerns, Cambodia passed an amended TUL in early 2020, but the amended law still does not go far enough to fully address ILO, U.S. government, labor NGO, and union concerns about the law’s curbs on freedom of association. In addition, Cambodia has only implemented and enforced a minimum wage in the export garment and footwear sectors.

In early 2020, the government also began consultations with businesses and unions on amending the Labor Law. Unions generally oppose the proposed amendments, seeing them as too pro-business. One proposed change, for example, would reduce extra pay for night shift work.

Through 2019, a number of Cambodian companies have received financing from the Overseas Private Investment Corporation (OPIC), including loans to financial institutions for the purposes of onward lending. OPIC’s successor agency, the Development Finance Corporation (DFC), is expected to carry these programs forward in Cambodia.

The Export-Import Bank of the United States (Ex-Im Bank) provides financing and insurance to local companies to help them purchase U.S. made products and services; repayment terms are generally up to seven years. In 2018, Ex-Im Bank facilitated the sale of a U.S.-made grain silo through a loan guarantee, its first commercial transaction in Cambodia. Cambodia is also a member of the Multilateral Investment Guarantee Agency of the World Bank, which offers political-risk insurance to foreign investors.

There has been a surge in FDI inflows to Cambodia in recent years. Though FDI goes primarily to infrastructure, including commercial and residential real estate projects, it has also recently favored investments in manufacturing and agro-processing. Cambodia reports its total stock of FDI reached $42 billion in 2019 in terms of fixed assets, up from $38.5 billion in 2018.

Investment into Cambodia is dominated by China, and the level of investment from China has surged especially the last five years. Cambodia reports that its stock of FDI from China reached $16.6 billion by the end of 2019. Other major sources of FDIs stock in Cambodia include South Korea ($4.7 billion), United Kingdom ($3.8 billion), Malaysia ($2.7 billion), and Japan ($2.4 billion), through 2019. In 2019 alone, Chinese investment in Cambodia reached $1.3 billion, followed by Hong Kong ($913 million), and the United Kingdom ($822 million).

* Source for Host Country Data: The Council for the Development of Cambodia (CDC) provides official government data on investment in Cambodia, but not all data is published online. See: www.cambodiainvestment.gov.kh/why-invest-in-cambodia/investment-enviroment/investment-trend.html 

Data retrieved from IMF’s Coordinated Direct Investment Survey database presents a much different picture of FDI into Cambodia as compared to that provided by the Cambodian government. For example, the Council for Development of Cambodia reports $38.5 billion stock FDI in term of fixed asset through year-end 2018, while the IMF reports only $23 billion.

Table 4: Sources of Portfolio Investment
Data not available.

David Ryan Sequeira, CFA
Economic Officer
U.S. Embassy Phnom Penh
No. 1, Street 96, Sangkat Wat Phnom, Phnom Penh, Cambodia
Phone: (855) 23-728-401
Email: CamInvestment@state.gov

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements, but progress is slow.  Notable developments included passage of a comprehensive anti-money laundering law in 2010 and a land acquisition law in 2012.  Although Indonesia continues to move forward with regulatory system reforms foreign investors have indicated they still encounter challenges in comparison to domestic investors and have criticized the current regulatory system for its failure to establish clear and transparent rules for all actors.  Certain laws and policies, including the DNI, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.

Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in what companies have identified as additional red tape.  Certain businesses claim that Indonesia encounters challenges in launching bureaucratic reforms due to ineffective management, resistance from vested interests, and corruption.  U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations.  Government ministries and agencies, including the Indonesian House of Representatives (DPR), continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora and it can take years for draft legislation to become law.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

U.S. companies note that regulatory consultation in Indonesia is inconsistent, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government regulation 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations.  The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations.  Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required.

In 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business.  However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision.  The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws.

In 2017, the government issued Presidential Instruction No. 7/2017, which aims to improve the coordination among ministries in the policy-making process.  The new regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation.  Presidential Instruction No. 7 also requires Ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation.  The presidential instruction did not address the frequent lack of coordination between the central and local governments.  Pursuant to various Indonesian economy policy reform packages over the past several years, the government has eliminated 220 regulations as of September 2018.  Fifty-one of the eliminated regulations are at the Presidential level and 169 at the ministerial or institutional level.

In July 2018, President Jokowi issued Presidential Regulation No. 54/2018, updating and streamlining the National Anti-Corruption Strategy to synergize corruption prevention efforts across ministries, regional governments, and law enforcement agencies.  The regulation focuses on three areas: licenses, state finances (primarily government revenue and expenditures), and law enforcement reform.  An interagency team, including KPK, leads the national strategy’s implementation efforts.

In October 2018, the government issued Presidential Regulation No. 95/2018 on e-government that requires all levels of government (central, provincial, and municipal) to implement online governance tools (e-budgeting, e-procurement, e-planning) to improve budget efficiency, government transparency, and the provision of public services.

International Regulatory Considerations

As a member of ASEAN, Indonesia has successfully implemented regional initiatives, including real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and reduces opportunities for corruption.   Indonesia has also committed to ratify the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement.  Notwithstanding progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation.  The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.

Indonesia joined the WTO in 1995.  Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.  In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA).  At this point, Indonesia has met 88.7 percent of its commitments to the TFA provisions, including publication and availability information, consultations, advance ruling, review procedure, detention and test procedure, fee and charges discipline, goods clearance, border agency cooperation, import/export formalities, and goods transit.

Indonesia is a Contracting Party to the Aircraft Protocol to the Convention of International Interests in Mobile Equipment (Cape Town Convention).  However, foreign investors bringing aircraft to Indonesia to serve the aviation sector have faced difficulty in utilizing Cape Town Convention provisions to recover aircraft leased to Indonesian companies.  Foreign owners of leased aircraft that have become the subject of contractual lease disputes with Indonesian lessees have been unable to recover their aircraft in certain circumstances.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law.  The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort).  Indonesia also has a Constitutional Court.  The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation.  Both the Supreme and Constitutional Courts have authority to conduct judicial review.

Corruption also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staffs.  Many businesses note that the judiciary is susceptible to influence from outside parties.  Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia.

Judges are not bound by precedent and many laws are open to various interpretations.  A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law No.2/2012 enacted in 2012 included legal mechanisms designed to resolve some past land ownership issues.  In addition, companies find Indonesia to have a poor track record on the legal enforcement of contracts, and civil disputes are sometimes criminalized.  Government Regulation No. 79/2010 opened the door for the government to remove recoverable costs from production sharing contracts.  Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets.  Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law No. 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in Presidential Decree No. 44/2016, commonly referred to as the 2016 Negative Investment List or DNI. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to provide greater certainty for foreign and domestic investors. The 2016 DNI enables greater foreign investment in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 DNI contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/ .  Indonesia mandates reporting obligations for all foreign investors through BKPM Regulation No.7/2018.  See section two for Indonesia’s procedures for licensing foreign investment.

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law. Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities. In April 2017, the Indonesia DPR began deliberating a new draft of the Indonesian antitrust law, which would repeal the current Law No. 5/1999 and strengthen KPPU’s enforcement against monopolistic practices and unfair business competition.

Expropriation and Compensation

Indonesia’s political leadership has long championed economic nationalism, particularly in regard to mineral and oil and gas reserves. According to Law No. 25/2007 (the Investment Law), the Indonesian government is barred from nationalizing or expropriating an investors’ property rights, unless provided by law.  If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provided market value compensation to the investor.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts; however, some investors note that these awards are not always enforced in practice.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled, and discontinued cases. In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining. In March 2019, the tribunal rejected an annulment request from the claimants. In addition, a Dutch arbitration court recently ruled in favor of the Indonesian government in USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys. Two cases involved Newmont Nusa Tenggara under the BIT with Netherlands and Oleovest under the BIT with Singapore were discontinued.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs). All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark. However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would seek to better protect perceived national interests. The Indonesian model BIT is under legal review.

In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause. In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreement signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed. Indonesia’s legal code recognizes the right of parties to apply agreed-upon rules of arbitration. Some arbitration, but not all, is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UNCITRAL model law and ICSID arbitration rules. Though U.S. firms have reported that doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors. Companies complain that the court system in Indonesia works slowly as international arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is viewed as pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

Investment Incentives

Indonesia seeks to facilitate investment through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. As part of the Economic Policy Package XVI, Indonesia issued a modified tax holiday scheme in November 2018 through Ministry of Finance (MOF) Regulation 150/2018, which revokes MOF Regulation 35/2018.  This regulation is intended to attract more direct investment in pioneer industries and simplify the application process through the OSS. The period of the tax holiday is extended up to 20 years; the minimum investment threshold is IDR 100 billion (USD 6.6 million), a significant reduction from the previous regulation at IDR 500 billion (USD 33 million). In addition to the tax holiday, depending on the investment amount, this regulation also provides either 25 or 50 percent income tax reduction for the two years after the end of the tax holiday. The following table explains the parameters of the new scheme:

Based on BKPM Regulation 1/2019 as amended by BKPM Regulation 8/2019, the coverage of pioneer sectors was expanded to the digital economy, agricultural, plantation, and forestry, bringing the total to eighteen industries:

1. Upstream basic metals;
2. Oil and gas refineries;
3. Petrochemicals derived from petroleum, natural gas, and coal;
4. Inorganic basic chemicals;
5. Organic basic chemicals;
6. Pharmaceutical raw materials;
7. Semi-conductors and other primary computer components;
8. Primary medical device components;
9. Primary industrial machinery components;
10. Primary engine components for transport equipment;
11. Robotic components for manufacturing machines;
12. Primary ship components for the shipbuilding industry;
13. Primary aircraft components;
14. Primary train components;
15. Power generation including waste-to-energy power plants;
16. Economic infrastructure;
17. Digital economy including data processing; and
18. Agriculture, plantation, and forestry-based processing

Government Regulation No. 9/2016 expanded regional tax incentives for certain business categories in 2016. Apparel, leather goods, and footwear industries in all regions are now eligible for the tax incentives. In this regulation, existing tax facilities are maintained, including:

• Deduction of 30 percent from taxable income over a six-year period
• Accelerated depreciation and amortization
• Ten percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
• Compensation losses extended from 5 to 10 years with certain conditions for companies that are:

1. 1. Located in industrial or bonded zone;
   2. Developing infrastructure;
   3. Using at least 70 percent domestic raw material;
   4. Absorbing 500 to 1000 laborers;
   5. Doing research and development (R&D) worth at least 5 percent of the total investment over 5 years;
   6. Reinvesting capital; or,
   7. Exporting at least 30 percent of their product.

On March 31, 2020, Indonesia issued Government Regulation in Lieu of Law No. 1 of 2020 on State Financial Policy and the Stability of Financial Systems for the Handling of the Coronavirus Disease 2019 Pandemic (Perppu 1/2020). Among its provisions are plans to regulate electronic based trading activity (e-trading) and to charge value-added taxes (VAT) on taxable intangible goods and services from foreign e-commerce parties and other highly-digitalized businesses. Income tax will also be imposed upon foreign e-commerce parties that are judged to meet a “significant economic presence” threshhold, based on consolidated gross circulation of a business group, total sales value, or active Indonesian users. The regulation also introduces an electronic transaction tax (ETT) that will be imposed on foreign entities that are subject to income tax obligations under the aformentioned threshhold but would not otherwise be subject to corporate income tax in Indonesia in the absence of a permanent establishment, where taxing such transactions is prohibited by bilateral tax treaties.  Industry representatives have expressed concern that such provisions seek to circumvent bilateral tax treaties intended to avoid double taxation, including the tax treaty between Indonesia and the United States.  They have also noted a lack of clarity over the Perppu’s implementation and concerns over administrative sanctions and the high cost to comply with new measures.  The new regulation will also also cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022. In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent.

The government provides the facility of Government-Borne Import Duty (Bea Masuk Ditanggung Pemerintah /BMDTP) with zero percent import duty to improve industrial competitiveness and public goods procurement in high value added, labor intensive, and high growth sectors. MOF Regulation 12/2020 provides zero import duty for imported raw materials in 36 sectors including plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, toys, vehicle components including for electric vehicles, telecommunications, fertilizers, and pharmaceuticals until December 2020.

To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation 86/2020 streamlined licensing requirement for manufacturers of pharmaceuticals and medical devices. The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies. Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.

 At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in government-financed or subsidized research and development programs. The Ministry of Research and Technology handles applications on a case-by-case basis.

Indonesia’s vast natural resources have attracted significant foreign investment over the last century and continues to offer significant prospects. However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 Mining Policy Perception Index. In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. A ban on the export of raw minerals went into effect in January 2014. However, in July 2014, the government issued regulations that allowed, until January 2017, the temporary export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full export ban came back into effect in January 2017, the government again issued new regulations that allowed exports of copper concentrate and other specified minerals, but imposed more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted mineral ores, companies with contracts of work must convert to mining business licenses—and thus be subject to prevailing regulations—and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves. In January 2020, the government banned the export of  nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which have been reported to overlap or be unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

During President Jokowi’s first term, the Indonesian government invested more than  USD 350 billion in infrastructure to connect Indonesia’s more than 17,000 islands. The investments included toll roads, seaports, airports, power generation, telecommunications, and upgrades to Indonesia’s social infrastructure, such as, clean water and sanitation, and housing projects.  President Jokowi has emphasized that he will continue this infrastructure program during his second five-year term, aiming to increase Indonesia’s infrastructure stock from 43 percent of GDP in 2019 to 50 percent in 2024.

Despite high-level attention from Indonesian policymakers, many U.S. companies and investors report that the current institutional arrangement for infrastructure development still suffers from functional overlap, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector by state-owned enterprises (SOEs), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to test a new policy approach, corruption, and a relatively small Indonesian private sector. As a result of these challenges, the World Bank estimates that Indonesia faces a USD 1.5 trillion infrastructure gap in comparison to other emerging market economies.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special economic and trade zones throughout Indonesia. The largest zone is the free trade zone (FTZ) island of Batam, located just south of Singapore. Neighboring Bintan Island and Karimun Island also enjoy FTZ status. Investors in FTZs are exempted from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials. Fees are assessed on the portion of production destined for the domestic market which is “exported” to Indonesia, in which case fees are owed only on that portion.  Foreign companies are allowed up to 100 percent ownership of companies in FTZs. Companies operating in FTZs may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of  February 2020, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction. Eleven SEZs are operational (though development is sometimes limited) at: 1) Sei Mangkei, North Sumatera; 2) Tanjung Lesung, Banten; 3) Palu, Central Sulawesi; 4) Mandalika, West Nusa Tenggara; 5) Arun Lhokseumawe, Aceh; 6) Galang Batang, Bintan, Riau Islands; 7) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands; 8) Bitung, North Sulawesi; 9) Morotai, North Maluku; 10) Maloy Batuta Trans Kalimantan, East Kalimantan; and 11) Sorong, Papua. Four more SEZs are under construction: Tanjung Api-Api, South Sumatera; Singhasari, East Java; Kendal, Central Java; and Likupang, North Sulawesi. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives. The Indonesian government announced in December 2018 that it plans to transition management of the Batam FTZ to the local government, creating a single regulatory authority on the island. The conversion to an SEZ is still ongoing  and will not affect the status of the neighboring FTZs on Bintan and Karimun islands.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative treatment.  Among these are Industrial Zones/Industrial Estates (Kawasan  Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 103 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs facilities available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auction places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to designate more in eastern Indonesia.  In 2018, Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation 120/2013, bonded zones have a domestic sales quota of 50 percent of the preceding realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic areas are only allowed for further processing to become capital goods, and to companies which have a license from the economic area organizer for the goods relevant to their business.

Performance and Data Localization Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations. Under Presidential Regulation No. 20/2018, issued in March 2018, the Ministry of Manpower now has two days to approve a complete RPTKA application, and an RPTKA is not required for commissioners or executives. An RPTKA’s validity is now based on the duration of a worker’s contract (previously it was valid for a maximum of five years). The new regulation no longer requires expatriate workers to go through the intermediate step of obtaining a Foreign Worker Permit (IMTA). Instead, expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. Regulation No. 20/2018 also abolished the requirement for all expatriates to receive a technical recommendation from a relevant ministry. However, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign worker for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Regulation No. 20/2018 provides for short-term working permits (maximum six months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Ministry of Manpower issued Regulation No.10/2018 to implement Regulation 20/2018, revoking its Regulation No. 16/2015 and No. 35/2015. Regulation 10/2018 provides additional details about the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to “facilitate” Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to a fund for local manpower training at regional manpower offices. The Ministry of Manpower issued Decree 228/2019 to widen the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunication, and professionals. Foreign workers  have to obtain approval from Manpower Minister or designated officials for applying positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In February 2017, the Ministry of Energy and Natural resources abolished regulations specific to the oil and gas industry, bringing that sector in line with rules set by the Ministry of Manpower.

With the passage of a defense law in 2012 and subsequent implementing regulations in 2014, Indonesia established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising Indonesian interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study, they will publish a standardized multiplier value schedule. According to government officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges or requiring local content targets in some sectors.

In October 10, 2019, Indonesia issued Government Regulation No. 71 (GR71) to replace Regulation No. 82/2012 which classifies electronic system operators (ESO) into two categories: public and private. Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervision authority. Private ESOs are individuals, businesses and communities that operate electronic system. Public ESOs are required to manage, process, and store their data in Indonesia, unless the storing technology is not available locally.  Private ESOs have the option to choose where they will manage, process, and store their data. However, if private ESOs choose to process data outside of Indonesia, they are required to provide access to their systems and data for government supervision and law enforcement purposes. For private financial sector ESOs, GR71 provides  that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities with regards to the private sector’s ESO systems, data processing, and data storage.

In March 2020, the Ministry of Communication and Information Technology (MCIT) published a proposed draft implementing regulation of GR 71 for private ESOs. Article 6 of the draft requires private ESOs to obtain approval from MCIT before they can manage, process, and store their data outside of Indonesia. This provision has been widely criticized by foreign firms and is more restrictive than the original government regulation (GR71) which allows offshore data storage. Post continues to monitor this issue.

Additionally, pursuant to GR71, the Financial Services Authority (OJK) issued Regulation 13/2020, an amendment to Regulation 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK.  Furthermore, OJK will evaluate whether the arrangement for offshore data could diminish its supervisory efficiency, negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations. The regulation became effective March 31, 2020.

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24/1997, though the Ministry of Forestry administers all ”forest land.” Registration is sometimes complicated by local government requirements and claims, as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation No.103/2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 20 additional years.

As part of President Jokowi’s second-term economic reform agenda, the Indonesian government has introduced an omnibus bill on job creation that aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs).

Intellectual Property Rights

In the U.S. Trade Representative’s (USTR) Special 301 Report released on April 29, 2020, Indonesia remains on the priority watch list due to the  lack of adequate and effective IP protection and enforcement. Indonesia’s patent law continues to raise serious concerns, including with respect to patentability criteria and compulsory licensing. Further, counterfeiting and piracy continue to be pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy. Local industry associations have reported large amounts of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Mangga Dua Market, and online markets Tokopedia, Bukalapak, were included in USTR’s Notorious Markets List in 2019.

Indonesia improved market access by amending a troubling provision within the 2016 Patent Law related to compulsory licenses (CLs). Ministry of Law and Human Right (MLHR) Regulation 30/2019 aims to provide more clarity on the criteria for CLs, including provisions on the non-transferability of CLs to third parties, specific purposes, and duration. The provisions also clarify conditions where CLs can be granted based on determination of “detriment to society”, including insufficient supply and unfordable prices of patented products. The new regulation incorporates Regulation 15/2018’s renewable exemption for patent holders to delay local manufacturing requirements. While industry contacts viewed this regulation as an improvement, they still have concerns that this regulation may undermine the overall level of protection that patent holders receive by registering their patents in Indonesia.

MLHR’s Director General of Intellectual Property (DGIP)  said the GOI will further amend the 2016 Patent Law through the pending omnibus bill and a future Patent Law amendment. The job creation omnibus bill would remove a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. Previously, MLHR allowed a five-year exemption from local production requirements under Regulation 15/2018. The Patent Law amendment will contain revisions to Article 4 on second use and Article 82 on compulsory licensing. The 2016 Patent Law contains several other concerning provisions, including a restrictive definition of “invention” that potentially imposes an additional “meaningful benefit” requirement for patents on new forms of existing compounds, an expansive national interest test for proposed patent licenses, and disclosure of genetic information and traditional knowledge to promote access and benefit sharing.  Observers expect the omnibus bill to be passed in 2020.  Aside from the Article 20 revision in the omnibus bill, there is no concrete timeline for the Patent Law amendment. DGIP reports it is currently drafting guidelines for patent examiners on pharmacy, computer, and biotechnology patents that will be released in 2020.

DGIP has relaxed its more aggressive efforts to collect patent annuity fees by offering extensions to the deadline.  On August 16, 2018, DGIP issued a circular letter warning stakeholders that it may refuse to accept new patent applications from rights holders that have not paid patent annuity fee debts. The letter gave rights holders until February 16, 2019, to settle unpaid patent annuity payments. On February 17, 2019, DGIP issued another circular letter on its website extending the deadline to August 17, 2019. DGIP has since announced a further extension to settle any unpaid annuities to July 31, 2020. However, in order to benefit from the latest extension, companies were required to send a “commitment letter” to DGIP by January 31, 2020 indicating their intention to pay the outstanding annuities.  The U.S. government continues to monitor implementation of this policy with DGIP and industry stakeholders.

Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in October 2017 and issued implementing regulations in June 2018. Under the new rules, applicants desiring international mark protection under the Madrid Protocol are required to first register their application with DGIP , and must be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in treatment of international well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

Following the issuance of Ministry of Finance (MOF) Regulation No.40/2018, on December 10, 2019, the Supreme Court ruled on MOF Regulation No. 6/2019, which further granted DGCE the legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection. Under Regulation No.6/2019, rights holders are notified by DGCE (through the recordation system) when an incoming shipment is suspected of containing infringing products. If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a suspension of the shipment. Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (approximately USD 6,600) when they file a claim with the court. Rights holders can apply for a 10-day (extendable for an additional 10 days) temporary suspension of the shipment until the completion of a commercial court review.  Once the commercial court examines the evidence, the court can make a ruling that same day whether to maintain the temporary hold or to cancel the judgement.  If the court sides with the rights holder, then the guarantee money will be returned to the applicant. Despite  business stakeholder concerns, the GOI retained a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

In 2015, DGIP and KOMINFO jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. Also in 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. BEKRAF reported that the task force remained focused on coordinating the review of complaints from industry about infringing websites in 2018.  MCIT reported that it blocked 1,946 infringing websites in 2019, a significant increase from the previous  year’s 442 cases. IndoXXI and LayarIndo21, two of the largest online pirated entertainment providers,  reportedly closed in early January. After the IndoXXI shutdown was announced, Video Coalition of Indonesia (VCI) found 200 new infringing websites with similar content. A YouGov survey published by the Asia Video Industry Association (AVIA) revealed that 63 percent of Indonesians access infringing websites for entertainment purposes. MCIT senior officials stated the Ministry is working with the Indonesia National Police Cybercrime Unit and industry groups, including AVIA, to determine and identify the source host, but admitted MCIT does not have the capability to track down the perpetrators and bring criminal charges,

DGIP reports that its directorate of investigation has increased staffing to 187 investigators, including 40 nationwide investigators and 147 staff certified to act as local investigators in 33 provinces when needed for a pending case, and saw the number of investigations double from 30 in 2018 to 47 in 2019. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: http://jakarta.usembassy.gov/us-service/attorneys.html.

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 668 listed companies as of December 2019 with a daily trading volume of USD 650 million and market capitalization of USD 521 billion. Over the past five years, there has been a 34 percent increase of the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 59.26 percent of the market cap. There were 50 initial public offerings in 2019 – seven fewer than 2018. As of January 2020, domestic entities conducted more than 67.97 percent  of total IDX stock trades.

In November 2018, IDX introduced T+2 settlement, with sellers now receiving proceeds within two days instead of the previous standard of three days (T+3). In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. This was followed in 2017 by the IDX’s introduction the first online sharia stock trading platform. As of December 2019, the ISSI is composed of 429 stocks that are a part of IDX’s Jakarta Composite Index (JCI), with a total market cap of USD 267 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Corporate bonds are less liquid due to less public knowledge of the product. The government also issues sukuk (Islamic treasury notes) treasury bills as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of December 2019 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board. In 2014, OJK also assumed BI’s supervisory role over commercial banks. Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment (including 38.57 percent of government securities). Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries or sectors, such as those outlined in the DNI.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest net interest margins in the region. As of August 2019, the 10 top banks had IDR 5,210 trillion (USD 372 billion) in total assets. Loans grew 6.08 percent in 2019 compared to 11.5 percent in2018. Gross non-performing loans in December 2019 remained at 2.53 percent from 2.4 percent the previous year. For 2020, the Financial Services Authority (OJK) project annual credit growth at 12-14 percent and deposit growth around 10-12 percent for Indonesia’s banking industry.

OJK Regulation No.56/03/2016 limits bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders. This does not apply to foreign bank branches in Indonesia. Foreign banks may establish branches if the foreign bank is ranked among the top 200 global banks by assets.  A special operating license is required from OJK in order to establish a foreign branch. The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets. In 2017, HSBC, which previously registered as a foreign branch, changed its legal status to a Limited Liability Company and merged with a local bank subsidiary which it had purchased in 2008.

On March 16, OJK  issued OJK Regulation Number 12/POJK.03/2020 on commercial bank consolidation. The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and the encouraging consolidation of banks in Indonesia. This regulation generally consists of two main regulations concerning bank consolidation policies, as well as  increasing minimum core capital for commercial banks and increasing Capital Equivalency Maintained Assets for foreign banks with branch offices by least IDR 3 trillion, by December 31, 2022.

In 2015, OJK eased rules for foreigners to open a bank account in Indonesia. Foreigners can open a bank account with a balance between USD 2,000-50,000 with just their passport. For accounts greater than USD 50,000, foreigners must show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.

Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector. Peer-to-peer (P2P) lending companies recorded a triple-digit increase in 2008 and e-payment services have grown more than six-fold since 2012. Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro-, small-, and medium-sized enterprises (MSMEs), with estimates that in 2020, fintech lending will hit IDR 223 trillion (USD 13.61 billion) in loan disbursements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (approximately USD 6,600) or more, or the equivalent in another currency, must report the amount to DGCE. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 66,000).

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:

• capital, profit, interest, dividends and other income;
• funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
• additional funds required for investment;
• funds for debt payment;
• royalties;
• income of foreign individuals working on the investment;
• earnings from the sale or liquidation of the invested company;
• compensation for losses; and
• compensation for expropriation.

U.S. firms report no difficulties in obtaining foreign exchange.

BI began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

In 2015, the government announced a regulation requiring the use of the rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must now use rupiah, which has impacted some U.S. business operations. The central bank may grant a company permission to receive payment in foreign currency upon application, and where the company has invested in a strategic industry.

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions. Carrying rupiah bank notes of more than IDR 100 million (approximately USD 6,600) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

As of 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime. In 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

As of mid-2020, Indonesia is still preparing to establish a sovereign wealth fund, despite macroeconomic and budgetary pressures from the pandemic response. When established, it is expected the fund will operate as a state-owned investment fund that will aim to attract foreign capital, including from foreign sovereign wealth funds, and invest that capital in long-term Indonesian assets. According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies. The sovereign wealth fund will be authorized by the planned passage of the omnibus bill on job creation, which includes 14 articles to set up the fund and facilitate greater cooperation with foreign partners. This cooperation includes authorizing the fund to be set up in foreign jurisdictions and allowing foreigners as general partners of the fund.

In 2015, the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange. In addition, 14 are special purpose entities under the SOE Ministry (BUMN), with one SOE, the Indonesian Infrastructure Guarantee Fund, under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In November 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir  has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda. Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles. Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the IDX.

Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only).

There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

In the third quarter of 2019 (the most recent data available), SOEs have contributed USD 22 billion of tax payments, non-tax payments, and dividends to the Indonesian state. SOEs also contributed a profit of USD 131 billion, with total assets of 626 billion, liabilties of USD 429 billion, and equities of USD 196 billion.

Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws  are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.

OJK regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, and the government is not known to have encouraged adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in 2015.

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies. The Indonesian government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption.  KPK is one of the most trusted and respected institutions in Indonesia. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 66,000).  The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019.  Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2019 improved to 85 out of 180 countries surveyed, compared to 89 out of 180 countries in 2018.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 40 in 2019 (scale of 0/very corrupt to 100/very clean).  At the beginning of President Jokowi’s term in 2014, Indonesia’s score was  34. Indonesia ranks 4^th of the 10 ASEAN countries.

Nonetheless, according to certain reports, corruption remains pervasive despite laws to combat it. Some have noted that KPK leadership, along with the commission’s investigators and prosecutors, are sometimes harassed, intimidated, or attacked due to their anticorruption work. In early 2019, a Molotov cocktail and bomb components were placed outside the homes of two KPK commissioners, and in 2017 unidentified assailants committed an acid attack against a senior KPK investigator. Police have not identified the perpetrators of either attack. The Indonesian National Police and Attorney General’s Office also investigate and prosecute corruption cases; however, neither have the same organizational capacity or track-record of the KPK. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

On September 2019, the Indonesia House of Representatives (DPR) passed Law No. 19/2019 on the Corruption Eradication Commission (KPK) which revised the KPK’s original charter. This revised law introduced several changes relating to the authority and supervision of the KPK, including KPK’s status as a state agency under the authority of the executive branch (it was previously an independent body outside of the judicial, legislative, or executive branches) and establishment of a Supervisory Council to oversee certain KPK activities.  The new law also changed the KPK’s status as a separate law enforcement authority and mandated the KPK to provide performance review reports to the President, the DPR RI, and the supervisory board.  Finally, the KPK’s previous independent authority to terminate corruption investigations and prosecutions, as well as authorize wiretaps, searches, arrests, and asset seizures, has now been transferred to the Supervisory Council.  Many observers view these changes as limiting KPK’s ability to pursue corruption investigations without political interference.

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014, Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. Kuningan Persada Kav 4, Setiabudi
Jakarta Selatan 12950
Email: informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Since the large-scale Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively and successfully continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to become operational and conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.

According to the industry, foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there, including the death of a New Zealand citizen in an attack on March 30, 2020. Additionally, racially-motivated attacks against ethnic Papuans living in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced.

Travelers to Indonesia can visit the U.S. Department of State travel advisory website for the latest information and travel resources: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Indonesia.html.

Companies have reported that the Indonesian labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and reduced gaps between minimum wages and average wages. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised again from IDR 3.6 million (USD 256.6) per month in 2018 to IDR 3.94 million (USD 260) per month in 2019. Unions staged largely peaceful protests across Indonesia in 2018 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers. Under the new wage setting policy adopted as part of the 2018 economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region.

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Until the onset of the COVID-19 pandemic, unemployment has remained steady at 4.38 percent. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but inadequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia.

Employers also note that the skills provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Manpower maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

The government has proposed an omnibus bill on labor reforms intended to attract investors, boost economic growth and create jobs.  The bill covers foreign workers, wages, work hours, redundancy and social security.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

• Child Labor Report: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/indonesia .
• Trafficking in Persons Report: https://www.state.gov/reports/2019-trafficking-in-persons-report/indonesia/
• Human Rights Report: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/

The U.S. International Development Finance Corporation (DFC) and its predecessor, the Overseas Private Investment Corporation (OPIC), have invested USD 2.35 billion across 116 projects in Indonesia since 1974, including in the power generation, financial services, and agricultural sectors. The DFC’s current portfolio is USD 123.8 million across five projects in Indonesia. The bulk of its exposure is in the DFC-financed UPC Renewables Sidrap Bayu wind power plant in South Sulawesi, where a USD 120 million investment supported the construction of Indonesia’s first commercial wind farm. The project demonstrates DFC’s commitment to help eliminate blackouts and diversify Indonesia’s energy supply. On March 12, 2020, DFC approved a USD 190 million loan to Trans Pacific Networks (TPN) to support the world’s longest telecommunications cable. The cable will directly connect Singapore, Indonesia, and the United States and have the capability to serve several markets in Southeast Asia and the Pacific.

Indonesia is one of the DFC’s priority markets and the DFC remains interested in projects in the transportation, energy, and digital economy sectors. In January 2020, DFC CEO Adam Boehler visited Indonesia as part of his first overseas visit since the DFC’s formal launch. His visit followed other senior visits by DFC officials to identify projects for DFC support, including the first-ever, DFC-led, U.S.-Australia-Japan trilateral infrastructure business development mission in August 2019.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. In 2018, MIGA provided a guarantee loan to Indonesian state-owned financial institutions and financed a hydroelectric power plant.

*Indonesia Statistic Agency, GDP from the host country website is converted into USD with the exchange rate 14,156 for 2019

*Indonesia Investment Coordinating Board (BKPM), January 2020

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies. While BEA recorded transactions in balance of payments, BKPM relies on company realization reports. BKPM also excludes investments in oil and gas, non-bank financial institutions, and insurance.

Source:  IMF Coordinated Direct Investment Survey for inward and outward investment data.

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.
The Bank of Indonesia published comparable data.

Reggie Singh
Economic Section
U.S. Embassy Jakarta
+62-21-50831000
BusinessIndonesia@state.gov

Transparency of the Regulatory System

Regulations in Laos can be vague and conflicting, a subject that the private sector raises regularly with the government, including through official fora such as the Lao Business Forum.  The 2013 Law on Making Legislation mandated that all laws be available online at the official gazette website, www.laoofficialgazette.gov.la .  Draft bills are also available for public comment through the official gazette website, although not all bills are posted for comment or in the official gazette, and the provinces seldom post their local legislation.  Though the situation continues to improve, the realities of doing business in Laos can fail to correspond with existing legislation and regulation.  Implementation and enforcement often do not strictly follow the letter of the law, and vague or contradictory clauses in laws and regulations provide for widely varying interpretations.  Regulations at the national and provincial levels can often diverge, overlap, or contradict one another.  Many local firms still complain of informal or gray competition from firms that offer lower costs by flaunting formal registration requirements and operating outside of government regulatory structures.

The nascent legal, regulatory, and accounting systems are not particularly conducive to a transparent, competitive business environment.  International accounting norms apply and major international firms are present in the market, though understanding and adherence to these norms is limited to a small section of the business community.  There are nine companies listed on the Lao stock exchange.  Regulations dictate that companies listed on the exchange must be held to accounting standards, but the government’s capacity to enforce those standards is low.

The government now publicly releases the enacted budget, which includes the total amount of domestic and external debt obligations for the whole country.

International Regulatory Considerations

Laos is a member of the ASEAN Economic Community (AEC), and is seeking to implement all AEC-agreed standards domestically.  However, the local capacity to develop regulatory standards is weak, while enforcement of technical regulations is weaker still. On the positive side, the Lao government has been diligent at notifying draft technical regulations – such as its new law on standards – to the WTO committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Laos currently has a poorly developed legal sector.  The government aims to become a rule of law state by 2020 and continues to work with many international donors on a comprehensive legal sector reform plan.  From 1975 to 1991, Laos did not have a constitution, and government decrees issued by various ministries and officials only exacerbated the country’s poor legal framework.  While there have been dramatic improvements in the legal system over the last decade, there are relatively few lawyers, many judges lack formal training and experience, and laws often remain vague and subject to broad interpretation.

The existing system incorporates some major elements of the French civil law system, but it is also influenced by legal systems of the former Soviet Union and some of its neighbors in the region.  Court decisions are neither widely published nor do they necessarily affect future decisions.  Despite being bureaucratically independent of the government cabinet, the Lao judiciary is still subject to government and political interference.

Contract law in Laos is lacking in many areas important to trade and commerce.  The law provides for the sanctity of contracts, but in practice, contracts are subject to political interference and patronage.  Businesses report that contracts can be voided if they are found to be disadvantageous to one party, or if they conflict with state or public interests.  Foreign businessmen describe contracts in Laos as being “a framework for negotiation” rather than a binding agreement, and even when faced with a judgment, enforcement is weak and subject to the influence of corruption.  Although a commercial court system exists, most judges adjudicating commercial disputes have little training in commercial law.  Those considering doing business in Laos are strongly urged to contact a reputable law firm for additional advice on contracts.

One positive development from 2019 is that under the leadership of MOIC, Laos became the 92nd State Party to join the United Nations Convention on Contracts for the International Sale of Goods.

Laws and Regulations on Foreign Direct Investment

As discussed above, the 2009 Law on Investment promotion was amended in November 2016. The new law provides more transparency regarding regulations and procedures, and provides greater detail about what specific responsibilities fall under the Ministry of Planning and Investment.  The 2016 Law on Investment Promotion introduced uniform business registration requirements and tax incentives that apply equally to foreign and domestic investors.  As noted above, foreigners may invest in any sector or business except in cases where the government deems the investment to be detrimental to national security, health, or national traditions, or to have a negative impact on the natural environment.  Aside from these sectors, there are no statutory limits on foreign ownership or control of commercial enterprises.  For reasons discussed above, despite changes in the law, many companies continue to seek a local partner.

Most laws of interest to investors are featured on the Lao Trade Portal website, http://www.laotradeportal.gov.la , with many laws and regulations translated into English, or the Lao Official Gazette, http://laoofficialgazette.gov.la , or the official website of the  Ministry of Planning and Investment, www.investlaos.gov.la , or the newly created Lao Law App.

In sum, neither the government’s investment bureaucracy nor the commercial court system is well developed, although the former is improving and reforming.  Investors have experienced government practices that deviate significantly from publicly available law and regulation.  Some investors decry the courts’ limited ability to handle commercial disputes and vulnerability to corruption.  The Lao government has repeatedly underscored its commitment to increasing predictability in the investment environment, but in practice, with some exceptions in the creation and operation of SEZs, and investments by larger companies, foreign investors describe inconsistent application of law and regulation.

Competition and Anti-Trust Laws

There have been no updates since 2017.  A new competition law was approved in 2015 that applies to both foreign and domestic individuals and entities.  The law was drafted with the assistance of the German government and other donors.  The competition law was one of the Lao government’s policy efforts to implement the ASEAN Economic Community, or AEC, before 2016.  The law established two new government entities, the Business Competition Control (BCC) Commission and the BCC Secretariat.  The BCC Commission is the senior body and its membership is decided by the Prime Minister with the advice of the Minister of Industry and Commerce (MOIC).  According to the legislation, it should include senior officials from multiple ministries as well as business people, economists, and lawyers.  The BCC Commission can draft regulations, approve mergers, levy penalties, and provide overall guidance on government competition policy and regulation.  The BCC Secretariat, a lower-level institution equivalent to a MOIC department or division, can hear complaints, conduct investigations, and conduct research and reporting at the request of the Commission.

Expropriation and Compensation

According to law, foreign assets and investments in Laos are protected against seizure, confiscation, or nationalization except when deemed necessary for a public purpose.  Public purpose can be broadly defined, however, and land grabs are feared by Lao nationals and expatriates alike.  In the event of a government expropriation, the Lao government is supposed to provide fair market compensation.  Nevertheless, a business relying on a specific parcel of land may lose its investment license if the land is in dispute.  Revocation of an investment license cannot be appealed to an independent body, and companies whose licenses are revoked must quickly liquidate their assets.  Small landholdings, land with unclear title, or land on which taxes have not been paid are at particular risk of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Laos is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID Convention).  It is, however, a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Investor-State Dispute Settlement

According to the Law on Investment Promotion, resolution of a dispute resolution should occur through the following process: mediation, administrative dispute resolution, dispute resolution by the Committee for Economic Dispute Resolution, and finally, litigation.  However, due to the underdeveloped state of the Lao legal system, foreign investors are generally advised to seek arbitration outside of the country.  There are few publicly available records on international investment disputes.   According to the 2017 investment promotion law, article 96 on Dispute Resolution by the Office for Economic Dispute Resolution in the Lao PDR or international organization to which Lao PDR is a party states: “When there is an investment-related dispute, either party thereto shall have the rights to request the Office for Economic Dispute Resolution for resolution within the Lao PDR or abroad as agreed by the parties of the dispute. The Lao PDR recognizes and enforces the award of foreign or international arbitration subject to certification by people’s court of Lao PDR.”  However, in practice, the Embassy is not aware of this new article being successfully exercised by a foreign investor.

International Commercial Arbitration and Foreign Courts

Beyond those listed above, there are no formal Alternative Dispute Resolution mechanisms provided in Lao law but based on the amended Investment Promotion Law and the law on Investment resolution law dated June 22, 2018, both parties can decide if they would like to have the arbitration in Laos or abroad as mentioned in the contract.  There is no known history of Laos enforcing foreign commercial arbitral decisions.

The 1994 bankruptcy law permits either the business or creditor the right to petition the court for a bankruptcy judgment and allows businesses the right to request mediation.  The law also authorizes liquidation of assets based upon the request of a debtor or creditor.  However, there is no record of a foreign-owned enterprise, whether as debtor or as creditor, petitioning the courts for a bankruptcy judgment.  According to the World Bank’s Ease of Doing Business Report, Laos remains at the very bottom of the global rankings for ease of resolving insolvency.

Investment Incentives

Laos offers a range of investment incentives depending on the investment vehicle, with particular focus on government concessions and Special Economic Zones.  Many of these incentives can be found at www.investlaos.gov.la  and are generally governed by the Investment Promotion Law.

Foreign Trade Zones/Free Ports/Trade Facilitation

The new Foreign Investment Law allows for the establishment of Special Economic Zones and Specific Economic Zones (both referred to as SEZs).  Special Economic Zones are intended to support development of new infrastructure and commercial facilities, and include incentives for investment.  Specific Economic Zones are intended for the development of existing infrastructure and facilities, and provide a lower level of incentives and support than Special Economic Zones.  Laos has announced plans to construct as many as 40 special and specific zones, but as of 2020, it has only established 12.  Some, such as Savan Seno SEZ in Savannakhet and Vientiane Industry and Trade Area SEZ, or VITA Park, in Vientiane, have successfully attracted foreign investors.  Others are accused of harboring illegal activities, such as the Golden Triangle SEZ in Bokeo Province that houses the Kings Roman Casino.  The Department of Treasury Office of Foreign Assets Control in early 2018 designated the Kings Roman Casino and its owners a Transnational Criminal Organization for engaging in drug trafficking, human trafficking, money laundering, bribery, and wildlife trafficking.  More Chinese-invested SEZs are expected to open in the coming years, especially along the China-Laos Railway line. Thai companies are also exploring new SEZ-style industrial parks in Laos.

Generally, the Lao government places a high priority on trade facilitation measures in international fora, particularly as it relies upon trade across its neighboring countries in order to reach seaports.  Nonetheless, Laos has struggled to harmonize its own internal processes.   For example, customs practices vary widely at different ports of entry.  With assistance from Japan, the Lao government instituted a new system for electronic collection of customs fees at several major border crossings in 2016, which has been a significant improvement, and in early 2019 the Department of Customs introduced electronic customs payments at the Lao – Thai Friendship Bridge for passengers.  On several border crossings with Vietnam, Lao and Vietnamese officials jointly conduct inspections to facilitate movement of goods.

Performance and Data Localization Requirements

Laos does not have performance requirements.  Requirements relating to foreign hiring are governed by the 2014 Labor Law, but in practice, large investors have been able to extract additional government concessions on use of foreign labor.  Some foreign-owned businesses have criticized labor regulations for strict requirements that foreign employees not travel abroad during the first months of their Lao residency.

Laos does not currently have enacted laws or regulations on domestic data storage or localization requirements.

Real Property

The government continues to consider changes to its existing land policy, although progress has been slow; and is complicated by sensitive issues including community-held land rights, traditional land rights, slash-and-burn or shifting cultivation, and a history of expropriation for infrastructure, mining, and power projects. A draft revision to the Law on Land Rights has been previewed at multiple National Assembly sessions, but continues to be delayed because of the numerous sensitivities.

Foreign investors are not currently permitted to own land.  However, Article 16 of the 2016 Law on Investment Promotion allows investors to obtain land for use through long-term leases or as concessions, and allows the ownership of leases and the right to transfer and improve leasehold interests.  Government approval is not required to transfer property interests, but the transfer must be registered and a registration fee paid.

Under existing law, a creditor may enforce security rights against a debtor and the concept of a mortgage does exist.  The Lao government is currently engaged in a land parceling and titling project, but it remains difficult to determine if a piece of property is encumbered in Laos.  Enforcement of mortgages is complicated by the legal protection given mortgagees against forfeiture of their sole place of residence.

Laos provides for secured interests in moveable and non-moveable property under the 2005 Law on Secured Transactions and a 2011 implementing decree from the Prime Minister.  In 2013, the State Assets Management Authority at the Ministry of Finance launched a new Secured Transaction Registry (STR), intended to expand access to credit for individuals and smaller firms.  The STR allows for registration of movable assets such as vehicles and equipment so that they may be easily verified by financial institutions and used as collateral for loans.

Outside of urban areas, land rights can be even more complex.  Titles and ownership are not clear, and some areas practice communal titling.

Intellectual Property Rights

Intellectual property protection in Laos is weak, but steadily improving.  The USAID-funded Lao PDR-U.S. International and ASEAN Integration (USAID LUNA II) project assisted the Lao government’s efforts to increase its capacity in the area of intellectual property rights (IPR) and to progress on the IPR-related commitments undertaken as a part of Laos’ 2013 WTO accession package. USAID LUNA II worked with the Ministry of Science and Technology’s Department of Intellectual Property to establish an online portal that provides detailed information regarding the registration of copyrights, trademarks, geographic indicators and plant varieties, https://dip.gov.la . Interested individuals can use the portal to complete the application forms online. The portal officially launched in February 2019. Additionally, USAID LUNA II provided technical support to the Lao government in amending the Law on Intellectual Property.

The Ministry of Science and Technology controls the issuance of patents, copyrights, and trademarks.  Laos is a member of the ASEAN Common Filing System on patents but lacks qualified patent examiners. The bilateral IPR agreement between Thailand and Laos dictates that a patent issued in Thailand also be recognized in Laos.

Laos is a member of the World Intellectual Property Organization (WIPO) Convention and the Paris Convention on the Protection of Industrial Property but has not yet joined the Berne Convention on Copyrights.

In 2011 the National Assembly passed a comprehensive revision of the Law on Intellectual Property which brings it into compliance with WIPO and Trade-Related Aspects of Intellectual Property standards (TRIPS).  Amendments to the 2011 Law on Intellectual Property were made public in May 2018. The consolidation of responsibility for IPR under the Ministry of Science and Technology is a positive development, but the Ministry lacks enforcement capacity.

Laos is not listed in USTR’s 2020 Special 301 Report and the USTR 2019 Review of Notorious Markets does not list any physical or online markets based in Laos.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Laos does not have a well-developed capital market, although government policies increasingly support the formation of capital and free flow of financial resources.  The Lao Securities Exchange (LSX) began operations in 2011 with two stocks listed, both of them state-owned – the Banque Pour l’Commerce Exterieur (BCEL), and the power generation arm of the electrical utility, Electricite du Laos – Generation (EDL-Gen).  In 2012, the Lao government increased the proportion of shares that foreigners can hold on the LSX from 10 to 20 percent.  As of March 2020, there are eleven companies listed on the LSX: BCEL, EDL-Gen, Petroleum Trading Laos (fuel stations), Lao World (property development and management), Souvanny Home Center (home goods retail), Phousy Construction and Development (Construction and real estate development), Lao Cement (LCC), Mahathuen Leasing (leasing), Lao Agrotech (palm oil plantation and extraction factory), Vientiane Center (property development and management), and Lao ASEAN Leasing (LALCO) ( financing and leasing).  News and information about the LSX is available at http://www.lsx.com.la/ .

Businesses report that they are often unable to exchange kip into foreign currencies through central or local banks.  Analysts suggest that concerns about dollar reserves may have led to temporary problems in the convertibility of the national currency.  Private banks allege that the Bank of Lao PDR withholds dollar reserves.  The Bank of Lao PDR alleges that the private banks already hold sizable reserves and have been reluctant to give foreign exchange to their customers in order to maintain unreasonably high reserves.  The tightness in the forex market led to a temporary 5-10 percent divergence between official and gray-market currency rates in late 2019 and early 2020, and since 2017 the Lao kip has depreciated against both the dollar and Thai baht.

Lao and foreign companies alike, and especially small- and medium-sized enterprises (SMEs), note the lack of long-term credit in the domestic market.  Loans repayable over more than five years are very rare, and the choice of credit instruments in the local market is limited.  The Credit Information Bureau, developed to help inject more credit into markets, still has very little information and has not yet succeeded in mitigating lender concerns about risk.

Money and Banking System

The banking system is under the supervision of the Bank of Lao PDR, the nation’s central bank, and includes more than 40 banks, most of them commercial.  Private foreign banks can establish branches in all provinces of Laos.  ATMs have become ubiquitous in urban centers.  Technical assistance to Laos’ financial sector has led to some reforms and significant improvements to Laos’ regulatory regime on anti-money laundering and countering the financing of terrorism, but overall capacity within the financial governance structure remains poor.

The banking system is dominated by large, government-owned banks.  The health of the banking sector is difficult to determine given the lack of reliable data, though banks are widely believed to be poorly regulated and there is broad concern about bad debts and non-performing loans that have yet to be fully reconciled by the state-run banks, in particular.  The IMF and others have encouraged the Bank of Lao PDR to facilitate recapitalization of the state-owned banks to improve the resilience of the sector.

While publicly available data is difficult to find, non-performing loans are widely believed to be a major concern in the financial sector, fueled in part by years of rapid growth in private lending.  The government’s fiscal difficulties in 2013 and 2014 led to non-payment on government infrastructure projects.  The construction companies implementing the projects in turn could not pay back loans for capital used in construction.  Many analysts believe the full effects of the government’s fiscal difficulties have not yet worked their way through the economy.  In recent years Laos is projected to continue running a budget deficit of 4-5 percent, which coupled with rising public or publicly held debt estimated over 60 percent of GDP, add to concerns about Laos’ fiscal outlook.   In 2018 Laos passed a new law on Public Debt Management aimed at reducing the debt-to-GDP ratio in the coming years.

Foreign Exchange and Remittances

Foreign Exchange

There are no published, formal restrictions on foreign exchange conversion, though restrictions have previously been reported, and because the market for Lao kip is relatively small, the currency is rarely convertible outside the immediate region.  Laos persistently maintains low levels of foreign reserves, which are estimated to cover only 1.1 months’ worth of total imports.  The reserve buffer is expected to remain relatively low due to structurally weak export growth in the non-resource sector and debt service payments. The decline in reserves was due to a drawdown of government deposits primarily for external debt service payments, some intervention in the foreign exchange market to manage the volatility of the currency (notwithstanding a more flexible currency), and financing the continuing current account deficit. The Bank of the Lao PDR (BOL) occasionally imposes daily limits on converting funds from Lao kip into U.S. dollars and Thai baht, or restricts the sectors able to convert Lao kip into dollars, sometimes leading to difficulties in obtaining foreign exchange in Laos.

In order to facilitate business transactions, foreign investors generally open commercial bank accounts in both local and foreign convertible currency at domestic and foreign banks in Laos.  The Enterprise Accounting Law places no limitations on foreign investors transferring after-tax profits, income from technology transfer, initial capital, interest, wages and salaries, or other remittances to the company’s home country or third countries provided that they request approval from the Lao government.  Foreign enterprises must report on their performance annually and submit annual financial statements to the Ministry of Planning and Investment (MPI).

According to a recent report from Laos’ National Institute for Economic Research (NIER), the increasing demand for USD and Thai Baht for the import of capital equipment for projects and consumer goods,  coupled with growing demand for foreign currency to pay off foreign debts has resulted in a depreciation of the exchange rate in 2019. The official nominal kip/U.S. dollar reference rate depreciated by 3.59% in 2019, while the kip/Baht exchange rate depreciated by 7.59%.

Remittance Policies

There have been no recent changes to remittance law or policy in Laos.  Formally, all remittances abroad, transfers into Laos, foreign loans, and payments not denominated in Lao kip must be approved by the BOL.  In practice, many remittances are understood to flow into Laos informally, and relatively easily, from a sizeable Lao workforce based in Thailand.  Remittance-related rules can be vague and official practice is reportedly inconsistent.

Sovereign Wealth Funds

There are no known sovereign wealth funds in Laos.

The Lao government maintains ownership stakes in key sectors of the economy such as telecommunications, energy, finance, airlines, and mining.  Where state interests conflict with private ownership, the state is in a position of advantage.

There is no centralized, publicly available list of Lao State-Owned Enterprises (SOEs).  The Lao government’s most recent figures report that there are now more than 187 SOEs in Lao PDR. 133 SOEs are 51 – 100 percent State owned. The registered capital was more than USD 26 billion. At the end of 2017, the total assets of 60 SOEs managed by State Property Management Department of Ministry of Finance was more than USD 13 billion (80.51percent of GDP). The net profit from SOEs was around USD 156 million of which USD 105 million was the Government dividends.  The government occasionally floats the idea of increasing private ownership in SOEs such as Lao Airlines through partial listings on the LSX, or spinning off parts of larger enterprises, such as the state electrical utility, EDL.

The government has not specified a code or policy for its management of SOEs and has not adopted OECD guidelines for Corporate Governance of SOEs.  There is no single government body that oversees SOEs.  Several separate government entities exercise SOE ownership in different industries.  SOE senior management does not uniformly report to a line minister.  Comprehensive information on boards of directors or their independence is not publicly available.  While there is scant evidence one way or the other, private businesses generally assume that court decisions would favor an SOE over another party in an investment dispute.

Privatization Program

There is no formal SOE privatization program, though Prime Minister Thongloun has openly discussed subjecting some SOEs to greater competition and possible privatization, and the government has over the past several years occasionally floated ideas for increasing private ownership in some SOEs through partial listings on the LSX, or through spinning off and privatizing parts of others.

There is low general awareness of responsible business conduct (RBC) and corporate social responsibility (CSR).  There is no systematic government or NGO monitoring of RBC.  RBC is not generally included in the government’s investment policy formulations.

Corruption is a serious problem in Laos that affects all levels of the economy.  The Lao government has developed several anti-corruption laws but enforcement remains weak.   Since assuming office in early 2016, Prime Minister Thongloun Sisoulith has put a renewed focus on government anti-corruption efforts, and Lao media and the National Assembly now regularly report on corruption challenge and the sacking of disciplining of corrupt officials.  In September 2009, Laos ratified the United Nations Convention against Corruption.

Domestic and international firms have repeatedly identified corruption as a problem in the business environment and a major detractor for international firms exploring investment or business activities in the local market.

The Lao State Inspection and Anti-Corruption Authority (SIAA), an independent, ministry-level body, is charged with analyzing corruption at the national level and serves as a central office for gathering details and evidence of suspected corruption.  Additionally, each ministry and province contains an SIAA office independent from the organization in which it is housed.  These SIAA offices feed into the SIAA’s central system.

According to Lao law, both giving and accepting bribes are criminal acts punishable by fine and/or imprisonment.  Nonetheless, foreign businesses frequently cite corruption as an obstacle to operating in Laos.  Often characterized as a fee for urgent service, officials commonly accept bribes for the purpose of approving or expediting applications.  Laos is not a signatory to the OECD Convention on Combating Bribery.

In 2014, an asset declaration regime entered into force for government officials, which required them to declare income, assets and debts for themselves and their family members; this was further strengthened in 2017 and 2018.  Officials are now required to file a declaration of any assets valued over USD 2,500, including land, structures, vehicles and equipment, as well as cash, gold, and financial instruments.  These declarations are reportedly held privately and securely by the government.  If a corruption complaint is made against an official, the SIAA can compare the sealed declaration with the official’s current wealth.  Whether this program has worked or is working remains unclear.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Mr. Viengkeo PhonAsa,
Director General
Anti-Corruption Department, State Inspection and Anti-Corruption Authority
Sivilay Village, Xaythany District, Vientiane Capital, 13th South Road
Tel: office:, 021 715032; Fax: 021 715006; cell: 020 2222 5432

Laos is generally a peaceful and politically stable country.  The risk of political violence directed at foreign enterprises or businesspersons is low.  There was a string of unexplained attacks on vehicles traveling in remote areas of Xaysomboun province in late 2015 and 2016 which caused several diplomatic missions to issue travel warnings to their citizens, but such incidents have not been repeated in recent years.  There has been little-to-no political violence in the last decade, and Laos’ political stability is an attractive feature for foreign investors.

Despite Laos’ young population, approximately 62 percent of which are 30 years of age or younger, the labor market remains tight with employers reporting shortages of labor at all levels, especially skilled labor, reflecting the relatively low level of educational attainment within Laos.  The government enacted a new labor law in late 2014 that established many new protections for workers.  It also contained provisions aimed at increasing the skills of the Lao labor force and established stricter provisions on the hiring of foreign workers.

The new law also authorized independent worker’s groups to elect their own leaders and to represent their interests and engage in collective bargaining on their behalf.  The Lao Federation of Trade Unions (LFTU), which is associated with the ruling Lao People’s Revolutionary Party, is the primary representative of labor and represents workers in tripartite processes.  Laos’ National Assembly passed a new Trade Union Law in November 2017 but the impact of the new law on the labor market and foreign investors has yet to be determined.  No official English translations of the final Trade Union Law are publicly available.

Child labor is outlawed except under very strict, limited conditions that ensure no interference with the child’s education or physical wellbeing.  The 2014 law outlaws several forms of employment discrimination and provides standards for work hours.  The minimum wage is set by separate regulation, and in recent years has seen annual increases after a tri-partite negotiation among LFTU, the Ministry of Labor and Social Welfare, and the Lao National Chamber of Commerce and Industry.  The 2014 law also established occupational health and safety standards, but inspections remain inconsistent.  An International Labor Organization project undertaken in 2015 and 2016 trained labor inspectors in basic practices, with particular focus on the garment industry.

Foreign investors using a concession as the investment vehicle are reportedly able to negotiate the percentage of foreign labor to be used in the investment.  However, labor standards such as minimum wage and health and safety standards should apply uniformly regardless of investment vehicle or use of a special economic zone.  In 2018, the minimum wage was approximately USD130 per month.

The new labor law authorizes strikes if several steps of dispute resolution fail; however, there is no record of strikes occurring in Laos.  A cultural distaste for open confrontation and the general shortage of labor continue to make strikes highly unlikely.

Employment contracts are required under the labor law, but are rarely used in practice.  In February 2018, the government promulgated a new decree on labor dispute resolution.

Collective bargaining is typically undertaken by representatives of the Lao Federation of Trade Unions, though the 2014 labor law also provides the elected representative of independent worker’s groups the ability to negotiate their own collective bargaining agreements with employers.  Basic and subsistence agriculture, informal businesses, and small family businesses make up the vast majority of employment, thus collective bargaining is relatively rare in the overall economy and unfamiliar to many.

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

Athnasak Sisouk
Economic and Commercial Assistant
U.S. Embassy, Km 9, Tha Deua Rd, Vientiane Laos
(+856) 21 487-000
AthansakS@state.gov

As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral FTAs with Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey.

Reference: https://www.wto.org/english/tratop_e/tpr_e/s366_sum_e.pdf 

Malaysia has bilateral investment treaties with 36 countries, but not yet with the United States.  Malaysia does have bilateral “investment guarantee agreements” with over 70 economies, including the United States. The Government reports that 65 of Malaysia’s existing investment agreements contain Investor State Dispute Settlement (ISDS) provisions.  Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

Transparency of the Regulatory System

In July 2013, the Malaysian government accelerated its efforts to modernize the regulatory processes in the country by releasing the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP).  Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework.  The benefits to the private sector thus far have included a streamlining of project approval requirements and fees (to the point that Malaysia ranked 2nd in the World Bank’s 2020 Doing Business report on ease of “dealing with construction permits”), a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings.  The main components of the policy are: 1) the requirement of a Regulatory Impact Assessment (RIA) (a cost-benefit analysis of all newly proposed regulations) with each new piece of regulation; and 2) the formalization of a public consultation process to take the views of stakeholders into account while formulating new legislation.  Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine which ones need to be adjusted or eliminated.

In furtherance of the NPDIR, the Malaysian government published four circulars in 2013 and 2014 to explain the methodology and implementation of their new strategy.  These four documents laid out a clear framework toward increasing accountability, standardization, and transparency, as well as explaining enforcement and compliance mechanisms to be established.  Throughout its various agencies, the government of Malaysia has taken steps to actualize these circulars.  Ministries and agencies use their respective websites to publish the text and or summaries of proposed regulations prior to enactment, albeit with varying levels of consistency.  Further, Malaysia’s procurement principles include adherence to open and fair competition, public accountability, transparency, and value for money.

Despite these efforts to foster inclusion, fairness, and transparency, considerable room for improvement exists.  The Malaysian government’s 2018 Report on Modernization (sic) of Regulations emphasized the need to “Establish an accountability mechanism for the implementation of regulatory reviews by the government.”  Many foreign investors echo this lack of accountability and criticize the opacity in the government decision-making process.  One major area of concern for foreign investors remains government procurement policy, as non-Malaysian companies claim to have lost bids against Bumiputera-owned (ethnic Malay) companies despite offering better products at lower costs.  Such results are due to the government’s preference policy to facilitate greater Bumiputera participation in the private sector.  This preference policy is manifested through set-aside contracts for Bumiputera suppliers and contractors, and through the use of preferential price margins to increase the competitiveness of Bumiputera bidders.

Malaysia has a three-tiered system of legislation: federal-level (Parliament), State-level, and local-level.   Federal and state-level legislation derive their authority from the Malaysian Constitution, specifically Articles 73-79.  Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters.  Parliament can delegate its authority to administrative agencies, states, and local bodies through Acts.  States have the power to make laws concerning land, local government, and Islamic courts.  Local legislative bodies derive their authority from Acts promulgated by Parliament, most notably the Local Government Act of 1976.  Local authorities have the ability to issue by-laws concerning local taxation and land use.  For foreign investors, the Parliament is the most relevant legislating body, as it governs issues related to trade, and because Article 75 of the Constitution states that in a conflict of laws between state and federal-level legislatures, the federal laws win out.

It is also important to note the role of the administrative state in the promulgation of new laws and regulations in Malaysia.  Pursuant to the Interpretation Act of 1948 and 1967,

“Any proclamation, rule, regulation, order, notification, bye-law, or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect.”  Thus, the various ministries and agencies can be delegated lawmaking authority by an Act of a legislature with the legal right to make laws.

The Malaysian government’s strides toward improving transparency are evident in its embrace of internationally accepted standards in various highly regulated fields, including auditing, accounting, and law.  In that vein, the Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework, which came into effect on January 1, 2012.  The MFRS framework is fully compliant with the International Financial Reporting Standards (IFRS) framework; this compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.  According to the World Economic Forum’s 2019 Global Competitiveness Report (the “WEF 2019 Report”), Malaysia ranks 29th out of 141 countries in terms of its strength of auditing and accounting standards.

Specifically regarding auditing, the Malaysian Institute of Accountants (MIA) has the authority to set standards.  The MIA’s Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.

Publicly listed companies in Malaysia must comply with standard international reporting requirements.  The IFRS framework converged with the Malaysian auditing framework in 2012, compelling compliance by Malaysian publicly listed companies.  The IFRS framework has obtained force of law through Section 7 of the Financial Reporting Act (FRA) of 1997, which allows the MASB to issue approved accounting standards for application in Malaysia.  The FRA requires that financial statements prepared or lodged with the Central Bank, Securities Commission, or Registrar of Companies are required to comply with the standards issued by MASB.  Thus, the MASB’s adoption of the IFRS framework is legally binding.

In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking.  The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which expanded upon information contained in the Best Practice Regulation Handbook of 2013 in furtherance of GRP.  The Guideline clarifies the roles of government and stakeholders in the consultation process and provides the guiding principles for Malaysia’s public consultation approach.  Additionally, the Guideline provides robust examples of the information that should be included in consultation papers, furnishes information on enforcement, and details the timeline of the consultation process.  As it pertains to foreign investment, the consultation procedures apply to investment laws and regulations, which usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia, or the Malaysian Central Bank.  The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders.  These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.

The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations.  PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation.  PEMUDAH plays an advocacy role in various points in the regulatory implementation process; it provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.

Despite the relative robustness of the Guideline, and despite the significant steps forward Malaysia has taken to reduce the regulatory burden on industry, obstacles remain.  There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied.  Adding to the difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.

There is a non-governmental website that publishes Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2019.  The site publishes the full text of the documents.  However, to the best of our knowledge, no such government-run clearinghouse of historical regulatory action exists.  However, Malaysia took a large step forward on this front in 2019, as in association with the World Bank, the MPC created a website that contains all ongoing pieces of legislation and allows public comment thereon.  The website, called the Uniform Public Consultation Portal (http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?home=1), does not appear to contain legislation that was completed or implemented before 2019, but is a positive move toward standardizing and emphasizing the public consultation process.  The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.

Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements.  The most important enforcement mechanism is access to judicial review.  The WEF 2019 Report lists Malaysia as the 12th ranked country in efficiency of the legal framework in challenging regulations.  Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.  Additionally, PEMUDAH (the Malaysian government’s Special Task Force to Facilitate Business) serves as an advocacy role during the various phases of the consultation process to ensure that the private sector’s voice is being heard.

Throughout the administrative state, various avenues exist through which aggrieved parties may seek recourse.  Different governmental organisms have their own enforcement mechanisms to handle specific issues they face.  For instance, the Central Bank has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions.  The Bank lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution.  By contrast, the Inland Revenue Board of Malaysia (tax agency) has a an organism called the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations.  The Malaysian Companies Commission (which regulates laws relating to companies registered in Malaysia) is also engaged in enforcement proceedings, as is the Malaysian Securities Commission.  On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.

In addition to the various agency-led enforcement mechanisms, aggrieved parties may also go through administrative courts.  The rulings of these courts have force of law pursuant to various Acts of Parliament, and Malaysia has taken measures to increase their efficacy in order to improve its reputation as an international business hub.  The decisions of these administrative courts are subject to judicial review on grounds of illegality, irrationality, and procedural impropriety.

Reference:

• http://rulemaking.worldbank.org/  provides data for 185 economies on whether governments publish or consult with public about proposed regulations.

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN).  On December 31, 2015, the ASEAN Economic Community formally came into existence. ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 10-country bloc.  Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital.  No regional regulatory system is in place.  As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by Parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes.  States generally control property laws for residences, although the Malaysian government has recently adopted measures, including high capital gains taxes, to prevent the real estate market from overheating.  Nevertheless, through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

In 2007 the judiciary introduced dedicated intellectual property (IP) courts that consist of 15 “Sessions Courts” that sit in each state, and six ‘High Courts’ that sit in certain states (i.e. Kuala Lumpur, Johor, Perak, Selangor, Sabah and Sarawak).  Malaysia launched the IP courts to deter the use of IP-infringing activity to fund criminal activity and to demonstrate a commitment to IP development in support of the country’s goal to achieve high-income status. These lower courts hear criminal cases, and have the jurisdiction to impose fines for IP infringing acts.  There is no limit to the fines that they can impose. The higher courts are designated for civil cases to provide damages incurred by rights holders once the damages have been quantified post-trial. High courts have the authority to issue injunctions (i.e., to order an immediate cessation of infringing activity) and to award monetary damages.

Labor Courts, which the Ministry of Human Resources describes as “a quasi-judicial system that serves as an alternative to civil claims,” provide a means for workers to seek payment of wages and other financial benefits in arrears.  Proceedings are generally informal but conducted in accordance with civil court principles. The High Court has upheld decisions which Labor Courts have rendered.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA).  However, before a foreign judgment can be enforceable, it has to be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei.  If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The Government of Malaysia established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions.  Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors.  Regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.

As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction.  Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian Government ministry or agency over the sector in question.

Competition and Anti-Trust Laws

On April 21, 2010, the Parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010.  The Acts took effect January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions.  Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition.  As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions.  In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market.  The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966.  In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966. (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966. (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980. (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts.  Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

References:

• https://icsid.worldbank.org/en/Pages/about/MembershipStateDetails.aspx?state=ST86 
• http://www.newyorkconvention.org/countries 

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes.  Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian Government’s general handling of investment disputes.  In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders.  The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005.  The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor.  The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development.  Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law.  Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

Many firms choose to include mandatory arbitration clauses in their contracts.  The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes.  The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967.  On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016.  After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders.  Bankruptcy is not criminalized in Malaysia. The country ranks 46th on the World Bank Group’s Doing Business Rankings for Ease of Resolving Insolvency.

• http://www.mdi.gov.my/index.php/57-announcements/1182-announcement-on-the-enforcement-date-of-insolvency-act-1967 
• http://www.ssm.com.my/sites/default/files/companies_act_2016/aktabi_20160915_companiesact2016act777_0.pdf 
• http://www.doingbusiness.org/data/exploreeconomies/malaysia 

Investment Incentives

The Malaysian Government has codified the incentives available for investments in qualifying projects in target sectors and regions.  Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.

The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia/posts/ .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock.  The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone.  Currently there are 13 FIZs and 12 FCZs in Malaysia.  In June 2006, the Port Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ, although the project has been dogged by corruption allegations related to the land acquisition for the site.  The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba.  DFTZ aims to facilitate seamless cross-border trading and eCommerce and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of an eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers; and an eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade.

For more information, please visit https://mydftz.com 

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials, and components may be located in these FZs.  Ports, shipping and maritime-related services play an important role in Malaysia since 90 percent of its international trade by volume is seaborne.  Malaysia is also a major transshipment center.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties.  If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN-sourced.  In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from two to eight weeks.

Performance and Data Localization Requirements

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer requirements.  Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

The Malaysian government extends a full tax exemption incentive of fifteen years for firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and ten years for companies with “Investment Tax Allowance” status (those on which the government places a priority, but not as high as Pioneer Status).  However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. Government priorities generally include the levels of value-added, technology used, and industrial linkages.  If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded.  Potentially, a firm could lose its manufacturing license.  The New Economic Model stated that in the long term, the government intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors.  More information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia.  However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period, or adding new MSC Malaysia Qualifying Activities in order to review and amend Malaysia’s tax incentives.  While the MSC Malaysia Status Services Incentive was published on December 31, 2018, the MSC Malaysia Status IP Incentive policy is still under review.  For further details on incentives, see www.mdec.my.  The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status.  For more information please visit: https://www.mdec.my/msc-malaysia .

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarter research and development, university and graduate education, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management.  To date, Malaysia has had some success in attracting regional distribution centers, global shared services offices, and local campuses of foreign universities.  For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia.  In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical device manufacturing facility.

Malaysia seeks to attract foreign investment in biotechnology but sends a mixed message on agricultural and food biotechnology.  On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology.  The amendments also included a requirement that no person shall import, prepare, or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director.  There is no ‘threshold’ level on the labeling requirement.  Labeling of “GMO Free” or “Non-GMO” is not permitted.  The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed.  The labeling regulation was supposed to go into force in 2014, but remains to date with no date announced.  A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/BiosafetyAct2007.html , and http://www.biosafety.nre.gov.my/BIOSAFETY percent20REGULATIONS percent202010.pdf .

Malaysia has not implemented measures amounting to “forced localization” for data storage.  Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework.  The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor but does not mandate use of onshore providers.  Companies in the information and communications technology sector are not required to hand over source code.

Real Property

Land administration is shared among federal, state, and local government.  State governments have their own rules about land ownership, including foreign ownership.  Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer.  There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights.  Foreign investors are allowed to borrow using real property as collateral.  Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default.  Malaysia ranks 29th (ranked 42nd in 2018) in ease of registering property according to the Doing Business 2019 report, right behind Finland and ahead of Hungary, thanks to changes it made to its registration procedures.

[Reference]

http://www.doingbusiness.org/rankings 

Intellectual Property Rights

In December 2011, the Malaysian Parliament passed amendments to the copyright law designed to bring the country into compliance with the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty, define Internet Service Provider (ISP) liabilities, and prohibit unauthorized recording of motion pictures in theaters.  Malaysia subsequently acceded to the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty in September 2012.  In addition, the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC) took steps to enhance Malaysia’s enforcement regime, including active cooperation with rights holders on matters pertaining to IPR enforcement, ongoing training of prosecutors for specialized IPR courts, and the 2013 reestablishment of a Special Anti-Piracy Taskforce.  On December 27, 2019, Malaysia’s new Trademarks Act came into force bringing Malaysia’s trademark protections in line with the Madrid Protocol for international registration of trademarks, allowing U.S. trademark holders to more easily register their trademarks within Malaysia.

The government, acting through the Property Association of Malaysia (MyIPO), is currently preparing an overhaul of the 1976 Trade Marks Act and revisions to the 1983 Patents Act and 1987 Copyright Act in an effort to bring the country’s IP rules in line with its adoption of the Doha Declaration on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. While some amendments are expected to bring it in closer adherence to global standards under proposed compulsory license provisions, Malaysian private enterprises would be able to export products produced under a compulsory license to foreign markets that also have compulsory licenses in place.

In response to trends of rising internet piracy, the interagency Special Anti-Piracy Task Force established a Special Internet Forensics Unit (SIFU) within MDTCC. The SIFU team’s responsibilities include monitoring for sites suspected of being, or known as, purveyors of infringing content.  This organization follows MDTCC’s practice of launching investigations based on information and complaints from legitimate host sites and content providers. Capacity building remains a priority for the SIFU.  Coordination with the Malaysian Communications and Multimedia Commission (MCMC), which has responsibility for overall regulation of internet content, has been improving according to many rights holders in Malaysia.  The Malaysian Communications and Multimedia Commission (MCMC) is proactively combatting illegal streaming sites which provide content that breaches copyrights and is taking action against owners of non-certified Android TV boxes that are used to stream illegal content.

Despite Malaysia’s success in improving IPR enforcement, key issues remain. There is relatively widespread availability of pirated and counterfeit products in Malaysia and there are concerns that the Royal Malaysian Customs Department (RMC) is not always effectively identifying counterfeit goods in transit.  According to U.S. Customs and Border Protection (CBP)’s statistics, Malaysia ranked as the ninth largest source country for IPR seizures. Although the $4,647,447 USD worth of items seized during fiscal year 2018 was a significant increase from the previous reporting year, it still only represents a small fraction of total seized counterfeit goods.  Limited interagency cooperation and a lack a knowledge of IPR laws among RMC officers remain impediments to effective enforcement.  The MTDCC’s Enforcement Division effectively targeted counterfeit alcohol, tobacco, and other products sold domestically; however, cases are not always brought to prosecution effectively.

The September 2017 authorization of a compulsory license for U.S. pharmaceutical Gilead Sciences’ sofosbuvir, a medicine used to treat the hepatitis C virus infection, has raised serious concerns among rights holders due to the lack of transparency and due process. While the compulsory license is set to expire in October 2020, the government has not taken proactive steps to end the compulsory license following the expiration of its tender with the foreign company producing Malaysia’s sofosbuvir medication.

USTR conducted an Out-of-Cycle Review of Malaysia in 2019 to consider the extent to which Malaysia is providing adequate and effective IP protection and enforcement, including with respect to patents. During this review, the United States and Malaysia have held numerous consultations to resolve outstanding issues. In 2020, USTR extended the out of cycle review until November 2020.

The United States continues to encourage Malaysia to accede to the WIPO Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure.  Additionally, the United States urges Malaysia to provide effective protection against unfair commercial use and unauthorized disclosure of test or other data generated to obtain marketing approval for pharmaceutical products, and an effective system to address patent issues expeditiously in connection with applications to market pharmaceutical products.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Foreigners may trade in securities and derivatives.  Malaysia houses one of Asia’s largest corporate bond markets and is the largest sukuk (Islamic bond) market in East Asia.  Both domestic and foreign companies regularly access capital in Malaysia’s bond market.  Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares.  However, foreign issuers remain subject to Bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia.  Listing requirements for foreign companies are similar to that of local companies, although foreign companies must also obtain approval of regulatory authorities of foreign jurisdiction where the company was incorporated and valuation of assets that are standards applied in Malaysia or International Valuation Standards and register with the Registrar of Companies under the Companies Act 1965 or 2016.

Malaysia has taken steps to promote good corporate governance by listed companies.  Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end.  An individual may hold up to 25 corporate directorships.  All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified.  A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS.  Short selling of stocks is prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated.  Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market.  The five largest banks – Maybank, CIMB, Public Bank, RHB, and AmBank – account for an estimated 75 percent of banking sector loans.  According to the World Bank, total banking sector lending for 2017 was 140.27 percent of GDP, and 1.5 percent of the Malaysian banking sector’s loans were non-performing for 2017.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange

In December 2016, the central bank, began implementing new foreign exchange management requirements.  Under the policy, exporters are required to convert 75 percent of their export earnings into Malaysian ringgit.  The goal of this policy was to deepen the market for the currency, with the goal of reducing exchange rate volatility.  The policy remains in place, with the Central Bank giving case-by-case exceptions.  All domestic trade in goods and services must be transacted in ringgit only, with no optional settlement in foreign currency.  The Central Bank has demonstrated little flexibility with respect to the ratio of earnings that exporters hold in ringgit.  Post is unaware of any instances where the requirement for exporters to hold their earnings in ringgit has impeded their ability to remit profits to headquarters.

Remittance Policies

Malaysia imposes few investment remittances rules on resident companies.  Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts.  Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia.  Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt.  Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances.  However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to harness revenue from commodity-based industries and promote growth in strategic development areas.  Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia.  The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians.  Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds.

Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives.  As of December 31, 2018, Khazanah reported a 21 percent drop in its net worth and a decline in its “realizable” assets to RM136 billion (from USUSD 39.3 billion to USUSD 32.9 billion).  Khazanah also recorded a pre-tax loss of RM6.27 billion (USUSD 1.52 billion) compared to a pre-tax profit of RM2.89 billion (USUSD 723 million) the previous year.  The sectors comprising its major holdings include telecommunications and media, airports, banking, real estate, health care, and the national energy utility.  According to its Annual Review 2019 presentation, in 2018, Khazanah’s mandate and objectives were refreshed, and the company will now pursue its two distinct objectives (commercial vs. strategic) through a dual-fund investment structure: (1) an intergenerational wealth fund to meet its commercial objectives (which will include public and private assets); and (2) a strategic fund to meet its strategic objective (which will include strategic assets and developmental ones).

• https://www.khazanah.com.my/khazanah/files/60/60f2c749-314c-4a89-831a-c28bd45024e6.pdf 
• https://www.khazanah.com.my/getmedia/806f3b69-9bb5-452d-a3fa-ce7e77e612b4/Khazanah-Annual-Review-2019-Presentation-Deck-5-Mar-2019_2.aspx 

State-owned enterprises which in Malaysia are called government-linked companies (GLCs), play a very significant role in the Malaysian economy.  Such enterprises have been used to spearhead infrastructure and industrial projects.  A 2017 analysis by the University of Malaya estimated that the government owns approximately 42 percent of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies.  Only a minority portion of stock is available for trading for some of the largest publicly listed local companies.  Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries including aerospace, construction, energy, finance, information & communication, and marine technologies.  The Prime Minister  chairs Khazanah’s Board of Directors.  PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive through improved corporate governance.  The Transformation Program pushes for more independent and professionalized board membership, but the OECD noted in 2018 that in practice shareholder oversight is lax an government officials exert influence over corporate boards.

Among the notable divestments of recent years, Khazanah offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012.  In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd.  Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million).  In 2018, Khazanah partially divested its shares in IHH Healthcare Berhad, saw two successful IPOs, and issued USUSD 321 million in exchangeable sukuk.  However, significant losses at domestic companies including at Axiata, Telekom Malaysia, Tenaga Nasional, IHH Healthcare Berhad, CIMB Bank, and Malaysia Airports led to the pre-tax loss of USD  1.52 billion the company experienced in 2018.  In April 2019, Khazanah sold 1.5 percent of its stake in Tenaga Nasional on Bursa Malaysia, after which Khazanah still owned 27.27 percent of the national electric company.  In its most recent annual review, Khazanah noted a 607% increase in divestment revenue from the prior year with total divestments for 2019 of RM 9.9 billion (USD 2.25 billion).

Reference: https://www.khazanah.com.my/Media-Downloads/Downloads 

GLCs with publicly traded shares must produce audited financial statements every year.  These SOEs must also submit filings related to changes in the organization’s management.  The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission.  The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency.  It is also consistent with the OECD’s guideline for Transparency and Disclosure.  Moreover, many SOEs prioritize operations that maximize their earnings.

The close relationships SOEs have with senior government officials, however, blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest.  For example, Petroliam Nasional Berhad (PETRONAS) is both an SOE in the oil and gas sector and the regulator of the industry.  Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of company’s staff and senior executives.  As of April, 2020, the government’s sovereign wealth fund, Khazanah, has shortlisted 4 of 9 bids to acquire the airline.

The Ministry of Finance holds significant minority stakes in five companies including a 50% stake in the financial guarantee insurer Danajamin Nasional Berhad.  The government also holds a golden share in 32 companies from key industries such as aerospace, marine technology, energy industries and ports.  The Ministry of Finance maintains a list of 70 companies directly controlled by the Minister of Finance Incorporated, known as MOF Inc, the largest Government Linked Investment Company (GLIC).  The seven GLICs in Malaysia are also listed.  However, a comprehensive list of the more than 200 GLCs that are controlled by these seven investment companies is not readily available.

https://www1.treasury.gov.my/index.php/en/contactus/faqs/gic.html 

With formal and informal ties between board members and government, Malaysian SOEs (GLCs) may have access to capital and financial protection from bankruptcy as well as reduced pressure to deliver profits to government shareholders.  The legal framework establishing GLCs under Malaysian law specifically seeks economic opportunity for Bumiputera entrepreneurs. There is some empirical evidence, published by the Asian Development Bank, that SOEs crowd out private investment in Malaysia.

Malaysia participates in OECD corporate governance engagements and continues to work on full adherence to the OECD Guidelines on Corporate Governance for SOEs through its Government Linked Companies (GLC) Transformation Program.  The National Resource Governance Institute’s Resource Governance Index rates Malaysia as weak on governance of its oil and gas sector; however, Malaysia also ranks as 27^th among 89 rated countries, in the top third.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market.  However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs.  The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects.  UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance.  UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity.  The National Development Policy confers preferential treatment to the Bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding.  However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

The development of RBC programs in Malaysia has transformed from a government-led initiative into a concept embraced by the private sector.  Through the efforts of the Bursa Malaysia and other governmental bodies, awareness of corporate responsibility now exists across wide swathes of the private sector in Malaysia.

The government initially viewed RBC through the lens of Corporate Social Responsibility (CSR) and philanthropic activities.  In 2006, the Malaysian Securities Commission published a CSR framework for all publicly listed companies (PLCs), which are required to disclose their CSR programs in their annual financial reports.  In 2007, the Women, Family and Community Ministry launched the Prime Minister’s CSR Awards to encourage the spread of CSR programs, and to honor those companies whose commitment to CSR had made a difference in their respective communities.

In 2011, the Malaysian government began to take a more holistic approach to RBC, using it as a way to facilitate change in Malaysian society.  That year the government launched the 1Malaysia Training Plan (SL1M), an employment incentive program that allows businesses to double the permitted tax deduction for expenses incurred in hiring and training graduates from rural areas and low-income families.  The Business Council for Sustainable Development Malaysia (BCSDM) (formerly known as the Board for Corporate Sustainability and Responsibility Malaysia) also supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s RBC programs.  This was an important development on the road to meeting international norms, as BCSDM is the local affiliate of the World Business Council for Sustainable Development, and aims to meet the World Bank’s Sustainable Development Goals.  Additionally, BCSDM has laid out its own Vision 2050 plan, which aims to facilitate an improvement in global living standards through the implementation of a series of environmentally responsible steps.

In the arena of Environmental, Social, and Governance (ESG) issues related to RBC, Bursa Malaysia has been the main catalyst in the drive to enhance corporate accountability.  In 2014, Bursa Malaysia launched the FTSE4Good Bursa Malaysia Index, which is composed of companies selected from the top 200 Malaysian stocks in the FTSE Bursa Malaysia EMAS Index.  These companies are screened in accordance with transparent and defined ESG criteria, and the index provides an avenue for investors to make ESG-focused investments and increase ESG exposure in their investment portfolios, thereby putting indirect pressure on companies to behave more responsibly.

In a subsequent step in 2015, Bursa Malaysia launched a Sustainability Framework, which was comprised of amendments to the Listing Requirement (which all PLCs must meet), and the publication of a Sustainability Reporting Guide Toolkit.  As part of their new responsibilities, PLCs were required to disclose sustainability statements in their annual reports, incorporating ESG issues related to their respective businesses.  In 2018 Bursa Malaysia launched a 2nd edition of the Sustainability Reporting Guidelines, which include recommendations for PLCs regarding how to integrate sustainability into their businesses, and how to conduct more extensive reporting on material Economic, Environmental, and Social (EES) risks and opportunities.

Various governmental entities have enacted measures to encourage RBC.  In 2015, SUHAKAM, the Malaysian Human Rights Commission, published a framework for a national plan of action on business and human rights (BHR Framework).  The goal of the BHR Framework was to facilitate the adoption and implementation of the UN Guiding Principles on Business and Human Rights by both state and non-state actors in Malaysia.  Subsequent to the creation of the BHR Framework, Parliament passed an amended Companies Act in 2016, which included the optional disclosure of a business review, containing information about: (i) environmental matters, including the impact of the company’s business on the environment; (ii) the company’s employees; and (iii) social and community issues.   In the wake of the Companies Act 2016, The Companies Commission of Malaysia similarly sought to push RBC, by developing a best practices circular that promotes adherence to international sustainability reporting standards.  This circular endorses specific international standards such as the Global Reporting Initiative (GRI) framework and the UN Guiding Principles on Business and Human Rights.

The push toward effectuating RBC by the government has not only involved human rights, but has also addressed environmental concerns.  The Ministry of Energy, Science, Technology, Environment & Climate Change (MESTECC) has published multiple roadmaps to that end, including: Green Technology Master Plan Malaysia 2017-2030; Malaysia’s Roadmap towards Zero Single-use Plastics 2018-2030; and National Energy Efficiency Master Plan.  Despite the efforts across multiple ministries to emphasize RBC, there is nothing in Malaysia’s official procurement policy that mentions it as a factor in government contracting.

In September 2019, U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO), thereby suspending imports of medical gloves from WRP Asia Pacific, a Malaysian manufacturer, citing widespread reports of the company’s use of forced labor to produce the gloves.  This came on the heels of a December 2018 report by The Guardian accusing WRP and another Malaysian glove manufacturer, Top Glove, of “forced labor, forced overtime, debt bondage, withheld wages and passport confiscation.”  Malaysia is the world’s largest exporter of medical gloves, and the U.S. is its largest export market, so the response from the Malaysian government to the WRO was prompt.   Soon after the WRO, then-Human Resources Minister M. Kulasegaran vowed to include a chapter on forced labor in the amended  Employment Act  to protect workers’ rights; however, the amendment to the Employment Act has not come before parliament.  Irrespective of the internal steps that the Malaysian government may have taken to codify protection of workers, CBP provided feedback to WRP to adjust its manufacturing and labor practices to ensure they are compliant with U.S. and international labor standards.  In March 2020, CBP revoked the WRO on WRP-produced rubber gloves, citing information “showing the company is no longer producing the rubber gloves under forced labor conditions.”

A 2019 chemical dumping incident paints a blurry picture regarding Malaysia’s ability to effectively and fairly enforce domestic laws on environmental protection.  In the state of Johor in March 2019, a lorry dumped a mixture of toxic chemicals into the Kim Kim River, causing the hospitalization of almost 3,000 individuals.  The overwhelming majority of those hospitalized did not get sick after the initial dumping, but rather days later aided by strong winds.  The authorities did not immediately remove the chemicals from the river due to the costliness of the procedure, leading to a political backlash.  The state government took straightforward legal steps against the responsible parties, and completed its investigation in a thorough and impartial manner.  The Johor government charged the driver of the lorry under the Environmental Quality Act 1974, and charged the owners of the factory responsible for the dumping pursuant to the Environment Quality Regulations (Scheduled Wastes) 2005 and Environmental Quality Regulations (Clean Air) Regulations 2014.

The Malaysian Securities Commission leads issues regarding corporate governance and shareholder protection.  In furtherance of its goal of safeguarding investors, in 2017 the SC released an updated version of the Malaysian Code of Corporate Governance (MCCG).  This -document includes principles on board leadership and effectiveness, audit and risk management, integrity in corporate reporting, and meaningful relationships with stakeholders.  The SC publishes an annual report called the CG Monitor to ascertain which of their suggested best practices in the MCCG are being implemented.  The CG Monitor evaluates issues ranging from executive compensation standards to the quality of disclosures made by PLCs.  The SC also issues policy papers on a range of related issues, including rules on takeovers, mergers, and acquisitions, with an eye on protecting shareholders.

Bursa Malaysia is similarly interested in ensuring shareholder protection, and has a dedicated chapter in its Listing Requirements to corporate governance.  This chapter lays out in detail the requirements for listed companies concerning board composition, rights of directors, and auditing practices.  The Listing Requirements circle back to the MCCG, and require that the board of PLCs disclose which of the best practices annunciated in the MCCG the company is following.

Promotion of RBC in Malaysia has been increasing due to pressure from institutional investors and government-linked investment funds.  In 2014, the Minority Shareholders Watch Group (an independent research organization on corporate governance matters, originally funded by four state-owned investment funds) (MSWG) and the SC worked together to draft the Malaysian Code for Institutional Investors (MCII).  The MCII includes six principles of effective stewardship by institutional investors, as well as guidance to facilitate implementation.   Furthermore, the MCII encourages institutional investors to invest responsibly by taking stock of the RBC and corporate governance standards of the company.  As a response to the MCII, the Institutional Investor Council (IIC) was formed in 2015.  The IIC is an industry-led initiative that represents the common interests of institutional investors in Malaysia, and promotes good governance (including ESG considerations) to PLCs.

The interest in RBC and good governance has taken hold not only in industry, but in governmental funds as well.  The government of Malaysia’s strategic investment fund (Khazanah Nasional Berhad), the government pension fund (KWAP), and the Employees Provident Fund (EPF) are signatories to the UN-supported Principles for Responsible Investment (PRI).  As signatories, they are required to carry out PRI principles, including taking ESG into consideration during the due diligence phase before making a potential investment, and ensuring that ESG best practices are met in companies in which they invest.

Post is not aware of any governmental interference in the efforts of regulators, business associations, and investors to improve responsible business practices amongst Malaysian corporations.

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Whistleblower Protection Act in 2010 and considers bribery a criminal act.  Malaysia’s anti-corruption law prohibits bribery of foreign public officials, permits the prosecution of Malaysians for offense committed overseas, prohibits bribes from being deducted from taxes, and provides for the seizure of property.

The MACC conducts investigations, but prosecutorial discretion remains with the Attorney General’s Chambers (AGC).  There is no systematic requirement for public officials to disclose their assets and the Whistleblower Protection Act does not provide protection for those who disclose allegations to the media.

The former Pakatan Harapan government prioritized anti-corruption efforts in its campaign manifesto.  After taking office in May 2018, it established Royal Commissions of Inquiry into alleged corruption at the Federal Land Development Authority (FELDA), the Council of Trust for the People (MARA), and the Hajj Pilgrims Fund (Tabung Haji), all government or government-linked agencies.  On May 21, 2018 the MACC established a 1MDB taskforce, including the police and central bank.  The government subsequently charged former Prime Minister Najib with 42 counts of money laundering, criminal breach of trust, and abuse of power for his alleged involvement in the 1MDB corruption scandal.  The current Prime Minister Muhyiddin has said to the media that his Perikatan Nasional (PN) government will continue to implement the National Anti-Corruption Plan (NACP) put in place by the previous Pakatan Harapan (PH) coalition government.  It remains to be seen how robustly this plan will be implemented.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Datuk Seri Azam Baki -Chief Commissioner
Malaysia Anti-Corruption Commission
Block D6, Complex D, Pusat Pentadbiran
Kerajaan Persekutuan, Peti Surat 6000
62007 Putrajaya
+6-1800-88-6000
Email: info@sprm.gov.my

Contact at a “watchdog” organization:

Cynthia Gabriel, Director
The Center to Combat Corruption and Cronyism (C4)
C Four Consultancies Sdn Bhd
A-2-10, 8 Avenue
Jalan Sg Jernih 8/1, Seksyen 8, 46050 Petaling Jaya
Selangor, Malaysia
Email: info@c4center.org

There have been no significant incidents of political violence since the 1969 national elections.  The May 9, 2018 national election led to the first transition of power between coalitions since independence and was peaceful.  The Pakatan Harapan administration collapsed on February 24, 2020 and was replaced by the Perikatan Nasional coalition led by Muhyiddin Yassin.  In April 2012, the Peaceful Assembly Act took effect, which outlaws street protests and places other significant restrictions on public assemblies.  Following the July 2014 Israeli incursion into Gaza, several Malaysian non-governmental entities organized a boycott of McDonald’s.  Over a several week period, protestors picketed at several McDonalds restaurants, at times taunting and harassing employees.  Periodically, Malaysian groups will organize modest protests against U.S. government policies, usually involving demonstrations outside the U.S. embassy.  To date, these have remained peaceful and localized, with a strong police presence.  Likewise, several non-governmental organizations have organized mass rallies in major cities in peninsular and East Malaysia related to domestic policies that have been peaceful.

Malaysia’s two million documented and 3.9 to 5.5 million undocumented foreign workers make up over 30 percent of the country’s workforce.  The previous government pledged to reduce Malaysia’s reliance on foreign labor while bringing the nation’s laws up to international standards, and had taken steps toward reforming a foreign worker recruitment process plagued by allegations of corruption and debt bondage before being replaced by Prime Minister Muhyiddin’s government in March.

Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies.  Malaysia has an acute shortage of highly qualified professionals, scientists, and academics.  U.S. firms operating in Malaysia have echoed this sentiment, noting that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market, traditionally accustomed to operating at or near full employment, has been heavily impacted by the prolonged shutdown as part of the government’s response to the global pandemic.  The unemployment rate reached five percent in April 2020, Malaysia’s highest in over 30 years, with economic observers predicting it will climb higher during the year.

Malaysia is a member of the International Labor Organization (ILO).  Labor relations in Malaysia are generally non-confrontational.  While  a system of government controls strongly discourages strikes and restricts the formation of unions, the new government has created a National Labor Advisory Council – comprised of the Malaysian Trade Unions Congress and Malaysian Employer’s Federation – to increase labor participation in unions.  The government amended its Trade Unions Act and Industrial Relations Act in July 2019 to increase freedom of association in Malaysia.  Some labor disputes are settled through negotiation or arbitration by an industrial court.  Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness and combatting forced labor conditions.  The previous government prohibited outsourcing companies, improved oversight of employment agencies, and brought the Employment Act, Children and Young Persons Act, and Occupational Safety and Health Act in line with ILO principles.

Although national unions are currently proscribed due to sovereignty issues within Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah and Sarawak).  The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations.  Instead of allowing a federation for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry.  Proposed changes to the Trade Unions Act should address this issue and allow unions to form.  Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers and has been expanded to cover foreign workers.  No systematic welfare programs or government unemployment benefits exist; however, the Employee Provident Fund, which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector.  Civil servants receive pensions upon retirement.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers, remains a notable impediment to employing workers in Malaysia.  The high cost of terminating employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers.  The former prime minister formed an Independent Committee on Foreign Workers to study foreign worker policies.  The Committee submitted 40 recommendations for streamlining the hiring of foreign workers and protecting employees from debt bondage and forced labor conditions.  It is unclear whether or how the new government will act on these recommendations.

Executives at U.S. companies operating in Malaysia have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas.  Race-based preferences in hiring and promotion are widespread in government, government-owned universities, and government-linked corporations.

The former government increased and standardized the minimum wage across the country to RM 1100 (USD 275), a raise from RM 1,000 (USD 250) in Peninsular Malaysia and RM 920 (USD 230) in East Malaysia.

In 2018, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), and garments (forced labor).  Senior officials across the Malaysian interagency have taken this listing seriously and have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy, including palm oil and electronics.

Malaysia has a limited investment guarantee agreement with the United States under the U.S. Overseas Private Investment Corporation (OPIC), the predecessor agency to the U.S. International Development Finance Corporation (DFC), for which it has qualified since 1959.  Few investors have sought OPIC insurance in Malaysia.

Embassy Kuala Lumpur Economic Section
376 Jalan Tun Razak / 50400 Kuala Lumpur Malaysia
+6-03-2168-5153
Email: KualaLumpurEcon@state.gov

Transparency of the Regulatory System

Proposed Philippine laws must undergo public comment and review. Government agencies are required to craft implementing rules and regulations (IRRs) through public consultation meetings within the government and with private sector representatives after laws are passed. New regulations must be published in newspapers or in the government’s official gazette, available online, before taking effect (https://www.gov.ph/). The 2016 Executive Order on Freedom of Information (FOI) mandates full public disclosure and transparency of government operations, with certain exceptions. The public may request copies of official records through the FOI website (https://www.foi.gov.ph/). Government offices in the Executive Branch are expected to come up with their respective agencies’ implementation guidelines. The order is criticized for its long list of exceptions, rendering the policy less effective.

Stakeholders report regulatory enforcement in the Philippines is generally weak, inconsistent, and unpredictable. Many U.S. investors describe business registration, customs, immigration, and visa procedures as burdensome and frustrating. Regulatory agencies are generally not statutorily independent but are attached to cabinet departments or the Office of the President and, therefore, are subject to political pressure. Issues in the judicial system also affect regulatory enforcement.

International Regulatory Considerations

The Philippines is a member of the World Trade Organization (WTO) and provides notice of draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). (http://tbtims.wto.org/en/Notifications/Search?ProductsCoveredHSCodes=&ProductsCoveredICSCodes=&DoSearch=True&ExpandSearchMoreFields=False&NotifyingMember=Philippines&DocumentSymbol=&DistributionDateFrom=&DistributionDateTo=&SearchTerm=&ProductsCovered=&DescriptionOfContent=&CommentPeriod=&FinalDateForCommentsFrom=&FinalDateForCommentsTo=&ProposedDateOfAdoptionFrom=&ProposedDateOfAdoptionTo=&ProposedDateOfEntryIntoForceFrom=&ProposedDateOfEntryIntoForceTo= ).

The Philippines continues to fulfill required regulatory reforms under the ASEAN Economic Community (AEC). The Philippines officially joined live operations of the ASEAN Single Window (ASW) on December 30, 2019. The country’s National Single Window (NSW) now issues an electronic Certificate of Origin via the TRADENET.gov.ph platform, and the NSW is connected to the ASW, allowing for customs efficiencies and better transparency.

The Philippines passed the Customs Modernization and Tariff Act in 2016, which enables the country to largely comply with the WTO Agreement on Trade Facilitation. The various implementing rules and regulations to execute specific provisions, however, have not been completed by the Department of Finance and the Bureau of Customs as of April 2020.

Legal System and Judicial Independence

The Philippines has a mixed legal system of civil, common, Islamic, and customary laws, along with commercial and contractual laws.

The Philippine judicial system is a separate and largely independent branch of the government, made up of the Supreme Court and lower courts. The Supreme Court is the highest court and sole constitutional body. More information is available on the court’s website  (http://sc.judiciary.gov.ph/). The lower courts consist of: (a) trial courts with limited jurisdictions (i.e. Municipal Trial Courts, Metropolitan Trial Courts, etc.); (b) Regional Trial Courts (RTCs); (c) Shari’ah District Courts (Muslim courts); and (d) Court of Appeals (appellate courts). Special courts include the “Sandiganbayan” (anti-graft court for public officials) and the Court of Tax Appeals. Several RTCs have been designated as Special Commercial Courts (SCC) to hear intellectual property (IP) cases, with four SCCs authorized to issue writs of search and seizure on IP violations, enforceable nationwide. In addition, nearly any case can be appealed to appellate courts, including the Supreme Court, increasing caseloads and further clogging the judicial system.

Foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive to investment. Many investors decline to file dispute cases in court because of slow and complex litigation processes and perceived corruption among some personnel. The courts are not considered impartial or fair. Stakeholders also report an inexperienced judiciary when confronted with complex issues such as technology, science, and intellectual property cases. The Philippines ranked 152nd out of 190 economies, and 18th among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of enforcing contracts.

Laws and Regulations on Foreign Direct Investment

The BOI regulates and promotes investment into the Philippines. The Investment Priorities Plan (IPP), administered by the BOI, identifies preferred economic activities approved by the President. Government agencies are encouraged to adopt policies and implement programs consistent with the IPP.

The Foreign Investment Act (FIA) requires the publishing of the Foreign Investment Negative List (FINL) that outlines sectors in which foreign investment is restricted. The FINL consists of two parts: Part A details sectors in which foreign equity participation is restricted by the Philippine Constitution or laws; and Part B lists areas in which foreign ownership is limited for reasons of national security, defense, public health, morals, and/or the protection of small and medium enterprises (SMEs).

The 1995 Special Economic Zone Act allows PEZA to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including grants of fiscal and non-fiscal incentives.

Further information about investing in the Philippines is available at BOI website (http://boi.gov.ph/) and PEZA website (http://www.peza.gov.ph/ ).

Competition and Anti-Trust Laws

The 2015 Philippine competition law established the Philippine Competition Commission (PCC), an independent body mandated to resolve complaints on issues such as price fixing and bid rigging, to stop mergers that would restrict competition. More information is available on PCC website (http://phcc.gov.ph/#content). The Department of Justice (https://www.doj.gov.ph/) prosecutes criminal offenses involving violations of competition laws.

Expropriation and Compensation

Philippine law allows expropriation of private property for public use or in the interest of national welfare or defense in return for fair market value compensation. In the event of expropriation, foreign investors have the right to receive compensation in the currency in which the investment was originally made and to remit it at the equivalent exchange rate. However, the process of agreeing on a mutually acceptable price can be protracted in Philippine courts. No recent cases of expropriation involve U.S. companies in the Philippines.

The 2016 Right-of-Way Act facilitates acquisition of right-of-way sites for national government infrastructure projects and outlines procedures in providing “just compensation” to owners of expropriated real properties to expedite implementation of government infrastructure programs.

Dispute Settlement

ICSID Convention and New York Convention

The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention.

Investor-State Dispute Settlement

The Philippines is signatory to various bilateral investment treaties that recognize international arbitration of investment disputes. Since 2002, the Philippines has been respondent to five investment dispute cases filed before the ICSID. Details of cases involving the Philippines are available on the ICSID website (https://icsid.worldbank.org/en/ ).

International Commercial Arbitration and Foreign Courts

Investment disputes can take years to resolve due to systemic problems in Philippine courts. Lack of resources, understaffing, and corruption make the already complex court processes protracted and expensive. Several laws on alternative dispute resolution (ADR) mechanisms (i.e. arbitration, mediation, negotiation, and conciliation) were approved to decongest clogged court dockets. Public-Private Partnership (PPP) infrastructure contracts are required to include ADR provisions to make resolving disputes less expensive and time-consuming.

A separate action must be filed for foreign judgments to be recognized or enforced under Philippine law. Philippine law does not recognize or enforce foreign judgments that run counter to existing laws, particularly those relating to public order, public policy, and good customary practices. Foreign arbitral awards are enforceable upon application in writing to the regional trial court with jurisdiction. The petition may be filed any time after receipt of the award.

Bankruptcy Regulations

The 2010 Philippine bankruptcy and insolvency law provides a predictable framework for rehabilitation and liquidation of distressed companies, although an examination of some reported cases suggests uneven implementation. Rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings. The law sets conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation. It also recognizes cross-border insolvency proceedings in accordance with the United Nations Conference on Trade and Development (UNCTAD) Model Law on Cross-Border Insolvency, allowing courts to recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines. Regional trial courts designated by the Supreme Court have jurisdiction over insolvency and bankruptcy cases. The Philippines ranked 65th out of 190 economies, and ninth among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of resolving insolvency and bankruptcy cases.

Investment Incentives

The Philippines’ Investment Priorities Plan (IPP) enumerates investment activities entitled to incentives facilitated by BOI, such as an income tax holiday. Non-fiscal incentives include the following: employment of foreign nationals, simplified customs procedures, duty exemption on imported capital equipment and spare parts, importation of consigned equipment, and operation of a bonded manufacturing warehouse.

The 2017 IPP, updated every three years, provides incentives to the following activities: manufacturing (e.g. agro-processing, modular housing components, machinery, and equipment); agriculture, fishery, and forestry; integrated circuit design, creative industries, and knowledge-based services (e.g. IT-Business Process Management services for the domestic market, repair/maintenance of aircraft, telecommunications, etc.); healthcare (e.g. hospitals and drug rehabilitation centers); mass housing; infrastructure and logistics (e.g. airports, seaports, and PPP projects); energy (development of energy sources, power generation plants, and ancillary services); innovation drivers (e.g. fabrication laboratories); and environment (e.g. climate change-related projects). Further details of the 2017 IPP are available on the BOI website (http://boi.gov.ph/ ). The BOI was tasked to update the investment priorities and formulate a Strategic Investment Priorities Plan to replace the IPP in light of the planned amendments in the tax incentive scheme of the Philippines under the Comprehensive Tax Reform Program (CITIRA).

In the current set-up, BOI-registered enterprises that locate in less-developed areas are entitled to pioneer incentives and can deduct 100 percent of the cost of necessary infrastructure work and labor expenses from taxable income. Pioneer status can be granted to enterprises producing new products or using new methods, goods deemed highly essential to the country’s agricultural self-sufficiency program, or goods utilizing non-conventional fuel sources. Furthermore, an enterprise with more than 40 percent foreign equity that exports at least 70 percent of its production may be entitled to incentives even if the activity is not listed in the IPP. Export-oriented firms with at least 50 percent of revenues derived from exports may register for additional incentives under the 1994 Export Development Act.

Multinational entities that establish regional warehouses for the supply of spare parts, manufactured components, or raw materials for foreign markets also enjoy incentives on imports that are re-exported, including exemption from customs duties, internal revenue taxes, and local taxes. The first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law which took effect January 1, 2018, removed the 15 percent special tax rate on gross income of employees of multinational enterprises’ regional headquarters (RHQ) and regional operating headquarters (ROHQ) located in the Philippines. RHQ and ROHQ employees are now subjected to regular income tax rates, usually at higher and less competitive rates.

Foreign Trade Zones/Free Ports/Trade Facilitation

Export-related businesses enjoy preferential tax treatment when located in export processing zones, free trade zones, and certain industrial estates, collectively known as economic zones, or ecozones. Businesses located in ecozones are considered outside customs territory and are allowed to import capital equipment and raw material free of customs duties, taxes, and other import restrictions. Goods imported into ecozones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties and are exempt from the Bureau of Customs’ Selective Pre-shipment Advance Classification Scheme. While some ecozones are designated as both export processing zones and free trade zones, individual businesses within them are only permitted to receive incentives under a single category.

PEZA operates 379 ecozones, primarily in manufacturing, IT, tourism, medical tourism, logistics/warehousing, and agro-industrial sectors. PEZA manages four government-owned export-processing zones (Mactan, Baguio, Cavite, and Pampanga) and administers incentives to enterprises in other privately owned and operated ecozones. Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export, IT, tourism, medical tourism, or agro-industrial enterprise with PEZA, provided the enterprise physically locates its activity inside any of the ecozones. PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority (http://www.peza.gov.ph/index.php/economic-zones/list-of-economic-zones/operating-economic-zones ).

The ecozones located inside former U.S. military bases were established under the 1992 Bases Conversion and Development Act. The BCDA (http://www.bcda.gov.ph/ ) operates Clark Freeport Zone (Angeles City, Pampanga), John Hay Special Economic Zone (Baguio), Poro Point Freeport Zone (La Union), and Bataan Technology Park (Morong, Bataan). The SBMA operates the Subic Bay Freeport Zone (Subic Bay, Zambales). Clark and Subic have their own international airports, power plants, telecommunications networks, housing complexes, and tourist facilities. These ecozones offer comparable incentives to PEZA. Enterprises already receiving incentives under the BCDA law are disqualified to receive incentives and benefits offered by other laws.

The Phividec Industrial Estate (Misamis Oriental Province, Mindanao) is governed by Phividec Industrial Authority (PIA) (http://www.piamo.gov.ph/), a government-owned and controlled corporation. Other ecozones are Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) (http://www.zfa.gov.ph/ ) and Cagayan Special Economic Zone (CEZA) and Freeport (Santa Ana, Cagayan Province) (http://ceza.gov.ph/ ). CEZA grants gaming licenses in addition to offering export incentives. The Regional Economic Zone Authority (Cotabato City, Mindanao) (https://reza.bangsamoro.gov.ph/) has been operated by the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). The incentives available to investors in these zones are similar to PEZA but administered independently.

Performance and Data Localization Requirements

The BOI imposes a higher export performance requirement on foreign-owned enterprises (70 percent of production) than on Philippine-owned companies (50 percent of production) when providing incentives under IPP.

Companies registered with BOI and PEZA may employ foreign nationals in supervisory, technical, or advisory positions for five years from date of registration (possibly extendable upon request). Top positions and elective officers of majority foreign-owned BOI-registered enterprises (such as president, general manager, and treasurer, or their equivalents) are exempt from employment term limitation. Foreigners intending to work locally must secure an Alien Employment Permit from the Department of Labor and Employment (DOLE ), renewable every year with the duration of employment (which in no case shall exceed five years). The BOI and PEZA facilitate special investor’s resident visas with multiple entry privileges and extend visa facilitation assistance to foreign nationals, their spouses, and dependents.

The 2006 Biofuels Act establishes local content requirements for diesel and gasoline. Regarding diesel, only locally produced biodiesel is permitted. For gasoline, all local ethanol must be bought off the market before imports are allowed to meet the blend requirement, and the local ethanol production may only be sourced from locally-produced sugar/molasses feedstock.

The Philippines does not impose restrictions on cross-border data transfers. Sensitive personal information is protected under the 2012 Data Privacy Act, which provides penalties for unauthorized processing and improper disposal of data even if processed outside the Philippines.

Real Property

The Philippines recognizes and protects property rights, but the enforcement of laws is weak and fragmented. The Land Registration Authority and the Register of Deeds (http://www.lra.gov.ph/), which facilitate the registration and transfer of property titles, are responsible for land administration, with more information available on their website s. Property registration processes are tedious and costly. Multiple agencies are involved in property administration, which results in overlapping procedures for land valuation and titling processes. Record management is weak due to a lack of funds and trained personnel. Corruption is also prevalent among land administration personnel and the court system is slow to resolve land disputes. The Philippines ranked 120th out of 190 economies in terms of ease of property registration in the World Bank’s 2020 Ease of Doing Business report.

Intellectual Property Rights

The Philippines is not listed on the United States Trade Representative’s (USTR) 2020 Special 301 Report. . The country has a robust intellectual property rights (IPR) regime in place, although enforcement is irregular and inconsistent. The total estimated value of counterfeit goods reported seized in 2019 was USD 434 million, close to 2018’s record of USD 453 million. The sale of imported counterfeit goods in local markets has visibly decreased, though stakeholders report the amount of counterfeit goods sold online is gradually increasing.

The Intellectual Property (IP) Code provides a legal framework for IPR protection, particularly in key areas of patents, trademarks, and copyrights. The Intellectual Property Office of the Philippines (IPOPHL) is the implementing agency of the IP Code, with more information available on its website  (https://www.ipophil.gov.ph/). The Philippines generally has strong patent and trademark laws. IPOPHL’s IP Enforcement Office (IEO) reviews IPR-related complaints and visits establishments reportedly engaged in IPR-related violations. However, weak border protection, corruption, limited enforcement capacity by the government, and lack of clear procedures continue to weaken enforcement. In addition, IP owners still must assume most enforcement and storage costs when counterfeit goods are seized.

Enforcement actions are often not followed by successful prosecutions. The slow and capricious judicial system keeps most IP owners from pursuing cases in court. IP infringement is not considered a major crime in the Philippines and takes a lower priority in court proceedings, especially as the courts become more crowded out with criminal cases deemed more serious, which receive higher priority. Many IP owners opt for out-of-court settlements (such as ADR) rather than filing a lawsuit that may take years to resolve in the unpredictable Philippine courts.

The IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing through its Arbitration and Mediation Center.

For additional information about treaty obligations and points of contact at the local IP offices, see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

Contacts at Mission:

Douglas Fowler, Economic Officer
Karen Ang, Trade Specialist Economic Section, U.S. Embassy Manila
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

A list of local lawyers can be found on the U.S. Embassy’s website: https://ph.usembassy.gov/u-s-citizen-services/attorneys/.

Capital Markets and Portfolio Investment

The Philippines welcomes the entry of foreign portfolio investments, including local and foreign-issued equities listed on the Philippine Stock Exchange (PSE ). Investments in certain publicly listed companies are subject to foreign ownership restrictions specified in the Constitution and other laws. Non-residents are allowed to issue bonds/notes or similar instruments in the domestic market with prior approval from the Central Bank; in certain cases, they may also obtain financing in Philippine pesos from authorized agent banks without prior Central Bank approval.

Although growing, the PSE (with fewer than 271 listed firms as of the end of 2019) lags behind many of its neighbors in size, product offerings, and trading activity. The securities market is growing but remains dominated by government bills and bonds. Hostile takeovers are uncommon because most companies’ shares are not publicly listed and controlling interest tends to remain with a small group of parties. Cross-ownership and interlocking directorates among listed companies also decrease the likelihood of hostile takeovers.

Credit is generally granted on market terms and foreign investors are able to obtain credit from the liquid domestic market. However, some laws require financial institutions to set aside loans for preferred sectors (e.g. agriculture, agrarian reform, and MSMEs). To help promote lending at competitive rates to MSMEs, the government has fully operationalized a centralized credit information system that uses financial statements to predict firms’ credit worthiness. The government has also implemented the 2018 Personal Property Security law, which aims to spur lending to MSMEs by allowing non-traditional collateral (e.g., movable assets like machinery and equipment and inventories).

Money and Banking System

The Bangko Sentral ng Pilipinas (BSP/Central Bank) is a highly respected institution that oversees a stable banking system. The Central Bank has pursued regulatory reforms promoting good governance and aligning risk management regulations with international standards. Capital adequacy ratios are well above the 8 percent international standard and the Central Bank’s 10 percent regulatory requirement. The non-performing loan ratio was at 2.0 percent as of the end of 2019, and there is ample liquidity in the system, with the liquid assets-to-deposits ratio estimated at about 48 percent. Commercial banks constitute more than 90 percent of the total assets of the Philippine banking industry. The five largest commercial banks represented about 60 percent of the total resources of the commercial banking sector as of 2019. Twenty-six of the 46 commercial banks operating in the country are foreign branches and subsidiaries, including three U.S. banks (Citibank, Bank of America, and JP Morgan Chase). Citibank has the largest presence among the foreign bank branches and currently ranks 13th overall in terms of assets.

Foreign residents and non-residents may open foreign and local currency bank accounts. Although non-residents may open local currency deposit accounts, they are limited to the funding sources specified under Central Bank regulations. For non-residents who wish to convert their local deposits to foreign currency, sales of foreign currencies are limited up to the local currency balance. Non-residents’ foreign currency accounts cannot be funded from foreign exchange purchases from banks and banks’ subsidiary/affiliate foreign exchange corporations.

Foreign Exchange and Remittances

Foreign Exchange

The Bangko Sentral ng Pilipinas (Central Bank) has actively pursued reforms since the 1990s to liberalize and simplify foreign exchange regulations. As a general rule, the Central Bank allows residents and non-residents to purchase foreign exchange from banks, banks’ subsidiary/affiliate foreign exchange corporations, and other non-bank entities operating as foreign exchange dealers and/or money changers and remittance agents to fund legitimate foreign exchange obligations, subject to provision of information and/or supporting documents on underlying obligations. No mandatory foreign exchange surrender requirement is imposed on exporters, overseas workers’ incomes, or other foreign currency earners; these foreign exchange receipts may be sold for pesos or retained in foreign exchange in local and/or offshore accounts. The Central Bank follows a market-determined exchange rate policy, with scope for intervention to smooth excessive foreign exchange volatility.

Remittance Policies

The Central Bank does not restrict payments and transfers for current international transactions, in accordance with the country’s acceptance of International Monetary Fund Article VIII obligations of September 1995. Purchase of foreign currencies for trade and non-trade obligations and/or remittances requires submission of a foreign exchange purchase application form if the foreign exchange is sourced from banks and/or their subsidiary/affiliate foreign exchange corporations and falls within specified thresholds (currently USD 500,000 for individuals and USD 1 million for corporates/other entities). Purchases above the thresholds are also subject to the submission of minimum documentary requirements but do not require prior Central Bank approval. A person may freely bring foreign currencies with a value of up to USD 10,000 into or out of the Philippines; more than this threshold requires submission of a foreign currency declaration form.

Foreign exchange policies do not require approval of inward foreign direct and portfolio investments unless the investor will purchase foreign currency from banks to convert its local currency proceeds or earnings for repatriation or remittance. Registration of foreign investments with the Central Bank or custodian banks is generally optional. Duly registered foreign investments are entitled to full and immediate repatriation of capital and remittance of dividends, profits, and earnings.

As a general policy, government-guaranteed private sector foreign loans/borrowings (including those in the form of notes, bonds, and similar instruments) require prior Central Bank approval. Although there are exceptions, private sector loan agreements should also be registered with the Central Bank if serviced through the purchase of foreign exchange from the banking system.

The Philippines is pushing for amendments to the Anti-Money Laundering Act and Human Security Act to meet the Asia Pacific Group 2019 Mutual Evaluation Report recommendations ahead of the 2020 Financial Action Task Force’s (FATF) review. Proposed amendments include the addition of tax evasion, terrorism-related offenses, and corruption to the list of predicate crimes; the inclusion of real estate developers and brokers as covered persons; and the expansion of Anti-Money Laundering Council’s investigative powers and financial sanctions authority. In 2013, the FATF removed the Philippines from its “grey list” of countries with strategic deficiencies in countering money laundering and the financing of terrorism. The Philippines has a restrictive regime for accessing bank accounts to detect or prosecute financial crimes, which is a significant impediment to enforcing laws against corruption, tax evasion, smuggling, laundering, and other economic crimes.

Sovereign Wealth Funds

The Philippines does not presently have sovereign wealth funds.

State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominantly in the power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors. There were 105 operational and functioning GOCCs as of April 2020; a list is available on the Governance Commission for GOCC [GCG] website  (https://gcg.gov.ph). GOCCs are required to remit at least 50 percent of their annual net earnings (e.g. cash, stock, or property dividends) to the national government.

Private and state-owned enterprises generally compete equally. The Government Service Insurance System (GSIS ) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in build-operate-transfer (BOT) projects and privatized government corporations. Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in obtaining financing from government financial institutions and private banks. Most GOCCs are not statutorily independent, but attached to cabinet departments, and, therefore, subject to political interference.

The Philippines is not an OECD member country. The 2011 GOCC Governance Act addresses problems experienced by GOCCs, including poor financial performance, weak governance structures, and unauthorized allowances. The law allows unrestricted access to GOCC account books and requires strict compliance with accounting and financial disclosure standards; establishes the power to privatize, abolish, or restructure GOCCs without legislative action; and sets performance standards and limits on compensation and allowances. The GCG  formulates and implements GOCC policies. GOCC board members are limited to one-year term and subject to reappointment based on a performance rating set by GCG, with final approval by the Philippine President.

Privatization Program

The Philippine Government’s privatization program is managed by the Privatization Management Office (PMO) under the Department of Finance (DOF). The privatization of government assets undergoes a public bidding process. Apart from restrictions stipulated in FINL, no regulations discriminate against foreign buyers and the bidding process appears to be transparent. Additional information is available on the PMO website (http://www.pmo.gov.ph/index.htm).

Responsible Business Conduct (RBC) is regularly practiced in the Philippines, although no domestic laws require it. The Philippine Tax Code provides RBC-related incentives to corporations, such as tax exemptions and deductions. Various non-government organizations and business associations also promote RBC. The Philippine Business for Social Progress (PBSP ) is the largest corporate-led social development foundation involved in advocating corporate citizenship practice in the Philippines. U.S. companies report strong and favorable responses to RBC programs among employees and within local communities.

The Philippines is not an OECD member country. The Philippine government strongly supports RBC practices among the business community but has not yet endorsed the OECD Guidelines for Multinational Enterprises to stakeholders.

Corruption is a pervasive and long-standing problem in both the public and private sectors. The country’s ranking in Transparency International’s Corruption Perceptions Index declined to the 113th spot (out of 180), its worst score in over seven years. The Philippines was 99th in 2018, and the lack of progress in tackling public corruption resulted in a lower score for 2019. Various organizations, including the World Economic Forum, have cited corruption among the top problematic factors for doing business in the Philippines. The Bureau of Customs is still considered to be one of the most corrupt agencies in the country, having fired and replaced five customs commissioners over the past six years.

The Philippine Development Plan 2017-2022 outlines strategies to reduce corruption by streamlining government transactions, modernizing regulatory processes, and establishing mechanisms for citizens to report complaints. A front line desk in the Office of the President, the Presidential Complaint Center, or PCC (https://op-proper.gov.ph/contact-us/), receives and acts on corruption complaints from the general public. The PCC can be reached through its complaint hotline, text services (SMS), and social media sites.

The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials all aim to combat corruption and related anti-competitive business practices. The Office of the Ombudsman investigates and prosecutes cases of alleged graft and corruption involving public officials, with more information available on its website . Cases against high-ranking officials are brought before a special anti-corruption court, the Sandiganbayan, while cases against low-ranking officials are filed before regional trial courts.

The Office of the President can directly investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations. Soliciting, accepting, and/or offering/giving a bribe are criminal offenses punishable by imprisonment, a fine, and/or disqualification from public office or business dealings with the government. Government anti-corruption agencies routinely investigate public officials, but convictions by courts are limited, often appealed, and can be overturned. Recent positive steps include the creation of an investors’ desk at the Ombudsman’s Office, and corporate governance reforms of the Securities and Exchange Commission.

The Philippines ratified the United Nations Convention against Corruption in 2003. It is not a signatory to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Office of the Ombudsman
Ombudsman Building, Agham Road, North Triangle
Diliman, Quezon City
Hotline:  (+632) 8926.2662
Telephone:  (+632) 8479.7300
Email/Website: pab@ombudsman.gov.ph / http://www.ombudsman.gov.ph /

Presidential Complaint Center
Gama Bldg., Minerva St. corner Jose Laurel St.
San Miguel, Manila
Telephone: (+632) 8736.8645, 8736.8603, 8736.8606
Email: pcc@malacanang.gov.ph / https://op-proper.gov.ph/presidential-action-center/

Contact Center ng Bayan
Text:  (+63) 908 881.6565
Call:  1-6565
Email/Website: email@contactcenterngbayan.gov.ph / contactcenterngbayan.gov.ph 

Terrorist groups and criminal gangs operate in some regions. The Department of State publishes a consular information sheet and advises all Americans living in or visiting the Philippines to review the information periodically. A travel advisory is in place for those U.S. citizens contemplating travel to the Philippines.

Terrorist groups, including the ISIS-Philippines affiliated Abu Sayyaf Group (ASG), the Maute Group, Ansar al-Khalifa Philippines (AKP) and elements of the Bangsamoro Islamic Freedom Fighters (BIFF), periodically attack civilian targets, kidnap civilians – including foreigners – for ransom, and engage in armed attacks against government security forces. These groups have mostly carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea. They are also capable of operating in some areas outside Sulu, as evidenced by the 2015 kidnapping of four hostages from Samal Island, just outside Davao City. Groups affiliated with ISIS-Philippines continued efforts to recover from battlefield losses, recruiting and training new members, and staging suicide bombings and attacks with improvised explosive devices (IEDs) and small arms that targeted security forces and civilians.

In 2017, ISIS-affiliated groups in Mindanao occupied and held siege to Marawi City for five months, prompting President Duterte to declare martial law over the entire Mindanao region – approximately one-third of the country’s territory. After granting multiple extensions of over two and a half years, Congress, with support from the government, allowed martial law to lapse on December 31, 2019. In expressing its support for the decision, the military cited improvement in the security climate in Mindanao, but also noted that Proclamation 55, a national state of emergency declaration, remained in effect and would be used as necessary.

The New People’s Army (NPA), the armed wing of the Communist Party of the Philippines (CPP), is responsible in some parts of the country, mostly Mindanao, for civil disturbances through assassinations of public officials, sporadic attacks on military and police forces, bombings, and attacks on infrastructure, such as power generators and telecommunications towers. The NPA relies on extortionist revolutionary taxes from local and some foreign businesses to fund its operations. The Philippine government ended a unilateral ceasefire with the CPP/NPA in 2017 and announced that it had designated the group as a terrorist organization under domestic law.

The Philippines’ most significant human rights problems were killings allegedly undertaken by vigilantes, security forces, and insurgents; cases of apparent governmental disregard for human rights and due process; official corruption; and a weak and overburdened criminal justice system notable for slow court procedures, weak prosecutions, and poor cooperation between police and investigators.

President Duterte’s administration continued a nationwide campaign, led primarily by the Philippine National Police (PNP), to eliminate illegal narcotics. The ongoing operation continues to receive worldwide attention for its harsh tactics.

Managers of U.S. companies in the Philippines report that local labor costs are relatively low and workers are highly motivated, with generally strong English language skills. As of January 2020, the Philippine labor force reached 43 million workers, with an employment rate of 94.7 percent and an unemployment rate of 5.3 percent. These figures include employment in the informal sector and do not capture the substantial rates of underemployment in the country. Youths between the ages of 15 and 24 made up over 40 percent of the unemployed. More than half of all employment was in the services sector, with 22.7 percent and 18.8 percent in agriculture and industry sectors, respectively.

Compensation packages in the Philippines tend to be comparable with those in neighboring countries. Regional Wage and Productivity Boards meet periodically in each of the country’s 16 administrative regions to determine minimum wages. The non-agricultural daily minimum wage in Metro Manila is approximately USD 10, although some private sector workers receive less. Most regions set their minimum wage significantly lower than Metro Manila. Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime. Philippine law also provides for a comprehensive set of occupational safety and health standards. The Department of Labor and Employment (DOLE) has responsibility for safety inspection, but a shortage of inspectors has made enforcement difficult.

The Philippines Constitution enshrines the right of workers to form and join trade unions. The trend among firms using temporary contract labor to lower employment costs continues despite government efforts to regulate the practice. The DOLE Secretary has the authority to end strikes and mandate a settlement between parties in cases involving national interest. DOLE amended its rules concerning disputes in 2013, specifying industries vital to national interest: hospitals, the electric power industry, water supply services (excluding small bottle suppliers), air traffic control, and other industries as recommended by the National Tripartite Industrial Peace Council (NTIPC). Economic zones often offer on-site labor centers to assist investors with recruitment. Although labor laws apply equally to economic zones, unions have noted some difficulty organizing inside the zones.

The Philippines is signatory to all International Labor Organization (ILO) core conventions but has faced challenges with enforcement. Unions allege that companies or local officials use illegal tactics to prevent workers from organizing. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities. Meanwhile, the NTIPC monitors the application of international labor standards.

Reports of forced labor in the Philippines continue, particularly in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries.

The U.S. International Development Finance Corp. (DFC, formerly Overseas Private Investment Corporation or OPIC) provides debt financing, partial credit guarantees, political risk insurance, grants, equity investment, and private equity capital to support U.S. investors and their investments. It does so under a bilateral agreement with the Philippines. DFC can provide debt financing, in the form of direct loans and loan guarantees, of up to USD 1 billion per project for business investments, preferably with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others. DFC political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. and other investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment is also available for business investments in the Philippines. Grants are available for projects that are already reasonably developed but need additional, limited funding and specific work – for example technical, environment and social, or legal – in order to be bankable and eligible for DFC financing or insurance. In all cases, DFC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions. Past OPIC activities in the Philippines include projects with the National Power Corporation (NAPOCOR), The Asia Foundation, and a cloud-based technology company for the local cargo and courier industry. In addition, DFC supports twelve private equity funds that are eligible to invest in projects within the Philippines.

The Philippine Central Bank does not publish or post inward and outward FDI stock broken down by country. Total stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB). As of the third quarter of 2019, inward direct investment (i.e. liabilities) is USD 90 billion, while outward direct investment (i.e. assets) is USD 56.1 billion.

The Philippine Central Bank disaggregates data into equity and debt securities but does not publish or post the stock of portfolio investments assets broken down by country. Total foreign portfolio investment stock figures are reported under the “International Investment Position” data that Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB). As of third quarter 2019, outward portfolio investment (i.e. assets) was USD 25.2 billion, of which USD 2.2 billion was in equity investments and USD 23 billion was in debt securities.

Douglas Fowler, Economic Officer
Karen Ang, Trade Specialist
U.S. Embassy Manila
1201 Roxas Boulevard, Manila, Philippines
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

Transparency of the Regulatory System

The government establishes clear rules that foster competition. The USSFTA enhances transparency by requiring regulatory authorities to consult with interested parties before issuing regulations, and to provide advance notice and comment periods for proposed rules, as well as to publish all regulations. Singapore’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Rule-making authority is vested in the Parliament to pass laws that determine the regulatory scope, purpose, rights and powers of the regulator and the legal framework for the industry. Regulatory authority is vested in government ministries or in statutory boards, which are organizations that have been given autonomy to perform an operational function by legal statutes passed as Acts in parliament, and report to a specific Ministry. Local laws give regulatory bodies wide discretion to modify regulations and impose new conditions, but in practice agencies use this positively to adapt incentives or other services on a case-by-case basis to meet the needs of foreign as well as domestic companies. Acts of Parliament also confer certain powers on a Minister or other similar persons or authorities to make rules or regulations in order to put the Act into practice; these rules are known as subsidiary legislation.

National-level regulations are the most relevant for foreign businesses. Singapore, being a city-state, has no local or state regulatory layers.

Before a ministry instructs the Attorney-General’s Chambers (AGC) to draft a new bill or make an amendment to a bill, the ministry has to seek in-principle approval from the Cabinet for the proposed bill. The Legislation Division of AGC advises and helps vet or draft bills in conjunction with policymakers from relevant ministries. Public and private consultations are often requested for proposed draft legislative amendments. Thereafter, the Cabinet’s approval is required before the bill can be introduced in Parliament.  All Bills passed by Parliament (with some exceptions) must be forwarded to the Presidential Council for Minority Rights (PCMR) for scrutiny, and thereafter presented to the President for assent. Only after the President has assented to the Bill does the Bill become law (i.e. an Act of Parliament).

While ministries or regulatory agencies do conduct internal impact assessments of proposed regulations, there are no criteria used for determining which proposed regulations are subjected to an impact assessment, and there are no specific regulatory impact assessment guidelines. There is no independent agency tasked with reviewing and monitoring regulatory impact assessments and distributing findings to the public. The Ministry of Finance publishes a biennial Singapore Public Sector Outcomes Review (http://www.mof.gov.sg/Resources/Singapore-Public-Sector-Outcomes-Review-SPOR). It focuses on broad outcomes and indicators rather than policy evaluation. Results of scientific studies or quantitative analysis conducted in review of policies and regulations are not made publicly available.

Industry self-regulation occurs in several areas, including advertising and corporate governance. Advertising Standards Authority of Singapore  (ASAS), an advisory council under the Consumers Association of Singapore, administers the Singapore Code of Advertising Practice, which focuses on ensuring that advertisements are legal, decent, and truthful. Listed companies are required under the Singapore Exchange (SGX) Listing Rules to describe in their annual reports their corporate governance practices with specific reference to the principles and provisions of the Code. Listed companies must comply with the principles of the Code, and, if their practices vary from any provisions of the Code, they must note the reason for the variation and explain how the practices they have adopted are consistent with the intent of the relevant principle. The SGX plays the role of a self-regulatory organization (SRO) in listings, market surveillance, and member supervision to uphold the integrity of the market and ensure participants’ adherence to trading and clearing rules. There have been no reports of discriminatory practices aimed at foreign investors.

Singapore’s legal and accounting procedures are transparent and consistent with international norms and rank similar to the U.S. in international comparisons (http://worldjusticeproject.org/rule-of-law-index ). The prescribed accounting standards for Singapore-incorporated companies applying to be or are listed in the public market, Singapore Exchange, are known as Singapore Financial Reporting Standards (SFRS(I)), which areidentical to those of the International Accounting Standards Board (IASB). Non-listed Singapore-incorporated companies can voluntarily apply for SFRS(I). Otherwise, they are required to comply with Singapore Financial Reporting Standards (SFRS), which are also aligned with those of IASB. For the use of foreign accounting standards, the companies are required to seek approval of the Accounting and Corporate Regulatory Authority (ACRA).

For foreign companies with primary listings on the Singapore Exchange, the SGX Listing Rules allow the use of alternative standards such as International Financial Reporting Standards (IFRS) or the U.S. Generally Accepted Accounting Principles (U.S. GAAP). Accounts prepared in accordance with IFRS or U.S. GAAP need not be reconciled to SFRS(1). Companies with secondary listings on the Singapore Exchange need only reconcile their accounts to SFRS(I), IFRS, or U.S. GAAP.

Notices of proposed legislation to be considered by Parliament are published, including the text of the laws, the dates of the readings, and whether or not the laws eventually pass. The government has established a centralized Internet portal (www.reach.gov.sg ) to solicit feedback on selected draft legislation and regulations, a process that is being used with increasing frequency. There is no stipulated consultative period. Results of consultations are usually consolidated and published on relevant websites. As noted in the “Openness to Foreign Investment” section, some U.S. companies, in particular in the telecommunications and media sectors, are concerned about the government’s lack of transparency in its regulatory and rule-making process. However, many U.S. firms report they have opportunities to weigh in on pending legislation that affects their industries. These mechanisms also apply to investment laws and regulations.

The Parliament of Singapore website (https://www.parliament.gov.sg/parliamentary-business/bills-introduced ) publishes a database of all Bills introduced, read, and passed in Parliament in chronological order as of 2006. The contents are the actual draft texts of the proposed legislation/legislative amendments. All statutes are also publicly available in the Singapore Statutes Online website (https://sso.agc.gov.sg ). However, there is no centralized online location where key regulatory actions are published. Regulatory actions are published separately on websites of Statutory Boards.

Enforcement of regulatory offences is governed by both Acts of Parliament and subsidiary legislation. Enforcement powers of government statutory bodies are typically enshrined in the Act of Parliament constituting that statutory body. There is accountability to Parliament for enforcement action through Question Time, where Members of Parliament may raise questions with the Ministers on their respective Ministries’ responsibilities.

Singapore’s judicial system and courts serve as the oversight mechanism in respect of executive action (such as the enforcement of regulatory offences) and dispense justice based on law. The Supreme Court, which is made up of the Court of Appeal and the High Court, hears both civil and criminal matters. The Chief Justice heads the Judiciary. The President appoints the Chief Justice, the Judges of Appeal and the Judges of the High Court if she, acting at her discretion, concurs with the advice of the Prime Minister.

No systemic regulatory reforms or enforcement reforms relevant to foreign investors have been announced. The Monetary Authority of Singapore focuses enforcement efforts on timely disclosure of corporate information, business conduct of financial advisors, compliance with anti-money laundering/combatting the financing of terrorism requirements, deterring stock market abuse, and insider trading.. In March 2019, MAS published its inaugural Enforcement Report detailing enforcement measures and publishes recent enforcement actions on its website (https://www.mas.gov.sg/regulation/enforcement/enforcement-actions ).

International Regulatory Considerations

Singapore was the 2018 chair of the Association of Southeast Asian Nations (ASEAN). ASEAN is working towards the 2025 ASEAN Economic Community (AEC) Blueprint aimed at achieving a single market and production base, with a free flow of goods, services, and investment within the region. While ASEAN is working towards regulatory harmonization, there are no regional regulatory systems in place; instead, ASEAN agreements and regulations are enacted through each ASEAN Member State’s domestic regulatory system. While Singapore has expressed interest in driving intra-regional trade, the dynamics of ASEAN economies are convergent.

The WTO’s 2016 trade policy review notes that Singapore’s guiding principle for standardization is to align national standards with international standards, and Singapore is an elected member of the International Organization of Standardization (ISO) and International Electrotechnical Commission (IEC) Councils. Singapore encourages the direct use of international standards whenever possible. Singapore Standards (SS) are developed when there is no appropriate international standard equivalent, or when there is a need to customize standards to meet domestic requirements. At the end of 2015, Singapore had a stock of 553 SS, about 40 percent of which were references to international standards. Enterprise Singapore, the Singapore Food Agency, and the Ministry of Trade and Industry are the three national enquiry points under the TBT Agreement. There are no known reports of omissions in reporting to TBT.

A non-exhaustive list of major international norms and standards referenced or incorporated into the country’s regulatory systems include Base Erosion and Profit Shifting (BEPS) project, Common Reporting Standards (CRS), Basel III, EU Dual-Use Export Control Regulation, Exchange of Information on Request, 27 International Labor Organization (ILO) conventions on labor rights and governance, UN conventions, and WTO agreements.

Singapore is signatory to the Trade Facilitation Agreement (TFA). The WTO reports that Singapore has fully implemented the TFA (https://www.tfadatabase.org/members/singapore ).

Legal System and Judicial Independence

Singapore’s legal system has its roots in English common law and practice and is enforced by courts of law. The current judicial process is procedurally competent, fair, and reliable. In the 2020 Rule of Law Index by World Justice Project , it is ranked overall 12th in the world, 1st on order and security, 3rd on regulatory enforcement, 3rd in absence of corruption, 6th on civil and criminal justice, 29th on constraints on government powers, 26th on open government, and 32nd on fundamental rights. Singapore’s legal procedures are ranked 1st in the world in the World Bank’s 2020 Ease of Doing Business sub-indicator on contract enforcement which measures speed, cost, and quality of judicial processes to resolve a commercial dispute. The judicial system remains independent of the executive branch and the executive does not interfere in judiciary matters.

Laws and Regulations on Foreign Direct Investment

Singapore strives to promote an efficient, business-friendly regulatory environment. Tax, labor, banking and finance, industrial health and safety, arbitration, wage, and training rules and regulations are formulated and reviewed with the interests of both foreign investors and local enterprises in mind. Starting in 2005, a Rules Review Panel, comprising senior civil servants, began overseeing a review of all rules and regulations; this process will be repeated every five years. A Pro-Enterprise Panel  of high-level public sector and private sector representatives examines feedback from businesses on regulatory issues and provides recommendations to the government.

The Cybersecurity Act, which came into force in August 2018, establishes a comprehensive regulatory framework for cybersecurity. The Act provides the Commissioner of Cyber Security with powers to investigate, prevent, and assess the potential impact of cyber security incidents and threats in Singapore. These can include requiring persons and organizations to provide requested information, requiring the owner of a computer system to take any action to assist with cyber investigations, directing organizations to remediate cyber incidents, and, if safeguards have been met, authorizing officers to enter premises, and installing software and take possession of computer systems to prevent serious cyber-attacks in the event of severe threat. The Act also establishes a framework for the designation and regulation of Critical Information Infrastructure (CII). Requirements for CII owners include a mandatory incident reporting regime, regular audits and risk assessments, and participation in national cyber security stress tests. In addition, the Act will establish a regulatory regime for cyber security service providers and required licensing for penetration testing and managed security operations center (SOC) monitoring services. U.S. business chambers have expressed concern about the effects of licensing and regularly burdens on compliance costs, insufficient checks and balances on the investigatory powers of the authorities, and the absence of a multidirectional cyber threat sharing framework that includes protections from liability. Under the law, additional measures, such as the Cybersecurity Labelling Scheme, continue to be introduced. Authorities stress that, “in view of the need to strike a good balance between industry development and cybersecurity needs, the licensing framework will take a light-touch approach.”

Competition and Anti-Trust Laws

The Competition and Consumer Commission of Singapore (CCCS) is a statutory board under the Ministry of Trade and Industry (MTI) and is tasked with administering and enforcing the Competition Act. The Act contains provisions on anti-competitive agreements, decisions, and practices; abuse of dominance; enforcement and appeals process; and mergers and acquisitions. The Competition Act was enacted in 2004 in accordance with U.S-Singapore FTA commitments, which contains specific conduct guarantees to ensure that Singapore’s GLCs will operate on a commercial and non-discriminatory basis towards U.S. firms. GLCs with substantial revenues or assets are also subject to enhanced transparency requirements under the FTA. A 2018 addition to the Act gives the CCCS additional administrative power to protect consumers against unfair trade practices.

The most recent infringement decision  issued by CCCS occurred in January 2019 when three competing hotel operators, including a major British hospitality company, exchanged “commercially sensitive” information. The operators were fined a total financial penalty of $1.1 million for conduct potentially resulting in reduced competitive pressure on the market. No other cases tied to commercial behavior in 2019 or the first quarter of 2020 have received penalties from CCCS.

Expropriation and Compensation

Singapore has not expropriated foreign owned property and has no laws that force foreign investors to transfer ownership to local interests. Singapore has signed investment promotion and protection agreements with a wide range of countries. These agreements mutually protect nationals or companies of either country against certain non-commercial risks, such as expropriation and nationalization and remain in effect unless otherwise terminated. The USSFTA contains strong investor protection provisions relating to expropriation of private property and the need to follow due process; provisions are in place for an owner to receive compensation based on fair market value. No disputes are pending.

Dispute Settlement

ICSID Convention and New York Convention

Singapore is party to the Convention on the Settlement of Investment Disputes (ICSID Convention) and the convention on the Recognition and Enforcement of Foreign Arbitration Awards (1958 New York Convention). Singapore passed an Arbitration (International Investment Disputes) Act to implement the ICSID Convention in 1968. Singapore acceded to the 1958 New York Convention in August 1986 and gives effect to it via the International Arbitration Act (IAA). The 1958 New York Convention is annexed to the IAA as the Second Schedule. Singapore is bound to recognize awards made in any other country that is a signatory to the 1958 New York Convention. (http://www.lexology.com/library/detail.aspx?g=3f833e8e-722a-4fca-8393-f35e59ed1440 )

Domestic arbitration in Singapore is governed by the Arbitration Act (Cap 10). The Arbitration Act was enacted to align the laws applicable to domestic arbitration with the Model Law.

Singapore is also a party to the United Nations Convention on International Settlement Agreements Resulting from Mediation, further referred to as the “Convention.” This Convention provides a process for parties to enforce or invoke an international commercial mediated settlement agreement once the conditions and requirements of the Convention are met. Singapore has put in place domestic legislation – the Singapore Convention on Mediation Bill 2020, which was passed in Parliament on 4 February 2020. On 25 February 2020, Singapore and Fiji were the first two countries to deposit their respective instruments of ratification of the Convention at the United Nations Headquarters. The Convention will enter into force six months after the third State deposits its instrument of ratification, acceptance and approval or accession.

Investor-State Dispute Settlement

After Singapore’s accession to the New York Convention of 1958 on August 21, 1986, it re-enacted most of its provisions in Part III of the IAA. By acceding to this Convention, Singapore is bound to recognize awards made in any other country that is a signatory to the Convention. Singapore is a member of the Commonwealth of Nations and, under the Reciprocal Enforcement of Commonwealth Judgments Act (RECJA), recognizes judgments made in the United Kingdom, as well as jurisdictions that are part of the Commonwealth and with which Singapore has reciprocal arrangements for the recognition and enforcement of judgments. The Act lists the countries with which such arrangements exist, and of the 53 countries that are members of the Commonwealth, nine have been listed. (https://sso.agc.gov.sg/SL/RECJA1921-N1?DocDate=19990701) Singapore also has reciprocal recognition of foreign judgements with Hong Kong Special Administrative Region of the People’s Republic of China.

Singapore is party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). Singapore passed an Arbitration (International Investment Disputes) Act to implement the ICSID Convention in 1968. ICSID Convention has an enforcement mechanism for arbitration awards rendered pursuant to ICSID rules that is separate from the 1958 arbitration awards rendered pursuant to ICSID rules that is separate from the 1958 New York Convention. Investor-State dispute settlement provisions in Singapore’s trade agreements, including the USSFTA, refer to ICSIID rules as one of the possible options for resolving disputes. Investor-State arbitration under rules other than ICSID’s would result in an arbitration award that may be enforced using the 1958 New York Convention.

Singapore has had no investment disputes with U.S. persons or other foreign investors in the past ten years that have proceeded to litigation. Any disputes settled by arbitration/mediation would remain confidential. There have been no claims made by U.S. investors under the USSFTA. There is no history of extrajudicial action against foreign investors. The government is investing in establishing Singapore as a global mediation hub.

International Commercial Arbitration and Foreign Courts

Dispute resolution (DR) institutions include the Singapore International Arbitration Centre (SIAC), Singapore International Mediation Centre (SIMC), Singapore International Commercial Court (SICC), and the Singapore Chamber of Maritime Arbitration (SCMA). Singapore’s extensive dispute resolution institutions and integrated dispute resolution facilities at Maxwell Chambers have contributed to its development as a regional hub for alternative disputes mechanisms. The SIAC is the major arbitral institution and its increasing caseload reflects Singapore’s policy of encouraging the use of alternative modes of dispute resolution, including arbitration.

Arbitral awards in Singapore, for either domestic or international arbitration, are legally binding and enforceable in Singapore domestic courts, as well as in jurisdictions that have ratified the 1958 New York Convention.

The International Arbitration Act (IAA) regulates international arbitrations in Singapore. Domestic arbitrations are regulated by the Arbitration Act (AA). The IAA is heavily based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, with a few significant differences. For example, arbitration agreements must be in writing. This requirement is deemed to be satisfied if the content is recorded in any form, including electronic communication, regardless of whether the arbitration agreement was concluded orally, by conduct, or by other means (e.g. an arbitration clause in a contract or a separate agreement can be incorporated into a contract by reference). The AA is also primarily based on the UNCITRAL Model Law. There have been no reported complaints about the partiality or transparency of court processes in investment and commercial disputes.

Bankruptcy Regulations

Singapore has bankruptcy laws allowing both debtors and creditors to file a bankruptcy claim. Singapore ranks number 27 for resolving insolvency in the World Bank’s 2020 Doing Business Index. While Singapore performed well in recovery rate and time of recovery following bankruptcies, the country did not score well on cost of proceedings or insolvency frameworks.. In particular, the insolvency framework does not require approval by the creditors for sale of substantial assets of the debtor or approval by the creditors for selection or appointment of the insolvency representative.

Singapore has made several reforms to enhance corporate rescue and restructuring processes, including features from Chapter 11 of the U.S. Bankruptcy Code. Amendments to the Companies Act, which came into force in May 2017, include additional disclosure requirements by debtors, rescue financing provisions, provisions to facilitate the approval of pre-packaged restructurings, increased debtor protections, and cram-down provisions that will allow a scheme to be approved by the court even if a class of creditors oppose the scheme, provided the dissenting class of creditors are not unfairly prejudiced by the scheme.

In October 2018, the Insolvency, Restructuring and Dissolution Act was passed, but the expected effective date of the bill has been delayed from the first half of 2019 into 2020.. It updates the insolvency legislation and introduces a significant number of new provisions, particularly with respect to corporate insolvency. It mandates licensing, qualifications, standards, and disciplinary measures for insolvency practitioners. It also includes standalone voidable transaction provisions for corporate insolvency and, a new wrongful trading provision. The Act allows ‘out of court’ commencement of judicial management, permits judicial managers to assign the proceeds of certain insolvency related claims, restricts the operation of contractual ‘ipso facto clauses’ upon the commencement of certain restructuring and insolvency procedures, and modifies the operation of the scheme of arrangement cross class ‘cram down’ power. Authorities continue to seek public consultations of subsidiary legislation to be drafted under the Act.

Two MAS-recognized consumer credit bureaus operate in Singapore: the Credit Bureau (Singapore) Pte Ltd and Experian Credit Bureau Singapore Pte Ltd. U.S. industry advocates enhancements to Singapore’s credit bureau system, in particular, adoption of an open admission system for all lenders, including non-banks. Bankruptcy is not criminalized in Singapore. https://www.acra.gov.sg/CA_2017/ 

Investment Incentives

Singapore’s Economic Development Board (EDB) is the lead investment promotion agency facilitating foreign investment into Singapore (https://www.edb.gov.sg ). EDB undertakes investment promotion and industry development, and works with international businesses, both foreign and local, by providing information, connection to partners, and access to government incentives for their investments. The Agency for Science, Technology, and Research (A*STAR) is Singapore’s lead public sector agency focused on economic-oriented research to advance scientific discovery and innovative technology. (https://www.a-star.edu.sg ) The National Research Foundation (NRF) provides competitive grants for applied research through an integrated grant management system, (https://researchgrant.gov.sg/pages/index.aspx ). Various government agencies (including Intellectual Property Office of Singapore (IPOS), NRF, and EDB,) provide venture capital co-funding for startups and commercialization of intellectual property.

Foreign Trade Zones/Free Ports/Trade Facilitation

Singapore has nine free-trade zones (FTZs) in five geographical areas operated by three FTZ authorities. The FTZs may be used for storage and repackaging of import and export cargo, and goods transiting Singapore for subsequent re-export. Manufacturing is not carried out within the zones. Foreign and local firms have equal access to the FTZ facilities.

Performance and Data Localization Requirements

Performance requirements are applied uniformly and systematically to both domestic and foreign investors. Singapore has no forced localization policy requiring domestic content in goods or technology. The government does not require investors to purchase from local sources or specify a percentage of output for export. There are no rules forcing the transfer of technology. There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption. The industry regulator is the Info-communications Media Development Authority (IMDA), a statutory board under the Ministry of Communications and Information (MCI).

In May 2020, Singapore will tighten requirements for hiring foreign workers, including raising minimum salary thresholds and additional enforcement of penalties for employers not giving “fair consideration” to local applicants before hiring foreign workers.

Personal data matters are independently overseen by the Personal Data Protection Commission, which administers and enforces the Personal Data Protection Act (PDPA) of 2012. The PDPA governs the collection, use, and disclosure of personal data by the private sector and covers both electronic and non-electronic data.

Singapore is currently reviewing the PDPA to ensure that it keeps pace with the evolving needs of businesses and individuals in a digital economy such as introducing an enhanced framework for the collection, use, and disclosure of personal data and a mandatory data breach notification regime.

Singapore does not have a data localization policy. Singapore participates in various regional and international frameworks that promote interoperability and harmonization of rules to facilitate cross-border data flows. The ASEAN Framework on Digital Data Governance (FDFG) is one example. Under DFDFG, Singapore will focus on developing model contractual clauses and certification for cross border data flows within the ASEAN region. Another is Singapore’s participation in the APEC Cross-Border Privacy Rules (CBPR) and Privacy Recognition for Processors (PRP) systems, to facilitate data transfers for certified organizations across APEC economies.

Real Property

Property rights and interests are enforced in Singapore. Residents have access to mortgages and liens, with reliable recording of properties. In the 2020 World Bank Doing Business Report, Singapore ranks first in the world in enforcing contracts and number 21st in registering property.

Foreigners are not allowed to purchase public housing (HDB) in Singapore, and prior approval from the Singapore Land Authority is required to purchase landed residential property and residential land for development. Foreigners can purchase non-landed, private sector housing (e.g. condominiums or any unit within a building) without the need to obtain prior approval. However, they are not allowed to acquire all the apartments or units in a development without prior approval. These restrictions also apply to foreign companies.

There are no restrictions on foreign ownership of industrial and commercial real estate. Since July 2018, foreigners who purchase homes in Singapore are required to pay an additional effective 20 percent tax on top of standard buyer’s taxes.. However, U.S. citizens are accorded national treatment under the FTA, meaning only second and subsequent purchases of residential property will be subject to 12 and 15 percent ABSD, equivalent to Singaporean citizens.

The availability of covered bond legislation under MAS Notice 648 has provided an incentive for Singapore financial institutions to issue covered bonds. Under Notice 648, only a bank incorporated in Singapore may issue covered bonds. The three main Singapore banks: DBS, OCBC, and UOB, all have in place covered bond programs, with the issues offered to private investors. The banking industry has made suggestions to allow the use of covered bonds in repo transactions with the central bank and to increase the encumbrance limit, currently at four percent. (http://www.mas.gov.sg/regulations/notices/notice-648 ))

Intellectual Property Rights

Singapore maintains one of the strongest intellectual property rights (IPR) regimes in Asia. The Chief Executive of the Intellectual Property Office of Singapore was elected director-Director General of the World Intellectual Property Organization (WIPO) in April 2020. However, some concerns remain in certain areas such as business software piracy, online piracy, and enforcement.

Effective from January 1, 2020, all patent applications must be fully examined by the Intellectual Property Office of Singapore (IPOS) to ensure that any foreign-granted patents fully satisfy Singapore’s patentability criteria. The Registered Designs (Amendment) Act broadens the scope of registered designs to include virtual designs and color as a design feature, and will stipulate the default owner of designs to be the designer of a commissioned design, rather than the commissioning party.

The USSFTA ensures that government agencies will not grant regulatory approvals to patent- infringing products, but Singapore does allow parallel imports. Under the Patents Act, with regards to pharmaceutical products, the patent owner has the right to bring an action to stop an importer of “grey market goods” from importing the patent owner’s patented product, provided that the product has not previously been sold or distributed in Singapore, the importation results in a breach of contract between the proprietor of the patent and any person licensed by the proprietor of the patent to distribute the product outside Singapore and the importer has knowledge of such.

The USSFTA ensures protection of test data and trade secrets submitted to the government for regulatory approval purposes. Disclosure of such information is prohibited. Such data may not be used for approval of the same or similar products without the consent of the party who submitted the data for a period of five years from the date of approval of the pharmaceutical product and ten years from the date of approval of an agricultural chemical. Singapore has no specific legislation concerning protection of trade secrets. Instead, it protects investors’ commercially valuable proprietary information under common law by the Law of Confidence as well as legislation such as the Penal Code (e.g. theft) and the Computer Misuse Act (e.g., unauthorized access to a computer system to download information). U.S. industry has expressed concern that this provision is inadequate.

Singapore is a member of the WTO and a party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). It is a signatory to other international intellectual property rights agreements, including the Paris Convention, the Berne Convention, the Patent Cooperation Treaty, the Madrid Protocol, and the Budapest Treaty. WIPO Secretariat opened a regional office in Singapore in 2005 (http://www.wipo.int/about-wipo/en/offices/singapore/ ). Amendments to the Trademark Act, which were passed in January 2007, fulfill Singapore’s obligations in WIPO’s revised Singapore Treaty on the Law of Trademarks.

Singapore ranked 11th out of 53 in the world in the 2020 U.S. Chamber of Commerce’s International IP Index. The index noted that Singapore’s key strengths include an advanced national IP framework and efforts to accelerate research, patent examination, and grants. The index also lauded Singapore as a global leader in patent protection and online copyright enforcement. Despite a decrease in estimated software piracy from 35 percent in 2009 to 27 percent in 2020, the Index noted that piracy levels remain high for a developed, high-income country. Lack of transparency and data on customs seizures of IP-infringing goods is also noted as a key area of weakness.

Singapore does not publicly report the statistics on seizures of counterfeit goods, and does not rate highly on enforcement of physical counterfeit goods, online sales of counterfeit goods or digital online piracy, according to the 2018 U.S. Chamber of Commerce’s International IP Index. Singapore is not listed in USTR’s 2020 Special 301 Report, but some Singapore-based online retailers are named in USTR’s2019 Review of Notorious Markets. For additional information about national laws and points of contact at local IP offices, see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Capital Markets and Portfolio Investment

The government takes a favorable stance towards foreign portfolio investment and fixed asset investments. While it welcomes capital market investments, the government has introduced macro-prudential policies aimed at reducing foreign speculative inflows in the real estate sector since 2009. The government promotes Singapore’s position as an asset and wealth management center, and assets under management grew 5.4 percent in 2018 to US$2.4 trillion (S$3.4 trillion)– the latest year for which the Monetary Authority of Singapore conducted a survey.

The Government of Singapore facilitates the free flow of financial resources into product and factor markets, and the Singapore Exchange (SGX) is Singapore’s stock market. An effective regulatory system exists to encourage and facilitate portfolio investment. Credit is allocated on market terms and foreign investors can access credit, U.S. dollars, Singapore dollars (SGD), and other foreign currencies on the local market. The private sector has access to a variety of credit instruments through banks operating in Singapore. The government respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.

Money and Banking System

Singapore’s banking system is sound and well regulated by the Monetary Authority of Singapore (MAS), and it serves as a financial hub for the region. Banks have a very high domestic penetration rate, and according to World Bank Financial Inclusion indicators, over 97 percent of persons held a financial account in 2017. (latest year available). Local Singapore banks saw net profits rise 27 percent in the last quarter of 2019. Banks are statutorily prohibited from engaging in non-financial business. Banks can hold 10 percent or less in non-financial companies as an “equity portfolio investment.” At the end of 2019, the non-performing loans ratio (NPL ratio) of the three local banks remained at an averaged 1.5 percent since the last quarter of 2018. The World Bank records Singapore’s banking sector overall NPL ratio at 1.3 in 2018.

Foreign banks require licenses to operate in the country. The tiered licenses, for Merchant, Offshore, Wholesale, Full Banks and Qualifying Full Banks (QFBs) subject banks to further prudential safeguards in return for offering a greater range of services. U.S. financial institutions enjoy phased-in benefits under the USSFTA. Since 2006, U.S.-licensed full service banks that are also QFBs have been able to operate at an unlimited number of locations (branches or off-premises ATMs) versus 25 for non-U.S. full service foreign banks with QFB status.

Under the OECD Common Reporting Standards (CRS), which has been in effect since January 2017, Singapore-based Financial Institutions (SGFIs) – depository institutions such as banks, specified insurance companies, investment entities, and custodial institutions – are required to establish the tax residency status of all their account holders, collect and retain CRS information for all non-Singapore tax residents in the case of new accounts and report to tax authorities the financial account information of account holders who are tax residents of jurisdictions with which Singapore has a Competent Authority Agreement (CAA) to exchange the information. As of December 2019, Singapore has established more than 80 exchange relationships, include one with the United States established in September 2018.

U.S. financial regulations do not restrict foreign banks’ ability to hold accounts for U.S. citizens. U.S. Citizens are encouraged to alert the nearest U.S. Embassy of any practices they encounter with regard to the provision of financial services.

Fintech investments in Singapore rose from $365 million in 2018 to $861 million in 2019. To strengthen Singapore’s position as a global Fintech hub, MAS has created a dedicated Fintech Office as a one-stop virtual entity for all FinTech-related matters to enable FinTech experimentation and promote an open-API (Application Programming Interfaces) in the financial industry. Investment in payments start-ups accounted for about 40 percent of all funds. Singapore has over 50 innovation labs established by global financial institutions and technology companies.

MAS also aims to be a regional leader in the implementation of blockchain technologies to position Singapore as a financial technology center. MAS and the Association of Banks in Singapore are prototyping the use of Distributed Ledger Technology (DLT) for inter-bank clearing and settlement of payments and securities. Two phases have been completed, including a proof-of-concept project for inter-bank payments and software prototypes for decentralized inter-bank payment and settlements. The next two phases will focus on DLT interoperability, including Delivery-versus-Payment (DvP) settlement of payments and securities, and cross-border payments. A fifth phase will then explore the business value of a blockchain-based multi-currency payments network, such as in enabling business opportunities that would benefit or make viable greater cost efficiencies compared to existing systems. (https://www.mas.gov.sg/schemes-and-initiatives/Project-Ubin ).

Alternative financial services include retail and corporate non-bank lending via finance companies, co-operative societies, and pawnshops; and burgeoning financial technology-based services across a wide range of sectors: crowdfunding, Initial Coin Offerings, payment services and remittance, which remains a small but growing sector. In January 2020, the Payment Services Bill went into effect, which will require all cryptocurrency service providers to be licensed with the intent to provide more user protection. Smaller payment firms will receive a different classifications from larger institutions and will be less heavily regulated. Key infrastructures supporting Singapore’s financial market include interbank (MEP), Foreign exchange (CLS, CAPS), retail (SGDCCS, USDCCS, CTS, IBG, ATM, FAST, NETS, EFTPOS), securities (MEPS+-SGS, CDP, SGX-DC) and derivatives settlements (SGX-DC, APS)(https://www.mas.gov.sg/regulation/payments/payment-systems )

Foreign Exchange and Remittances

Foreign Exchange

The USSFTA commits Singapore to the free transfer of capital, unimpeded by regulatory restrictions. Singapore places no restrictions on reinvestment or repatriation of earnings and capital, and maintains no significant restrictions on remittances, foreign exchange transactions and capital movements.

Singapore’s monetary policy has been centered on the management of the exchange rate since 1981, with the stated primary objective of promoting medium term price stability as a sound basis for sustainable economic growth. As described by MAS, there are three main features of the exchange rate system in Singapore. MAS operates a managed float regime for the Singapore dollar with the trade-weighted exchange rate allowed to fluctuate within a policy band. The Singapore dollar is managed against a basket of currencies of its major trading partners. The exchange rate policy band is periodically reviewed to ensure that it remains consistent with the underlying fundamentals of the economy.

Remittance Policies

There are no time or amount limitations on remittances. No significant changes to investment remittance was implemented or announced over the past year. Local and foreign banks may impose their own limitations on daily remittances.

Sovereign Wealth Funds

The Government of Singapore has three key investment entities. GIC Private Limited (GIC) is the sovereign wealth fund in Singapore that manages the government’s substantial investments, fiscal, and foreign reserves, with the stated objective to achieve long-term returns and preserve the international purchasing power of the reserves. Temasek is a holding company wholly owned by the Singapore Minister for Finance. Under the Singapore Minister for Finance (Incorporation) Act, the Minister for Finance is a corporate body. The MAS, as the central bank of Singapore, manages the Official Foreign Reserves, and a significant proportion of its portfolio is invested in liquid financial market instruments.

GIC does not publish the size of the funds under management, but some industry observers estimate its managed assets may exceed $400 billion. GIC does not invest domestically, but manages Singapore’s international investments, which are generally passive (non-controlling) investments in publicly traded entities. The United States is its top investment destination, accounting for 32 percent of GIC’s portfolio as of March 2019, while Asia ex-Japan accounts for 20 percent, the Eurozone 12 percent, Japan 12 percent, and UK 6 percent. Investments in the United States are diversified and include industrial and commercial properties, student housing, power transmission companies, and financial, retail and business services. Although not required by law, GIC has published an annual report since 2008.

Temasek began as a holding company for Singapore’s state-owned enterprises, now GLCs, but has since branched out to other asset classes and often holds significant stake in companies. As of March 2019, Temasek’s portfolio value reached $222 billion, and its asset exposure to Singapore is 26 percent; 40 percent in the rest of Asia, and 15 percent in North America. As set out in the Temasek Charter, Temasek delivers sustainable value over the long term for its stakeholders. Temasek has published a Temasek Review annually since 2004. The statements only provides consolidated financial statements, which aggregate all of Temasek and its subsidiaries into a single financial report. A major international audit firm audits Temasek Group’s annual statutory financial statements. GIC and Temasek uphold the Santiago Principles for sovereign investments. GIC is a member of the International Forum of Sovereign Wealth Funds.

Other investing entities of government funds include EDB Investments Pte Ltd, Singapore’s Housing Development Board, and other government statutory boards with funding decisions driven by goals emanating from the central government

Singapore has an extensive network of full and partial SOEs that held under the umbrella of Temasek Holdings, a holding company with the Singapore Minister for Finance as its sole shareholder. Singapore SOEs play a substantial role in Singapore’s domestic economy, especially in strategically important sectors including telecommunications, media, healthcare, public transportation, defense, port, gas, electricity grid, and airport operations. In addition, the SOEs are also present in many other sectors of the economy, including banking, subway, airline, consumer/lifestyle, commodities trading, oil and gas engineering, postal services, infrastructure, and real estate.

The Government of Singapore emphasizes that government-linked entities operate on an equal basis with both local and foreign businesses without exception. There is no published list of SOEs.

Temasek’s annual report notes that its portfolio companies are guided and managed by their respective boards and management, and Temasek does not direct their business decisions or operations. However, as a substantial shareholder, corporate governance within GLCs typically are guided or influenced by policies developed by Temasek. There are differences in corporate governance disclosures and practices across the GLCs, and GLC boards are allowed to determine their own governance practices, with Temasek advisors occasionally meeting with the companies to make recommendations. GLC board seats are not specifically allocated to government officials, although it “leverages on its networks to suggest qualified individuals for consideration by the respective boards”, and leaders formerly from the armed forces or civil service are often represented on boards and fill senior management positions. Temasek exercises its shareholder rights to influence the strategic directions of its companies but does not get involved in the day-to-day business and commercial decisions of its firms and subsidiaries.

GLCs operate on a commercial basis and compete on an equal basis with private businesses, both local and foreign. Singapore officials highlight that the government does not interfere with the operations of GLCs or grant them special privileges, preferential treatment or hidden subsidies, asserting that GLCs are subject to the same regulatory regime and discipline of the market as private sector companies. Observers, however, have been critical of cases where GLCs have entered into new lines of business or where government agencies have “corporatized” certain government functions, in both circumstances entering into competition with already-existing private businesses. Some private sector companies have said they encountered unfair business practices and opaque bidding processes that appeared to favor incumbent, government-linked firms. In addition, they note that the GLC’s institutional relationships with the government give them natural advantages in terms of access to cheaper funding and opportunities to shape the economic policy agenda in ways that benefit their companies.

The USSFTA contains specific conduct guarantees to ensure that GLCs will operate on a commercial and non-discriminatory basis towards U.S. firms. GLCs with substantial revenues or assets are also subject to enhanced transparency requirements under the USSFTA. In accordance with its USSFTA commitments, Singapore enacted the Competition Act in 2004 and established the Competition Commission of Singapore in January 2005. The Act contains provisions on anti-competitive agreements, decisions, and practices, abuse of dominance, enforcement and appeals process, and mergers and acquisitions.

Privatization Program

The government has privatized GLCs in multiple sectors and has not publicly announced further privatization plans, but is likely to retain controlling stakes in strategically important sectors, including telecommunications, media, public transportation, defense, port, gas, electricity grid, and airport operations. The Energy Market Authority (EMA) is extending the liberalization of the retail market from commercial and industrial consumers with an average monthly electricity consumption of at least 2,000 kWh to households and smaller businesses. The Electricity Act and the Code of Conduct for Retail Electricity Licensees govern licensing and standards for electricity retail companies.

The awareness and implementation of corporate social responsibility (CSR) in Singapore has been increasing since the formation of the Global Compact Network Singapore (GCNS) under the United Nations Global Compact (UNGC) network, with the goals of encouraging companies to adopt sustainability principles related to human and labor rights, environmental conservation, and anti-corruption. GCNS facilitates exchanges, conducts research, and provides training in Singapore to build capacity in areas including sustainability reporting, supply chain management, ISO 26000, and measuring and reporting carbon emissions.

KPMG’s 2017 Corporate Responsibility Reporting survey showed that 84 percent of the largest companies in Singapore are fulfilling their corporate responsibility and sustainability reporting responsibilities, which is higher than the global average at 72 percent. KPMG’s survey also noted that climate and environment risks are not adequately recognized or addressed by Singapore companies. Only 17 percent of Singapore companies have set carbon-reduction targets, lower than the global rate of 50 percent. The Government of Singapore notes that in 2018 as part of the Year of Climate Action, the Ministry of Environment and Water Resources received more than 500 pledges from companies that have made public commitments toward taking climate action. A 2019 World Wide Fund for Nature (WWF) survey showed a lack of transparency by Singapore companies in disclosing palm oil sources. However, awareness is growing and the Southeast Asia Alliance for Sustainable Palm Oil (Saspo) has received additional pledges in 2018 by companies to adhere to standards for palm oil sourcing set by the Roundtable for Sustainable Palm Oil (RSPO). A group of F&B, retail and hospitality companies announced in January 2019 what the WWF calls “the most impactful business response to-date on plastics.” The pact, initiated by WWF and supported by Singapore’s National Environment Agency, is a commitment to significantly reduce plastic production and usage by 2030.

In June 2016, the Singapore Exchange (SGX) introduced mandatory, comply-or-explain, sustainability reporting requirements for all listed companies, including material environmental, social and governance practices, from the financial year ending December 31, 2017 onwards. The Singapore Environmental Council (SEC) operates a green labeling scheme, which endorses environmentally friendly products, numbering over 3,000 from 2729 countries. The Association of Banks in Singapore (ABS) has issued voluntary guidelines to banks in Singapore last updated in Jule 2018 encouraging them to adopt sustainable lending practices, including the integration of environmental, social and governance (ESG) principles into their lending and business practices. Singapore-based banks is listed in a 2018 Market Forces report as major lenders in regional coal financing.

Singapore has not developed a National Action Plan on business and human rights, but promotes responsible business practices, and encourages foreign and local enterprises to follow generally accepted CSR principles. The government does not explicitly factor responsible business conduct (RBC) policies into its procurement decisions.

The host government effectively and fairly enforces domestic laws with regard to human rights, labor rights, consumer protection, environmental protections, and other laws/regulations intended to protect individuals from adverse business impacts. The private sector’s impact on migrant workers and their rights, and domestic migrant workers in particular (due to the latter’s exemption from the Employment Act which stipulates the rights of workers), remains an area of advocacy by civil society groups. The government has taken incremental steps to improve the channels of redress and enforcement of migrant workers’ rights; however, key concerns about legislative protections remain unaddressed for domestic migrant workers. The government generally encourages businesses to comply with international standards. However, there are no specific mentions of the host government encouraging adherence to the OECD Due Diligence Guidance, or supply chain due diligence measures.

The Companies Act principally governs companies in Singapore. Key areas of corporate governance covered under the act include separation of ownership from management, fiduciary duties of directors, shareholder remedies, and capital maintenance rules. Limited liability partnerships are governed by the Limited Liability Partnerships Act. Certain provisions in other statutes such as the Securities and Futures Act are also relevant to listed companies. Listed companies are required under the Singapore Exchange Listing Rules to describe in their annual reports their corporate governance practices with specific reference to the principles and provisions of the Code of Corporate Governance (“Code”). Listed companies must comply with the principles of the Code and if their practices vary from any provision in the Code, they must explain the variation and demonstrate the variation is consistent with the relevant principle. The revised Code of Corporate Governance will impact Annual Reports covering financial years from January 1, 2019 onward. The revised code encourages board renewal, strengthens director independence, increases transparency of remuneration practices, enhances board diversity, and encourages communication with all stakeholders. MAS also established an independent Corporate Governance Advisory Committee (CGAC) to advocated good corporate governance practices in February 2019. The CGAC monitors companies’ implementation of the code and advises regulators on corporate governance issues.

There are independent NGOs promoting and monitoring responsible business conduct (RBC). Those monitoring or advocating around RBC are generally able to do their work freely within most areas. However, labor unions are tightly controlled and legal rights to strike are granted with restrictions under the Trade Disputes Act.

Singapore has no oil, gas, or mineral resources and is not a member of the Extractive Industries Transparency Initiative (EITI). A small sector in Singapore processes rare minerals and complies with responsible supply chains and conflict mineral principles. Under the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) framework, it is a requirement for Corporate Service Providers to develop and implement internal policies, procedures and controls to comply with Financial Action Task Force (FATF) recommendations on combating of money laundering and terrorism financing.

Singapore actively enforces its strong anti-corruption laws, and corruption is not cited as a concern for foreign investors. Transparency International’s 2019 Corruption Perception Index ranks Singapore 4th 4th of 180175 countries globally, the highest ranking Asian country. The Prevention of Corruption Act (PCA), and the Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act provide the legal basis for government action by the Corrupt Practices Investigation Bureau (CPIB), which is the only agency authorized under the PCA to investigate corruption offences and other related offences. These laws cover acts of corruption within Singapore as well as those committed by Singaporeans abroad. When cases of corruption are uncovered, whether in the public or private sector, the government deals with them firmly, swiftly, and publicly. The anti-corruption laws extend to family members of officials, and to political parties. The CPIB is effective and non-discriminatory. Singapore is generally perceived to be one of the least corrupt countries in Asia and the world, and corruption is not identified as an obstacle to FDI in Singapore. In its 2018 annual review of corruption, Asia, Political, and Economic Risk Consultancy rated Singapore the least corrupt country in the Asian-Pacific Region and praised Singapore authority’s response to a high-level corruption case involving Keppel Offshore & Marine, in which GLC Temasek Holdings holds a 20 percent stake. Singapore is a signatory to the UN Anticorruption Convention, but not the OECD Anti-Bribery Convention.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Corrupt Practices Investigation Bureau
2 Lengkok Bahru, Singapore 159047
+65 6270 0141
 info@cpib.gov.sg

Contact at a “watchdog” organization:

Transparency International
Alt-Moabit 96
10559 Berlin, Germany
+49 30 3438 200

Singapore’s political environment is stable and there is no history of incidents involving politically motivated damage to foreign investments in Singapore. The ruling People’s Action Party (PAP) has dominated Singapore’s parliamentary government since 1959 and currently controls 83 of the 89 regularly contested parliamentary seats. Singapore opposition parties, which currently hold six regularly contested parliamentary seats and three additional seats reserved to the opposition by the constitution, do not usually espouse views that are radically different from the mainstream of Singapore political opinion.

As of June 20192018, Singapore’s labor market totaled 3.7 million workers; this includes about 1.4 million foreigners, of whom about 684 percent are basic skilled or semi-skilled workers. The labor market continues to be tight, with overall unemployment rate averaging in the 2.4 percent the first quarter of 2020. Budget 2020 announced in February and two subsequent supplementary budgets announced in March and April, provides for substantial wage and training support for all firms during the COVID-19 outbreak. In sectors, such as travel and tourism, the government offered temporary employment or training for workers placed on unpaid leave. 2018. Local labor laws allow for relatively free hiring and firing practices. Either party can terminate employment by giving the other party the required notice. The Ministry of Manpower (MOM) must approve employment of foreigners.

Since 2011, the government has introduced policy measures to support productivity increases coupled with reduced dependence on foreign labor. In Budget 2019, MOM announced a decrease in the foreign worker quota ceiling from 40 percent to 38 percent on January 1, 2020 and to 35 percent on January 1, 2021. The quota reduction does not apply to those on Employment Passes which are high skilled workers making above $33,100 per year. In Budget 2020, the foreign worker quota was cut further in the for mid-skilled (“S Pass”) workers in construction, marine shipyards, and the process sectors from 20 to 18 percent by January 1, 2021. The quota will be further reduced to 15 percent on January 1, 2023. Singapore’s labor force did not significantly change in size in 2019 and is expected to face significant demographic headwinds from an aging population and low birth rates, alongside restrictions on foreign workers. Singapore’s local workforce growth is slowing, heading for stagnation over the next ten years. In November 2018, the IMDA announced a new program to support and scale start-ups in Singapore.

To address concerns over an aging and shrinking workforce, MOM has expanded its training and grant programs to more than 15. In Budget 2019, MOM raised the work-life grant budget from $22.2 million to $73.8 million. Additional individual and company subsidies for existing and new programs were included in the Budget 2020 and the supplementary March and April budgets. An example of an existing program is SkillsFuture, a government initiative managed by SkillsFuture Singapore (SSG), a statutory board under the Ministry of Education, designed to provide all Singaporeans with enhanced opportunities and skills-capacity building. SSG also administers the Singapore Workforce Skills Qualifications (WSQ), a national credential system that trains, develops, assesses and certifies skills and competencies for the workforce.

All foreigners must have a valid work pass before they can start work in Singapore, with Employment Pass (for professionals, managers and executives), S Pass (for mid-level skilled staff), and Work Permits (for semi-skilled workers), among the most widely issued. Workers need to have a job with minimum fixed monthly salary and acceptable qualifications to be eligible for the Employment Pass and S Pass. In March 2020, MOM announced that the minimum salaries will be raised as of May 1, 2021. The minimum monthly salary eligibility thresholds for S Pass holders will be raised from $919 to $990 and for Employment Pass holders from $2334 to $2546., 2020. The government further regulates the inflow of foreign workers through the Foreign Worker Levy (FWL) and the Dependency Ratio Ceiling (DRC). The DRC is the maximum permitted ratio of foreign workers to the total workforce that a company can hire, and serves as a quota on the hiring of foreign workers. The DRC varies across sectors. Employers of S Pass and Work Permit holders are required to pay a monthly FWL to the government. The FWL varies according to the skills, qualifications and experience of their employees. The FWL is set on a sector-by-sector basis and is subject to annual revisions. FWLs have been progressively increased for most sectors since 2012.

MOM requires employers to consider Singaporeans before hiring skilled professional foreigners. The Fair Consideration Framework (FCF), implemented in August 2014, affects employers who apply for Employment Passes (EP), the work pass for foreign professionals working in professional, manager, and executive (PME) posts. Companies have noted inconsistent and increasingly burdensome documentation requirements and excessive qualification criteria to approve EP applications. Under the rules, firms making new EP applications must first advertise the job vacancy in a new jobs bank administered by Workforce Singapore (WSG), www.mycareersfugure.sg, ) for at least 14 days. The jobs bank is free for use by companies and job seekers and the job advertisement must be open to all, including Singaporeans. Employers are encouraged to keep records of their interview process as proof that they have done due diligence in trying to look for a Singaporean worker. If an EP is still needed, the employer will have to make a statutory declaration that a job advertisement on www.careersfuture.sg had been made. Smaller firms with 10 or fewer employees and jobs, which pay a fixed monthly salary of $10,609 or more, are exempt from the requirements, which were newly tightened and took effect from July 2018. The minimum fixed salary will be raised to $14,145 on May 1, 2021.

Consistent with Singapore’s WTO obligations, intra-corporate transfers (ICT) are allowed for managers, executives, and specialists who had worked for at least one year in the firm before being posted to Singapore. ICT would still be required to meet all EP criteria, but the requirement for an advertisement on www.careersfuture.sg would be waived. In April 2016, MOM outlined measures to refine the work pass applications process, looking not only at the qualifications of individuals, but at company-related factors. Companies found not to have a “healthy Singaporean core, lacking a demonstrated commitment to developing a Singaporean core, and not found to be “relevant” to Singapore’s economy and society, will be labeled “triple weak” and put on a watch list. Companies unable to demonstrate progress may have work pass privileges suspended after a period of scrutiny. Since 2016, MOM has placed approximately 600 companies on the FCF Watchlist. The Tripartite Alliance for Fair and Progressive Employment Practices have worked with 260 companies to be successfully removed from the watchlist.

The Employment Act covers all employees under a contract of service, and under the act, employees who have served the company for at least two years are eligible for retrenchment benefits, and the amount of compensation depends on the contract of service or what is agreed collectively. Employers have to abide by notice periods in the employment contract before termination, and stipulated minimum periods in the Employment Act in the absence of a notice period previously agreed upon, or provide salary in lieu of notice. Dismissal on grounds of wrongful conduct by the employee is differentiated from retrenchments in the labor laws, and is exempted from the above requirements. Employers must notify MOM of retrenchments within five working days after they notify the affected employees to enable the relevant agencies to help affected employees find alternative employment and/or identify relevant training to enhance employability. Singapore does not provide unemployment benefits, but provides training and job matching services to retrenched workers.

Labor laws are not waived in order to attract or retain investment in Singapore. There are no additional or different labor law provisions in free trade zones.

Collective bargaining is a normal part of labor-management relations in all sectors. As of 2018 about 20 percent of the workforce is unionized. Foreign workers constituted approximately 15 percent of union members. Almost all unions are affiliated with the National Trades Union Congress (NTUC), the sole national federation of trade unions in Singapore, which has a close relationship with the PAP ruling party and the government. The current NTUC Secretary General is also a Minister in the Prime Minister’s Office. Given that nearly all unions are NTUC affiliates, the NTUC has almost exclusive authority to exercise collective bargaining power on behalf of employees. Union members may not reject collective agreements negotiated between their union representatives and an employer. Although transfers and layoffs are excluded from the scope of collective bargaining, employers consult with unions on both problems, and the Taskforce for Responsible Retrenchment and Employment Facilitation issues guidelines calling for early notification to unions of layoffs. Data on coverage of collective bargaining agreements is not publicly available. The Industrial Relations Act (IRA) regulates collective bargaining. The Industrial Arbitration Courts must certify any collective bargaining agreement before it is deemed in effect and can deny certification on public interest grounds. Additionally, the IRA restricts the scope of issues over which workers may bargain, excluding bargaining on hiring, transfer, promotion, dismissal, or reinstatement of workers.

Most labor disagreements are resolved through conciliation and mediation by MOM. Since April 2017 the Tripartite Alliance for Dispute Management (TADM) under MOM provides advisory and mediation services, including mediation for salary and employment disputes. Where the conciliation process is not successful, the disputing parties may submit their dispute to the IAC for arbitration. Depending on the nature of the dispute, the Court may be constituted either by the President of the IAC and a member of the Employer and Employee Panels, or by the President alone. The Employment Claims Tribunals (ECT) was established under the Employment Claims Act (2016). To bring a claim before the ECT, parties must first register their claims at the TADM for mediation. Mediation at TADM is compulsory. Only disputes which remain unresolved after mediation at TADM may be referred to the ECT.

The ECT hears statutory salary-related claims, contractual salary-related claims, dismissal claims from employees, and claims for salary in lieu of notice of termination by all employers. There will be a limit of $21,200 on claims for cases with TADM mediation, and $14,100 for all other claims. In March 2019, MOM announced that 85 percent of salary claims had been resolved by TADM between April 2017 and December 2018. Salary-related disputes that are not resolved by mediation are covered by the Employment Claims Tribunals under the State Courts.

Industrial disputes may also submit their case be referred to the tripartite Industrial Arbitration Court (IAC). The IAC composed has two panels: an employee panel and a management panel. For a majority of dispute hearings, a Court is constituted comprising the President of the IAC and a member each from the employee and employer panels’ representatives and chaired by a judge. In some situations, the law provides for compulsory arbitration. The court must certify collective agreements before they go into effect. The court may refuse certification at its discretion on the ground of public interest.

The legal framework in Singapore provides for some restrictions in the registration of trade unions, labor union autonomy and administration, the right to strike, who may serve as union officers or employees, and collective bargaining. Under the Trade Union Act (TUA), every trade union must register with the Registrar of Trade Unions, which has broad discretion to grant, deny, or cancel union registration. The TUA limits the objectives for which unions can spend their funds, including for contributions to a political party or for political purposes, and allows the Registrar to inspect accounts and funds “at any reasonable time.” Legal rights to strike are granted with restrictions under TUA. The law requires more than 50 percent of affected unionized workers to vote in favor of a strike by secret ballot, as opposed to 51 percent of those participating in the vote. Strikes cannot be conducted for any reason apart from a dispute in the trade or industry in which the strikers are employed, and it is illegal to conduct a strike if it is “designed or calculated to coerce the government either directly or by inflicting hardship on the community.” Workers in “essential services” are required to give 14 days’ notice to an employer before conducting a strike. Although workers, other than those employed in the three essential services of water, gas and electricity, may strike, no workers did so since 1986 with the exception of a strike by bus drivers in 2012. The TUA bars non-citizens from serving as union officers or employees, unless prior written approval is received from the Minister for Manpower.

The Employment Act, which prohibits all forms of forced or compulsory labor and the Prevention of Human Trafficking Act (PHTA), strengthens labor trafficking victim protection, and governs labor protections. Other acts protecting the rights of workers include the Occupational Safety and Health Act and Employment of Foreign Manpower Act. Labor laws set the standard legal workweek at 44 hours, with one rest day each week, and establish a framework for workplaces to comply with occupational safety and health standards, with regular inspections designed to enforce the standards. MOM effectively enforces laws and regulations establishing working conditions and comprehensive occupational safety and health (OSH) laws, and implements enforcement procedures and promoted educational and training programs to reduce the frequency of job-related accidents. Changes to the Employment Act took effect on April 1, 2019, including for extension of core provisions to managers and executives, increasing the monthly salary cap, transferring adjudication of wrongful dismissal claims from MOM to the ECT, and increasing flexibility in compensating employees working during public holidays (for more detail see https://www.mom.gov.sg/employment-practices/employment-act  ). All workers, except for public servants, domestic workers and seafarers are covered by the Employment Act, and additional time-based provisions for more vulnerable employees.

Singapore has no across the board minimum wage law, although there are some exceptions in certain low skill industries. Generally, the government follows a policy of allowing free market forces to determine wage levels. In specific sectors where wages have stagnated and market practices such as outsourcing reduce incentive to upskill workers and limit their bargaining power, the government has implemented Progressive Wage Models to uplift wages. These are currently implementing in the cleaning, security, elevator maintenance, and landscape sectors. The National Wage Council (NWC), a tripartite body comprising representatives from the government, employers and unions, recommends non-binding wage adjustments on an annual basis. The NWC recommendations apply to all employees in both domestic and foreign firms, and across the private and public sectors. While the NWC wage guidelines are not mandatory, they are published under the Employment Act and form the basis of wage negotiations between unions and management. The NWC recommendations apply to all employees in both domestic and foreign law firms, and across the public and private sectors. The level of implementation is generally higher among unionized companies compared to non-unionized companies.

MOM is responsible for combating labor trafficking and improving working conditions for workers, and generally enforces anti-trafficking legislation, although some workers in low-wage and unskilled sectors are vulnerable to labor exploitation and abuse. PHTA sets out harsh penalties (including up to nine strokes of the cane and 15 years’ imprisonment) for those found guilty of trafficking, including forced labor, or abetting such activities. The government developed a mechanism for referral of forced labor, among other trafficking-in-persons activities, to the interagency taskforce, co-chaired by the Ministry of Home Affairs and the Ministry of Manpower. Some observers note that the country’s employer sponsorship system made legal migrant workers vulnerable to forced labor, because they cannot change employers without the consent of the current employer. MOM effectively enforces laws and regulations pertaining to child labor. Penalties for employers that violated child labor laws were subject to fines and/or imprisonment, depending on the violation. Government officials assert that child labor is not a significant issue. The incidence of children in formal employment is low, and almost no abuses are reported.

The U.S.-Singapore Free Trade Agreement came into effect on January 1, 2004 and includes a chapter on labor protections. The chapter contains a statement of shared commitment by each party that the principles and rights set forth in Article 17.7 of the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up are recognized and protected by domestic law, and each party shall strive to ensure it does not derogate protections afforded in domestic labor law as an encouragement for trade or investment purposes. The chapter includes the establishment of a labor cooperation mechanism, which promotes the exchange of information on ways to improve labor law and practice, and the advancement of effective implementation of the principles reflected in the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up.

See the U.S. State Department Human Rights Report as well as the U.S. State Department’s Trafficking in Persons Report https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/ and https://www.state.gov/wp-content/uploads/2019/06/2019-Trafficking-in-Persons-Report.pdf [16 MB]

https://www.state.gov/wp-content/uploads/2019/06/2019-Trafficking-in-Persons-Report.pdf [16 MB]

Under the 1966 Investment Guarantee Agreement with Singapore, the Overseas Private Investment Corporation (OPIC) offers insurance to U.S. investors in Singapore against currency inconvertibility, expropriation, and losses arising from war. Singapore became a member of the Multilateral Investment Guarantee Agency (MIGA) in 1998. In March 2019, Singapore and the United States signed a MOU aimed at strengthening collaboration between the infrastructure agency of Singapore, Infrastructure Asia, and OPIC. Under the agreement, both countries will work together on information sharing, deal facilitation, structuring and capacity building initiatives in sectors of mutual interest such as energy, natural resource management, water, waste, transportation, and urban development. The aim is to enhance Singapore-based and U.S. companies’ access to project opportunities, while building on Singapore’s role as an infrastructure hub in Asia.

Singapore’s domestic public infrastructure projects are funded primarily via Singapore government reserves or capital markets, reducing the scope for direct project financing subsidies by foreign governments.

* Source for Host Country Data

*CDIS data not available. Outward 2018 FDI taken from www.singstat.gov.sg .

Table 4: Sources of Portfolio Investment
Data not available.

Martha Tipton
Economic Specialist
U.S. Embassy
27 Napier Road
Singapore 258508
+65 9069-8592
Tiptonm@state.gov

Transparency of the Regulatory System

U.S. companies continue to report that they face frequent and significant challenges with inconsistent regulatory interpretation, irregular enforcement, and an unclear legal framework. AmCham members have consistently said they perceive that Vietnam lacks a fair legal system for investments, which affects these companies’ ability to do business in Vietnam. The 2019 PCI report documented companies’ difficulties dealing with land, taxes, and social insurance issues, but also found improvements in procedures related to business administration.

Accounting systems are inconsistent with international norms, which increase transaction costs for investors. Vietnam has improved the way it accounts for government revenues, and the government’s long-term goal is to have financial institutions and companies using International Financial Reporting Standards (IFRS) by 2020. Currently, Vietnam has its own accounting standards to which publicly listed Vietnamese companies must adhere. Some companies – particularly those that receive foreign investment – already prepare financial statements in line with IFRS.

In Vietnam, the National Assembly passes laws, which serve as the highest form of legal direction, but often lack specifics. Ministries provide draft laws to the National Assembly. The Prime Minister issues decrees, which provide guidance on how to implement a law. Individual ministries issue circulars, which provide guidance on how a ministry will administer a law or decree.

After line ministries have cleared a particular law in preparation to send the law to the National Assembly, the government posts the law for a 60-day comment period. However, sometimes, in practice, the public comment period is far shorter than 60 days. Foreign governments, NGOs, and private-sector companies can and do comment during this period, following which the ministry may redraft the law after considering the comments. Upon completion of the revisions, the ministry submits the legislation to the Office of the Government (OOG) for approval, including the Prime Minister’s signature, and then the legislation moves to the National Assembly for committee review. During this process, the National Assembly can send the legislation back to the originating ministry for further changes. The Communist Party of Vietnam’s Politburo reserves the right to review special or controversial laws.

In practice, drafting agencies often lack the resources needed to conduct adequate data-driven assessments. Ministries are supposed to conduct policy impact assessments that holistically consider all factors before drafting a law, but the quality of these assessments varies.

The Ministry of Justice (MOJ) is in charge of ensuring that government ministries and agencies follow administrative procedures. The MOJ has a Regulatory Management Department, which oversees and reviews legal documents after they are issued to ensure compliance with the legal system. The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements be published online for comments for 60 days and published in the Official Gazette before implementation.

Business associations and various chambers of commerce regularly comment on draft laws and regulations. However, when issuing more detailed implementing guidelines, government entities sometimes issue circulars with little advance warning and without public notification, resulting in little opportunity for comment by affected parties. In several cases, authorities receive comments for the first draft only and do not provide subsequent draft versions to the public. The centralized location where key regulatory actions are published can be found here: http://vbpl.vn/ .

While general information is publicly available, Vietnam’s public finances and debt obligations (including explicit and contingent liabilities) are not transparent. The National Assembly set a statutory limit for public debt at 65 percent of nominal GDP, and, according to official figures, Vietnam’s public debt to GDP ratio in late 2019 was 56 percent, down 6 percent from 2018. However, the official public-debt figures exclude the debt of certain SOEs. This poses a risk to Vietnam’s public finances, as the government is ultimately liable for the debts of these companies. Vietnam could improve its fiscal transparency by making its executive budget proposal, including budgetary and debt expenses, widely and easily accessible to the general public long before the National Assembly enacts the budget, ensuring greater transparency of off-budget accounts, and by publicizing the criteria by which the government awards contracts and licenses for natural resource extraction.

International Regulatory Considerations

Vietnam is a member of ASEAN, a 10-member regional organization working to advance economic integration through cooperation in economic, social, cultural, technical, scientific and administrative fields. Within ASEAN, the ASEAN Economic Community (AEC) has the goal of establishing a single market across ASEAN nations (similar to the EU’s common market), but member states have not made significant progress. To date, the greatest success of the AEC has been tariff reductions.

Vietnam is also a member of the Asia-Pacific Economic Cooperation (APEC), an inter-governmental forum for 21 member economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific region. APEC aims to facilitate business among member states through trade facilitation programming, senior-level leaders’ meetings, and regular dialogue. However, APEC is a non-binding forum. ASEAN and APEC membership has not resulted in Vietnam incorporating international standards, especially when compared with the EU or North America.

Vietnam is a party to the WTO’s Trade Facilitation Agreement (TFA) and has been implementing the TFA’s Category A provisions. Vietnam submitted its Category B and Category C implementation timelines on August 2, 2018. According to these timelines, Vietnam will fully implement the Category B and C provisions by the end of 2023 and 2024, respectively.

Legal System and Judicial Independence

Vietnam’s legal system mixes indigenous, French, and Soviet-inspired civil legal traditions. Vietnam generally follows an operational understanding of the rule of law that is consistent with its top-down, one-party political structure and traditionally inquisitorial judicial system.

The hierarchy of the country’s courts is: 1) the Supreme People’s Court; 2) the High People’s Court; 3) Provincial People’s Courts; and 4) District People’s Courts. The People’s Courts operate in five divisions: criminal, civil, administrative, economic, and labor. The Supreme People’s Procuracy is responsible for prosecuting criminal activities as well as supervising judicial activities.

Vietnam lacks an independent judiciary and separation of powers among Vietnam’s branches of government. For example, Vietnam’s Chief Justice is also a member of the Communist Party’s Central Committee. According to Transparency International, there is significant risk of corruption in judicial rulings. Low judicial salaries engender corruption; nearly one-fifth of surveyed Vietnamese households that have been to court declared that they had paid bribes at least once. Many businesses therefore avoid Vietnamese courts.

Along with corruption, the judicial system continues to face additional problems. For example, many judges and arbitrators lack adequate legal training and are appointed through personal or political contacts with party leaders or based on their political views. Regulations or enforcement actions are appealable, and appeals are adjudicated in the national court system. Through a separate legal mechanism, individuals and companies can file complaints against enforcement actions under the Law on Complaints.

The 2005 Commercial Law regulates commercial contracts between businesses. Specific regulations prescribe specific forms of contracts, depending on the nature of the deals. If a contract does not contain a dispute-resolution clause, courts will have jurisdiction over a possible dispute. Vietnamese law allows dispute-resolution clauses in commercial contracts explicitly through the Law on Commercial Arbitration. The law follows the United Nations Commission on International Trade Law (UNCITRAL) model law as an international standard for procedural rules.

Vietnamese courts will only consider recognition of civil judgments issued by courts in countries that have entered into agreements on recognition of judgments with Vietnam or on a reciprocal basis. However, with the exception of France, these treaties only cover non-commercial judgments.

Laws and Regulations on Foreign Direct Investment

The legal system includes provisions to promote foreign investment. Vietnam uses a “negative list” approach to approve foreign investment, meaning foreign businesses are allowed to operate in all areas except for six prohibited sectors (illicit drugs, wildlife trade, prostitution, human trafficking, human cloning, and other commerce related to otherwise illegal activities).

The law also requires foreign and domestic investors be treated the same in cases of nationalization and confiscation. However, foreign investors are subject to different business-licensing processes and restrictions, and Vietnamese companies that have a majority foreign investment are subject to foreign-investor business-license procedures.

In 2019, Vietnam passed a new Securities Law, which stated the government’s long-term intention to remove some FOLs (but did not give specifics) and allows for the sale of certain derivatives. Also, in 2019, Vietnam adopted a new Labor Code, which allows greater flexibility in contract termination, allows employees to work more overtime hours, increases the retirement age, and adds more flexibility in terms of labor contracts. There is a “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors: https://vietnam.eregulations.org/ 

Competition and Anti-Trust Laws

In 2018, Vietnam passed a new Law on Competition, which came into effect on July 1, 2019, replacing Vietnam’s Law on Competition of 2004. The Law includes punishments – such as fines – for those who violate the law. The government has not prosecuted any person or entity under this law since it came into effect, though there were prosecutions under the 2004 law. The law does not appear to have affected foreign investment.

Expropriation and Compensation

Under Vietnamese law, the government can only expropriate investors’ property in cases of emergency, disaster, defense, or national interest, and the government is required to compensate investors if it expropriates property. Under the U.S.-Vietnam Bilateral Trade Agreement, Vietnam must apply international standards of treatment in any case of expropriation or nationalization of U.S. investor assets, which includes acting in a non-discriminatory manner with due process of law and with prompt, adequate, and effective compensation. The U.S. Mission in Vietnam is unaware of any expropriation cases involving U.S. firms.

Dispute Settlement

ICSID Convention and New York Convention

Vietnam has not yet acceded to the International Center for Settlement of Investment Disputes (ICSID) Convention. MPI has submitted a proposal to the government to join the ICSID, but the government has not moved forward on this. Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), meaning that foreign arbitral awards rendered by a recognized international arbitration institution should be respected by Vietnamese courts without a review of cases’ merits.

Investor-State Dispute Settlement

Vietnam has signed 66 bilateral investment treaties, is party to 26 treaties with investment provisions, and is a member of 12 free trade agreements in force. Some of these include provisions for Investor-State Dispute Settlement. As a signatory to the New York Convention, Vietnam is required to recognize and enforce foreign arbitral awards within its jurisdiction, with very few exceptions. Technically, foreign and domestic arbitral awards are legally enforceable in Vietnam; however, foreign investors in Vietnam do not trust the system will work in a fair and impartial manner. Vietnamese courts may reject foreign arbitral awards if the award is contrary to the basic principles of Vietnamese laws.

According to UNCTAD, over the last 10 years there were two dispute cases against the Vietnamese government involving U.S. companies.  The courts decided in favor of the government in one case, and the parties decided to discontinue the other case.  The Vietnamese government is currently in two pending, active disputes (with the UK and South Korea, respectively). More details are available at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/229/viet-nam.

International Commercial Arbitration and Foreign Courts

With an underdeveloped legal system, Vietnam’s courts are often ineffective in settling commercial disputes. Negotiation between concerned parties is the most common means of dispute resolution. Since the Law on Arbitration does not allow a foreign investor to refer an investment dispute to a court in a foreign jurisdiction, Vietnamese judges cannot apply foreign laws to a case before them, and foreign lawyers cannot represent plaintiffs in a court of law. Vietnam does not have a domestic arbitration body, but the Law on Commercial Arbitration of 2011 permits foreign arbitration centers to establish branches or representative offices (although none have done so).

There are no readily available statistics on how often domestic courts rule in favor of SOEs. In general, the court system in Vietnam works slowly. International arbitration awards, when enforced, may take years from original judgment to payment. Many foreign companies, due to concerns related to time, costs, and potential for bribery, have reported that they have turned to arbitration or asking influential individuals to weigh in.

Bankruptcy Regulations

Based on the 2014 Bankruptcy Law, bankruptcy is not criminalized unless it relates to another crime. The law clarified the definition of insolvency as an enterprise that is more than three months overdue in meeting its payment obligations. The law also provided provisions allowing creditors to commence bankruptcy proceedings against an enterprise and created procedures for credit institutions to file for bankruptcy. Despite these changes, according to the World Bank’s 2020 Ease of Doing Business Report, Vietnam ranked 122 out of 190 for resolving insolvency. The report noted that it still takes, on average, five years to conclude a bankruptcy case in Vietnam. The Credit Information Center of the State Bank of Vietnam provides credit information services for foreign investors concerned about the potential for bankruptcy with a Vietnamese partner.

Investment Incentives

Foreign investors are exempt from import duties on goods imported for their own use that cannot be procured locally, including machinery; vehicles; components and spare parts for machinery and equipment; raw materials; inputs for manufacturing; and construction materials. Remote and mountainous provinces are allowed to provide additional tax breaks and other incentives to prospective investors.

Projects in the following sectors are eligible for investment incentives, including lower corporate income tax rates, exemption of some import tariffs, and/or favorable land rental rates: high-tech; research and development; new materials; energy; clean energy; renewable energy; energy saving products; automobiles; software; waste treatment and management; and primary or vocational education.

The government rarely issues guarantees for financing FDI projects; when it does so, it is usually because the project links to a national security priority. Joint financing with the government occurs when a foreign entity partners with an SOE. The government’s reluctance to guarantee projects reflects its desire to stay below a statutory 65 percent public debt-to-GDP ratio cap, and a desire to avoid incurring liabilities from projects that would not be economically viable without the guarantee. This has delayed approval of some large-scale projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Vietnam has prioritized efforts to establish and develop foreign trade zones (FTZs) over the last decade. Vietnam currently has more than 350 industrial zones (IZs) and export processing zones (EPZs). Many foreign investors report that it is easier to implement projects in IZs because they do not have to be involved in site clearance and infrastructure construction. Enterprises pay no duties when importing raw materials if they export the finished products. Customs warehouse companies in FTZs can provide transportation services and act as distributors for the goods deposited.

Additional services relating to customs declaration, appraisal, insurance, reprocessing, or packaging require the approval of the provincial customs office. In practice, the time involved for clearance and delivery of goods by provincial custom officials can be lengthy and unpredictable. Vietnam also has economic zones which can contain IZs and EPZs. Companies operating economic zones are entitled to more tax reductions as measures to incentivize investments.

Performance and Data Localization Requirements

Vietnamese law states that employers can only recruit foreign nationals for high-skilled positions such as manager, managing director, expert, or technical worker. Local companies must also justify that their efforts to hire suitable local employees were unsuccessful before recruiting foreigners, and their justification must be approved in writing by the local authority and/or the national government. This does not apply to board members elected by shareholders or capital contributors.

Over the last four years, the government has issued decrees that have made it easier for foreign investors and workers to obtain visas, work permits, and residence. The government plans to further streamline this process in 2021.

On January 1, 2019, the Law on Cybersecurity (LOCS) came into effect, requiring cross-border services to store data of Vietnamese users in Vietnam, despite sustained international and domestic opposition to the regulation. The latest draft of the LOCS implementing decree, released in July 2019, sparked concerns among foreign digital services firms regarding the draft decree’s provisions on data localization and local presence for a broad range of services in the Internet economy, from cloud computing to email. Provisions of the LOCS require firms to provide unencrypted user information upon request by law enforcement. However, application of this requirement hinges on issuance of the implementing decree, which is still pending as of May 2020. The government committed to consider comments from the U.S. government, companies, and trade associations and promised to consult with the U.S. government before finalization.

On July 1, 2020, the Law on Tax Administration will come into effect and will require foreign entities doing business on digital platforms without permanent presence in Vietnam to register as taxpaying entities in Vietnam. The Ministry of Finance said it would issue guidance on this requirement but had not done so as of May 2020.

There are currently no measures preventing or unduly impeding companies from freely transmitting customer or other business-related data outside of Vietnam.

The Ministry of Information and Communications (MIC) issued Circular 38 on Cross Border Provisioning of Public Information in 2016. Circular 38 does not require localization of servers but does require offshore service providers in Vietnam to comply with local-content restrictions. This includes websites, social networks, mobile phone apps, search engines, and other similar services that 1) have more than one million monthly users in Vietnam or 2) lease a data center to store digital information in Vietnam in order to provide services. MIC’s Authority on Broadcasting and Electronic Information is currently reviewing Circular 38 and related legislation with the goal of revision by late 2020.

MIC released a draft of Decree 72 on Internet Services and Information Content Online for public comment on April 19, 2020. Foreign investors reported concerns regarding Decree 72’s provisions on mandatory licensing requirements for large foreign social networks; tightened regulations on social media companies; compulsory content review; and policies requiring responses to government takedown requests within 24 to 48 hours. The draft Decree requires local Internet service providers to terminate services for companies that fail to cooperate with the new regulations. According to the government’s plan for issuing legal documents, the revised decree is scheduled to go into effect in late 2020.

MIC is also revising Decree 06 on Management, Provision and Utilization of Radio and Television Services, which applies specifically to streaming services that provide online content. The first draft, released August 2019, required onerous licensing procedures, local-presence (including joint venture) requirements, local-content quotas, content preapproval, compulsory translation, and local advertising agents. These requirements are inconsistent with Vietnam’s commitments under the World Trade Organization (WTO).

Real Property

The State collectively owns and manages all land in Vietnam, and therefore neither foreigners nor Vietnamese nationals can own land. However, the government grants land-use and building rights, often to individuals. According to the Ministry of National Resources and Environment (MONRE), as of September 2018 – the most recent time period in which the government has made figures available – the government has issued land-use rights certificates for 96.9 percent of land in Vietnam. If land is not used according to the land-use rights certificate or if it is unoccupied, it reverts to the government. Vietnam is building a national land-registration database, and some localities have already digitized their land records.

State protection of property rights are still evolving, and the law does not clearly demarcate circumstances in which the government would use eminent domain. Under the Housing Law and Real Estate Business Law passed by the National Assembly in November 2014, the government can take land if it deems it necessary for socio-economic development in the public or national interest and the Prime Minister, the National Assembly, or the Provincial People’s Council approves such action. However, the law loosely defines “socio-economic” development, and there are many outstanding legal disputes between landowners and local authorities – including some U.S. entities. Disputes over land rights continue to be a significant driver of social protest in Vietnam. Foreign investors also may be exposed to land disputes through merger and acquisition activities when they buy into a local company.

Foreign investors can lease land for renewable periods of 50 years, and up to 70 years in some underdeveloped areas of the country. This allows titleholders to conduct property transactions, including mortgages on property. Some investors have encountered difficulties amending investment licenses to expand operations onto land adjoining existing facilities. Investors also note that local authorities may seek to increase requirements for land-use rights when current rights must be renewed, particularly when the investment in question competes with Vietnamese companies.

The government is working on reforms relating to property rights. MONRE is currently drafting amendments to the 2013 Land Law, which would allow foreigners to own homes in Vietnam. MONRE expects to submit the draft law to the National Assembly for review and approval in late 2020.

Intellectual Property Rights

Vietnam does not have a strong record on protecting and enforcing intellectual property (IP). There were positive developments over the past year, such as the issuance of the national IP strategy, public awareness campaigns and training activities, and reported improvements on border enforcement in some parts of the country. However, IP enforcement continues to be a challenge.

Lack of coordination among ministries and agencies responsible for enforcement is a primary obstacle, and capacity constraints related to enforcement persist, in part, due to a lack of resources and IP expertise. Vietnam continues to rely heavily on administrative enforcement actions, which have consistently failed to deter widespread counterfeiting and piracy.

The United States is closely monitoring and engaging with the Vietnamese government on the ongoing implementation of amendments to the 2015 Penal Code with respect to criminal enforcement of IP violations. Counterfeit goods are widely available online and in physical markets. In addition, online piracy (including the use of piracy devices and applications to access unauthorized audiovisual content); book piracy; lack of effective criminal measures for cable and satellite signal theft; and both private and public-sector software piracy remain problematic.

Vietnam’s system for protecting against the unfair commercial use and unauthorized disclosure of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products needs clarification.  The United States is monitoring the implementation of IP provisions of the CPTPP, which the National Assembly ratified in November 2018, and the EVFTA, which Vietnam’s National Assembly expects to ratify in late 2020.

In its international agreements, Vietnam committed to strengthen its IP regime and is in the process of drafting implementing legislation and other measures in a number of IP-related areas, including in preparation for acceding to the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty.  In September 2019, Vietnam acceded to the Hague Agreement Concerning the International Registration of Industrial Designs, and the United States will monitor the implementation of that agreement.

The United States, through the U.S.-Vietnam Trade and Investment Framework Agreement and other bilateral fora, continues to urge Vietnam to address these issues and to provide interested stakeholders with meaningful opportunities for input as it proceeds with these reforms. The United States and Vietnam signed a Customs Mutual Assistance Agreement in December 2019, which will facilitate bilateral cooperation in IP enforcement.

In 2019, the Intellectual Property Office of Vietnam (IP Vietnam) reported receiving 120,793 IP applications of all types (up 10 percent from 2018), of which 75,742 were registered for industrial property rights (up 16 percent from 2018). IP Vietnam reported granting 2,922 patents in 2019 (up 13 percent from 2018). Industrial designs registrations reached 2,172 in 2019 (down 8 percent from 2018). In total, IP Vietnam granted more than 40,715 protection titles for industrial property, out of more than 75,742 applications in 2019 (up 41 percent from 2018). The DMS processed 9,510 counterfeit and IP infringement cases and collected over USD 1.5 million in fines. The most infringed-upon products were clothes, consumer goods, electronics, foodstuffs, fertilizers, pharmaceuticals, cosmetics, construction materials, and bicycle and automobile parts.

The Copyright Office of Vietnam received and settled 15 copyright petitions and five requests for copyright assessment in 2019. In 2019, the Ministry of Culture, Sports, and Tourism’s Inspector General carried out inspections for software licensing compliance and discovered 111 violations, resulting in total fines of USD 150,000 – nearly triple the amount in 2018. For more information, please see the following reports from the U.S. Trade Representative:

• Special 301 Report: https://ustr.gov/sites/default/files/2019_Special_301_Report.pdf 

• Notorious Markets Report: https://ustr.gov/sites/default/files/2019_Special_301_Report.pdf 
• For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

The Vietnamese government generally encourages foreign portfolio investment. The country has two stock markets – the Ho Chi Minh City Stock Exchange, which lists publicly traded companies, and the Hanoi Stock Exchange, which lists bonds and derivatives. Vietnam also has a market for unlisted public companies (UPCOM) at the Hanoi Securities Center.

Although Vietnam welcomes portfolio investment, the country sometimes has difficulty in attracting such investment. Morgan Stanley Capital International (MSCI) classifies Vietnam as a Frontier Market, which precludes some of the world’s biggest asset managers from investing in its stock markets. Vietnam is improving its legal framework to reach its goal of meeting the “emerging market” criteria in 2020 and attracting more foreign capital. However, exogenous events may make this difficult: in the first quarter of 2020, foreign investors withdrew USD 500 million in portfolio assets from Vietnam due to the COVID-19 pandemic.

There is enough liquidity in the markets to enter and maintain sizable positions. Combined market capitalization at the end of 2019 was approximately USD 189 billion, equal to 73 percent of Vietnam’s GDP, with the Ho Chi Minh City Stock Exchange accounting for USD 141 billion, the Hanoi Exchange USD 8 billion, and the UPCOM USD 40 billion. Bond market capitalization reached over USD 50 billion in 2019, the majority of which were government bonds, largely held by domestic commercial banks.

Vietnam complies with International Monetary Fund (IMF) Article VIII. The government notified the IMF that it accepted the obligations of Article VIII, Sections 2, 3, and 4, effective November 8, 2005.

Local banks generally allocate credit on market terms, but the banking sector is not as sophisticated or capitalized as those in advanced economies. Foreign investors can acquire credit in the local market, but both foreign and domestic firms often seek foreign financing since Vietnamese banks do not have sufficient capital at appropriate interest rate levels for a significant number of FDI projects.

Money and Banking System

Vietnam’s banking sector has been stable since recovering from the 2008 global recession. Nevertheless, the SBV estimated in 2018 that half of Vietnam’s population is underbanked or lacks bank accounts due to a preference for cash, distrust in commercial banking, limited geographical distribution of banks, and a lack of financial acumen. The World Bank’s Global Findex Database 2017 (the most recent available) estimated that only 31 percent of Vietnamese over the age of 15 had an account at a financial institution or through a mobile money provider.

Although the banking sector was stable during 2019, COVID-19 may challenge the sector. Ratings agency Moody’s reported, on April 7, 2020, that “the consumer finance industry in Vietnam is vulnerable to disruptions given its risky borrower profile,” and noted that layoffs, underemployment, and business closures resulting from COVID-19 further decrease the creditworthiness of borrowers. At the end of 2019, the SBV reported that the percentage of non-performing loans (NPLs) in the banking sector was 1.9 percent, a significant improvement from the 2.4 percent at the end of 2018.

The banking sector’s estimated total assets stood at USD 519 billion, of which USD 222 billion belonged to seven state-owned and majority state-owned commercial banks – accounting for 42 percent of total assets. Though classified as joint-stock (private) commercial banks, the Bank of Investment and Development Bank (BIDV), Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) all are majority-owned by SBV. In addition, the SBV holds 100 percent of Agribank, Global Petro Commercial Bank (GPBank), Construction Bank (CBBank), and Oceanbank.

The U.S. Mission in Vietnam did not find any evidence that a Vietnamese bank had lost a correspondent banking relationship in the past three years; there is also no evidence that a correspondent banking relationship is currently in jeopardy.

Foreign Exchange and Remittances

Foreign Exchange

There are no legal restrictions on foreign investors converting and repatriating earnings or investment capital from Vietnam. A foreign investor can convert and repatriate earnings provided the investor has the supporting documents required by law and has applied to remit money. The SBV sets the interbank lending rate and announces a daily interbank reference exchange rate. SBV determines the latter based on the previous day’s average interbank exchange rates, while considering movements in the currencies of Vietnam’s major trading and investment partners. The Vietnamese government generally keeps the exchange rate at a stable level compared to major world currencies.

Remittance Policies

Vietnam mandates that in-country transactions must be made in the local currency – Vietnamese dong (VND). The government allows foreign businesses to remit lawful profits, capital contributions, and other legal investment earnings via authorized institutions that handle foreign currency transactions. Although foreign companies can remit profits legally, sometimes these companies find difficulties bureaucratically, as they are required to provide supporting documentation (audited financial statements, import/foreign-service procurement contracts, proof of tax obligation fulfillment, etc.). SBV also requires foreign investors to submit notification of profit remittance abroad to tax authorities at least seven working days prior to the remittance; otherwise there is no waiting period to remit an investment return.

The inflow of foreign currency into Vietnam is less constrained. There are no recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.

Sovereign Wealth Funds

Vietnam does not have a Sovereign Wealth Fund.

In 2018, the government created the Commission for State Capital Management at Enterprises (CMSC) to manage SOEs with increased transparency and accountability. The CMSC’s goals include accelerating privatization in a transparent manner, promoting public listings of SOEs, and transparency in overall financial management of SOEs.

SOEs do not operate on a level playing field with domestic companies and continue to benefit from preferential access to resources such as land, capital, and political largesse. In the 2019 PCI report, however, the percentage of surveyed firms agreeing with the statement “SOEs find it easier to win state contracts” dropped to 21 percent from 27 percent in 2015.

Third-party market analysts note that a significant number of SOEs have extensive liabilities, including pensions owed, real estate holdings in areas not related to the SOE’s ostensible remit, and a lack of transparency with respect to operations and financing.

Privatization Program

Vietnam officially started privatizing SOEs in 1998. The process has been slow because privatization has historically transferred only a small share of an SOE (two to three percent) to the private sector, and investors have had concerns about the financial health of many companies. Additionally, the government has inadequate regulations with respect to privatization procedures.

Companies are required to publish their corporate social responsibility activities, corporate governance work, information of related parties and transactions, and compensation of management. Companies must also announce extraordinary circumstances, such as changes to management, dissolution, or establishment of subsidiaries, within 36 hours of the event.

Most multinational companies implement Corporate Social Responsibility (CSR) programs that contribute to improving the business environment in Vietnam, and awareness of CSR programs is increasing among large domestic companies. The VCCI conducts CSR training and highlights corporate engagement on a dedicated website (http://www.csr-vietnam.eu/ ) in partnership with the UN.

AmCham also has a CSR group that organizes events and activities to raise awareness of social issues. Non-governmental organizations collaborate with government bodies, such as VCCI and the Ministry of Labor, Invalids, and Social Affairs (MOLISA), to promote business practices in Vietnam in line with international norms and standards.

Overall, the government has not defined responsible business conduct (RBC), nor has it established a national plan or agenda for RBC. The government has yet to establish a national point of contact or ombudsman for stakeholders to get information or raise concerns regarding RBC. The new Labor Code passed in December 2019 recognizes the right of employees to establish their own representative organizations. For a detailed description of regulations on worker/labor rights in Vietnam, see the Department of State’s Human Rights Report (https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/vietnam/).

Vietnam has laws to combat corruption by public officials, and they extend to all citizens. Corruption is due, in large part, to low levels of transparency, accountability, and media freedom, as well as poor remuneration for government officials and inadequate systems for holding officials accountable. Competition among agencies for control over businesses and investments has created overlapping jurisdictions and bureaucratic procedures that, in turn, create opportunities for corruption.

The government has tasked various agencies to deal with corruption, including the Central Steering Committee for Anti-Corruption (chaired by the Communist Party of Vietnam General Secretary Nguyen), the Government Inspectorate, and line ministries and agencies. Formed in 2007, the Central Steering Committee for Anti-Corruption has been under the purview of the CPV Central Commission of Internal Affairs since February 2013. The National Assembly provides oversight on the operations of government ministries. Civil society organizations have encouraged the government to establish a single independent agency with oversight and enforcement authority to ensure enforcement of anti-corruption laws.

Resource to Report Corruption

Contact at government agency responsible for combating corruption:

Mr. Phan Dinh Trac
Chairman, Communist Party Central Committee Internal Affairs
4 Nguyen Canh Chan; +84 0804-3557
Contact at NGO:
Ms. Nguyen Thi Kieu Vien
Executive Director, Towards Transparency
Transparency International National Contact in Vietnam
Floor 4, No 37 Lane 35, Cat Linh street, Dong Da, Hanoi, Vietnam; +84-24-37153532
Fax: +84-24-37153443;
kieuvien@towardstransparency.vn

Vietnam is a unitary single-party state, and its political and security environment is largely stable. Protests and civil unrest are rare, though there are occasional demonstrations against perceived or real social, environmental, labor, and political injustices.

In August 2019, online commentators expressed outrage over the slow government response to an industrial fire in Hanoi that released unknown amounts of mercury. Other localized protests in 2019 and early 2020 broke out over alleged illegal dumping in waterways and on public land, and the perceived government attempts to cover up potential risks to local communities.

Citizens sometimes protest actions of the People’s Republic of China (PRC), usually online. For example, they did so in June 2019, when China Coast Guard vessels harassed the operations of Russian oil company Rosneft in Block 06-01, Vietnam’s highest-producing natural gas field.

In April 2016, after the Formosa Steel plant discharged toxic pollutants into the ocean and caused a large number of fish deaths, the affected fishermen and residents in central Vietnam began a series of regular protests against the company and the government’s lack of response to the disaster. Protests continued into 2017 in multiple cities until security forces largely suppressed the unrest. Many activists who helped organize or document these protests were subsequently arrested and imprisoned.

The Labor Code passed in December 2019 will come into effect on January 1, 2021. The CPTPP and the EVFTA helped advance labor reform in Vietnam. In particular, the EVFTA requires Vietnam to publish a timeline for ratifying the two remaining core International Labor Organization (ILO) conventions: Convention 105 (abolition of forced labor) in 2020; and Convention 87 (freedom of association and protection of the right to organize) in 2023. Convention 87, together with Convention 98, would allow trade unions, which are currently dominated by the sole national trade union, the Vietnam General Confederation of Labor, to better represent workers’ interests. Even with new momentum on labor issues, enactment of legal and regulatory changes to improve working conditions in Vietnam will still take years to fully develop and implement.

According to Vietnam’s General Statistics Office (GSO), in the first quarter of 2019 there were 55 million people participating in the formal labor force in Vietnam out of over 72 million people aged 15 and above. The labor force is relatively young, with workers 15-39 years of age accounting for half of the total labor force.

Estimates on the size of the informal economy differ widely. The IMF states 40 percent of Vietnam’s laborers work on the informal economy; the World Bank puts the figure at 55 percent; the ILO puts the figure as high as 79 percent if agricultural households are included.

An employer is permitted to lay off employees due to technological changes, organizational changes (in cases of a merger, consolidation, or cessation of operation of one or more departments), or when the employer faces economic difficulties. There are no waivers on labor requirements to attract foreign investment. COVID-19 has increased the number of layoffs in the Vietnamese economy. In March and April 2020, the Vietnamese government passed measures, including cash payments and supplemental cash for companies, to help pay salaries for workers and offer unemployment insurance.

The constitution affords the right of association and the right to demonstrate. The 2019 Labor Code, that will come into effect on January 1, 2021, allows workers to establish and join independent unions of their choice. However, the relevant governmental agencies are still drafting the implementing decrees on procedures to establish and join independent unions, and to determine the level of autonomy independent unions will have in administering their affairs.

Vietnam has been a member of the ILO since 1992, and has ratified six of the core ILO labor conventions (Conventions 100 and 111 on discrimination, Conventions 138 and 182 on child labor, Convention 29 on forced labor, and Convention 98 on rights to organize and collective bargaining). While the constitution and law prohibit forced or compulsory labor, Vietnam has not ratified Convention 105 on forced labor as a means of political coercion and discrimination and Convention 87 on freedom of association and protection of the rights to organize, although the government states it is currently taking steps toward ratification.

The Overseas Private Investment Corporation (OPIC), the predecessor of the U.S. International Development Finance Corporation (DFC), signed a bilateral agreement with Vietnam in 1998, and Vietnam joined the Multilateral Investment Guarantee Agency (MIGA) in 1995.

On January 8, 2020, DFC CEO Adam Boehler made his first visit to Vietnam and met with the Prime Minister. CEO Boehler noted that the DFC hopes to make a multibillion-dollar commitment to Vietnam in the coming years, with investments in energy, healthcare, education, and small businesses.

* General Statistics Office (GSO)

Table 3: Sources and Destination of FDI
Data not available.

Economic Section
U.S. Embassy
7 Lang Ha, Ba Dinh, Hanoi, Vietnam +84-24-3850-5000
+84-24-3850-5000
InvestmentClimateVN@state.gov