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Bangladesh

Executive Summary

Bangladesh is the most densely populated non-city state country in the world, with the world’s eighth largest population (over 165 million) in a territory the size of Iowa.  Bangladesh is situated in the northeastern corner of the Indian subcontinent, sharing a 4,100 km border with India and a 247 km border with Burma. With sustained economic growth over the past decade, a large, young, and hard-working workforce, strategic location between the large South and Southeast Asian markets, and vibrant private sector, Bangladesh will likely attract increasing investment.

Buoyed by a growing middle class, Bangladesh has enjoyed consistent annual GDP growth of more than six percent over the past decade.  Much of this growth continues to be driven by the ready-made garments (RMG) industry, which exported USD 36.66 billion of products in FY 2017-18, second only to China, and continued remittance inflows, reaching nearly USD 15 billion in FY 2017-18.  Forecasts based on the first nine months of the 2018-19 fiscal year estimate Bangladesh is on track to reach USD 40 billion in garment exports for the fiscal year.

The Government of Bangladesh (GOB) actively seeks foreign investment, particularly in the agribusiness, garment/textiles, leather/leather goods, light manufacturing, energy, information and communications technology (ICT), and infrastructure sectors.  It offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors. Bangladesh received USD 3.0 billion in foreign direct investment (FDI) in FY 2017-18, up from USD 2.45 billion the previous year.  However, the rate of FDI inflows is only around 1 percent of GDP, one of the lowest of rates in Asia.

Bangladesh has made gradual progress in reducing some constraints on investment, including taking steps to better ensure reliable electricity, but inadequate infrastructure, limited financing instruments, bureaucratic delays, and corruption continue to hinder foreign investment.  New government efforts to improve the business environment show promise but implementation has yet to be seen. Slow adoption of alternative dispute resolution mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes.

A series of terrorist attacks in 2015-17, including the July 1, 2016 Holey Bakery attack in Dhaka’s diplomatic enclave, resulted in increased security restrictions for many expatriates, including U.S. Embassy staff.  National elections, which were held on December 30, 2018, are prone to instances of political violence. The influx of more than 700,000 Rohingya refugees since August 2017 has also raised security concerns.

International brands and the international community continue to press the GOB to meaningfully address worker rights and factory safety problems in the country.  With support from the international community and the private sector, Bangladesh has made significant progress on fire and workplace safety. Critical work remains on safeguarding workers’ rights to freely associate and bargain collectively, including in the Export Processing Zones (EPZs).  

The GOB has limited resources for intellectual property rights (IPR) protection and counterfeit goods are readily available in Bangladesh.  Government policies in the ICT sector are still under development. Current policies grant the government broad powers to intervene in that sector.

Capital markets in Bangladesh are still developing and the financial sector is still highly dependent on banks.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 149 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 176 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 116 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Partner Country ($M USD, stock positions) 2017 $460 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $1,470 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Bangladesh actively seeks foreign investment, particularly in the agribusiness, garment and textiles, leather and leather goods, light manufacturing, energy, information and communications technology (ICT), and infrastructure sectors.  It offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors.

Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Four sectors, however, are reserved for government investment:

  • Arms and ammunition and other defense equipment and machinery;
  • Forest plantation and mechanized extraction within the bounds of reserved forests;
  • Production of nuclear energy;
  • Security printing.

The Bangladesh Investment Development Authority (BIDA) is the principal authority tasked with promoting supervising and promoting private investment.  The BIDA Act of 2016 approved the merger of the now disbanded Board of Investment and the Privatization Committee. BIDA performs the following functions:

  • Provides pre-investment counseling services
  • Registers and approves of private industrial projects
  • Issues approval of branch/liaison/representative offices
  • Issues work permits for foreign nationals
  • Issues approval of royalty remittances, technical know-how and technical assistance fees
  • Facilitates import of capital machinery and raw materials
  • Issues approvals for foreign loans and supplier credits

BIDA’s newly designed website has aggregated information regarding Bangladesh investment policies and ease of doing business indicators: http://bida.gov.bd/  .  

The Bangladesh Export Processing Zone Authority (BEPZA) acts as the investment supervisory authority in export processing zones (EPZs).  BEPZA is the one-stop service provider and regulatory authority for companies operating inside EPZs. In addition, Bangladesh plans to establish over 100 Economic Zones (EZs) throughout the country over the next several years.  The EZs are designed to attract additional foreign investment to locations throughout the country. The Bangladesh Economic Zones Authority (BEZA) is responsible for supervising and promoting investments in the economic zones (EZs).  

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Bangladesh allows private investment in power generation and natural gas exploration, but efforts to allow full foreign participation in petroleum marketing and gas distribution have stalled.  Regulations in the area of telecommunication infrastructure currently include provisions for 60 percent foreign ownership (70 percent for tower sharing).

Four sectors are reserved for government investment and exclude both foreign and domestic private sector activity:

  • Arms and ammunition and other defense equipment and machinery;
  • Forest plantation and mechanized extraction within the bounds of reserved forests;
  • Production of nuclear energy;
  • Security printing.

In addition, there are 17 controlled sectors that require prior clearance/ permission from the respective line ministries/authorities. These are:

  1. Fishing in the deep sea
  2. Bank/financial institution in the private sector
  3. Insurance company in the private sector
  4. Generation, supply and distribution of power in the private sector
  5. Exploration, extraction and supply of natural gas/oil
  6. Exploration, extraction and supply of coal
  7. Exploration, extraction and supply of other mineral resources
  8. Large-scale infrastructure projects (e.g. flyover, elevated expressway, monorail,     economic zone, inland container depot/container freight station)
  9. Crude oil refinery (recycling/refining of lube oil used as fuel)
  10. Medium and large industry using natural gas/condescend and other minerals as raw material
  11. Telecommunication service (mobile/cellular and land phone)
  12. Satellite channels
  13. Cargo/passenger aviation
  14. Sea-bound ship transport
  15. Sea-port/deep seaport
  16. VOIP/IP telephone
  17. Industries using heavy minerals accumulated from sea beach

While discrimination against foreign investors is not widespread, the government frequently promotes local industries and some discriminatory policies and regulations exist. For example, the government closely controls approvals for imported medicines that compete with domestically-manufactured pharmaceutical products and it has required majority local ownership of new shipping and insurance companies, albeit with exemptions for existing foreign-owned firms, following a prime ministerial directive.  In practical terms, foreign investors frequently find it necessary to have a local partner even though this requirement may not be statutorily defined.

In certain strategic sectors, the GOB has placed unofficial barriers on foreign companies’ ability to divest from the country.

Business Registration

The Bangladesh Investment Development Authority (BIDA), formerly the Board of Investment, is responsible for screening, reviewing, and approving FDI in Bangladesh.  BIDA is directly supervised by the Prime Minister’s office and the Chairman of BIDA has Minister-equivalent rank. There have been instances where receiving approval was delayed.  Once the foreign investor’s application is submitted to BIDA, the authorities review the proposal to ensure the investment does not create conflicts with local business. Investors note it is frequently necessary to separately register with other entities such as the National Board of Revenue.  According to the World Bank, business registration in Bangladesh takes 19.5 days on average with nine distinct steps: http://www.doingbusiness.org/data/exploreeconomies/bangladesh/   .  

BIDA’s resources on Ease of Doing Business, Investment Opportunity, Potential Sectors, and Doing Business in Bangladesh are also available at:  

Requirements vary by sector, but all foreign investors are also required to obtain clearance certificates from relevant ministries and institutions with regulatory oversight.  BIDA establishes time-lines for the submission of all the required documents. For example, if a proposed foreign investment is in the healthcare equipment field, investors need to obtain a No Objection Certificate (NOC) from the Directorate General for Health Services under the Ministry of Health.  The NOC states that the specific investment will not hinder local manufacturers and is in alignment with the guidelines of the ministry. Negative outcomes can be appealed, except for applications pertaining to the four restricted sectors previously mentioned.

A foreign investor also must register its company with the Registrar of Joint Stock Companies and Firms (RJSC&F) and open a local bank account under the registered company’s name.  For BIDA screening, an investor must submit the RJSC&F Company Registration certificate, legal bank account details, a NOC from the relevant ministry, department, or institution, and a project profile (if the investment is more than USD 1.25 million) along with BIDA’s formatted application form.

Other Investment Policy Reviews

In 2013 Bangladesh completed an investment policy review (IPR) with the United Nations Conference on Trade and Development (UNCTAD) and can be found at: http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=444&Sitemap_x0020_Taxonomy=Investment percent20Policy percent20Reviews percent20(IPR);#20;#UNCTAD percent20Home  .

Bangladesh has not conducted an IPR through the Organization for Economic Cooperation and Development.

A Trade Policy Review was last done by the World Trade Organization in October 2012 and can be found at:  https://www.wto.org/english/tratop_e/tpr_e/tp370_e.htm  .

With EU assistance, Bangladesh conducted a trade policy review, the “Comprehensive Trade Policy of Bangladesh” which was published by the Ministry of Commerce in September 2014.  Current Bangladesh government export and import policies are available at: http://www.mincom.gov.bd/site/page/30991fcb-8dfc-4154-a58b-09bb86f60601/Policy  .

Business Facilitation

The Government has had limited success reducing the time required to establish a company.  BIDA and BEZA are both attempting to establish one-stop business registration shops and these agencies have proposed draft legislation for this purpose.  In February 2018, the Bangladesh Parliament passed the “One Stop Service Bill 2018,” which aims to streamline business and investment registration processes.  Expected streamlined services from BIDA include: company registration, name clearance issuance, tax certificate and taxpayer’s identification number (TIN), value added tax (VAT) registration, visa recommendation letter issuance, work permit issuance, foreign borrowing request approval, and environment clearance.  BIDA started its online one-stop service (OSS) on a trial basis in January 2018. Businesses are currently getting 15 types of services online. BIDA aims to automate 150 processes from 34 government agencies once the OSS becomes fully operational.

Companies can register their business at the Office of the Registrar of Joint Stock Companies and Firms:  www.roc.gov.bd  .  However, the online business registration process is not clear and cannot be used by a foreign company to attain the business registration as certain steps are required to be performed in-person.  

In addition, BIDA has branch/liaison office registration information on its website at: http://bida.gov.bd/  .  

Other agencies with which a company must typically register are as follows:

  • City Corporation – Trade License
  • National Board of Revenue – Tax & VAT Registration
  • Chief Inspector of Shops and Establishments – Employment of workers notification.

The company registration process now takes around 15 workdays to complete.  The process to open a branch or liaison office is approximately one month. The process for a trade license, tax registration, and VAT registration requires seven days, two days, and three weeks, respectively.  

Outward Investment

Outward foreign direct investment is generally restricted through the Foreign Exchange Regulation Act of 1947.  As a result, the Bangladesh Bank plays a key role in limiting outbound investment. In September 2015, the government amended the 1947 Act by adding a “conditional provision” that permits outbound investment for export-related enterprises.  Private sector contacts note that the few international investments approved by the Bangladesh Bank have been limited to large exporting companies with international experience.

2. Bilateral Investment Agreements and Taxation Treaties

Bangladesh has signed bilateral investment treaties with 28 countries, including Austria, the Belgium-Luxembourg Economic Union, China, Denmark, France, Germany, India, Indonesia, Iran, Italy, Japan, Democratic People’s Republic of Korea, Republic of Korea, Malaysia, Netherlands, Pakistan, Philippines, Poland, Romania, Singapore, Switzerland, Thailand, Turkey, United Arab Emirates, United Kingdom, United States, Uzbekistan, and Vietnam.  

The U.S.-Bangladesh Bilateral Investment Treaty, signed on March 12, 1986, entered into force on July 23, 1989.  The Foreign Investment Act includes a guarantee of national treatment. The United States and Bangladesh also signed a bilateral treaty for the avoidance of double taxation on September 26, 2004.  The United States ratified it on March 31, 2006. The parties exchanged instruments of ratification on August 7, 2006. The treaty became effective for most taxpayers beginning in the 2007 tax year.

Bangladesh has successfully negotiated several regional trade and economic agreements, including the South Asian Free Trade Area (SAFTA), the Asia-Pacific Trade Agreement (APTA), and the Bay of Bengal Initiative for Multi-Sectoral, Technical and Economic Cooperation (BIMSTEC).  Bangladesh has not signed any bilateral free trade agreements (FTA), but started FTA discussions with Sri Lanka in March 2017 with the intention to sign the agreement by the end of 2018. In August 2017, Bangladesh also signed a memorandum of understanding with Turkey to begin discussions towards an FTA.  It has also announced plans to negotiate agreements with Cambodia and Thailand.

Bangladesh has taken steps to strengthen bilateral economic relations with India by reducing trade barriers and improving connectivity.  Bangladesh gained duty-free access to India via regional trade agreements including the South Asian Association for Regional Cooperation (SAARC) Preferential Trading Arrangement (SAPTA) signed in 1993 and the South Asian Free Trade Area (SAFTA) agreement signed in 2004.  Tariff reduction under SAFTA started from July 2006. Under SAFTA, Bangladesh can export goods duty-free to India, with the exception of alcohol and tobacco. India also provides duty-free and preferential tariff treatment to Bangladesh under the Duty Free Tariff Preference (DFTP) Scheme for Least Developed Countries (LDCs) effective from August 13, 2008.  As a founding member of the World Trade Organization (WTO) and as a Less Developed Country (LDC), Bangladesh has been an active advocate for LDC interests in WTO negotiations. In reality, however, many non-tariff barriers between Bangladesh and India continue to inhibit increased regional trade. These include anti-dumping and countervailing duties, conformity in testing/assessment, compliance with sanitary and phytosanitary standards, rules of origin, visa restrictions, and trade facilitation like poor logistic facilities at land ports.  India is the destination for less than 2 percent of Bangladesh’s exports.

Bangladesh met all three criteria required to graduate from LDC status at the triennial review of the UN’s Economic and Social Council Committee for Development Policy held in March 2018.  Bangladesh expects to fully graduate from LDC status in 2024 and then receive a three-year transition period during which it can still enjoy LDC-specific benefits. After 2027, Bangladesh is expected to lose access to several trade preferences program, including the European Union’s Generalized System of Preferences (GSP) Everything but Arms (EBA) program and other preferential financing arrangements.  To gain access to the EU’s GSP+ program, Bangladesh will need to ratify 27 international conventions on human and labor rights, environment, and governance.

3. Legal Regime

Transparency of the Regulatory System

Since 1989, the government has gradually moved to decrease regulatory obstruction of private business.  The Bangladeshi chambers of commerce have called for a greater voice for the private sector in government decisions and for privatization, but at the same time, many support protectionism and subsidies for their own industries.  The result is that policy and regulations in Bangladesh are often not clear, consistent, or publicized. Registration and regulatory processes are alleged to be frequently used as rent-seeking opportunities. The major rule-making and regulatory authority exist at the national level—under each Ministry with many final decisions being made at the top-most levels, including the Prime Minister’s office (PMO).  The PMO is actively engaged in controlling policies, as well as foreign investment in government-controlled projects. 

The Bangladesh Investment Development Authority (BIDA)—a merger of the Board of Investment (BOI) and the Privatization Commission (PC)—was formed in accordance with the Bangladesh Investment Development Authority Bill 2016 passed by Parliament on July 25, 2016.  The bill established BIDA as the lead private investment promotion and facilitation agency in Bangladesh. The move came amid complaints about redundancies in the BOI’s and the PC’s overlapping mandates and concerns that the PC had not made sufficient progress. BIDA hopes to become a “one-stop shop” for investors and a “true” investment promotion authority rather than simply follow the referral service-orientation of BOI.  Currently, BIDA is not yet a one-stop shop and companies must still seek approvals from relevant line ministries

Bangladesh has achieved incremental progress in using information technology to improve the transparency and efficiency of some government services and to develop independent agencies to regulate the energy and telecommunication sectors.  Some investors cited government laws, regulations, and implementation as impediments to investment.  The government has historically limited opportunities for the private sector to comment on proposed regulations.  In 2009, Bangladesh adopted the Right to Information Act that provides for multilevel stakeholders consultation through workshops or media outreach.  Although the consultation process exists, it is still weak and subject to further improvement.

Ministries do not generally publish and release draft proposals to the public.  However, several government organizations, including the Bangladesh Bank (central bank), BIDA, the Ministry of Commerce, and the Bangladesh Telecommunications Regulatory Commission have occasionally posted draft legislation and regulations online and solicited feedback from the business community.  In some instances, parliamentary committees have also reached out to relevant stakeholders for input on draft legislation. The media continues to be the main information source for the public on many draft proposals. There is also no legal obligation to publish proposed regulations, consider alternatives to proposed regulation, or solicit comments from the general public.

Regulatory agencies generally do not solicit comments on proposed regulations from the general public; however, when a consultation occurs, comments may be received through public media consultation, feedback on websites (e.g., in the past, the Bangladesh Bank received comments on monetary policy), focus group discussions, or workshops with relevant stakeholders.  There is no government body tasked with soliciting and receiving comments, but the Bangladesh Government Press of the Ministry of Information is entrusted with the authority of disseminating government information to the public. The law does not require regulatory agencies to report on the results of consultations and, in practice, regulators do not generally report the results.  Widespread use of social media in Bangladesh has created an additional platform for public input into developing regulations and government officials appear to be sensitive to this form of messaging.

The government printing office, The Bangladesh Government Press (http://www.dpp.gov.bd/bgpress/  ), publishes the weekly “Bangladesh Gazette” every Thursday.  The gazette provides official notice of government actions, including the issuance of government rules and regulations and the transfer and promotion of government employees.  Laws can also be accessed at http://bdlaws.minlaw.gov.bd/  .

Bangladesh passed the Financial Reporting Act of 2015 which created the Financial Reporting Council (FRC) in 2016 in an aim to establish transparency and accountability in the accounting and auditing of financial institutions.  However, the FRC is not fully functional as the regulations that will govern the accountings, earning reports, and disclosure of companies have not yet been formulated. Accounting practices and quality varies widely in Bangladesh.  Internationally known and recognized firms have begun establishing local offices in Bangladesh and the presence of these firms is positively influencing the accounting norms in the country. Some firms are capable of providing financial reports audited to international standards while others maintain unreliable (or multiple) sets of accounting reports.  Regulatory agencies also do not conduct impact assessment of proposed regulations; hence, regulations are often not reviewed on the basis of data-driven assessments. National budget documents are not prepared according to internationally accepted standards.

International Regulatory Considerations

The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) aims to integrate regional regulatory systems between Bangladesh, India, Burma, Sri Lanka, Thailand, Nepal, and Bhutan.  However, efforts to advance regional cooperation measures have stalled in recent years and regulatory systems remain uncoordinated.

Local law is based on the English common law system but most fall short of international standards. The country’s regulatory system remains weak and many of the laws and regulations are not enforced and standards are not maintained.

Bangladesh has been a member of the World Trade Organization (WTO) since January 1995.  The WTO requires all signatories to the Agreement on Technical Barriers to Trade (TBT) to establish a National Inquiry Point and Notification Authority to gather and efficiently distribute trade-related regulatory, standards, and conformity assessment information to the WTO Member community.  Bangladesh Standards and Testing Institute (BSTI) has been working as the National Enquiry Point for the WTO-TBT Agreement since 2002. There is an internal committee on WTO affairs in BSTI and it participates in the notification activities to WTO through the Ministry of Commerce and the Ministry of Industries.

Focal Points and Methods of Contact are:  

General Contact:

Email: ictcell.bsti@gmail.com
Tel: +880-2-8870275

Email address for WTO-TBT National Enquiry Point: bsti_pub@bangla.net

Focal Points for WTO:

  • Md. Muazzem Hossain, Director General, BSTI, Dhaka; Email: dg@bsti.gov.bd, Tel: +880-2-8870275
  • Mr. Shajjatul Bari, Deputy Director, Standards Wing, BSTI, Dhaka; Email: dstd@bsti.gov.bd, Tel: +880-2-8870278, Cell: +8801672790239
  • Mr. Md. Munir Chowdhury, Director General, WTO Cell, Ministry of Commerce; Email: dg.wto@mincom.gov.bd, Tel: +880-2-9545383, Cell: +88 0171 1591060
  • Focal Points for Sanitary and Phytosanitary Measures (SPS), Technical Barriers to Trade (TBT) and Trade-Related Aspects of Intellectual Property Rights (TRIPS):
  • Mr. Md. Hafizur Rahman, Director, WTO Cell, Ministry of Commerce: Email: director1.wto@mincom.gov.bd, Tel: +880-2-9552105, Cell: +88 0171 1861056
  • Mr. Md. Hamidur Rahman Khan, Director, WTO Cell, Ministry of Commerce-
  • Email: director2.wto@mincom.gov.bd, Tel: +880-2-9549195, Cell: +88 01711372093

Link to BSTI: http://www.bsti.gov.bd/  

Legal System and Judicial Independence

Bangladesh is a common law based jurisdiction.  Many of the basic laws of Bangladesh, such as the penal code, civil and criminal procedural codes, contract law, and company law are influenced by English common laws.  However, family laws, such as laws relating to marriage, dissolution of marriage, and inheritance are based on religious scripts and therefore differ between religious communities.  The Bangladeshi legal system is based on a written constitution and the laws often take statutory forms that are enacted by the legislature and interpreted by the higher courts. Ordinarily, executive authorities and statutory corporations cannot make any law, but can make by-laws to the extent authorized by the legislature.  Such subordinate legislation is known as rules or regulations and is also enforceable by the court. As a common law system, statutes are typically short and set out basic rights and responsibilities that are then elaborated on by the courts in their application and interpretation. The Judiciary of Bangladesh acts through (1) The Superior Judiciary having appellate, revision, and original jurisdiction and (2) Sub-Ordinate Judiciary having original jurisdiction.

Since 1971, Bangladesh’s legal system has been updated in the areas of company, banking, bankruptcy, and money loan court laws and other commercial laws.  An important impediment to investment in Bangladesh is a weak and slow legal system in which the enforceability of contracts is uncertain.  The judicial system does not provide for interest to be charged in tort judgments, which means delays in proceedings carry no penalties.  Bangladesh does not have a separate court or division of a court dedicated solely to hearing commercial cases. The Joint District Judge court (a civil court) is responsible for enforcing contracts.

Some notable commercial laws include:

  • The Contract Act, 1872 (Act No. IX of 1930)
  • The Sale of Goods Act, 1930 (Act No. III of 1930)
  • The Partnership Act, 1932 (Act No. IX of 1932)
  • The Negotiable Instruments Act, 1881 (Act No. XXVI of 1881)
  • The Bankruptcy Act, 1997 (Act No. X of 1997)
  • The Arbitration Act, 2001 (Act No. I of 2001).

The judicial system of Bangladesh has never been completely independent from the interference of the executive branch of the government.  In a significant milestone, the government in 2007 separated the country’s judiciary from the executive but the executive retains strong influence over the judiciary through control of judicial appointments.  Other pillars of the justice system, including the police, courts, and legal profession, are also closely aligned with the executive branch.  In lower courts, corruption is widely perceived as a serious problem.  Regulations or enforcement actions are appealable under the Appellate Division of the Supreme Court.

Bangladesh scored a 3.33 in the World Bank’s 2017 Judicial Independence Index on a 1-7 band score with 7 being the best ranking.  That was up from 2016 when it scored a 2.38.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign investment include: the Foreign Private Investment (Promotion and Protection) Act of 1980, the Bangladesh Export Processing Zones Authority Act of 1980, the Companies Act of 1994, the Telecommunications Act of 2001, the Industrial Policy Act of 2005, the Industrial Policy Act of 2010, and the Bangladesh Economic Zones Act 2010.  The Industrial Policy Act of 2016 was approved by the Cabinet Committee on Industrial Purchase on February 24, 2016 and replaces the Industrial Policy of 2010.

The Industrial Policy Act of 2016 offers incentives for “green” (environmental), high-tech, or “transformative” industries.  Foreign investors who invest USD 1 million or transfer USD 2 million to a recognized financial institution can apply for Bangladeshi citizenship.  The Government of Bangladesh will provide financial and policy support for high-priority industries (those that create large-scale employment and earn substantial export revenue) and creative industries (architecture, arts and antiques, fashion design, film and video, interactive laser software, software, and computer and media programming).  Specific importance will be given to agriculture and food processing, ready-made garments (RMG), information and communication technology (ICT), software, pharmaceuticals, leather and leather products, and jute and jute goods.

In 2017, BIDA submitted proposed legislation for a One-Stop Service Act (OSS), which was approved by the Parliament in February 2018, to attract further foreign direct investment to Bangladesh.  In addition, Petrobangla, the state-owned oil and gas company, has modified its production sharing agreement contract for offshore gas exploration to include an option to export gas.

BIDA has a “one-stop” website that provides relevant laws, rules, procedure, and reporting requirements for investors at: http://www.bida.gov.bd/  .   Aside from information on relevant business laws and licenses, the website includes information on Bangladesh’s investment climate, opportunities for business, potential sectors, and how to do business in Bangladesh.  The website also has an eService Portal for Investors which provides services like visa recommendations for foreign investors, approval/extension of work permits for expatriates, approval of foreign borrowing, and approval/renewal of branch/liaison and representative offices.  However, the effectiveness of these online services is questionable.

Competition and Anti-Trust Laws

The GOB formed an independent agency in 2011 called the “Bangladesh Competition Commission (BCC)” under the Ministry of Commerce.  The Bangladesh Parliament then passed the Competition Act in June 2012. However, the BCC has experienced operational delays and it has not received sufficient resources to fully operate.  Currently, the WTO Cell of the Ministry of Commerce handles most competition-related issues.

In January 2016, the two parent companies of Malaysia-based Robi and India-based Airtel signed a formal deal to merge their operations in Bangladesh, completing the country’s first telecommunications merger.  The deal, valued at USD 12.5 million, is to date Bangladesh’s largest corporate merger. The merger raised anti-competition concerns but it was completed in November 2016 after the Bangladesh Telecommunication Regulatory Commission (BTRC) and Prime Minister Sheikh Hasina gave final approvals.  

Expropriation and Compensation

Since the Foreign Investment Act of 1980 banned nationalization or expropriation without adequate compensation, the GOB has not nationalized or expropriated property from foreign investors.  In the years immediately following independence in 1971, widespread nationalization resulted in government ownership of more than 90 percent of fixed assets in the modern manufacturing sector, including the textile, jute, and sugar industries and all banking and insurance interests, except those in foreign (but non-Pakistani) hands.  During the last 20 years, the government has since taken steps to privatize many of these industries and the private sector has developed into a main driver of the country’s sustained economic growth.

Dispute Settlement

ICSID Convention and New York Convention

Bangladesh is a signatory to the International Convention for the Settlement of Disputes (ICSID) and it acceded in May 1992 to the United Nations Convention for the Recognition and Enforcement of Foreign Arbitral Awards.  Alternative dispute resolutions are possible under the Bangladesh Arbitration Act of 2001. The current legislation allows for enforcement of arbitral awards.

Investor-State Dispute Settlement

Bangladeshi law allows contracts to refer investor-state dispute settlement to third country fora for resolution.  The U.S.-Bangladesh Bilateral Investment Treaty also stipulates that parties may, upon the initiative of either of them and as a part of their consultation and negotiation, agree to rely upon non-binding, third-party procedures, such as the fact-finding facility available under the Rules of the “Additional Facility (“Facility”) of the International Centre for the Settlement of Investment Disputes (“Centre”).”  If the dispute cannot be resolved through consultation and negotiation, then the dispute shall be submitted for settlement in accordance with the applicable dispute-settlement procedures upon which they have previously agreed. Bangladesh is also a party to the South Asia Association for Regional Cooperation (SAARC) Agreement for the Establishment of an Arbitration Council, signed November 2005, which aims to establish a permanent center for alternative dispute resolution in one of the SAARC member countries.

International Commercial Arbitration and Foreign Courts

Bangladeshi law allows contracts to refer dispute settlement to third country fora for resolution.  The Bangladesh Arbitration Act of 2001 and amendments in 2004 reformed alternative dispute resolution in Bangladesh.  The Act consolidated the law relating to both domestic and international commercial arbitration. It thus creates a single and unified legal regime for arbitration in Bangladesh.  Although the new Act is principally based on the UNCITRAL Model Law, it is a patchwork as some unique provisions are derived from the Indian Arbitration and Conciliation Act 1996 and some from the English Arbitration Act 1996.

In practice, enforcement of arbitration results is applied unevenly and the GOB has challenged ICSID rulings, especially those that involve rulings against the GOB.  The timeframe for dispute resolution is unpredictable and has no set limit. It can be done as quickly as a few months, but often takes years depending on the type of dispute.  Anecdotal information indicates average resolution time can be as high as 16 years. Local courts may be biased against foreign investors in resolving disputes.

Bangladesh is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and recognizes the enforcement of international arbitration awards.  Domestic arbitration is under the authority of the district judge court bench and foreign arbitration is under the authority of the relevant high court bench.

The ability of the Bangladeshi judicial system to enforce its own awards is weak.  Senior members of the government have been effective in using their offices to resolve investment disputes on several occasions, but the GOB’s ability to resolve investment disputes at a lower level is mixed.  The GOB does not publish the numbers of investment disputes involving U.S. or foreign investors. Anecdotal evidence indicates investment disputes occur with limited frequency and the involved parties often resolve the disputes privately rather than seek government intervention.  

The practice of alternative dispute resolution (ADR) in Bangladesh has many challenges, including lack of funds, lack of lawyer cooperation, and lack of good faith.  Slow adoption of ADR mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes in Bangladesh.

As in many countries, Bangladesh has adopted a “conflicts of law” approach to determining whether a judgment from a foreign legal jurisdiction is enforceable in Bangladesh.  This single criterion allows Bangladesh courts broad discretion in choosing whether to enforce foreign judgments with significant effects on matrimonial, adoption, corporate, and property disputes.  Most enterprises in Bangladesh, and especially state-owned enterprises (SOEs), whose leadership is nominated by the ruling government party, maintain strong ties with the government.  Thus domestic courts strongly tend to favor SOEs and local companies in investment disputes.

Investors are also increasingly turning to the Bangladesh International Arbitration Center (BIAC) for dispute resolution.  BIAC is an independent arbitration center established by prominent local business leaders in April 2011 to improve commercial dispute resolution in Bangladesh to stimulate economic growth.  The council committee is headed by the President of International Chamber of Commerce—Bangladesh (ICCB) and includes the presidents of other prominent chambers such as like Dhaka Chamber of Commerce and Industry (DCCI) and Metropolitan Chamber of Commerce and Industry (MCCI).  The center operates under the Bangladesh Arbitration Act of 2001. According to BIAC, fast track cases are resolved in approximately six months while typical cases are resolved in one year. Major Bangladeshi trade and business associations such as the American Chamber of Commerce in Bangladesh (AmCham) can sometimes help to resolve transaction disputes.

Bankruptcy Regulations

Many laws affecting investment in Bangladesh are old and outdated.  Bankruptcy laws, which apply mainly to individual insolvency, are sometimes not used in business cases because of the series of falsified assets and uncollectible cross-indebtedness supporting insolvent banks and companies.  A Bankruptcy Act was enacted in 1997 but has been ineffective in addressing these issues. An amendment to the Bank Companies Act of 1991 was enacted in 2013. Some bankruptcy cases fall under the Money Loan Court Act which has more stringent and timely procedures.

4. Industrial Policies

Investment Incentives

Details regarding fiscal and non-fiscal incentives are available on the BIDA website: http://bida.gov.bd/?page_id=146  . Current regulations permit a tax holiday for designated “thrust” (strategic) sectors and infrastructure projects established between July 01, 2011 and June 30, 2019.  Industries set up in Export Processing Zones (EPZs) are also eligible for tax holidays. Thrust sectors subject to exemption include: certain pharmaceuticals, automobile manufacturing, contraceptives, rubber latex, chemicals or dyes, certain electronics, bicycles, fertilizer, biotechnology, commercial boilers, certain brickmaking technologies, compressors, computer hardware, energy efficient appliances, insecticides, pesticides, petro-chemicals, fruit and vegetable processing, textile machinery, tissue grafting, and tire manufacturing industries. Physical infrastructure projects eligible for exemptions include: deep sea ports, elevated expressways, road overpasses, toll road and bridges, EPZs, gas pipelines, information technology parks, industrial waste and water treatment facilities, liquefied natural gas (LNG) terminals, electricity transmission, rapid transit projects, renewable energy projects, and ports.

In addition to the above tax rebate, manufacturers located in rural areas and commencing commercial operations between July 1, 2014 and June 30, 2019 are eligible for tax exemptions of up to 20 percent for the first 10 years of production.

Independent non-coal fired power plants (IPPs) commencing production (COD) after January 1, 2015 are granted a 100 percent tax exemption for five years, a 50 percent exemption for years 6-8, and a 25 percent exemption for years 9-10.  For coal-fired IPPs contracting with the GOB before June 30, 2020 and COD before June 30, 2023, the tax exemption rate is 100 percent for the first 15 years of operations. For power projects, import duties are waived for imports of capital machinery and spare parts.

The valued-added tax (VAT) rate on exports is zero.  For companies that only export, import duties are waived for imports of capital machinery and spare parts.  For companies that primarily export (80 percent of production and above), an import duty rate of one percent is charged for imports of capital machinery and spare parts identified and listed in notifications to relevant regulators.  Import duties are also waived for EPZ industries and other export oriented industries for imports of raw materials consumed in production.

Special incentives are provided to encourage non-resident Bangladeshis to invest in the country.  Incentives include the ability to buy newly issued shares and debentures in Bangladeshi companies.  A quota of 10 percent of primary shares has been fixed for non-resident Bangladeshis. Furthermore, non-resident Bangladeshis can maintain foreign currency deposits in Non-resident Foreign Currency Deposit (NFCD) accounts.

In the past several years, U.S. companies have experienced difficulties securing the investment incentives initially offered by the GOB.  Several companies have reported instances of infrastructure guarantees (ranging from electricity to gas connections) not being fully delivered or tax exemptions being delayed, either temporarily or indefinitely.

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the Bangladesh Export Processing Zones Authority Act of 1980, the government established an EPZ in Chattogram in 1983.  Additional EPZs now operate in Dhaka (Savar), Mongla, Ishwardi, Cumilla, Uttara, Karnaphuli (Chattogram), and Adamjee (Dhaka).  Korean investors are also operating a separate and private EPZ in Chattogram.

Investments that are wholly foreign-owned, joint ventures, and wholly Bangladeshi-owned companies are all permitted to operate in and enjoy equal treatment in the EPZs.  Approximately one dozen U.S. firms—mostly textile producers—are currently operating in Bangladesh EPZs. Investors have begun to view intermittent infrastructure services, including electricity and gas connections, and increasing costs as making the EPZs less attractive.

In 2010, Bangladesh enacted the Special Economic Zone Act that allows for the creation of privately owned economic zones (EZs) that can produce for export and domestic markets.  The EZs provide special fiscal and non-fiscal incentives to domestic and foreign investors in designated underdeveloped areas throughout Bangladesh. The International Finance Corporation provided assistance to the GOB to establish an EZ authority, the Bangladesh Economic Zones Authority (BEZA), modeled after BEPZA, to implement the new law and oversee the establishment of EZs. The government recently announced plans to create up to 100 new EZs and invited private companies to develop the zones.  Several EZs are moving forward under this initiative: http://www.beza.gov.bd/  .  However, assurances regarding access to necessary infrastructure and other resources, including gas and power, have not been made.  

Performance and Data Localization Requirements

Performance Requirements

The Bangladesh Investment Development Authority (BIDA) has set restrictions for the employment of foreign nationals and the issuance of work permits as follows:

  • Nationals of countries recognized by Bangladesh are eligible for employment consideration;
  • Expatriate personnel will only be considered for employment in enterprises duly registered with the appropriate regulatory authority;
  • Employment of foreign nationals is generally limited to positions for which qualified local workers are unavailable;
  • Persons below 18 years of age are not eligible for employment;
  • The board of directors of the employing company must issue a resolution for each offers or extension of employment;
  • The percentage of foreign employees should not exceed 5 percent in industrial sectors and 20 percent in commercial sectors, including among senior management positions;
  • Initial employment of any foreign national is for a term of two years, which may be extended based on merit;
  • The Ministry of Home Affairs will issue necessary security clearance certificates.

In response to the high number of expatriate workers in the ready-made garment industry, BIDA has issued informal guidance encouraging industrial units to refrain from hiring additional semi-skilled foreign experts and workers.  Overall, the government looks favorably on investments that employ significant numbers of local workers and/or provide training and transfers of technical skills.

The GOB does not formally mandate that investors use domestic content in goods or technology.  However, companies bidding on government procurement tenders are often informally encouraged to have a local partner and to produce or assemble a percentage of their products in country.

Data Storage Requirements

According to a legal overview by the Telenor Group, for reasons of national security or in times of emergency, several regulations and amendments, including the Bangladesh Telecommunication Regulatory Act, 2001 (the “BTRA”), Information and Communication Technology Act 2006 (the “ICT Act”), and the Telegraph Act 1885 (the “1885 Act”), grant law enforcement and intelligence agencies legal authority to lawfully seek disclosure of communications data and request censorship of communications.  A draft Digital Security Act of 2016 (the “Digital Security Act”) was adopted by the Parliament in October 2018.

On the grounds of national security and maintaining public order, the GOB can authorize relevant government authorities (intelligence agencies, national security agencies, investigation agencies, or any officer of any law enforcement agency) to suspend or prohibit the transmission of any data or any voice call and to record or collect user information relating to any subscriber to a telecommunications service.  

Under section 30 of the ICT Act, the GOB, through the ICT Controller, may access any computer system, any apparatus, data, or any other material connected with a computer system, for the purpose of searching for and obtaining any such information or data.  The ICT Controller may, by order, direct any person in charge of, or otherwise concerned with the operation of a computer system, data apparatus, or material, to provide reasonable technical and other assistance as may be considered necessary. Under section 46 of the ICT Act, the ICT Controller can also direct any government agency to intercept any information transmitted through any computer resource, and may order any subscriber or any person in charge of computer resources to provide all necessary assistance to decrypt relevant information.

There is no direct reference in the BTRA to the storage of metadata.  Under the broad powers granted to the BTRA, however, the GOB, on the grounds of national security and public order, may require telecommunications operators to keep records relating to the communications of a specific user.  Telecommunications operators are also required to provide any metadata as evidence if ordered to do so by any civil court.

The ICT Controller enforces the ICT Act and the Bangladesh Telecommunication Regulatory Commission (BTRC) enforces the BTRA.  The Ministry of Home Affairs grants approval for use of powers given under the BTRA. The ICT Act also established a Cyber Tribunal to adjudicate cases.  If approved, the Digital Security Act would create a Digital Security Agency (DSA) empowered to monitor and supervise digital content. Also under the Digital Security Act, for reasons of national security or maintenance of public order, the Director General (DG) of the DSA would be authorized to block communications and to require that service providers facilitate the interception, monitoring, and decryption of a computer or other data source.  

The Bangladesh Road Transport Authority’s (BRTA) Ride-sharing Service Guideline 2017 came into force on March 8, 2018.  The new regulations included requirements that ride sharing companies keep data servers within Bangladesh.

5. Protection of Property Rights

Real Property

Although land, whether for purchase or lease, is often critical for investment and as security against loans, antiquated real property laws and poor record-keeping systems can complicate land and property transactions.  Instruments take effect from the date of execution, not the date of registration, so a bona fide purchaser can never be certain of title. Land registration records have historically been prone to competing claims. Land disputes are common, and both U.S. companies and citizens have filed complaints about fraudulent land sales.  For example, sellers fraudulently claiming ownership have transferred land to good faith purchasers while the actual owners were living outside of Bangladesh. In other instances, U.S.-Bangladeshi dual citizens have purchased land from legitimate owners only to have third parties make fraudulent claims of title to extort settlement compensation.

Property owners can obtain mortgages but parties generally avoid registering mortgages, liens, and encumbrances due to the high cost of stamp duties (i.e., transaction taxes based on property value) and other charges.  There are also concerns that non-registered mortgages are often unenforceable.

Article 42 of the Bangladesh Constitution guarantees a right to property for all citizens but property rights are often not protected due to a weak judiciary system.  The Transfer of Property Act of 1882   and the Registration Act of 1908   are the two main laws that regulate transfer of property in Bangladesh but these laws do not have any specific provisions covering foreign and/or non-resident investors.  Currently, foreigners and non-residents can incorporate a company with the Registrar of Joint Stock Companies and Firms. The company would be considered a local entity and would be able to buy land in its name.

Intellectual Property Rights

Counterfeit goods are readily available in Bangladesh.  The GOB has limited resources for intellectual property rights (IPR) protection.  Industry estimates that 90 percent of business software is pirated. A number of U.S. firms, including film studios, manufacturers of consumer goods, and software firms, have reported violations of their IPR.  Investors note that police are willing to investigate counterfeit goods producers when informed but are unlikely to initiate independent investigations.

The Software Alliance, also known as BSA, is a trade group established by Microsoft Corporation in 1988.  It opened a Bangladesh office in early 2014 as a platform to improve IPR protection in Bangladesh. Public awareness of IPR is growing, thanks in part to the efforts of the Intellectual Property Rights Association of Bangladesh: http://www.ipab.org.bd/ .  Bangladesh is not currently listed in the U.S. Trade Representative’s Special 301 or Notorious Markets reports.  Bangladesh is a member of the World Intellectual Property Organization (WIPO) and acceded to the Paris Convention on Intellectual Property in 1991.

Bangladesh has slowly made progress toward bringing its legislative framework into compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  The government enacted a Copyright Law in July 2000 (amended in 2005), a Trademarks Act in 2009, and Geographical Indication of Goods (Registration and Protection) Act in 2013. The Department of Patents, Designs and Trademarks (DPDT) drafted a new Patent Act in 2014 prepared in compliance with the requirements of the TRIPS Agreement.  However the draft act still remains under Ministry of Industries review and this effort has not made measurable progress during the past year.

A number of government agencies are empowered to take action against counterfeiting, including the NBR/Customs, Mobile Courts, the Rapid Action Battalion (RAB), and local Police.  The Department of National Consumer Rights Protection (DNCRP) is charged with tracking and reporting on counterfeit goods and the NBR/Customs tracks counterfeit goods seizures at ports of entry.  Reports are not publicly available.

6. Financial Sector

Capital Markets and Portfolio Investment

Capital markets in Bangladesh are still developing and the financial sector remains highly dependent on bank lending.  Current government policy inhibits the creation of reliable benchmarks for long-term bonds and prevents the development of a tradable bond market.  

Bangladesh is home to the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE).  The Bangladesh Securities and Exchange Commission (BSEC), a statutory body formed in 1993 and attached to the Ministry of Finance, regulates both.  As of March 2019, the DSE market capitalization stood at USD 48.6 billion.

Although the GOB has a positive attitude towards foreign portfolio investors, participation remains low due to limited liquidity and the lack of publicly available and reliable company information.  The DSE has attracted some foreign portfolio investors to the country’s capital market; however, the volume of foreign investment in Bangladesh remains a small fraction of total market capitalization.  As a result, foreign portfolio investment has had limited influence on market trends and Bangladesh’s capital markets have been largely insulated from the volatility of international financial markets. Bangladeshi markets continue to rely primarily on domestic investors and Bangladeshi firms increasingly rely on capital markets to finance investment projects.  In March 2017, the government relaxed investment rules making it possible for foreign investors to use local currency to invest directly in local companies through the purchase of corporate shares.

BSEC has formed separate committees to establish a central clearing and settlement company, allow venture capital and private equity firms, launch derivatives products, and activate the bond market.  In December 2013, BSEC became a full signatory of International Organization of Securities Commissions (IOSCO) Memorandum of Understanding.

BSEC has taken steps to improve regulatory oversight, including installing a modern surveillance system, the “Instant Market Watch,” that provides real time connectivity with exchanges and depository institutions.  As a result, the market abuse detection capabilities of BSEC have improved significantly. A new mandatory Corporate Governance Code for listed companies was introduced in August 2012. Demutualization of both the DSE and CSE was completed in November 2013 to separate ownership of the exchanges from trading rights. A majority of the members of the Demutualization Board, including the Chairman, are independent directors. Apart from this, a separate tribunal has been established to resolve capital market-related criminal cases expeditiously.  All these reforms target a disciplined market with better infrastructure so that entrepreneurs can raise capital and attract foreign investors.

The Demutualization Act 2013 also directed DSE to pursue a strategic investor who would acquire a 25 percent stake in the bourse.  DSE opened bids for a strategic partner in February 2018 and, in September 2018, the Chinese consortium of Shenzhen and Shanghai stock exchanges became DSE’s strategic partner after buying a 25 percent share of DSE for taka 9.47 billion (USD 112.7 million).  

According to the International Monetary Fund (IMF), Bangladesh is an Article VIII member and maintains restrictions on the unapproved exchange, conversion, and/or transfer of proceeds of international transactions into non-resident taka-denominated accounts.  Since 2015, authorities have relaxed restrictions by allowing some debits of balances in such accounts for outward remittances, but there is currently no established timetable for the complete removal of the restrictions.

Money and Banking System

The Bangladesh Bank (BB) acts as the central bank of Bangladesh.  It was established on December 16, 1971 through the enactment of the Bangladesh Bank Order-1972.  General supervision and strategic direction of BB has been entrusted to a nine-member Board of Directors, which is headed by the BB Governor.  BB has 45 departments and 10 branch offices.

According to the BB, four types of banks operate in the formal financial system: State Owned Commercial Banks (SOCBs), Specialized Banks, Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs).  Some 59 “scheduled” banks in Bangladesh operate under the full control and supervision of the center as per the Bangladesh Bank Order 1972. The scheduled banks including six SOCBs, three specialized government banks established for specific objectives like agricultural or industrial development, 41 PCBs, and nine FCBs as of March 2019.  The scheduled banks are licensed to operate under Bank Company Act 1991 (Amended 2013). There are also five non-scheduled banks in Bangladesh, established for special and definite objectives and operating under Acts that are enacted for meeting up those objectives.

Currently, 34 non-bank financial institutions (FIs) are operating in Bangladesh.  They are regulated under the Financial Institution Act, 1993 and controlled by the BB.  Out of the total, two are fully government owned, one is a subsidiary of an SOCB, 15 are private domestic initiatives, and 15 are joint venture initiatives.  Major sources of funds of these financial institutions are term deposits (at least three months tenure), credit facilities from banks and other financial institutions, call money, as well as bonds and securitization.

The major difference between banks and FIs are as follows:

FIs cannot issue checks, pay-orders, or demand drafts,

FIs cannot receive demand deposits,

FIs cannot be involved in foreign exchange financing,

FIs can employ diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc.

Microfinance institutions (MFIs) remain the dominant players in rural financial markets.  According to the Bangladesh Microcredit Regulatory Authority, as of June 2017, there were 783 licensed micro-finance institutions operating a network of 17,120 branches with 29.2 million members.  A 2014 Institute of Microfinance survey study showed that around 40 percent of the adult population and 75 percent of households had access to financial services in Bangladesh.

The banking sector has had a mixed record of performance over the past several years, but the sector has maintained overall healthy growth.  Total assets in the banking sector stood at 62.5 percent of gross domestic product at end of September 2018. The gross non-performing loan (NPL) ratio was 11.45 percent at end of September 2018.

On December 26, 2017, the BB issued a circular warning citizens and financial institutions about the risks associated with cryptocurrencies.  The circular noted that using cryptocurrencies may violate existing money laundering and terrorist financing regulations and that users may incur financial losses.  According to the BB, the circular did not constitute a ban. Bangladesh foreign exchange regulations, which limit outward payments, largely prevent the use of cryptocurrencies in Bangladesh.  The BB issued similar warnings against cryptocurrencies in 2014.

Foreign Exchange and Remittances

Foreign Exchange Policies

Free repatriation of profits is legally allowed for registered companies and profits are generally fully convertible.  However, companies report that the procedures for repatriation of foreign currency are lengthy and cumbersome. The Foreign Investment Act guarantees the right of repatriation of invested capital, profits, capital gains, post-tax dividends, and approved royalties and fees for businesses.  The central bank’s exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (in force since 1989) provide similar investment transfer guarantees. The Bangladesh Investment Development Authority may need to approve repatriation of royalties and other fees.

Since 2013, Bangladesh has tried to manage its exchange rate vis-à-vis the U.S. dollar within a fairly narrow range.  Until 2017, the Bangladesh taka traded between 76 and 78.8 taka to the dollar. The taka has depreciated relative to the dollar since October 2017 reaching 84.25 taka per dollar as of March 2019, despite ongoing interventions from the Bangladesh Bank.  The Bangladesh currency, the taka, is approaching full convertibility for current account transactions, such as imports and travel, but not for capital account transactions, such as investing, currency speculation, or e-commerce.

Remittance Policies

There are no set time limitations or waiting periods for remitting all types of investment returns.  Remitting dividends, returns on investments, interest, and payments on private foreign debts do not require approval from the central bank and transfers are done within one to two weeks.  For repatriating lease payments, royalties and management fees, some central bank approval is required, and this process can take between two and three-weeks. If a company fails to submit all the proper documents for remitting, it may take up to 60 days.  Foreign investors have reported difficulties transferring funds to overseas affiliates and making payments for certain technical fees without the government’s prior approval to do so. Additionally, some regulatory agencies have reportedly blocked the repatriation of profits due to sector-specific regulations.  The U.S. Embassy also received complaints of American citizens not being able to transfer the proceeds of sales of their properties. There is no mechanism in place for foreign investors to repatriate through government bonds issued in lieu of foreign currency payments. Bangladesh is not involved in currency manipulation tactics.

The Financial Action Task Force (FATF) notes that Bangladesh has established the legal and regulatory framework to meet its Anti-Money Laundering/Counterterrorism Finance (AML/CTF) commitments.  The Asia/Pacific Group on Money Laundering (APG), an independent and collaborative international organization based in Bangkok, conducted its mutual evaluation of Bangladesh’s AML/CTF regime in September 2018 and found that Bangladesh had made significant progress since the last Mutual Evaluation Report (MER) in 2009, but that Bangladesh still faces significant money laundering and terrorism financing risks.  The APG reports are available online: http://www.fatf-gafi.org/countries/#Bangladesh  .

Sovereign Wealth Funds

The Bangladesh Finance Ministry first announced in 2015 that it is exploring the possibility of establishing a sovereign wealth fund for the purposes of investing a portion of Bangladesh’s foreign currency reserves.  In February 2017, the Cabinet initially approved a USD 10 billion “Bangladesh Sovereign Wealth Fund,” (BSWF) that will be created with funds from excess foreign exchange reserves. The government claims the BSWF will be used to invest in “public interest” projects.  Bangladesh does not currently follow the Santiago Principles, a voluntary set of 24 principles and practices designed to promote transparency, good governance, accountability, and prudent investment practices while encouraging a more open dialogue and deeper understanding of sovereign wealth fund activities.

7. State-Owned Enterprises

The government privatized 74 state-owned enterprises (SOEs) during the past 20 years, but many SOEs retain an important role in the economy, particularly in the financial and energy sectors.  Out of the 74 SOEs, 54 were privatized through outright sale and 20 through offloading of shares. The Privatization Commission (PC) has slowed its rate of privatization activities and in 2016, the PC merged with the Board of Investment (BOI) to form a new Bangladesh Investment Development Authority (BIDA).  The 54 non-financial public enterprises in the country have been categorized into 7 sectors following the Bangladesh Standard Industrial Classification (BSIC) and their economic and financial performances are analyzed in the government budget.

Bangladesh’s 45 non-financial SOEs are spread among seven sectors – industrial; power, gas and water; transport and communication; trade; agriculture; construction; and services.  The list of non-financial SOEs and relevant budget details are published in Bangla in the Ministry of Finance’s SOE Budget Summary 2017-18: http://www.mof.gov.bd/site/page/5eed2680-c68c-4782-9070-13e129548aac/SOE-Budget  .

The current government has taken steps to restructure several SOEs to improve their competitiveness.  The GOB converted Biman Bangladesh Airline, the national airline, into a public limited company that initiated a rebranding and fleet renewal program, including the purchase of ten aircraft from Boeing, eight of which were delivered as of March 2019.  Three nationalized commercial banks (NCBs)—Sonali, Janata, and Agrani—have been converted to public limited companies. The GOB also liberalized the telecommunications sector in the last decade, which led to the development of a competitive cellular phone market.

The contribution of SOEs to gross domestic product, value-added production, employment generation, and revenue earning is substantial.  SOEs usually report to the ministries, though the government has allowed some enhanced autonomy for certain SOEs, such as Biman Bangladesh Airline.  SOEs maintain control of rail transportation whereas private companies compete freely in air and road transportation. The corporate governance structure of SOEs in Bangladesh has been restructured as per the guidelines published by the Organization for Economic Cooperation and Development (OECD), but the country’s practices are still not up to OECD standards.  There are no guidelines regarding ownership of SOEs, and while SOEs are required to prepare annual reports and make financial disclosures, disclosure documents are often unavailable to the public.  Each SOE has an independent board of directors composed of both government and private sector nominees. The boards report to the relevant regulatory ministry.  Most SOEs have strong ties with the government, and the ruling government party nominates most SOE leaders.  As the government controls most of the SOEs, domestic courts tend to favor the SOEs in investment disputes.

The Bangladesh Petroleum Act of 1974 grants authority for the government to award natural resources contracts and the Bangladesh Oil, Gas and Mineral Corporation Ordinance of 1984 gives Petrobangla, the state-owned oil and gas company, authority to assess and award natural resource contracts and licenses, to both SOEs and private companies.  Currently, oil and gas firms can pursue exploration and production ventures only through production sharing agreements with Petrobangla.

Privatization Program

Since 2010, the government’s privatization drive has slowed.  Previous privatization drives were plagued with allegations of corruption, undervaluation, political favoritism, and unfair competition.  Nonetheless, the government has publicly stated its goal of continuing the privatization drive. SOEs can be privatized through a variety of methods including: sales through international tender; sales of government shares in the capital market; transfers of some portion of the shares to the employees of the enterprises when shares are sold through the stock exchange; sale of government shares to a private equity company (restructuring); mixed sales methods; management contracts; leasing; and direct asset sales (liquidation).  In 2010, 22 SOEs were included in the Privatization Commission’s (now the Bangladesh Investment Development Authority’s) program for privatization. However, a study on privatized industries in Bangladesh conducted by the Privatization Commission in 2010 found that only 59 percent of the entities were in operation after being privatized and 20 percent of them were permanently closed down—implying a lack of planning or business motivation of their private owners. Later, in 2014, the government declared that SOEs would not be privatized via direct selling but instead by the offloading of shares in the SOE.  The government believed this to be a viable way for ensuring greater accountability for the management of the SOEs while minimizing the government’s exposure. However, unless the offloading of shares involves more than 50 percent of the SOE’s shares, the government would not divest control over the SOE. Additional information is available on the BIDA website at: http://bida.gov.bd/?page_id=4771 .

8. Responsible Business Conduct

The business community is increasingly aware of and engaged in responsible business conduct (RBC) activities with multinational firms leading the way.  While many firms in Bangladesh fall short on RBC activities and instead often focus on philanthropic giving, some of the leading local conglomerates have begun to incorporate increasingly rigorous environmental and safety standards in their workplaces.  U.S. companies present in Bangladesh maintain diverse RBC activities. Consumers in Bangladesh are generally less aware of RBC, and consumers and shareholders exert little pressure on companies to engage in RBC activities.

While many international firms are aware of OECD guidelines and international best practices in RBC, many local firms have limited familiarity with international standards.  There are currently two RBC NGOs active in Bangladesh:

CSR Bangladesh, http://www.csrbangladesh.org/aboutus.php  

CSR Centre Bangladesh, http://www.csrcentre-bd.org  .

Along with the Bangladesh Enterprise Institute (BEI), the CSR Centre is the joint focal point for United Nations Global Compact (UNGC) and its principles in Bangladesh.  The UN Global Compact is the world’s largest corporate citizenship and sustainability initiative. The Centre is a member of a regional RBC platform called the South Asian Network on Sustainability and Responsibility (SANSAR).  Currently, SANSAR has five member countries including Afghanistan, Bangladesh, India, Nepal, and Pakistan.

While several NGOs have proposed National Corporate Social Responsibility Guidelines, the GOB has yet to adopt any national standards for RBC.  As a result, the GOB encourages enterprises to follow generally accepted RBC principles but does not mandate any specific guidelines.

Bangladesh has natural resources, but it has not joined the Extractive Industries Transparency Initiative (EITI).  The country does not adhere to the Voluntary Principles on Security and Human Rights.

9. Corruption

Corruption remains a serious impediment to investment and economic growth in Bangladesh.  While the government has established legislation to combat bribery, embezzlement, and other forms of corruption, enforcement is inconsistent.  The Anti-Corruption Commission (ACC) is the main institutional anti-corruption watchdog. With amendments to the Money Prevention Act, the ACC is no longer the sole authority to probe money-laundering offenses.  Although it still has primary authority for bribery and corruption, other agencies will now investigate related offenses:

  • Bangladesh Police (Criminal Investigation Department) – Most predicate offenses.
  • NBR – VAT, taxation, and customs offenses.
  • Department of Narcotics Control – Drug related offenses.

The current Awami League-led government has publicly underscored its commitment to anticorruption efforts and reaffirmed the need for a strong ACC, but opposition parties claim that the ACC is used by the government to harass political opponents.  Efforts to ease public procurement rules and a recent constitutional amendment that reduced the independence of the ACC may undermine institutional safeguards against corruption. Bangladesh is a party to the UN Anticorruption Convention, but it has still not joined the OECD Convention on Combating Bribery of Public Officials.

Corruption is common in public procurement, tax and customs collection, and regulatory authorities.  Corruption, including bribery, raises the costs and risks of doing business. By some estimates, off-the-record payments by firms may result in an annual reduction of two to three percent of GDP.  Corruption has a corrosive impact on the broader business climate market and opportunities for U.S. companies in Bangladesh. It also deters investment, stifles economic growth and development, distorts prices, and undermines the rule of law.

Resources to Report Corruption

Mr. Iqbal Mahmood
Chairman
Anti-Corruption Commission, Bangladesh
1, Segun Bagicha, Dhaka 1000
+88-02-8333350
Email: chairman@acc.org.bd

Contact at “watchdog” organization:

Advocate Sultana Kamal
Chairperson
Transparency International Bangladesh (TIB)
MIDAS Centre (Level 4 & 5), House-5, Road-16 (New) 27 (Old), Dhanmondi, Dhaka – 1209
+880 2 912 4788 / 4789 / 4792
Email: 
edtib@ti-bangladesh.org, info@ti-bangladesh.org, advocacy@ti-bangladesh.org

10. Political and Security Environment

Prime Minister Hasina’s ruling Awami League party won 289 parliamentary seats out of 300 in a December 30, 2018 election that was marred by wide-spread vote-rigging, ballot-box stuffing, and intimidation.  Harassment, intimidation and violence during the pre-election period made it difficult for many opposition candidates and their supporters to meet, hold rallies, and campaign freely. The clashes between rival political parties and general strikes that previously characterized the political environment in Bangladesh have become far less frequent in the wake of the Awami League’s increasing dominance of the country and crackdown on dissent.  Many civil society groups have expressed concern about the apparent trend toward a one-party state and the marginalization of all political opposition groups.

Americans are advised to exercise increased caution due to crime and terrorism when traveling to Bangladesh.  Some areas have increased risk. For further information, see the State Department’s travel website for the Worldwide Caution, Travel Advisories, and Bangladesh Country Specific Information.

11. Labor Policies and Practices

Bangladesh’s comparative advantage in cheap labor for manufacturing is partially offset by lower productivity due to poor skills development, inefficient management, pervasive corruption, and inadequate infrastructure.  Bangladeshi workers have a strong reputation for hard work, entrepreneurial spirit, and a positive and optimistic attitude. With an average age in Bangladesh of 26 years, the country boasts one of the largest and youngest labor forces in the world.

Bangladesh has labor laws that specify employment conditions, working hours, minimum wage levels, leave policies, health and sanitary conditions, and compensation for injured workers.  Freedom of association and the right to join unions are guaranteed in the constitution. In practice, compliance and enforcement of labor laws are inconsistent, and companies frequently discourage the formation of labor unions.  Export Processing Zones (EPZs) are a notable exception to the national labor law in that they do not allow trade union participation, but the government is considering amendments to change that (see below). Historically, unions have been heavily politicized and labor-management relations contentious.

Bangladesh’s garment sector has undergone several reforms since the April 2013 Rana Plaza building collapse and the November 2012 Tazreen Fashions factory fire that together killed over 1,230 workers.  With support from the international community and the private sector, Bangladesh has made significant progress on fire and workplace safety. Critical work remains on safeguarding workers’ rights to freely associate and bargain collectively, including in the Export Processing Zones (EPZs).  

In June 2013, President Obama suspended Bangladesh’s Generalized System of Preferences (GSP) trade benefits.  Accompanying this decision was a 16-point Action Plan that set forth specific steps to address workers’ rights and safety in Bangladesh.  In July 2013, the EU, the International Labor Organization (ILO), the GOB, and the United States jointly developed a Sustainability Compact.  

Bangladesh has made significant progress in factory fire and structural safety remediation, thanks in part to two industry-led initiatives, the Alliance for Bangladesh Worker Safety (Alliance), which represents U.S. brands, and Accord on Fire and Building Safety in Bangladesh (Accord), which represents European brands.  Inspection and remediation of RMG factories outside the purview of the Alliance and the Accord are handled by the GOB, with assistance from the ILO, under the National Initiative. Only 20 percent of factories under the National Initiative, however, have completed remediation. The GOB has established a Remediation Coordination Center (RCC) to take over responsibility from the Alliance and Accord.

The Alliance successfully concluded its factory inspection and remediation operations at the end of 2018, as scheduled, but has quietly established a local NGO (Nirapon) to monitor remediated factories to ensure there is no backsliding.  Meanwhile, the Accord continues to seek to remain in Bangladesh to complete the remediation of the 1,600 factories under its remit. A Bangladeshi court initially ruled that Accord could not continue operations in Bangladesh past November 2018, but has subsequently instructed the Bangladesh government to try to work out a mutually acceptable, time-bound transition plan with the Accord.  The next court hearing to review where those negotiations stand is scheduled for May 2019.

Significant work remains to address freedom of association restrictions.  In December 2016, a widespread crackdown on union members drew international condemnation.  In response, the international community pressed the GOB to implement several labor reforms.  

The U.S. government suspended Bangladesh’s access to the U.S. General System of Preferences (GSP) over labor rights violations following a six-year formal review conducted by USTR.  The decision, announced in 2013, in the months following the Rana Plaza collapse that resulted in more than 1,100 deaths, was accompanied by a 16-point GSP Action Plan to help guide Bangladesh’s path to reinstatement of the trade benefits.  While some progress has been made in the intervening years, several key issues remain unaddressed. Preliminary analysis of recent revisions to the Bangladesh Labor Act (BLA) and Export Processing Zone (EPZ) law indicate they fail to allow free association and the formation of unions particularly in the ready-made garment (RMG) sector, and fall short of international labor standards.  The U.S. government funds efforts to improve occupational safety and health alongside labor rights in the readymade garments (RMG) sector in partnership with other international partners, civil society, businesses, and the GOB. The United States is also working with the EU, Canada, and the International Labor Organization (ILO) to continuously improve working conditions in the RMG sector via the Sustainability Compact, a coordination platform launched in 2013.  Labor unrest in December 2018 and January-February 2019 followed a disproportionate wage hike announced by the GOB, which increased the pay of entry-level workers by 50 percent, but left the wages of more skilled employees unchanged. In a subsequent crackdown, some 11,000 workers who participated in the mostly peaceful protests were reportedly terminated or forced to resign, and many of them were blacklisted and unable to find new employment.

The Bangladesh parliament in 2018 passed a series of amendments to the Bangladesh Labor Act and the Export Processing Zone (EPZ) law to address some concerns voiced by the International Labor Organization (ILO).  The European Union (EU) noted that 50 sections of the BLA had been amended.  The amendments reduced the membership requirement for the formation of trade unions from 30 to 20 percent and repealed conditional provisions for the employment of child labor in hazardous industries, while shortening time limits for the registration of unions from 60 to 55 days.  The amendments also established a festival allowance for the labor force and provided legal protections for women deprived of maternity leave.

The EU’s preliminary assessment of the EPZ law amendments indicated the BLA changes were made applicable to EPZ.  For example, the 20 percent threshold was now applicable to “Worker Welfare Associations” (WWA), which are allowed in EPZs in lieu of trade unions.  The Government of Bangladesh (GOB)’s Department of Inspection for Factories and Establishments (DIFE) had also been given the authority to inspect factory conditions within EPZs. 

The ILO’s Committee of Experts (COE) is analyzing the BLA amendments.  The term “Committee of Experts” refers to a group of jurists who examine reports from governments on any of the eight fundamental and four governance ILO Conventions they (the governments) may have ratified.  Bangladesh ratified the Labor Inspection Convention, 1947 (No. 81) in 1972.  Meanwhile, the COE continues to wait for an official English translation of the EPZ law amendments before it can begin its analysis of the contents of the amendments.  There is no timeframe for the COE’s completion of the review.

The EU felt the reduction of the membership requirement to 20 percent was an “eyewash” because the GOB had erected other barriers to prevent trade union registration.  The Bangladesh office of the Solidarity Center (SC) shared EU’s concerns and feels the BLA amendments were most “obstructive” in the area of registering new unions, including the 20 percent vote required to recognize a union, which could easily be manipulated by factory management to favor “yellow” or corrupt, undemocratic unions over independent unions.  SC feels the main challenge with the BLA was not its lack of protections, but its lack of implementation.

12. OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) and the Government of Bangladesh signed an updated bilateral agreement in May 1998: https://www.opic.gov/sites/default/files/docs/asia/bangladeshbilateral.pdf .  However, OPIC is not currently authorized for operation in the courty.  Investors should check OPIC’s website for updates: https://www.opic.gov/doing-business-us/OPIC-policies/where-we-operate  .  More information on OPIC services can be found at: www.opic.gov  .  

Bangladesh is also a member of the Multilateral Investment Guarantee Agency (MIGA): http://www.miga.org  .

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Economic Data Year Amount Year Amount USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $249,700 2016 $221,400 https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=BD  
Foreign Direct Investment 2017 $2,200 2016 $2,300 UNCTAD World Investment Report 2018  
U.S. FDI in Partner Country ($M USD, stock positions) 2017 $460 2016 $458 https://www.bea.gov/international/factsheet/factsheet.cfm?Area=631  
Host Country’s FDI in the United States ($M USD, stock positions) 2017 $2 2016 N/A https://www.bea.gov/international/factsheet/factsheet.cfm?Area=631  
Total Inbound Stock of FDI as % host GDP 2017 0.86% 2016 1.05% https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2130  


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $14,091 100% Total Outward $328 100%
United States $3,316 23.5% United Kingdom $84 25.6%
United Kingdom $1,559 11.1% China, P.R.: Hong Kong $76 23.2%
Singapore $934 6.6% Nepal $44 13.4%
Australia $860 6.1% India $42 12.8%
South Korea $811 5.8% United Arab Emirates $31 9.5%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets (June, 2018)
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $3,584 100% All Countries $10 100% All Countries $3,574 100%
-United States $587 16.4% Pakistan $10 100% United States $587 16.4%
Germany $581 16.2% N/A N/A N/A Germany $581 16.3%
United Kingdom $383 10.7% N/A N/A N/A United Kingdom $383 10.7%
Spain $235 6.6% N/A N/A N/A Spain $235 6.6%
France $201 5.6% N/A N/A N/A France $201 5.6%

14. Contact for More Information

Economic/Commercial Section
Embassy of the United States of America
Madani Avenue, Baridhara, Dhaka — 1212
Tel: +880 2 5566-2000
Email: USTC-Dhaka@state.gov

Cambodia

Executive Summary

Cambodia has experienced strong economic growth, with average annual gross domestic product (GDP) growth near seven percent over the last decade, driven by growing exports (particularly in garment and footwear products) and domestic consumption. Tourism is another large contributor to growth, with tourist arrivals reaching 6 million in 2018. Cambodia’s GNI per capita stood at USD 1,230 in 2017, while the average annual inflation rate was estimated at 3.2 percent.

Investing in Cambodia can be a relatively straightforward process.  Foreign direct investment (FDI) incentives available to investors include 100 percent foreign ownership of companies, corporate tax holidays of up to eight years, a 20 percent corporate tax rate after the incentive period ends, duty-free import of capital goods, and no restrictions on capital repatriation.

Despite these incentives, Cambodia has not historically attracted significant U.S. investment. Apart from the country’s relatively small market size, there are other factors dissuading U.S. investors: corruption, a limited supply of skilled labor, inadequate infrastructure (including high energy costs), and a lack of transparency in some government approval processes. Failure to consult the business community on new economic policies and regulations has also created difficulties for domestic and foreign investors alike. Notwithstanding these challenges, a number of American companies have maintained investments in the country, and in December 2016, Coca-Cola officially opened a USD 100 million bottling plant in Phnom Penh.

The story of FDI in Cambodia cannot be told without mentioning China, which has increased its investments in Cambodia sharply in the past five years.  The rise in FDI highlights China’s desire for influence in Cambodia, and Southeast Asia more broadly. Moreover, the rise in investment from China indicates that Chinese businesses, many that are state-owned enterprises, may not assess the challenges in Cambodia’s business environment in the same manner as U.S. businesses. While figures vary, the World Bank estimates that Chinese FDI accounted for 60 percent of total FDI-funded projects in Cambodia in 2017, and that share rose to 90 percent in the first six months of 2018.

Physical infrastructure projects, including commercial and residential real estate developments, continue to attract the bulk of FDI. However, there has been a recent increase in investment in manufacturing industries, including garments and agro-processing.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 161 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 138 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 98 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $151.0 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $1,230 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

As mentioned above, Cambodia has an open and liberal foreign investment regime and actively courts FDI. The primary law governing investment is the 1994 Law on Investment. The government permits 100 percent foreign ownership of companies in most sectors. In a few sectors, such as cigarette manufacturing, movie production, rice milling, gemstone mining and processing, publishing and printing, radio and television, wood and stone carving production, and silk weaving, foreign investment is subject to local equity participation or prior authorization from authorities. There is little or no official discrimination against foreign investors either at the time of initial investment or after investment. Some foreign businesses, however, have reported that they are at disadvantaged vis-a-vis Cambodian or other foreign rivals that engage in acts of corruption or tax evasion or take advantage of Cambodia’s poor regulatory enforcement.

The Council for the Development of Cambodia’s (CDC) is the lead investment promotion agency in Cambodia and is the principal government agency responsible for providing incentives to stimulate investment. Investors are required to submit an investment proposal to either the CDC or the Provincial-Municipal Investment Sub-committee to obtain a Qualified Investment Project (QIP) status depending on capital level and location of the investment question. This agency also facilitates public-private consultation mechanism that is considered to improve investment climate in Cambodia.  The forum acts as a platform for the private sector to raise concerns for the government to solve. More information about investment and investment incentives in Cambodia may be found on the website at: www.cambodiainvestment.gov.kh  .

To facilitate foreign investment, Cambodia has created special economic zones (SEZs). These zones provide companies with ready access to land, infrastructure, and services to facilitate the set-up and operation of businesses. Services provided include utilities, tax services, customs facilitation, and other administrative services designed to support import-export processes. Projects within the SEZs are also offered with incentives such as tax holidays; zero rate value-added tax; and import duty exemption for raw materials, machinery and equipment. The primary authority responsible for SEZs is the Cambodia Special Economic Zone Board (CSEZB).  The largest of these SEZs is located in Sihanoukville and hosts primarily Chinese companies.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are few limitations on foreign control and ownership in Cambodia. Foreign investors may own 100 percent of their investment projects except in the sectors mentioned above. According to Cambodia’s 2003 Amended Law on Investment and related sub-decrees, there are no limitations based on shareholder nationality or discrimination against foreign investors, except in relation to investments in real property or state-owned enterprises. Both the Law on Investment and the Amended Law on Investment state that the majority of interest in land, however, must be held by one or more Cambodian citizens. Pursuant to the Law on Public Enterprise, the Cambodian government must directly or indirectly hold more than 51 percent of the capital or the right to vote in state-owned enterprises. In addition, the Cambodian Bar has periodically taken actions to restrict or impede the work of foreign lawyers or foreign law firms.

Other Investment Policy Reviews

In compliance with World Trade Organization (WTO) requirements, Cambodia conducted its first review of trade policies and practices in November 2011. The second review was conducted on November 21-23, 2017. Cambodia’s full trade policy review report can be found on the WTO website: https://www.wto.org/english/tratop_e/tpr_e/tp464_e.htm  . Cambodia also conducted an Organization for Economic Co-operation and Development investment policy review in 2017.

In response to the WTO trade policy review recommendations, Cambodia completed the following reforms:

  • Elimination of the Certificate of Origin requirement for exports to countries where a certificate is not required;
  • Implementation of online business registration;
  • Adoption of a competitive hiring process for Ministry of Commerce staff;
  • Implementation of risk evaluation measures for the Cambodia Import-Export Inspection and Fraud Repression Directorate General (CamControl) and creation of a CamControl risk management unit;
  • Enactment of the Law on Public Procurement;
  • Enactment of three judicial system laws: the Law on Court Structures, the Law on the Duties and Discipline of Judges and Prosecutors, and the Law on the Organization and Functioning of the Supreme Council of Magistracy;
  • Creation of the Commercial Court as a specialized Court of First Instance;
  • The creation of a credit bureau;
  • Establishment of a Telecom Regulator of Cambodia (TRC); in 2012, the Ministry of Posts and Telecommunication transferred its regulatory role to the TRC;
  • Enactment of the Law on Telecommunications in December 2015; and
  • Enactment of the Law on Animal Health and Production in February 2016.

Areas of ongoing or planned reforms include a law on Special Economic Zones, amending the Standards Law, and enacting laws on competition, cyber security, food safety, and e-commerce.

Business Facilitation

All businesses are required to register with the Ministry of Commerce (MoC) and the General Department of Taxation (GDT). In January 2016, the Ministry of Commerce launched an online business registration portal that allows all existing and new businesses to register their companies at www.businessregistration.moc.gov.kh  . The link also provides sources of information for various types of business registration documents. Depending on the types of business activities, new businesses are also required to register with other relevant ministries. In addition to registering with the MoC and the GDT, for example, travel agencies must register with the Ministry of Tourism, and private universities must register with the Ministry of Education, Youth and Sport. The GDT also established their E-tax registration that can be found at owp.tax.gov.kh:50005/epaymentowpweb  . The World Bank’s 2019 Ease of Doing Business Report ranks Cambodia 138 of 190 countries globally for the ease of starting a business. The report notes that it includes nine separate procedures and can take up to three months to complete all business, tax, and employment registration processes.

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. The website of the Council for the Development of Cambodia (CDC) provides a list of laws, rules, procedures and regulations, which could be useful for foreign investors. CDC’s website is found here: www.cambodiainvestment.gov.kh  .

Outward Investment

There are no restrictions on domestic citizens investing abroad. A number of local companies have already invested in neighboring countries, particularly Laos and Myanmar, in various sectors including banking, IT services, legal and consulting services, and the entertainment industry.

2. Bilateral Investment Agreements and Taxation Treaties

BITs or FTAs

Cambodia has signed bilateral investment treaties (BITs) with 27 countries: Austria, Bangladesh, Belarus, China, Croatia, Cuba, Czech Republic, Democratic People’s Republic of Korea, France, Germany, Hungary, India, Indonesia (later terminated), Japan, Kuwait, Laos, Malaysia, the Netherlands, Pakistan, the Philippines, the Republic of Korea, Russia, Singapore, Switzerland, Thailand, Turkey, the United Arab Emirates, and Vietnam.  Cambodia does not have a BIT with the United States.

As a member of the Association of Southeast Asian Nations (ASEAN), Cambodia has signed regional investment agreements including the ASEAN Comprehensive Investment Agreement, the ASEAN-Hong Kong Investment Agreement, the ASEAN-India Investment Agreement, the ASEAN-China Investment Agreement, and the ASEAN-Korea Investment Agreement.

Cambodia is also a party to several regional free trade agreements that include provisions to liberalize trade as well as investment.  They include the ASEAN-Australia-New Zealand Free Trade Agreement, the ASEAN-Japan EPA, and ASEAN Framework Agreements with Korea, India, China, and the EU, that include investment provisions.  ASEAN is also a party to the Regional Comprehensive Economic Partnership Agreement (RCEP) that is currently under negotiation.

In July 2006, Cambodia signed a Trade and Investment Framework Agreement (TIFA) with the United States to promote greater trade and investment in both countries and provide a forum to address bilateral trade and investment issues. In January 2019, the fifth TIFA meeting took place in Siem Reap, Cambodia.

Bilateral Taxation Treaties

Cambodia does not have a bilateral taxation treaty with the United States, but has entered into six double taxation agreements with Brunei, China, Indonesia, Singapore, Thailand, and Vietnam. Details of those agreements are available on Cambodia’s General Department of Taxation (GDT) website: www.tax.gov.kh/en/ir.php  .

In the past, Cambodia’s GDT has lacked the capacity to collect taxes on a large scale. As a result, many companies evaded paying salary taxes, value-added taxes, and real estate taxes, despite being required to do so under Cambodian laws. The GDT has taken steps, however, to increase tax revenue both by building capacity within the organization and through better implementation of existing tax laws.

Application of Cambodia’s tax laws, while improving, remains inconsistent. In some cases, foreign investors face greater scrutiny to pay taxes than their domestic counterparts.  In others, the GDT has been criticized for employing audits and assessing large tax obligations for political purposes.

3. Legal Regime

Transparency of the Regulatory System

Numerous issues related to the general lack of transparency in the regulatory regime arise from the lack of legislation and limited capacity of key institutions, further exacerbated by weakness of the court system.  Investors often complain that the decisions of Cambodian regulatory agencies are inconsistent, arbitrary, or motivated 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.  Following this development, in April 2017, the National Bank of Cambodia introduced the interest rate cap on loans provided by the microfinance industry with no consultation with the relevant stakeholders at all. Some investors have expressed concern over draft cyber 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 line Ministries but are not always up to date. The Council of Jurists, the government body reviewing law and regulation, publishes a list of updated laws and regulations on its website at www.coj.gov.kh  .

Under Prakas (sub-decree) 643 of the Ministry of Economy and Finance, enterprises must submit their annual financial statements to be audited by an independent auditor registered with the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) provided those enterprises meet two of the following three criteria: (1) annual turnover above KHR 3 billion (approximately USD 750,000); (2) total assets above KHR 2 billion (approximately USD 500,000); and (3) more than 100 employees. QIPs registered with the CDC are also obligated to submit their annual financial statement to be audited by an independent auditor registered with the KICPAA.

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 member of the WTO, Cambodia has been drafting new laws and amending existing laws and regulations to comply with WTO rules. Relevant laws and regulations are notified to the WTO legal committee 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

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  .

Although the Cambodian Constitution calls for an independent judiciary, most investors are generally reluctant to use the Cambodian judicial system because the courts are perceived as unreliable and susceptible to external political influence or bribery. Both local and foreign businesses report problems with inconsistent judicial rulings, corruption, and difficulty enforcing judgments. For these reasons, most commercial disputes are currently resolved through negotiations facilitated by the Ministry of Commerce, the Council for the Development of Cambodia, the Cambodian Chamber of Commerce, or other institutions.

Cambodia adopted a Commercial Arbitration Law in 2006. In 2010, the government provided for the establishment of the National Commercial Arbitration Center (NCAC), the country’s first alternative dispute resolution mechanism, to enable companies to resolve commercial disputes more quickly and inexpensively than through the court system. The NCAC was officially launched in March 2013, but has limited capacity.

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 March 2003, the government simplified licensing and increased transparency and predictability by enacting the Law on the Amendment to the Law on Investment (Amended Law on Investment). Sub-decree No. 111 on the Implementation of the Law on the Amendment to the Law on Investment, issued in September 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: www.cambodiainvestment.gov.kh  .

Competition and Anti-Trust Laws

The government has announced plans to draft a competition law but the law has yet to be enacted. A competition department was established under the Directorate General of CamControl in 2016. The department aims to work on drafting laws and regulations on competition, study, and coordinate with various relevant agencies on local and international competition. The draft law is now reportedly being considered in a technical working group at the Council of Ministers and Council of Jurists.

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.

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 – also known as the Washington 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 2018 Doing Business Report ranks Cambodia 79 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.

4. Industrial Policies

Investment Incentives

All investments must be registered with the Ministry of Commerce. The Cambodian Law on Investment and the Amended Law on Investment offers varying types of investment incentives for projects that meet specified criteria. Investors seeking an incentive must submit an application to the CDC. Investors who wish to apply are required to pay an application fee of KHR 7 million (approximately USD 1,750), which covers securing necessary approvals, authorizations, licenses, or registrations from all relevant ministries and entities, including stamp duties. Under a 2008 sub-decree, the CDC is required to seek approval from the Council of Ministers for investment proposals that involve capital of USD 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.

Since 2011, tax incentives have been provided for rice farming, paddy rice purchase, and the export of milled rice. Meanwhile QIPs are entitled to receive different incentives such as corporate tax holiday; special depreciation allowance; and import taxes exemption 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 a three-year profit tax exemption, 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: www.cambodiainvestment.gov.kh/investment-scheme/investment-incentives.html  .

Investment activities excluded from incentives are detailed in the September 2005 Sub-Decree on the Implementation of the Amendment to the Law on Investment. These include the following sectors: retail, wholesale, and duty-free stores; entertainment establishments (including restaurants, bars, nightclubs, massage parlors, and casinos); tourism service providers; currency and financial services; press and media-related activities; professional services; and production and processing of tobacco and wood products. Incentives also may not be applied to investments in the production of certain products if the investment is less than USD 500,000. This includes food and beverages; textiles, garments, and footwear; and plastic, rubber, and paper products. Investors are not required to place a deposit guaranteeing their investment except in cases involving a concession contract or real estate development project.

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). In December 2005, the government adopted the Sub-Decree on Special Economic Zones to speed up the creation of the zones by detailing the procedures, conditions, and incentives for investors. The Government is also drafting the law on Special Economic Zones, which is now undergoing technical review within the CDC. There are currently 13 special SEZs, which are located in Phnom Penh, Koh Kong, Kandal, Kampot, Sihanoukville, and near 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. Twelve more SEZs are either planned or now under construction.

Performance and Data Localization Requirements

The Law on Investment permits investors to hire foreign nationals for employment as managers, technicians, or skilled workers if the qualifications and/or expertise are not available in Cambodia. According to the Cambodian Labor Law, the number of foreign employees should not exceed ten percent of the total number of Cambodian employees. In practice, companies can request an increase in this ratio from the Ministry of Labor.

Under Cambodian law, most foreign investments and foreign investors are subject to the following taxes: corporate profits tax (20 percent), tax on individual salaries (0 to 20 percent), withholding taxes (4 to 15 percent), value-added taxes (0 to ten percent), and import duties (0 to 35 percent).

Cambodia does not have any forced localization policy that obligates foreign investors to use domestic contents in goods or technology. Cambodia also does not currently require foreign Information Technology providers to turn over source code. The General Department of Information and Communications Technology (ICT) in the Ministry of Post and Telecommunications oversees ICT-related policy in Cambodia.  As mentioned above, as of early 2019, both cyber and e-commerce legislation were still in draft form. These laws, when finalized, could change data localization requirements.

5. Protection of Property Rights

Real Property

Mortgages exist in Cambodia, and Cambodian banks often require certificates of property ownership as collateral before approving loans. The mortgages recording 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 reported to be 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 124 out of 190 economies for ease of registering property in the 2019 World Bank Doing Business Report.

Intellectual Property Rights

Infringement of IPR is prevalent in Cambodia. Counterfeit and pirated goods are readily available in local markets and stores, and the enforcement  is weak. IP-infringing goods include counterfeit apparel, footwear, cigarettes, alcohol, pharmaceuticals, consumer goods, and pirated media such as software, music, and books. Although Cambodia is not a major center for the production and export of counterfeit or pirated materials, local businesses report that the problem is growing because of the lack of enforcement. To date, however, Cambodia has not been listed by the Office of the U.S. Trade Representative (USTR) in its annual Special 301 Report, which identifies trading partners that do not adequately protect and enforce IPR.

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 joined WIPO in 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). Despite this, many of the commitments included in these treaties remain unfulfilled due to Cambodia’s lack of institutional capacity.

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 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. Although in recent years seizure of counterfeit goods has increased, seizure usually does not occur unless a formal complaint has been made.

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 www.wipo.int/directory/en/details.jsp?country_code=KH  

6. Financial Sector

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, the Sihanoukville Autonomous Port, and Taiwanese garment manufacturer Grand Twins International.

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 USD 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, and a second is expected in 2019. 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 39 commercial banks, 15 specialized banks (set up to finance specific turn-key projects such as real estate development), 54 licensed microfinance institutions, and seven licensed microfinance deposit taking institutions in Cambodia. NBC has also granted licenses to 11 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.

In November 2018, Moody’s Investor Services affirmed Cambodia’s issuer rating at B2 with a stable outlook. The overall B2 rating was based on Cambodia’s robust GDP growth prospects, macroeconomic stability, and efforts to strengthen government revenue. However, Moody’s cited several potential threats such as a weak institutional framework, low incomes, and the high dollarization of loans and deposits that make Cambodia vulnerable to negative shocks.

Cambodia’s banking sector continues to experience strong growth. The banking sector’s assets, including those of micro-finance institutions (MFIs), rose 20.2 percent year-over-year in 2017 to 135.1 trillion riel (USD 33.8 billion), while capital grew 23.6 percent to 25.7 trillion riel (USD 6.4 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 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 USD 75 million for commercial banks and USD 15 million for specialized banks. Based on the new regulations, deposit-taking microfinance institutions now have a USD 30 million reserve requirement, while traditional microfinance institutions have a USD 1.5 million reserve requirement.

The Cambodian banking system is gradually shifting from a cash-based economy to an electronic payment culture as more financial institutions launch internet or mobile banking and expand their ATM networks. Evidence of the maturation of the financial sector includes the greater number of financial products and services offered, as well as the numbers of people of use them. In 2017, the National Bank of Cambodia measured financial inclusion at 55 percent. In addition, it said the number of depositors increased by 15 percent to 3.5 million, 42 percent of which are female, and the number of borrowers rose 1 percent to 755,000.

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. The government has committed to working with FATF to address these deficiencies through a jointly-developed action plan.  Should Cambodia not address the deficiencies, it could risk landing on the FATF “black list,” something that could negatively impact the banking sector and the country’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 USD 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 USD to KHR 4,000. Daily fluctuations of the exchange rate are low, typically under three percent. The Embassy is not aware of any cases in which investors have encountered obstacles in converting local currency to foreign currency or in sending capital out of the country. 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 Law on the Amendment to the Law on Investment of 2003 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.

7. State-Owned Enterprises

Cambodia currently has 15 state-owned enterprises (SOEs). Cambodian SOEs include 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, Kampcheary Insurance, Cambodia Life Insurance, Cambodia Securities Exchange.

In accordance with the Law on General Stature of Public Enterprises, there are two types of commercial SOEs in Cambodia. One type is that the state company’s capital is 100 percent owned by the Government, and another type is a joint-venture in which a majority of capital is owned by the state and a minority 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. These entities 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.

8. Responsible Business Conduct

The government does not have policies to promote responsible business conduct (RBC) or corporate social responsibility (CSR). However, there is strong awareness of RBC among 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.

9. Corruption

Corruption remains a significant issue in Cambodia for investors.  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, which is reported to already be at high levels.  In its Global Competitiveness Report 2018, the World Economic Forum ranked Cambodia 134th out of 140 countries for incidence of corruption.  Transparency International’s 2018 Corruption Perception index ranked Cambodia 161 of 180 countries globally, the lowest ranking of all ten 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. The ACU has also tackled the issue of ghost workers in the government, in which non-existent employees collect salaries. 

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 the 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. Despite a pay raise in 2016, the minimum salary for administrative civil servants remain below the level required to maintain a suitable quality of life in Cambodia, so public employees remain susceptible to bribes. Furthermore, the process for awarding government contracts is not transparent and is susceptible to corruption.

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

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

10. Political and Security Environment

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.

11. Labor Policies and Practices

Cambodia’s economy is primarily focused on four sectors: agriculture, garment production, tourism, and construction. The agricultural sector employees some 60 to 65 percent of the labor force. There are over one million people working in the garment and footwear sector, the majority of whom are women; around 620,000 are employed in the tourism sector; and a further 200,000 people in construction according to Government of Cambodia statistics. Around 1.5 to 2 million Cambodians work abroad – the official statistic is 1.2 million, but most experts estimate the figure far higher. Around 55 percent of the population is under the age of 25. The United Nations has estimated that around 300,000 new job seekers enter the labor market each year.

Given the severe disruption to the Cambodian education system and loss of skilled Cambodians during the 1975-1979 Khmer Rouge period, workers with higher education or specialized skills are few and in high demand. The Cambodia Socio-Economic Survey conducted in 2014 (the latest report available) found that about 36 percent of the labor force had completed a primary education. Only seven percent of the labor force had completed secondary education. The 2015-2016 Global Competitiveness Report of the World Economic Forum (WEF) identified an inadequately educated workforce as one of the most serious problems to doing business in Cambodia. Cambodia ranked 48 out of 137 on labor market efficiency of the WEF 2017-2018. Many middle management positions in the formal garment sector are filled by foreign nationals.

Cambodia’s 2016 Trade Union Law (TUL) erects barriers to the right 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, and has suggested substantial revisions to the law both during the 2017 meeting of the Committee on Application of Standards, and through a Direct Mission sent by the ILO to investigate the law’s implementation. The government has not made any public commitment to amend the law.

Unresolved labor disputes are mediated first on the shop-room floor, after which they are brought to the MOLVT for conciliation. If conciliation fails, then the cases may be brought to the Arbitration Council (AC), an independent state body that interprets labor regulations in collective disputes, such as when multiple employees are dismissed. Since the TUL went into force, AC 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.

The labor code prohibits forced or compulsory labor; establishes 15 as the minimum allowable age for paid work; and sets 18 as the minimum age for anyone engaged in work that is hazardous, unhealthy, or unsafe. The statute also guarantees an eight-hour workday and 48-hour workweek and provides for time-and-a-half pay for overtime or work on an employee’s day off. Enforcement of all labor laws, however, is lax. The labor inspectorate focuses primarily on export-oriented factories in the garment and footwear sector. 

In 2018, Cambodia amended its Labor Law to eliminate severance packages in favor of a “seniority” bonus paid to workers every six months. The amendment was intended to solve the problem of foreign factory owners absconding, leaving behind unpaid salaries and severances. The law and its implementing regulation did not, however, provide clear guidance on how to compensate workers for seniority they had already accrued prior to amendment’s passage.  This remains a point of dispute between workers and company owners, and the precise legal requirements for the timing of seniority payments on back wages remains unclear. 

Cambodia maintains a minimum wage for workers in the garment and footwear sector. The minimum wage for garment workers was set at USD 182 per month in 2019 by the Labor Advisory Committee (LAC), a tripartite group comprised of representatives from the government, labor, and manufacturers. Since 2010, the wage rate for workers in the sector has increased from USD 61 to USD 182. In 2018, the government passed a new Minimum Wage Law, which will for the first time allow minimum wages outside of the garment and footwear sector.  The law has not yet been put into effect.

12. OPIC and Other Investment Insurance Programs

Cambodia has an agreement with the Overseas Private Investment Corporation (OPIC) to encourage investment. A number of companies in Cambodia have received approval for OPIC financing, including loans to financial institutions for the purposes of microfinance. The BUILD Act, signed into law in October 2018, will consolidate OPIC with USAID’s Development Credit Authority into a new agency: the United States International Development Finance Corporation (DFC). The DFC will maintain many aspects of OPIC’s programs, but with additional tools and flexibility, it is intended to substantially increase the U.S. government’s support for private-sector led development in the world’s least developed countries. The DFC is expected to be operationalized by the end of 2019.

The Export-Import Bank of the United States (Ex-Im Bank) provides financing and insurance for purchases of U.S. exports by private-sector buyers in Cambodia on repayment terms of up to seven years. In 2018, Ex-Im made its first loan to a Cambodian business, facilitating the sale of a grain silo.  Ex-Im support is typically limited to transactions with a commercial bank functioning as an obligor or guarantor. Ex-Im will, however, consider transactions without a bank on a case-by-case basis. Cambodia is also a member of the Multilateral Investment Guarantee Agency of the World Bank, which offers political-risk insurance to foreign investors.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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 USD 7.1 billion in 2018, up from USD 6.8 billion in 2017.

Investment into Cambodia is dominated by China, and the level of investment from China has surged especially in the last five years. Cambodia reports that its FDI from China reached USD 1.6 billion (year-end 2018), while fixed asset investment from China reached USD 15.3 billion. Taiwan and Hong Kong are also major sources of investment in Cambodia, accounting for USD 614 million and USD 376 million of FDI, respectively, through 2018.

Cambodian investments into other countries are still quite small. Through 2017, the IMF reports a total of USD 367 million of Cambodian investments, with most going to China and Singapore.

NOTE: Discrepancies exists between IMF counterpart country data and the investment figures reported by Cambodia’s official source, the Council for the Development of Cambodia (CDC). In some cases, counterpart country data reports much larger FDI stocks in Cambodia than reported by CDC. In other cases, the data from the Cambodia government is the only source available. Many of Cambodia’s key FDI partners (notably China, Taiwan and Hong Kong) do not report FDI figures to the IMF.

There are also discrepancies in the reported total stock of U.S. FDI in Cambodia. For FDI through 2017, the U.S. government (BEA) reports USD 151 million, the IMF reports USD 110 million, and Cambodia reports only USD 100 million.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $24,400 2017 $22,158 https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=KH  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $100 2017 $151 https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=607  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $5 https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=607   
Total inbound stock of FDI as % host GDP 2018 29% 2017 99.2% https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx   

* 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-environment/investment-trend.html 


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data (Through 2017)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment  Outward Direct Investment
Total Inward $6,254 100% Total Outward $367 100%
Netherlands $1,487 23.8% China $189 51.5%
Korea, Republic of $1,479 23.6% Singapore $160 43.6%
Thailand $1,186 19.0% Philippines $21 5.7%
Malaysia $1,085 17.3% Myanmar $10 2.7%
France $428   6.8% India $6 1.6%
“0” reflects amounts rounded to +/- USD 500,000.

Data retrieved from IMF’s Coordinated Direct Investment Survey database (mirror data, as reported by counterpart economies) presents a much different picture of FDI into Cambodia as compared to that provided by the Cambodian government. For example, Cambodia reports USD 6.8 billion total FDI through year-end 2017 (USD 7.1 through year-end 2018), while the IMF reports only USD 2.8 billion.


Table 4: Sources of Portfolio Investment

N/A – IMF CPIS Data for Cambodia is not available.

14. Contact for More Information

David Ryan Sequeira
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

Indonesia

Executive Summary

While Indonesia’s population of 268 million, GDP over USD 1 trillion, growing middle class, and stable economy are attractive to U.S. investors, different entities have noted that investing in Indonesia remains challenging. Since October 2014, the Indonesian government under President Joko Widodo, widely referred to as ‘Jokowi,’ has prioritized boosting infrastructure investment to support Indonesia’s economic growth goals, and has committed to reducing bureaucratic barriers to investment, including the launch of a “one-stop-shop” for permits and licenses via the online single submission (OSS) system at the Investment Coordination Board. However, factors such as a decentralized decision-making process, legal uncertainty, economic nationalism, and powerful domestic vested interests in both the private and public sectors, create a complex investment climate. Other factors relevant to investors include: government requirements, both formal and informal, to partner with Indonesian companies, and to purchase goods and services locally; restrictions on some imports and exports; and, pressure to make substantial, long-term investment commitments. While the Indonesian Corruption Eradication Commission continues to investigate and prosecute high-profile corruption cases, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, relatively weak enforcement of contracts, bureaucratic issues challenging the efficiency of the process, and ambiguous legislation in regards to tax enforcement. Businesses have also complained about changes to rules at the government discretion with little or no notice and opportunity for comment, and lack of communication with companies in the development of laws and regulations. Investors have noted that new regulations are at times difficult to understand and often not properly communicated to those impacted. In addition, companies have complaint of the complexity of  coordination among ministries that continues to delay some processes important to companies, such as securing business licenses and import permits.

Indonesia restricts foreign investment in some sectors through a Negative Investment List. The latest version, issued in 2016, details the sectors in which foreign investment is restricted and outlines the foreign equity limits in a number of other sectors. The 2016 Negative Investment List allows greater foreign investments in some sectors, including e-commerce, film, tourism, and logistics. In health care, the 2016 list loosens restrictions on foreign investment in categories such as hospital management services and manufacturing of raw materials for medicines, but tightens restrictions in others such as mental rehabilitation, dental and specialty clinics, nursing services, and the manufacture and distribution of medical devices. Companies have reported that energy and mining still face significant foreign investment barriers.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in February 2014, allowing some of the agreements to expire. The United States does not have a BIT with Indonesia.

Despite the challenges that the industry has reported, Indonesia continues to attract foreign investment. Singapore, China, Japan, South Korea, and the United States were among the top sources of foreign investment in the country in 2017 (latest available full-year data). Private consumption is the backbone of the largest economy in ASEAN, making Indonesia a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors. Indonesia has ambitious plans to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers. UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.

Table 1

Measure Year Index or Rank Website Address
TI Corruption Perceptions index 2018 89 of 175 https://www.transparency.org/cpi2018
World Bank’s Doing Business Report “Ease of Doing Business” 2019 73 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 85 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $15,170 M http://www.bea.gov/
international/factsheet/
World Bank GNI per capita 2017 $3,540 https://data.worldbank.org/
indicator/NY.GNP.PCAP.CD?locations=ID

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

With GDP growth of 5.17 percent in 2018, Indonesia’s young population, strong domestic demand, stable political situation, and well-regarded macroeconomic policy make it an attractive destination for foreign direct investment (FDI). Indonesian government officials welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing. However, foreign investors have complained about vague and conflicting regulations,  bureaucratic issues, ambiguous legislation in regards to  tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.

The Investment Coordination Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors. In July 2018, Indonesia launched the OSS system to streamline 488 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services. As a new process, OSS implementation is a work in progress and would benefit from greater socialization, especially at the subnational level. Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD7.4 million) or employing 1,000 local workers.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in Presidential Decree No.44/2016, commonly referred to as the Negative Investment List or the DNI. The Negative Investment List aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors. The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields. Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR100 billion (USD7.4 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership. The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent: online marketplaces under IDR100 billion (USD7.4 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices. In certain sectors, restrictions are liberalized for foreign investors from other ASEAN countries. Though the energy sector saw little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent, while the operation and maintenance of such plants is capped at 49 percent foreign ownership. For investment in certain sectors, such as mining and higher education, the 2016 Negative Investment List is useful only as a starting point, as additional licenses and permits are required by individual ministries. A number of sensitive business areas, involving, for example, alcoholic beverages, ocean salvage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.

Foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for micro, small and medium enterprises (MSMEs) or requires a partnership between a foreign investor and local entity. Even where the 2016 DNI revisions lifted limits on foreign ownership, certain sectors remain subject to other restrictions imposed by separate laws and regulations. In November 2018, the government announced its plans to liberalize further DNI sectors through the XVI economic policy package, before shelving the idea a few weeks later.

In November 2016, Bank Indonesia issued Regulation No.18/2016 on the implementation of payment transaction processing.  The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer.  The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision.  BI’s July 2017 Regulation No.19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions.  Firms wishing to continue executing domestic debit transactions are obligated to form partnership agreements with a NPG switching company.

Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia’s Negative Investment List.

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in April 2013 and can be found on the WTO website: http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm .

The most recent OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website: http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm .

UNCTADs report on ASEAN Investment can be found here: http://www.unctad.org/en/PublicationsLibrary/unctad_asean_air2017d1.pdf .

Business Facilitation

Business Registration

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights. Once incorporated, a PMA must register through the OSS system. Upon registration, a company will receive a business identity number (NIB) along with proof of participation in the Workers Social Security Program (BPJS) and endorsement of any Foreign Worker Recruitment Plans (RPTKA).  An NIB remains valid as long as the business operates in compliance with Indonesian laws and regulations. Existing businesses will eventually be required to register through the OSS system. In general, the OSS system simplified processes for obtaining NIB from three days to one day.

Once an investor has obtained a NIB, he/she may apply for a business license. At this stage, investors must: document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an investment realization report; and provide a recommendation from relevant ministries as necessary.  Investors also need to apply for commercial and/or operational licenses prior to commencing commercial operations. Previously the business license process averaged 260 days.  Following establishment of the 2018 OSS system, which includes 488 licenses for various ministries/agencies, the process of starting business has been reduced to 20 days according to the World Bank’s 2019 Ease of Doing Business report, which placed Indonesia 73rd out of the 190 countries surveyed in the report. Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 7.2 million) or employing 1,000 local workers. After obtaining a NIB, investors in some designated industrial estates can immediately start project construction.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming and catalog and online retail. In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (USD0.8 million) or with total annual sales under IDR50 billion (USD 3.7 million). However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees. The government provides assistance to MSMEs, including: expanded access to business credit for MSMEs in farming, fishery, manufacturing, creative business, trading and services sectors; a tax exemption for MSMEs with annual sales under IDR 200 million (USD 14.8 million); and assistance with international promotion.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing and notification system has dramatically reduced the number of days needed to register a company. Foreign firms are not required to disclose proprietary information to the government.

Screening of FDI

BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and business licenses) to foreign entities and has taken steps to simplify the application process. The OSS serves as an online portal which allows foreign investors to apply for and track the status of licenses and other services online. The OSS coordinates many of the permits issued by more than a dozen ministries and agencies required for investment approval. In addition, BKPM now issues soft-copy investment and business licenses. While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities. Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies are only require to obtain one approval at the local level, businesses report that foreign companies often must additional approvals in order to establish a business.

The Ministry of Home Affairs, the Ministry of Administrative and Bureaucratic Reform, and BKPM issued a circular in 2010 to clarify which government offices are responsible for investment that crosses provincial and regional boundaries. Investment in a regency (a sub-provincial level of government) is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by the central government, or central BKPM. BKPM has plans to roll out its one-stop-shop structure to the provincial and regency level to streamline local permitting processes at more than 500 sites around the country.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the domestic market. BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in and policies of other countries. BKPM also uses their investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities. The government neither restricts nor provides incentives for outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

Indonesia has investment agreements with 41countries, including: Algeria, Australia, Bangladesh, Chile, Croatia, Cuba, Czech Republic, Guyana, Iran,  Jamaica, Jordan, Libya, Mauritius, Mongolia, Morocco, Mozambique, Norway, Pakistan, Philippines, Poland, Qatar, Russia, Saudi Arabia, Serbia, Slovak Republic, South Korea, Sri Lanka, Sudan, Suriname, Syria, Sweden, Tajikistan, Thailand, Tunisia, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, Venezuela, Yemen, and Zimbabwe.

In 2014, Indonesia began to abrogate its existing BITs by allowing the agreements to expire. By 2018, 26 BITs had expired, including those with Argentina, Belgium, Bulgaria, Cambodia, China, Denmark, Egypt, France, Finland, Germany, Hungary, India, Italy, Kyrgyzstan, Laos, Malaysia, Netherlands, Norway, Pakistan, Romania, Singapore, Spain, Slovakia, Switzerland, Turkey, and Vietnam. However, Indonesia renewed its BIT with Singapore in October 2018. Indonesia is currently developing a new model BIT that could limit the scope of Investor-State Dispute Settlement provisions.

The ASEAN Economic Community (AEC) arrangement came into effect on January 1, 2016, and was expected to reduce barriers for goods, services and some skilled employees across ASEAN. Under the ASEAN Free Trade Agreement, duties on imports from ASEAN countries generally range from zero to five percent, except for products specified on exclusion lists. Indonesia also provides preferential market access to Australia, China, Japan, Korea, India, Pakistan, and New Zealand under regional ASEAN agreements and to Japan under a bilateral agreement. In accordance with the ASEAN-China Free Trade Agreement (FTA), in August 2012 Indonesia increased the number of goods from China receiving duty-free access to 10,012 tariff lines. Indonesia is also participating in negotiations for the Regional Comprehensive Economic Partnership (RCEP), which includes the 10 ASEAN Member States and 6 additional countries (Australia, China, India, Japan, Korea and New Zealand). In February 2019, RCEP entered the 25th round of negotiations, which included discussion on trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, SMEs and other issues. In March 2019, ASEAN and Japan signed the First Protocol to Amend their Comprehensive Economic Partnership Agreement.

Indonesia has been actively engaged in bilateral FTA negotiations. In 2018, Indonesia signed trade agreements with Australia, Chile, and the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland). Indonesia is currently negotiating bilateral trade agreements with the European Union, Iran, Japan, Malaysia, Morocco, Mozambique, South Korea, Tunisia, and Turkey. In addition, Indonesia seeks to initiate trade negotiations with Bangladesh, Sri Lanka, the Gulf Cooperation Council, South Africa, and Kenya.

The United States and Indonesia signed the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of the Fiscal Evasion with Respect to Taxes on Income in Jakarta on July 11, 1988. This was amended with a Protocol, signed on July 24, 1996. There is no double taxation of personal income.

3. Legal Regime

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow.  Notable developments included passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in January 2012. Although Indonesia continues to move forward with regulatory system reforms foreign investors have indicated to still encounter challenges in comparison to domestic investors, and have criticized the current regulatory system in its function to establish clear and transparent rules for all actors.  Certain laws and policies, including the Negative Investment List, 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 costly red tape.  Certain business 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, at best, 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 June 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 November 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 ratification of the legal protocol and becoming one of the first five ASEAN Member States to implement 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.

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 reviews. Many businesses have noted that the judiciary is susceptible to corruption and 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. According to the U.S. industry, corruption also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staff.

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, issued in May 2016, commonly referred to as the 2016 Negative Investment List. 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 Negative Investment List 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 Negative List contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Investment Coordination 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

The Indonesian government generally recognizes and upholds the property rights of foreign and domestic investors. The 2007 Investment Law opened major sectors of the economy to foreign investment, while providing investors protection from nationalization, except where corporate crime is involved. However, Indonesian economic nationalism and an oft-stated desire for “self-sufficiency” continues to manifest itself through negotiations, policies, regulations, and laws in way that companies describe as eroding investor value. These include local content requirements, requirements to divest equity shares to Indonesian stakeholders, and requirements to establish manufacturing or processing facilities in Indonesia.

In 2012, the government issued a regulation requiring foreign-owned mining operations to divest majority equity to Indonesian shareholders within 10 years of operational startup using cost of investment incurred, rather than market value, for purposes of divestment valuation. In 2014, with Regulation No. 77/2014, the government eased the foreign ownership restrictions to 60 percent for companies that smelt domestically (40 percent divestment) and 70 percent for companies that operate underground mines (30 percent divestment). However, regulations enacted in 2017 again require foreign-owned miners to gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. The government has indicated it intends the majority-share divestment requirement to supersede Regulation No. 77/2014 and apply to all foreign investors in the sector. Based on the 2009 Mining Law, all mining contracts of work must be renegotiated to alter the terms to more favor the government, including royalty and tax rates, local content levels, domestic processing of minerals, and reduced mine areas. Some mining companies had to reduce the size of their original mining work area without compensation.

In general, Indonesia’s rising resource nationalism advances the idea that domestic interests should not have to pay prevailing market prices for domestic resources. In addition, in the oil and gas sector, the government is increasingly explicit in its policy that expiring production sharing contracts operated by foreign companies be transferred to domestic interests rather than extended. While there is no obligation of compensation under the production sharing contract, this policy has begun to affect the Indonesian business interests of foreign companies.

The Law on Land Acquisition Procedures for Public Interest Development passed in 2011 sought to streamline government acquisition of land for infrastructure projects. The law seeks to clarify roles, reduce the time frame for each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. The implementing regulations went into effect in 2015. Some reports indicate that the law has reduced land acquisition timelines, with no accusations of illegal government expropriation of land.

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 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 BIT with Netherlands and Oleovest under 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 more 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 decidedly 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.

4. Industrial Policies

Investment Incentives

Indonesia provides incentive facilities 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 trillion (USD 7.14 billion), which is a significant reduction from the previous regulation at IDR 500 trillion (USD 35.7 billion). 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:

Provision New Capital Investment IDR 100 billion to less than IDR 500 billion New Capital Investment IDR more  than IDR 500 billion
Reduction in Corporate Income Tax Rate

 

50 percent 100 percent
Concession Period

 

5 years 10 years
Transition Period 25 percent Corporate Income Tax Reduction for the next 2 years 50 percent Corporate Income Tax Reduction for the next 2 years

Based on BKPM Regulation 1/2019, 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 May 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. 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.

The government also 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 209/2018 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, telecommunication, fertilizer, and pharmaceuticals until December 2019.

Research and Development

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 for Research and Technology and Higher Education handles applications on a case-by-case basis.

Natural Resources

Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century and continues to offer significant prospects. However, some report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks near the bottom, 70th of 83 jurisdictions in the Fraser Institute’s 2018 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. The ban on the export of raw minerals went into effect in January 2014. In July 2014, the government issued regulations that allowed, until January 2017, the export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full ban came back into effect in January 2017, the government issued new regulations that again 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 over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. 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).

Infrastructure

Since taking office in October 2014, President Jokowi has made infrastructure development a top priority. The government originally announced plans to add 35,000 megawatts of electricity capacity by 2019, but in 2017 revised this target downward to 19,000 megawatts. The Jokowi administration also announced plans to create a maritime nexus, to include the development or expansion of 24 ports and other transportation infrastructure.  The Indonesian government is also implementing a PPP scheme to develop broadband internet access throughout the country as part of its “Palapa Ring” initiative. The initiative, which will install over 12,000 kilometers of fiber optic cable, is divided into three segments.  The western and central segments have been completed, and the eastern segment is expected to be complete by the end of 2019. Following completion of the Palapa Ring, Indonesia plans to deploy high-throughput satellites to connect remote and frontier areas for internet access. Many businesses 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, and, especially, lack of a PPP apex agency. Currently infrastructure development is largely taking place through SOEs, with PPPs having only a marginal share of infrastructure projects.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special 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 exempt from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market 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. 2/2011 on SEZ management, and Government Regulation No. 96/2015. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of April 2019, Indonesia has identified twelve SEZs in manufacturing and tourism centers that are operational or under construction, with 20 additional areas proposed as new SEZs. Ten 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. Two more SEZs are expected to operate in 2019: Tanjung Api-Api, South Sumatera; and Sorong, Papua. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives in Batam. 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 expected to be finished in 2019 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 97 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 auctions 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 September 2018, Indonesia had designated 59 BLCs in 81 locations, with plans to designate more in eastern Indonesia.  KAPET zones, first announced in a 1996 presidential decree, are eligible for partial tax holidays, certain income tax exemptions and deductions, flexible treatment of amortization of capital and losses, and fiscal loss compensation. 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.

In 2017, the government issued Presidential Regulation 91 on the Acceleration of Business Operations, aiming to reduce and simplify the Indonesian business licensing regime, including in SEZs. Under this regulation, Indonesia has established national, ministerial, provincial and regional task forces to examine inefficiencies in the process of starting a business, including business licensing practices, the availability of one-stop business registration in SEZs and FTZs, and data sharing between different jurisdictions. The Coordinating Ministry for Economic Affairs, which leads implementation of the regulation, reports that all Indonesian provinces, FTZs, and SEZs, and more than 90 percent of regencies (kabupaten) had established one-stop business licensing services by February 2018.  Under the new rules, businesses that apply for a license under a one-stop system must begin setting up within 90 days unless given an extension. The regulation also provides that the central government may take control of business licensing if a local government unduly delays business license issuance. Business and bonded zone licensing is increasingly integrated into Indonesia’s OSS.

Performance and Data Localization Requirements

Performance 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 6 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 is preparing additional rules listing the specific types of jobs that will be open for foreign workers. Foreign workers will not be eligible for 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.

WTO/Trade-Related Investment Measures

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.

Data Localization Requirements

In 2012, Indonesia issued Government Regulation No. 82/2012 requiring certain “public service providers” to establish data storage and disaster recovery centers on Indonesian soil. The regulation went into effect in October 2017 and several ministries have issued data localization regulations, including regulations related to data privacy, peer-to-peer lending, and insurance. As of April 2019, the Indonesian government has prepared a draft amendment to Government Regulation No. 82/2012 that would classify data into three categories: strategic, high-level, and low-level. The draft amendment offers vague definitions of these categories, defining strategic data as data potentially disruptive to the national governance, security, stability of the financial system, and/or other criteria established by law. The proposed amendment would require that “strategic” data be managed, stored, and processed only in Indonesia. The draft regulation would allow high- and low-level data to be managed, stored, and processed overseas so long as it does not reduce the effective implementation of Indonesian legal jurisdiction, subject to technical requirements established by the Ministry of Communications and Information Technology (KOMINFO).  The draft regulation would give financial sector regulators independent authority to identify and set conditions on the treatment of high-level financial data. It remains unclear how the proposed regulation would affect existing data localization requirements and what additional requirements may be imposed if the revised regulation is issued.

5. Protection of Property Rights

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.

Intellectual Property Rights

Indonesia is currently on the U.S. Trade Representative’s (USTR) Special 301 priority watch list for intellectual property rights (IPR) protection. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IPR laws has resulted in high levels of physical and online piracy. Local industry associations have reported tens of millions 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 Pasar Mangga Dua, and online markets Tokopedia, Bukalapak, and IndoXXI.com were included in USTR’s Notorious Markets list in 2018.

Indonesian efforts to enhance IP protection policy were mixed this year. The 2016 Patent Law, continues to be a source of significant concern for IP stakeholders, especially expansive compulsory license provisions and a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. In July 2018, the Ministry of Law and Human Rights (MLHR) enacted Ministerial Regulation 15/2018, allowing patent holders to request a five-year, renewable exemption from the 36-month local production requirement under Article 20.  However, MLHR issued Ministerial Regulation 39/2018 on December 28, providing new procedures for obtaining compulsory licenses for a variety of patented products. Regulation 39/2018 would allow individuals, government institutions, and patent holders to apply for a compulsory license on three bases: 1) failure to produce a patented product in Indonesia within 36 months; 2) use of a patent in a manner detrimental to the public interest; and 3) where a patent cannot be implemented without utilizing another party’s patent. The new regulation also gives MLHR the discretion to grant compulsory licenses to produce, import, and export patented products needed to remedy human disease in Indonesia and third countries.

MLHR reports that the five-year exemption from local production requirements under Regulation 15/2018 will continue to be available despite the issuance of Regulation 39/2018. The 2016 Patent Law contains several other provisions that some have defined as “concerning”, including a  definition of “invention” that potentially imposes an additional “increased 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.  The Directorate General for Intellectual Property (DGIP) is currently drafting guidelines on pharmacy, computer, and biotechnology patents for examiners; DGIP plans to release the guidelines in 2019.

DGIP has become more active in its efforts to collect patent annuity fees. 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 to extend the period of time for a patent holder to settle any unpaid annuities for 6 months to August 17, 2019. 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, Madrid Protocol applicants are required to register their application with DGIP first, 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.

The Ministry of Finance’s Directorate General for Customs and Excise (DGCE) continued to implement ex officio authorities to investigate shipments of infringing goods in 2018. Under MOF Regulation 40/2018, DGCE launched an online trademark recordation system that enables customs officials to detain a shipment of potentially IP-infringing goods for up to two days in order to inform a registered rights holder of the suspect shipment. Once the rights holder confirms the shipment is suspect, it has four days to file a request to suspend the shipment with the Indonesian Commercial Court. Rights holders are required to provide a monetary guarantee of IDR 100 million (approximately USD 7,700) when they request suspension of a shipment. 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 taskforce remained focused on coordinating the review of complaints from industry about infringing websites in 2018. KOMINFO reported that it blocked 442 infringing websites in 2018.

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 16 in 2017 to 36 in 2018. BPOM, Indonesia’s food and drug administration, reported the seizure of more than USD 6.3 billion in counterfeit drugs and cosmetics during the year. 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.

6. Financial Sector

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 618 listed companies as of December 2018 with a market capitalization of USD 526 billion. There were 57 initial public offerings in 2018 – the most in 26 years. As of January 2019, domestic entities conducted more than half of total IDX stock trades (65.08 percent). 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. In 2017, the IDX introduced the first online sharia stock trading platform. As of December 2018, the ISSI is composed of 403 stocks that are a part of IDX’s Jakarta Composite Index, with a total market cap of USD 275 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Treasury bills are less liquid due to their small issue size. Liquidity in BI-issued Sertifikat Bank Indonesia (SBI) is also limited due to the three-month required holding period. 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 2018 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

The Financial Services Supervisory Authority (OJK) began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board, and assumed BI’s supervisory role over commercial banks as of 2014. Foreigners have access to the Indonesian capital markets and are a major source (37.32 percent of government securities) of portfolio investment. 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 as determined by the Negative Investment List.

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 interest rate margins in the region. As of May 2018, the 11 top banks had IDR 4,877 trillion (USD 348.3 billion) in total assets. Loans grew 11.5 percent in 2018 compared to 8.1 percent a year earlier. Gross non-performing loans in December 2018 remained at 2.4 percent y-o-y from 2.4 percent the previous year. For 2019, analysts project annual credit growth at 10-12 percent and deposit growth around 8-10 percent for Indonesia’s banking industry.

OJK Regulation No.56/03/2016 has limited 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 in 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.

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.

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 7,377) 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 71,429).

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 7,377) 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 July 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

Indonesia does not operate a traditional sovereign wealth fund, but several SOEs invest in the domestic market. 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). SMI can use the funds for direct investment in infrastructure financing, the placement of funds in the form of government securities, Bank Indonesia Certificates, and/or other financial instruments in accordance with the provisions of laws. Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

7. State-Owned Enterprises

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2018, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange, and 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.  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 2018 (the most recent data available), SOE profits increased by 0.01 percent year-on-year to IDR 188 trillion (USD 13.4 billion). As of year-end 2018, SOEs assets stood at IDR 8,092 trillion (USD578 billion) compared to the previous year at IDR 7,210 trillion (USD 515 billion). On December 31, 2018, the 17 listed state-owned companies had a market capitalization of IDR 1,578 trillion (USD 112.7 billion) or 22.46 percent of the total capitalization of shares listed on the IDX stock exchange. 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.

8. Responsible Business Conduct

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.

The Financial Services Authority (OJK) regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

OECD Guidelines On Corporate Governance Of SOEs

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, nor has been recorded  the government encouraging 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 November 2015.

9. Corruption

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies, preventing increased FDI. The 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, and President Jokowi has continually expressed support for a strong and independent KPK, opposing proposals by legislators to weaken the anti-graft body’s authorities. 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 74,500).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 2018 improved to 89 out of 180 countries surveyed, compared to 96 out of 180 countries in 2017.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 38 in 2018 (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 4th 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.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

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. HR Rasuna Said Kav. C1 Kuningan
Jakarta Selatan 12920
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

10. Political and Security Environment

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 ISIL 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.

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.

11. Labor Policies and Practices

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 3.3 million (USD 243.4) per month in 2017 to IDR 3.6 million (USD 256.6) per month in 2018. 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. Unemployment has remained steady at 5.5 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 skill base 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 Labor 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.

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/

12. OPIC and Other Investment Insurance Programs

In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 Investment Support Agreement between the United States and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia. OPIC projects in Indonesia cover various sectors, including but not limited to banking, renewable energy, agribusiness, extractive industries, science, health care, and social assistance. Since 1974, OPIC has committed USD 2.35 billion in finance and insurance across 116 projects in Indonesia. Currently, OPIC has seven active projects in Indonesia with total commitment of USD 131.2 million. OPIC’s latest project was financing for Indonesia’s first utility-scale wind power project in 2016.

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.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD)  

2018

$1,107 2017 $1,016 https://data.worldbank.org/country/Indonesia 

*Bank of Indonesia, GDP from the host country website is converted into USD with the exchange rate 13.400 for 2018.

Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $1,217.6 2017 $15,171 http://bea.gov/international/
direct_investment_multinational_
companies_comprehensive_data.htm
 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $311 http://bea.gov/international/
direct_investment_multinational_
companies_comprehensive_data.htm
 
Total inbound stock of FDI as % host GDP 2018 2.6% 2017 24.5% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

*Indonesia Investment Coordinating Board (BKPM), January 2019

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 oil and gas, non-bank financial institutions, and insurance.


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment 2016 Outward Direct Investment 2016
Total Inward 240,104 100% Total Outward 65,871 100%
Singapore 58,046 24.2% N/A
Netherlands 43,667 18.2%
United States 24,020 10.0%
Japan 22,609 9.4%
“0” reflects amounts rounded to +/- USD 500,000.

Source:  IMF Coordinated Direct Investment Survey for inward investment data. World Investment Report 2018 UNTCAD for outward investment data, country specific data for outward investment is unavailable.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets 2016
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 17,316 100% All Countries 5,954 100% All Countries 11,361 100%
Netherlands 6,002 34.7% United States 2,289 38.4% Netherlands 5,998 52.8%
United States 3,276 18.9% India 1,531 25.7% Luxembourg 1,259 11.1%
India 1,577 9.1% China (PR Mainland) 774 13.0% United States 986 8.7%
Luxembourg 1,260 7.3% China (PR
Hong Kong)
534 9.0% Singapore 483 4.3%
China
(Mainland)
974 5.6% Australia 353 5.9% China (Mainland) 200 1.8%

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.

The Bank of Indonesia published comparable data.

14. Contact for More Information

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

Malaysia

Executive Summary

Since May 2018 elections, the new government has focused on delivering on some of its key campaign promises such as tackling corruption, improving livelihoods for the bottom 40 percent (B40) income earners, and introducing open tenders for infrastructure projects.  The Ministry of Finance has also revised Malaysia’s GDP to debt ratio when the government included previously off budgets in their reported figures. A key campaign promise, the abolishment of the Goods and Services Tax (GST) provided for a three-month tax holiday and was then replaced with a Sales and Services Tax (SST).  

The Government of Malaysia has traditionally encouraged foreign direct investment (FDI), and the Prime Minister and many Cabinet ministers have engaged with foreign investors a number of times since taking office.  The government has encouraged interested investors to meet with relevant government authorities to negotiate incentive packages, actively targeting industries. Government officials have called for investments in high technology and research and development, focusing on artificial intelligence, Internet of Things device design and manufacturing, Smart Cities, electric vehicles, automation of the manufacturing industry, telecommunications infrastructure, and other “catalytic sub-sectors,” such as aerospace.  It also seeks further development in sectors such as oil, gas and energy; palm oil and rubber; wholesale and retail operations; financial services; tourism; electrical and electronics (E&E); business services; communications content and infrastructure; education; agriculture; and health care.

Under the previous administration, inbound FDI had been steady in nominal terms, and Malaysia’s performance in attracting FDI relative to both earlier decades and the rest of the Association of Southeast Asian Nations (ASEAN) had slowed.  According to the 2013 Organization for Economic Cooperation and Development (OECD) Investment Policy Review of Malaysia, FDI to Malaysia began to decline in 1992, and private investment overall started to slide in 1997 following the Asian financial crises.  In the intervening years, domestic demand has increasingly been the source of Malaysia’s economic performance, with foreign investment receding as a driver of GDP growth. The OECD concluded in its Review that Malaysia’s FDI levels in recent years had reached record high levels in absolute terms, but were at low levels as a percentage of GDP.  The current government estimates that GDP will grow at 4.9 percent in 2019.

The business climate in Malaysia has been conducive to U.S. investment.  Increased transparency and structural reforms that will prevent future corrupt practices could make Malaysia a more attractive destination for FDI in the long run.  The largest U.S. investments are in the oil and gas sector, manufacturing, and financial services. Firms with significant investment in Malaysia’s oil and gas and petrochemical sectors include: ExxonMobil, Caltex, ConocoPhillips, Hess Oil, Halliburton, Dow Chemical and Eastman Chemicals.  Major semiconductor manufacturers, including ON Semiconductor, Texas Instruments, Intel, and others have substantial operations in Malaysia, as do electronics manufacturers Western Digital, Honeywell, St. Jude Medical Operations (medical devices), and Motorola. In recent years Malaysia has attracted significant investment in the production of solar panels, including from U.S. firms.  Many of the major Japanese consumer electronics firms (Sony, Fuji, Panasonic, Matsushita, etc.) have facilities in Malaysia.


Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 61 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2018 15 of 190 http://doingbusiness.org/rankings
Global Innovation Index 2018 35 of 127 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $15,100 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $9,650 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Malaysia has one of the world’s most trade-dependent economies with exports and imports of goods and services reaching about 130 percent of annual GDP according to the World Trade Organization. The Malaysian government values foreign investment as a driver of continued national economic development, but has been hampered by restrictions in some sectors and an at-times burdensome regulatory regime.  Some of these restrictions may be lifted by the new government in an effort to attract FDI.

In 2009, Malaysia removed its former Foreign Investment Committee (FIC) investment guidelines, enabling transactions for acquisitions of interests, mergers, and takeovers of local companies by domestic or foreign parties without FIC approval. Although the FIC itself still exists, its primary role is to review of investments related to distributive trade (e.g., retail distributors) as a means of ensuring 30 percent of the equity in this economic segment is held by the bumiputera (ethnic Malays and other indigenous ethnicities in Malaysia).

Since 2009, the government has gradually liberalized foreign participation in the services sector to attract more foreign investment. Following removal of certain restrictions on foreign participation in industries ranging from computer-related consultancies, tourism, and freight transportation, the government in 2011 began to allow 100 percent foreign ownership across the following sectors: healthcare, retail, education as well as professional, environmental, and courier services. Some limits on foreign equity ownership remain in place across in telecommunications, financial services, and transportation.

Foreign investments in services, whether in sectors with no foreign equity limits or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors. A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals. Nevertheless, the Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of specific investment projects. Investors in industries targeted by the Malaysian government often can negotiate favorable terms with ministries, or other bodies, regulating the specific industry. This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis. Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from the various regulatory bodies and therefore can face greater bureaucratic obstacles.

Limits on Foreign Control and Right to Private Ownership and Establishment

The legal framework for foreign investment in Malaysia grants foreigners the right to establish businesses and hold equity stakes across all parts of the economy.  However, despite the progress of reforms to open more of the economy to a greater share of foreign investment, limits on foreign ownership remain in place across many sectors.

Telecommunications

Malaysia began allowing 100 percent foreign equity participation in Applications Service Providers (ASP) in April 2012.  However, for Network Facilities Providers (NFP) and Network Service Provider (NSP) licenses, a limit of 70 percent foreign participation remains in effect.  In certain instances, Malaysia has allowed a greater share of foreign ownership, but the manner in which such exceptions are administered is non-transparent.  Restrictions are still in force on foreign ownership allowed in Telekom Malaysia. The limitation on the aggregate foreign share is 30 percent or five percent for individual investors.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits.  Foreign participation tends to take the form of production sharing contracts (PSCs). PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders. Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder.  PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Financial Services

Malaysia’s 10-year Financial Sector Blueprint envisages further opening to foreign institutions and investors, but does not contain specific market-opening commitments or timelines.  For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent. However, Malaysia’s Central Bank (Bank Negara Malaysia (BNM)), would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry.  The latest Blueprint, 2011-2020, helped to codify the case-by-case approach. Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country.  In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities. BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.

While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let a foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower income Malaysians.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas).  The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank. BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back office activities in Malaysia.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013.  Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies.  The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors.  Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations.  Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.

http://www.oecd.org/investment/countryreviews.htm  https://www.wto.org/english/tratop_e/tpr_e/tp466_e.htm  

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965.  Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure.  These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (ie, company charter); 2) a Declaration of Compliance (ie, compliance with provisions of the Companies Act); and 3) a Statutory Declaration (ie, no bankruptcies, no convictions).  The registration and business establishment process takes two weeks to complete, on average. The new government repealed GST and installed a new sales and services tax (SST), which began implementation on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses.  Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff.  The Malaysian Government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify.  Manufacturing investors seeking to expand or diversify their operations will need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives.  Companies in the services or other sectors that have revenue below RM20 million (approximately USD5.1 million) or fewer than 75 full-time employees will meet the SME definition.

[Reference]

Outward Investment

While the Malaysian government does not promote or incentivize outward investment, a number of Government-Linked companies, pension funds, and investment companies do have investments overseas.  These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad, KWAP, Malaysia’s largest public services pension fund, and the Employees’ Provident Fund of Malaysia.  Government owned oil and gas firm Petronas also has investments in several regions outside Asia.

2. Bilateral Investment Agreements and Taxation Treaties

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.

3. Legal Regime

Transparency of the Regulatory System

In July 2013, the Malaysian Government initiated a National Policy on Development and Implementation of Regulations (NPDIR).  Under this policy, the federal government embarked on a comprehensive approach to minimize redundancies in the country’s regulatory framework.  The benefits to the private sector thus far have largely been reduced licensing requirements, fees, and approval wait-times for construction projects.  The main components of the policy have been: 1) a regulatory impact assessment (a cost-benefit analysis of all newly proposed regulations); and 2) the creation of a regulations guide, PEMUDAH (similar to the role MIDA plays for prospective investors), to aid businesses and civil society organizations in understanding regulatory requirements affecting their organizations’ activities.  Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine with the new regulations need to be adjusted or eliminated.

Despite this effort to make government more accountable for its rules and to make the process more inclusive, many foreign investors continue to criticize the lack of transparency in government decision making.  The implementation of rules on government procurement contracts are a recurring concern. Non-Malaysian pharmaceutical companies claim to have lost bids against bumiputera (ethnic Malay)-owned companies further claiming they’d offered more effective medicines at lower cost.

[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. For many years ahead of that date, and since, ASEAN’s economic policy leaders have met regularly to discuss promoting greater economic integration within the 10-country bloc.  Although trade within the 10-country bloc is 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 generally reflects English Law in that it consists of written and unwritten laws.  Written laws include the federal and state constitutions as well as laws passed by Parliament and state legislatures.  Unwritten laws are 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.

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.

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. Summary judgment procedures (explained above) may be used to expedite the process.

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 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:

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.

4. Industrial Policies

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 two components:

An eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers;

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 has been approved and gazetted on December 31, 2018 and applications are accepted starting on April 2, 2019 for non-Intellectual Property (IP) activities, 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 devices 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 originally scheduled to be enforced beginning in July 2012. However, a Ministry of Health circular published on August 27, 2012 announced that enforcement would be deferred until July 8, 2014. However, there has not been any announcement to date of its enforcement. A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/BiosafetyAct2007.shtml, 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.

5. Protection of Property Rights

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, inter alia, 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.

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. Our contacts at MDTCC have told Post that the process of developing investigative leads that would support a case for the Attorney General’s Chambers (equivalent to the U.S. Department of Justice) is a work in progress.

Despite Malaysia’s success in improving IPR enforcement, key issues remain, including relatively widespread availability of pirated and counterfeit products in Malaysia, high rates of piracy over the Internet, and continued problems with book piracy.  USTR conducted an Out-of-Cycle Review of Malaysia in 2018 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 2019, USTR extended the Out-of-Cycle Review of Malaysia while asking Malaysia to complete actions to fully resolve these concerns in the near term.

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.  In addition, the United States continues to urge Malaysia to provide effective protection against unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products, and to provide 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/  .

6. Financial Sector

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. There are additional criteria for foreign companies wanting to list in Malaysia including, among others: approval of regulatory authorities of foreign jurisdiction where the company was incorporated, valuation of assets that are standards applied in Malaysia or International Valuation Standards, and the company must have been registered 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 remittance 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).

7. State-Owned Enterprises

State-owned enterprises play a very significant role in the Malaysian economy.  Such enterprises have been used to spearhead infrastructure and industrial projects.  As of July 2017, 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.  Prime Minister Mahathir 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.  Among the notable divestments of recent years, Khazanah, the largest Government-Linked Investment Company (GLIC), 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.  In 2015, Khazanah cut its equity ownership of national utility company Tenaga Nasional from 31 percent to 29 percent. 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 USUSD 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.

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 (SOEs), which in Malaysia are called government-linked companies (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. However, the close relationships SOEs have with senior government officials 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 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 the company’s staff and senior executives.  The airline is still undergoing a restructuring, and the stated goal of the country’s largest sovereign wealth fund, Khazanah, which holds all of the airline’s shares, is to re-list the airline in early 2019.

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.

8. Responsible Business Conduct

The development of responsible business conduct programs in Malaysia has shifted from a government-led initiative to business-led practices.  In 2006, Malaysian stock market regulator, the Securities Commission, published a Corporate Social Responsibility (CSR) Framework for all publicly listed companies, 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’s Awards to encourage the spread of CSR programs. In 2011, the Malaysian Government launched the 1Malaysia Training Plan (SL1M), an employment incentive that allows businesses to double the tax deduction for expenses to hire and train graduates from rural areas or from low-income families.  In 2011, the Board for Corporate Sustainability and Responsibility Malaysia (BCSRM) supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s responsible business conduct programs. The BCSRM is the local affiliate of the World Business Council for Sustainable Development.

Although the Malaysian Government encourages companies to adopt RBC programs, it does not promote adherence to the principles in the OECD Guidelines for Multinational Enterprises or the UN Guiding Principles on Business and Human Rights.  Malaysia is not a member of the Extractive Industries Transparency Initiative.

9. Corruption

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Whistleblower Protection Act in 2010.  The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from taxes. Malaysia’s anti-corruption law prohibits bribery of foreign public officials, permits the prosecution of Malaysians for offense committed overseas, 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.   In 2015, the Attorney General and Parliament opened investigations into allegations of financial mismanagement at the state development fund 1 Malaysia Development Berhad (1MDB), chaired by then-Prime Minister Najib Razak.  After Najib installed a new Attorney General and removed other ministers, the MACC’s investigation closed in late 2015 and the new Attorney General declared the Prime Minister innocent.

The new government prioritized  anti-corruption efforts in its campaign manifesto. Since taking office in May 2018, it established Royal Commissions of Inquiry into alleged corruption at 1MDB, 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 agenices.  On May 21, 2018 the MACC established a 1MDB taskforce, including the police and central bank. As of April 2019, the government has charged former Prime Minister Najib with 42 counts of money laundering, criminal breach of trust, and abuse of power.

On July 2, 2018, the government announced it was reducing the number of agencies and departments under the Prime Minister’s Department (PMD) from over 90 to only 26 for greater transparency.  Of those reduced, 40 will be re-designated to other ministries, while 10 agencies, offices, and task forces will be abolished. Nine have been given the green light to operate as independent entities, reporting directly to Parliament while five other agencies have been merged.  The Malaysian Anti-Corruption Commission, the Election Commission, Human Rights Commission of Malaysia and the National Audit Department will now report directly to Parliament instead of the PMD

Resources to Report Corruption

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

Datuk Seri Mohd Shukri bin Abdull -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

10. Political and Security Environment

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.  In April 2012, the Peaceful Assembly Act took effect, eliminating the need for permits for public assemblies, but outlaws street protests and placing other significant restrictions on public assemblies.  On April 28 2012, the police disrupted a large protest march that took place despite restrictions the government attempted to impose. Subsequent demonstrations and protest marches took place in 2013 and 2014 without disruption.  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.

11. Labor Policies and Practices

Malaysia’s 1.78 million documented and 2-4 million undocumented foreign workers make up over 20 percent of the country’s workforce.  The new Pakatan Harapan coalition government has pledged to reduce Malaysia’s reliance on foreign labor while bringing the nation’s laws up to international standards, and has begun taking steps towards reforming a foreign worker recruitment process accused of corrupt practices and leading workers into debt bondage under the former government.

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. The Embassy has heard from some U.S. companies that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market operates at essentially full employment, with unemployment for Malaysians at 3.3 percent as of February 2019.  In an effort to improve the employability of local graduates, the GOM offers additional training modules at public universities in English language skills, presentation techniques, and entrepreneurship.

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 plans to amend 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 and the new Minister of Human Resources has significantly reduced the backlog of industrial court cases over the past nine months.  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. In its first year in power, the government has outlawed 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.  Upcoming 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 (EPF), 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 their employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers.  The Prime Minister formed an Independent Committee on Foreign Workers to study foreign worker policies. The Committee submitted 40 recommendations for streamlining the hiring of migrant workers and protecting employees from debt bondage and forced labor conditions. The recommendations remain under consideration by the Cabinet.

Some contacts at U.S. companies 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.

Fulfilling a campaign promise, the new government has 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.  While campaigning, the government pledged to raise the minimum wage to RM1,500 (USD 375) within five years, although it has faced resistance from employer associations and the business community.

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.

12. OPIC and Other Investment Insurance Programs

Malaysia has a limited investment guarantee agreement with the U.S. under the U.S. Overseas Private Investment Corporation (OPIC) program, for which it has qualified since 1959.  Few investors have sought OPIC insurance in Malaysia.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $315,000 2017 $314,710 www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2016 $9,500 2017 $15,100 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host country’s FDI in the United States ($M USD, stock positions) 2015 $1,300 2017 $1,100 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Total inbound stock of FDI as % host GDP 2016 44.8% 2017 45% UNCTAD data available at https://unctad.org/sections/dite_dir/docs/wir2018/wir18_fs_my_en.pdf 


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data (as of June 2018)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $140,399 100% Total Outward $129,308 100%
Singapore $28,684 20.4% Singapore $23,171 18%
Japan $17,679 12.6% Indonesia $11,348 8.8%
Hong Kong $12,582 9.0% Mauritius $8,718 6.7%
Netherlands $9,557 6.8% Cayman Islands $7,297 5.6%
United States $8,306 6.0% Canada $6,859 5.3%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets (as of June 2018)
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $86,675 100% All Countries $60,004 100% All Countries $26,671 100%
United States $27,515 31.7% United States $22,020 36.7% Singapore $9,956 37.3%
Singapore $25,951 29.9% Singapore $15,996 26.7% United States $5,495 20.6%
Hong Kong $5,142 5.9% Hong Kong $4,422 7.4% Australia $1,682 6.3%
United Kingdom $4,591 5.3% United Kingdon $3,781 6.3% Indonesia $1.108 4.2%
Australia $3,545 4.1% Luxembourg $2,161 3.6% United Kingdom $809 3%

14. Contact for More Information

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

Pakistan

Executive Summary

Despite a relatively open foreign investment regime, Pakistan remains a challenging environment for foreign investors.  An improving but unpredictable security situation, difficult business climate, lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement, and inconsistent taxation policies have contributed to lower Foreign Direct Investment (FDI), as compared to regional competitors.  Pakistan ranked 136 out of 190 countries in the World Bank’s Doing Business 2019 rankings, gaining 11 places from 2018.

The Pakistan Tehreek-e-Insaf (PTI) government elected in July 2018 pledged to improve Pakistan’s economy, restructure tax collection, enhance trade and investment, and eliminate corruption.  Since taking power, the PTI government has faced a rapidly expanding current account deficit and declining foreign reserves.  Due to the inherited balance of payments crisis, the PTI government has worked on immediate needs to acquire external financing rather than medium- to long-term structural reforms.  Progress has been slow on key structural reforms including broadening the tax base, reforming the tax authority, and privatizing state owned enterprises.  Current tax policies negatively affect large businesses, as the government relies heavily on them for meeting its tax collection targets.  The PTI government has not announced new policies to attract FDI yet, but is reportedly working on a five-year FDI strategy.  The strategy reportedly aims to gradually increase FDI to USD 7.4 billion by Fiscal Year (FY) 2022-23.

The United States has consistently been one of the largest sources of FDI in Pakistan and one of its most significant trading partners.  Two-way trade in goods between the United States and Pakistan exceeded USD 6.6 billion in 2018, a record for bilateral trade, and included a 4.3-percent increase in U.S. exports to Pakistan.  Agriculture remained the largest growth area for U.S. exports.  The Karachi-based American Business Council, an affiliate of the U.S. Chamber of Commerce, has 65 U.S. member companies, most of which are Fortune 500 companies operating in Pakistan across a range of industries.  The Lahore-based American Business Forum – which has 25 founding members and 18 associate members – also assists U.S. investors.  American companies have profitable investments across a range of sectors, notably, but not limited to, fast-moving consumer goods and financial services.  Other sectors attracting U.S. interest include franchising, information and communications technology (ICT), thermal and renewable energy, and healthcare services.

In 2003, the United States and Pakistan signed a Trade and Investment Framework Agreement (TIFA) to serve as a key forum for bilateral trade and investment discussion.  The TIFA seeks to address impediments to greater trade and investment flows and increase economic linkages between our respective business interests.  Themost recent TIFA meeting was held in October 2016 in Islamabad, led by United States Trade Representative Michael Froman.  The last TIFA intersessional, a working level meeting to review the decisions taken in TIFA, was in June 2017 in Washington.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 117 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 136 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 109 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $518 http://www.bea.gov/international/factsheet/
World Bank GNI per capita (USD) 2017 $1,580 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

In the past decade, Pakistan was unable to attract sufficient foreign investments to support desired growth objectives and remains a low priority country for foreign investors.  The previous government recognized Pakistan’s need for foreign investment and introduced an Investment Policy, in 2013, to attract foreign investment and also signed an economic co-operation agreement with China, the China Pakistan Economic Corridor (CPEC), in April 2015.  CPEC is focused mainly on infrastructure and energy production.  Given that several large CPEC energy projects went online in 2018, Pakistan’s government has been able to develop sufficient power generation capacity in the country, though deficiencies in the transmission and distribution network remain.

The previous government also introduced incentives, which remain in place under the current PTI government, through the Strategic Trade Policy Framework (STPF) and Export Enhancement Packages (EEP).  These incentives are largely industry-specific and include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services.  The current government is reportedly working on its own STPF, but has not announced a new policy.  Pakistan also designated special economic zones (SEZs), which the PTI government continues to develop, which offer a separate basket of incentives to potential investors.  None of the SEZs are fully operational, but they have attracted some investment and are available to any company, domestic or foreign.

Net inflows of FDI peaked at USD 5.4 billion in fiscal year FY2008.  [Note:  Pakistan’s fiscal year in runs from July 1 to June 30.  End Note.]  In FY2018, net FDI was USD 3.1 billion, approximately 14.8 percent higher than FY2017.  According to the State Bank of Pakistan (SBP), the largest share of FDI (USD 997 million) was in the power sector (largely due to Chinese FDI in CPEC projects), followed by USD 708 million in the construction sector, and USD 400 million in financial business.  Most analysts believe that the improved security environment, large energy projects under CPEC, and improvements in macroeconomic stability have played a key role in the improvement of FDI in FY2018.  China remained the single largest FDI contributor in Pakistan, contributing more than 58 percent of Pakistan’s total FDI in FY2018.  During the last five years, cumulative FDI inflows remained USD 10 billion, over 81 percent in non-manufacturing sectors.  Since the PTI government started in 2018, Pakistan has signed Memorandum of Understandings (MoUs) with Saudi Arabia, the United Arab Emirates, and Malaysia.  These MoUs agreed to bring investments of over USD 21 billion, largely in the areas of energy, agriculture and oil and gas exploration.

Notwithstanding the substantial increase in Chinese FDI, non-Chinese sources are limited.  Compared to the region, low FDI is attributed to Pakistan offering competitive returns in only a few sectors.  For example, multinational companies in the consumer goods sector have witnessed steady profits, while pharmaceuticals have been obstructed by opaque and restrictive government regulations.  Power companies have also experienced an uptick in business since CPEC, but mostly by conventional energy providers; renewable energy providers have encountered obstacles in the form of inconsistent and discouraging policies from regulators.  The current government is working on introducing new energy policy for the next 25 years.  It aims to have 20-30 percent share of all energy come from renewable energy by 2030, compared to the current share of 2-3 percent.  The ICT sector has risen steadily, albeit from a relatively low base.  Growth has come from companies engaged in outsourcing services and software development.

Pakistan has a low tax-to-gross domestic product (GDP) ratio of approximately 13 percent in FY2018, which slightly increased from FY2017.  [Note:  For comparison, OECD countries averaged 32-34 percent over the past decade.  End Note]  Pakistan relies heavily on multinational corporations for a significant portion of the tax collections.  Foreign investors in Pakistan regularly report that both federal and provincial tax regulations are difficult to navigate.  The World Bank’s Doing Business 2019 report notes that companies pay 47 different taxes, compared to an average of 24.8 in other South Asian countries.  On average, calculating these payments requires that business spend on average over 293 hours per year.  In addition, companies frequently lament the lack of transparency in the assessment of taxes.  Since 2013, the government has requested advance tax payments from companies, complicating businesses’ operations as the government intentionally delays tax refunds.

The Foreign Private Investment Promotion and Protection Act, 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection of foreign investors and investment in Pakistan.  All sectors and activities are open for foreign investment unless specifically prohibited or restricted for reasons of national security and public safety.  Specified restricted industries include arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.

The specialized investment promotion agency of Pakistan is the Board of Investment (BOI).  The BOI is responsible for the promotion of investment, facilitating local and foreign investors for implementation of their projects, and to enhance Pakistan’s international competitiveness.  They assist companies and investors who intend to invest in Pakistan and facilitate the implementation and operation of their projects.

Limits on Foreign Control and Right to Private Ownership and Establishment

The 2013 Investment Policy eliminated minimum initial capital investment requirements across sectors so that no minimum investment requirement or upper limit on the share of foreign equity is allowed, with the exception of the airline, banking, agriculture, and media sectors.  Foreign investors in the services sector may retain 100 percent equity – subject to obtaining permission, a no objection certificate, or license from the concerned agency, as well as fulfilling the requirements of respective sectoral policy.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agricultural sector, the threshold is 60 percent – with an exception for corporate agriculture farming, where 100 percent ownership is allowed.  There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a USD 100,000 limit on initial franchise investments and a cap on subsequent royalty payments of 5 percent of net sales for five years.  Royalties and technical payments are subject to a 15 percent income tax, and subject to remittance restrictions listed in Chapter 14, section 12 of the SBP Foreign Exchange Manual (http://www.sbp.org.pk/fe_manual/index.htm ).  The tourism, housing, construction, and information and communications technology sectors have been granted “industry status,” eligible for lower tax and utility rates compared to “commercial sector” enterprises, including banks and insurance companies.  Small-scale mining valued at less than PKR 300 million (roughly USD 2.6 million) is restricted to Pakistani investors.

With the exception of arms, ammunition, high explosives, radioactive substances, private security companies, currency, and consumable alcohol, foreign investors are allowed in all sectors.  There are no restrictions or mechanisms that specifically exclude U.S. investors.

Since signing the World Trade Organization (WTO) Financial Services Agreement in December 1997, Pakistan’s financial services commitments have improved.  Foreign banks can establish locally incorporated subsidiaries and branches, provided they have USD 5 billion or belong to one of the regional organizations or associations to which Pakistan is a member (e.g., Economic Cooperation Organization (ECO) or the South Asian Association for Regional Cooperation (SAARC)).  Absent these requirements, foreign banks are limited to a 49-percent maximum equity stake in locally incorporated subsidiaries.  Foreign and local banks must submit an annual branch expansion plan to the SBP for approval.  The SBP approves branch openings based on the bank’s net worth, adequacy of capital structure, future earnings prospects, credit discipline, and the needs of the local population.  All banks are required to open 20 percent of their new branches in small cities, towns, and villages.

The Foreign Private Investment Promotion and Protection Act stipulates that foreign investments will not be subject to higher income taxes than similar investments made by Pakistani citizens.  While Pakistan’s legal code and economic policy do not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.  Pakistani courts have not upheld some international arbitration awards.

Pakistan maintains investment screening mechanisms for inbound foreign investment.  The BOI is the lead organization for such screening.  Pakistan blocks foreign investments if the screening process determines the investment could negatively affect Pakistan’s national security.

Other Investment Policy Reviews

Pakistan has not undergone any third-party investment policy reviews in last three years.  The International Monetary Fund assessed the nation’s overall macro economy under Article-IV consultation in 2018; however, that review was not specific to investment policy.

Business Facilitation

Pakistan works with the World Bank to improve its overall ease of doing business standing.  The government has simplified pre-registration and registration facilities and automated land records to simplify property registrations.  To improve cross border trade, it has also improved electronic submissions and processing of trade documents.  Even so, Pakistan ranked 130 out of 190 countries in the World Bank Doing Business 2019 report’s “Starting a Business” category.  Pakistan is ranked 26 out of 190 for protecting minority investors.  Starting a business in Pakistan normally involves 10 procedures and takes at least 16.5 days.

The Securities and Exchange Commission of Pakistan (SECP) manages company registrations.  Both foreign and domestic companies begin the registration by providing a company name and paying the requisite registration fees to the SECP.  Companies then supply documentation on the proposed business, including information on corporate offices, location of company headquarters, and a copy of the company charter.  Companies must apply for national tax numbers with the Federal Board of Revenue (FBR) to facilitate payment of income and sales taxes.  Industrial or commercial establishments with five or more employees must register with Pakistan’s Federal Employees Old-Age Benefits Institution (EOBI) for social security purposes.  Depending on the location, registration with provincial governments may be required.

The SECP website (www.secp.gov.pk ) offers the Virtual One Stop Shop (OSS) where companies can register with the SECP, FBR, and EOBI simultaneously.  OSS is also available for foreign investors.

The government’s investment policy provides both domestic and foreign investors the same incentives, concessions, and facilities for industrial development.  Though some incentives are included in the federal budget, the government relies on Statutory Regulatory Orders (SROs) for industry specific taxes or incentives.  For example, an SRO issued in February 2019 imposed additional labeling requirements for imported goods, creating non-tariff barriers.

Outward Investment

Pakistan does not promote or incentivize outward investment.  Although the government does not explicitly prohibit Pakistanis from investing abroad, the process of approvals is so cumbersome it normally takes years, discouraging potential investors.

2. Bilateral Investment Agreements and Taxation Treaties

Though U.S.-Pakistan Bilateral Investment Treaty (BIT) negotiations began in 2004 and closed the text in 2012, the agreement has not been signed due to reservations from Pakistani stakeholders.  According to the BOI, Pakistan has signed BITs with 49 countries with only 27 entered into force.

Pakistan does not have a Free Trade Agreement (FTA) with United States.  However, both countries have Trade and Investment Framework Agreement (TIFA) in place.  Pakistan has trade agreements with China, Malaysia, Sri Lanka, Iran, Mauritius, and Indonesia.  It is also a signatory of the South Asian Free Trade Agreement (SAFTA) and the Afghanistan Pakistan Transit Trade Agreement (APTTA).  Pakistan is negotiating FTAs with Turkey and Thailand and re-negotiating its existing FTA with China.

A U.S.-Pakistan bilateral tax treaty was signed in 1959.  Pakistan has double taxation agreements with 63 other countries and a multilateral tax treaty between the SAARC countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) came into force in 2011.  The treaty provides additional provisions for the administration of taxes.  In 2018, Pakistan updated its tax treaty with Switzerland and has approached the United States government to request the same.

In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  The Convention will help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks.  Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package.

3. Legal Regime

Transparency of the Regulatory System

Since the 2010 introduction of the 18th amendment to Pakistan’s constitution, foreign companies must address provincial, and sometimes local, government laws in addition to national law.  Respective regulatory authorities conduct in-house post-implementation reviews for regulations in consultation with relevant stakeholders.  However, these assessments are not made publicly available.  Prior to implementation, non-government sectors and private sector associations can provide feedback to the government on different laws and policies, but authorities are not bound to collect nor implement their suggestions.  Many foreign businesses in Pakistan complain about the inconsistencies in laws and policies from different regulatory authorities.  Since the implementation of the 18th amendment, which devolved certain powers from the federal to provincial governments, inconsistencies have affected sales of U.S. companies, particularly in food and beverages; the two largest provinces, Punjab and Sindh, have different regulations for beverages.  However, there are no rules or regulations in place that discriminate specifically against U.S. investors.

The SECP is the main regulatory body for foreign companies in Pakistan.  However, the SECP is not the sole regulator.  Company financial transactions are regulated by SBP, labor by the Social Welfare or EOBI, and specialized functions are overseen by bodies such as the National Electric Power Regulatory Authority or Alternate Energy Development Board.  Each body is overseen by autonomous management but all are required to go through the Ministry of Law and Justice before submitting their policies and laws to parliament or, in some cases, the executive branch; parliament or the Prime Minister is the final authority for any operational or policy related legal changes.

The SECP is technically empowered to notify accounting standards to companies in Pakistan.  Pakistan has adopted most, though not all, International Financial Reporting Standards.  Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.

Most draft legislations are made available for public comment but there is no centralized body to collect public responses.  The relevant authority gathers public comments, if deemed necessary; otherwise legislation is directly submitted to the legislative branch.  For business and investment laws and regulations, the Ministry of Commerce collects feedback from local chambers and associations – such as the American Business Council and Overseas Investors Chamber of Commerce and Industry (OICCI).  Rather than publishing regulations online for public review, the Ministry relies on stakeholder discussion forums for comment.

The government publishes limited debt obligations in the budget document in two broad categories: capital receipts and public debt, which are published in the “Explanatory Memorandum on Federal Receipts.”  These documents are available at http://www.finance.gov.pk , http://www.fbr.gov.pk , and http://www.sbp.org.pk/edocata .  The government does not adequately disclose the terms of bilateral debt obligations, including financing on China-Pakistan Economic Corridor projects.

International Regulatory Considerations

Pakistan has bilateral trade agreements with China, Indonesia, Iran, Malaysia, Mauritius, and Sri Lanka, although most are limited to a few hundred tariff lines and do not cover all trade.  It is negotiating additional trade agreements with Turkey and Thailand.  Pakistan is a member of the South Asia Free Trade Area, SAARC, the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).

Pakistan has been a World Trade Organization (WTO) member since January 1, 1995, and provides most favored nation (MFN) treatment to all member states, except India and Israel.  Since 2012, the government has maintained a “negative” list of products that cannot be imported from India.  The list contains approximately 1,200 products.  Pakistan does not recognize the State of Israel and thus does not trade with Israel.

In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA).  Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement.  Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Most international norms and standards incorporated in Pakistan’s regulatory system are influenced by British laws.  Laws governing domestic or personal matters are strongly influenced by Islamic Sharia Law.  Of the two courts – superior (high) courts and the subordinate (lower) courts – the superior judiciary is composed of the Supreme Court, the Federal Sharia Court, and five High Courts (Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court), and decisions have national standing.  The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government.  A 2015 constitutional amendment allows military courts to try civilians for terrorism, sectarian violence, and other charges; parliament renewed this authority in January 2017 for an additional two years, which lapsed in March 2019.  The sitting PTI government favors an extension of these courts for another two years but opposition benches are not supportive.  For extension, parliament needs a two-thirds majority to pass the bill, which the PTI government lacks.  Additionally, the government also use special civilian terrorism courts to try a wide range of cases, not necessarily limited to terrorism, including any crimes involving violence and acts or speech deemed by the government to foment religious hatred, including blasphemy.  The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, smuggling, drug trafficking, terrorism, tax law, environmental law, consumer protection, insurance, and cases of corruption.  Pakistan’s judiciary is influenced by the government and other stakeholders.  The lower judiciary is influenced by the executive branch and seen as lacking competence and fairness.  It currently faces a significant backlog of unresolved cases.

Pakistan has a written contractual/commercial law with the Contract Act of 1872 as the main source for regulating Pakistani contracts.  English decisions, where relevant, are also cited in courts.

Laws and Regulations on Foreign Direct Investment

Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in all sectors of the economy, subject to obtaining relevant permissions.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed.  In the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.  A majority of foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP.

While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations.  If the chief executive is not a Pakistani national, she or he is required to obtain a multiple entry work visa.  Companies operating in Pakistan are statutorily required to retain full-time audit services and legal representation.  Companies must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, and other pertinent details to the SECP within 15 days of the change.

To address long process delays, in 2013, the SECP introduced the issuance of a provisional “Certificate of Incorporation” prior to the final issuance of a “No Objection Certificate” (NOC).  The Certificate includes a provision noting that company shares will be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fails to obtain a NOC.

Pakistan’s judicial system allows specialized tribunals as a means of alternative dispute resolution.  Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes.  However, due to an active but weak and inefficient judiciary, most foreign investors include contract provisions that provide for international arbitration to avoid protracted disputes.

Competition and Anti-Trust Laws

Established in 2007, the Competition Commission of Pakistan (CCP) ensures private and public sector organizations are not involved in any anti-competitive or monopolistic practices.  Complaints regarding anti-competition practices can be lodged with CCP, which conducts the investigation and is legally empowered to award penalties; complaints are reviewable by the CCP appellate tribunal in Islamabad and the Supreme Court of Pakistan.  The CCP appellate tribunal is required to issue decisions on any anti-competition practice within six months from the date in which it becomes aware of the practice.

Expropriation and Compensation

Two Acts, the Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976, protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests.  Pakistan does not have a strong history of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID).  Pakistan ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2005.

Investor-State Dispute Settlement

In 2008, the Pakistani government instituted a Rental Power Plant (RPP) plan to help alleviate the chronic power shortages throughout the country.  Walters Power International Limited was a participant in three RPP plants and brought the power generation equipment into Pakistan to service these plants.  Subsequently, in 2010, the Supreme Court of Pakistan nullified all RPP contracts due to widespread corruption in cash advances made to RPP operators.  Walters Power International Limited settled with the Pakistan National Accountability Bureau (NAB) and the Central Power Generation Company Limited by returning advance payments plus interest.  In mid-2012, NAB formally acknowledged that settlement with the Walters Power International Limited had been made, which under Pakistani law released Walters Power International Limited from any further liability, criminal or civil, and should have permitted re-export of equipment.

However, the Government of Pakistan has (a) refused to allow the plant be exported so that some salvage value could be obtained, and (b) prevented the plant to operate despite critical need for power in the country.  This plant was internationally advertised in a competitive bidding process and went through seven levels of regulatory approvals.  Despite repeated efforts by Walters Power International Limited, NAB has declined to instruct the appropriate parties to issue a Notice of Clearance to Pakistan Customs to allow the re-export of the equipment.  Walters Power International Limited alleges that the unreasonable delay in permitting re-export of equipment following settlement constitutes expropriation.  The case is still pending with NAB.

International Commercial Arbitration and Foreign Courts

Foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms.  Protracted arbitration cases are a major concern.  Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve.  To mitigate such risks, most foreign investors include contract provisions that provide for international arbitration.

Pakistan is not a signatory of any treaty or investment agreement in which binding international arbitration of investment disputes is required.  With the exception of arbitration, there is no alternative dispute resolution (ADR) mechanism available as a means for settling disputes between two private parties.

Bankruptcy Regulations

Pakistan was ranked 53 of 190 for ease of “resolving insolvency” rankings in the World Bank’s Doing Business 2019 report.  On average, Pakistan requires 2.6 years to resolve insolvency issues and has a recovery rate of 44.5 percent.

Pakistan does not have a single, comprehensive bankruptcy law.  Foreclosures are governed under the Companies Act 2017 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions.  Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.

The Companies Act 2017 regulates mergers and acquisitions.  Mergers are allowed between international companies, as well as between international and local companies.  In 2012, the government enacted legislation for friendly and hostile takeovers.  The law requires companies to disclose any concentration of share ownership over 25 percent.  There are no laws or regulations authorizing private firms to adopt articles of incorporation discriminating against foreign investment.

Pakistan has no dedicated credit monitoring authority.  However, SBP has authority to monitor and investigate the quality of the credit commercial banks extend.

4. Industrial Policies

Investment Incentives

Pakistan currently does not provide any formal investment incentives such as grants, tax credits or deferrals, access to subsidized loans, or reduced cost of land to individual foreign investors.  The 2013 investment policy revolves around business facilitation and not direct incentives.  However, in 2016, the government reduced or eliminated custom duties on the imports of equipment and machinery and introduced temporary tariff concessions for the automobile manufacturing sector.  The government does not offer research and development incentives.  Nonetheless, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives.

In general, the government does not issue guarantees or jointly finance foreign direct investment projects.  However, the government made an exception for CPEC related projects; the Government of Pakistan provided sovereign guarantees for the investment and returns, and provided joint financing for specific projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Providing unique fiscal and institutional incentives exclusively for export-oriented industries, the government established the first Export Processing Zone (EPZ) in Karachi in 1989.  Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, RekoDek, and Duddar; today, only Karachi, Risalpur, Sialkot, and Saindak remain operational.  EPZs offer investors tax and duty exemptions on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window,” which facilitates import and export authorizations.  The 2012 Special Economic Zones Act allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs.  Despite offering substantial financial, investor service, and infrastructure benefits to reduce the cost of doing business, Pakistan’s SEZs have struggled to attract investment due to lack of basic infrastructure.

Pakistan intends to establish nine SEZs under China Pakistan Economic Corridor (CPEC).  The government plans to inaugurate the first one in Rashakai, Khyber Pakhtunkhwa, in June 2019.  Most CPEC SEZs remain in nascent stages of development.

Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOU) – a stand-alone industrial entity exporting 100 percent of its production.  Export-Oriented Units incentives include duty and tax exemptions for imported machinery and raw materials, as well as the duty-free import of vehicles.  Export-Oriented Units are allowed to operate anywhere in the country.  Pakistan provides the same investment opportunities to foreign investors and local investors.

Performance and Data Localization Requirements

Foreign business officials have struggled to get business visas to Pakistan.  When permitted, business people typically received single-entry visas with a short duration validity.  Once in country, Pakistan required NOCs to visit locations outside of Islamabad, Karachi, or Lahore, making it difficult to inspect factories, supply chains, or goods outside of these three cities.  Pakistan announced updates to its visa and NOC policies to attract foreign tourists and businesspeople, but the more open polices have not been fully implemented.  New visa policies will not apply to U.S. passport holders.  Technical and managerial personnel working in sectors that are open to foreign investments are typically not required to obtain special work permits.  The new NOC policy permits travel throughout Pakistan, with exceptions for travel near Pakistan’s borders that still requires an NOC.

Foreign investors are not required to use domestic content in goods or technology or hire Pakistani nationals, either as laborers or as representatives on the company’s board of directors.  Likewise, there are no specific performance requirements for foreign entities operating in the country, and the same investment incentives are available to both local and foreign investors.  Similarly, there are no special performance requirements on the basis of origin of the investment.

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information.  According to the country’s 2013 Investment Policy, manufacturers introducing new technologies that are unavailable in Pakistan receive the same incentives available to companies operating in Pakistan’s SEZs.

The embassy has not received complaints regarding encryption issues from IT companies operating in Pakistan.  Officially, accreditation from the Electronic Certification Accreditation Council (under the Ministry of Information Technology) is required for entities using encryption and cryptography services, though it is not consistently enforced.  Despite the company’s April 2016 announcement that it would employ end-to-end encryption, WhatsApp is widely used.  The Pakistan Telecommunication Authority (PTA) initially demanded unfettered access to Research in Motion’s BlackBerry customer information, but the issue was resolved when the company agreed to assist law enforcement agencies in the investigation of criminal activities.  PTA and SBP prohibit telecom and financial companies from transferring customer data overseas.  Other data, including emails, can be legally transmitted and stored outside the country.

5. Protection of Property Rights

Real Property

Though Pakistan’s legal system supports the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of property rights.  With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding land lease or acquisition by foreign or non-resident investors exists.  Corporate farming by foreign-controlled companies is permitted if the subsidiaries are incorporated in Pakistan.  There are no limits on the size of corporate farmland holdings, and foreign companies can lease farmland for up to 50 years, with renewal options.

The 1979 Industrial Property Order safeguards industrial property in Pakistan against government use of eminent domain with insufficient compensation for both foreign and domestic investors.  The 1976 Foreign Private Investment Promotion and Protection Act guarantees the remittance of profits earned through the sale or appreciation in value of property.

Though protection for legal purchasers of land are provided, even if unoccupied, clarity of land titles remains a challenge.  Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments dedicating significant resources to digitizing land records.

Intellectual Property Rights

The Government of Pakistan has identified intellectual property rights (IPR) protection as a key economic reform and has taken concrete steps over the past 15 years to strengthen its IPR regime.  In 2005, Pakistan created the Intellectual Property Organization (IPO) to consolidate government control over trademarks, patents, and copyrights.  Three ministries handled these areas previously: the Ministry of Education for copyright, Ministry of Commerce for trademarks, and the Ministry of Industries for patents.  The IPO’s mission also includes coordinating and monitoring the enforcement and protection of IPR through law enforcement agencies.  Enforcement agencies include local police, the Federal Investigation Agency, customs officials at the Federal Board of Revenue (FBR), the Securities & Exchange Commission (SECP), the Competition Commission of Pakistan (CCP), the Drug Regulatory Authority of Pakistan (DRAP), and the Print and Electronic Media Regulatory Authority.

Although the creation of the IPO consolidated policy-making institutions, confusion surrounding enforcement agencies’ roles still constrains IPO performance on IPR enforcement, leaving IPR holders struggling to identify the right forum in which to address IPR infringement.  The IPO constituted seven new enforcement coordination committees for better IPR enforcement and signed an MOU with the FBR to share information.  The IPO is in initial stages to sign MOUs with the CCP and SECP.  However, the IPO labors to coordinate disparate bodies under current laws.  Weak penalties and agencies’ redundancies allow counterfeiters to evade punishment, while companies struggle to identify the correct forum to file complaints.  Pakistan is the fourth largest source of counterfeit and pirated goods seized by U.S. customs and border protection.

In 2016, Pakistan established three specialized IP tribunals – in Karachi covering Sindh and Balochistan, in Lahore covering Punjab, and in Islamabad covering Islamabad and Khyber Pakhtunkhwa.  There are plans to create tribunals for Peshawar and Quetta as well.  The Lahore and Islamabad IP tribunals became fully operational in 2016, and the Karachi tribunal came online in April 2017.  The IP tribunals have already ruled on 800 cases, many of which have resulted in injunction orders.  Numerous U.S. companies have successfully defended their IPR in the new tribunals, but a lack of capacity and consistency of the presiding officers remains a concern.  In under three years, the Islamabad and Lahore tribunals have each seated three different presiding officers while Karachi had two, and high court justices without expertise in IP law often overrule tribunals’ decisions.  While these three tribunals are fully operational and have improved IPR enforcement, they have not made any major rulings, and it remains too early to assess their long-term influence on Pakistan’s IPR environment.

In 2018, the CCP investigated and imposed a fine of USD 47,000 on a local coffee house on charges of unauthorized use of the Starbucks trademark.

Pakistan has sought to encourage investment in the seed industry through enhanced regulatory structure.  Over the past three years officials have revised the 1976 Seed Act, cautiously resumed  the biotechnology approval process, and received parliamentary approval of the Plant Breeders’ Rights Act (approved December 2016), which, once implementing rules are written, is expected to provide Pakistan’s first-ever intellectual property protection for seeds.  While current and potential investors have expressed concern over enforcement capacity and would like to accelerate the approval process for new technologies, the Government of Pakistan is taking steps to solidify federal (rather than provincial) oversight of the sector and respond to industry input.  Access to modern seed technology is vital to the development of Pakistan’s agricultural sector.

Pakistan is a party to the Berne Convention for the Protection of Literary and Artistic Works and is a member of the World Intellectual Property Organization (WIPO).  In July 2004, Pakistan acceded to the Paris Convention for the Protection of Industrial Property.  Pakistan has not yet ratified the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty.

In 2016, Pakistan was upgraded from Priority Watch List to Watch List with an Out-of-Cycle Review on the U.S. Trade Representative’s Special 301 Report.  Pakistan currently remains on the Watch List for the 2019 Special 301 Report, which acknowledged certain achievements by the government but highlighted the lack of enforcement on violations, particularly with respect to copyrights, pharmaceutical data, and media piracy.  Pakistan is not included on the Notorious Markets List.

Pakistan does not track and report on seizure of counterfeit goods.

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/ 

6. Financial Sector

Capital Markets and Portfolio Investment

The Government of Pakistan does not provide any investment incentives except the incentives offered to attract new capital inflows in specialized sectors and SEZs.  These incentives for specific sector and SEZs include tax exemptions, tariffs reductions, infrastructure, and investor facilitation services in designated special economic zones.  Since 1997, Pakistan has established and maintained a largely open investment regime.  The PML-N government introduced the Investment Policy 2013 that further liberalized investment policies in most sectors.  However, in addition to expressing concern about the deteriorating law and order situation, foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and an established a clear and consistent policy of upholding contractual obligations and settlement of tax disputes.

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE) in January 2016.  As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSE is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions.  In 2016, the government imposed a capital gains tax of 10 percent on stocks held for less than six months, and eight percent on stocks held for more than six months but less than a year and no capital gains tax for holdings that exceed 12 months.  However, in 2017, the government modified the capital gain tax and imposed 15 percent on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 months.  The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.  Per the Foreign Exchange Regulations, foreign investors can invest in shares and securities listed on the PSE and can repatriate profits, dividends, or disinvestment proceeds.  The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.

The free flow of financial resources for domestic and foreign investors is supported by financial sector policies, with the SBP and SECP providing regulatory oversight of financial and capital markets.  Interest rates depend on the reverse repo rate (also called the policy rate).  The SBP steadily lowered the policy rate from a high of 10 percent at the fourth quarter 2014 to 6 percent in November 2017, but has increased the rate to 10.75 percent in March 2019.

Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.

Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits.

The banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of banks’ equity with effect from December 2013.  Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves.

For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital.  While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending.  Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in early stages of development.  There are a limited number of venture capitalists operating in Pakistan.

Money and Banking System

The State Bank of Pakistan (SBP) is the central bank of Pakistan.

According to the most recent statistics published by the SBP, only 23 percent of the adult population uses formal banking channels to conduct financial transactions while 24 percent are informally served by the banking sector.  The remaining 53 percent of the adult population do not use any formal financial services.

The overall financial sector has done well in Pakistan over the last few years.  The SBP’s December 2018 banking sector review noted improving asset quality, stable liquidity, robust solvency, and increased investment in the banking sector.  The asset base of the banking sector expanded by 7.3 percent during 2018.  The risk profile of the banking sector remained satisfactory because profitability and asset quality improved as the non-performing loans to gross loans (infection) rate declined to its lowest level in a decade, 8 percent, at the end of 2018.

The five largest banks, one of which is state owned, control 52.3 percent of all banking sector assets.  In 2018, total assets of the banking industry were USD 140.6 billion[1].  As of December 2018, net non-performing bank loans totaled approximately USD 785.7 million – 1.4 percent of net total loans.

The penetration of foreign banks in Pakistan is relatively low and do not account for a significant portion of the local banking industry and overall economy.  According to a study conducted by the World Bank Group in 2018, the share of foreign banks to GDP stands at 3.5 percent.  In the wake of the global financial crisis, foreign banks have scaled down their operations and businesses in Pakistan mainly due to policies to shrink operations in small and struggling markets.  Banks closing down or limiting their operations included the Royal Bank of Scotland and Citibank, which sold its consumer banking portfolio to Habib Bank Limited and restricted its operations to corporate banking.  Other foreign banks operating in Pakistan are Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the newly established Bank of China.

International banks are involved in two major types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations.

SBP requires that foreign banks hold at minimum USD 300 million in capital reserves at their Pakistan flagship location, and maintain at least an eight percent capital adequacy ratio.  In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

  • 1 to 5 branches: USD 28 million in assigned capital;
  • 6 to 50 branches: USD 56 million in assigned capital;
  • Over 50 branches: USD 94 million in assigned capital.

Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan.  There are no further other restrictions to prevent foreigners from opening and operating a bank account.  However, most foreigners prefer to use a foreign bank to conduct their banking transactions.

Foreign Exchange and Remittances

Foreign Exchange

SBP maintains strict controls over the exchange rate and monitors foreign exchange transactions in the open market.  Banks are required to report and justify outflows of foreign currency.  Travelers leaving or entering Pakistan are allowed to physically carry a maximum of USD 10,000 in cash.  While cross-border payments of interest, profits, dividends, and royalties are allowed without submitting prior notification, banks are required to report loan information so SBP can verify remittances against repayment schedules.  Exchange companies are permitted to buy and sell foreign currency for individuals, banks, and other exchange companies, and can also sell foreign currency to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees.  Exchange companies are playing an increasingly important role in facilitating remittances from Pakistanis working overseas.

There is no clear policy on convertibility of funds associated with investment to other global currencies.  SBP deals with such cases and opts for an ad-hoc approach on a case to case and situational basis.

The embassy has provided advocacy for U.S. companies that have struggled to repatriate their profits.  Although no formal policy bars profit repatriation, U.S. companies have faced delays in repatriation from the SBP.

The Ministry of Finance and the SBP jointly manage Pakistan’s exchange rate.  Even though the exchange rate is determined by the market, over the past few years the SBP has intervened to stabilize the exchange rate or manage its decline.  Falling foreign exchange reserves have constrained the SBP’s ability to directly intervene in the market by injecting dollars into it.

Remittance Policies

The 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels.  Remittance of full capital, profits, and dividends over USD 5 million are permitted while dividends are tax-exempt.  No limits exist for dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law.  However, large transactions that have the potential to influence Pakistan’s foreign exchange reserves require approval from the government’s Economic Coordination Committee.  Similarly, banks are required to account for outflows of foreign currency.  Investor remittances must be registered with the SBP within 30 days of execution and can only be made against a valid contract or agreement.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law.  Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

[1] Even though the value of total assets has increased in PKR, due to devaluation of the rupee, the converted number in USD has decreased from 2017.

7. State-Owned Enterprises

The second round of the Government of Pakistan’s extensive 15-year privatization campaign came to an abrupt halt after 2006 when the Supreme Court reversed a proposed deal for the privatization of Pakistan Steel Mills, setting a precedent for future offerings.  As a result, large and inefficient state-owned enterprises (SOEs) retain monopolistic powers in a few key sectors, requiring the government to provide annual subsidies to cover SOE losses.  Three of the country’s largest SOEs include Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM).  According to the IMF, the total debt of SOEs now amounts to 3.6 percent of GDP (almost USD 10 billion) in 2018.

There are 197 SOEs in the power, oil and gas, banking and finance, insurance, and transportation sectors.  Some are profitable; others suffer losses.  They provide stable employment and other benefits for more than 420,000 workers.  According to the IMF, in 2018, Pakistan’s total debts and liabilities for SOEs exceeded PKR 1.2 trillion (USD 10 billion), or 3.6 percent of GDP – a 22 percent increase since 2016, but roughly the same since 2017.  Some SOEs have governing boards, but they are not effective.

The following links provides details of the Government of Pakistan’s privatized transactions over the past 18 years since 1991.  http://privatisation.gov.pk/?page_id=125 

SOEs competing in the domestic market receive non-market based advantages from the host government.  Two examples include PIA and PSM, which are operating at loss, but the Government of Pakistan continues to provide them with financial bailout packages.  The embassy is not aware of any negative impact to the U.S firms in this regard.

PR is the only provider of rail services in Pakistan and the largest public sector employer, with approximately 90,000 employees.  PR’s freight traffic has declined by over 75 percent since 1970 and only about 250 of PR’s 458 locomotives are serviceable.  PR has attempted to recapture the market share previously ceded to the trucking industry, and in 2016, the company purchased 55 new locomotives from GE for its freight operations.  PR has received commitments for USD 8.2 billion in CPEC loans and grants to modernize its mail rail lines.  PR relies on monthly government subsidies of approximately USD 2.8 million to cover its ongoing obligations.  In FY2018, government payments to PR totaled approximately USD 321 million.  Pakistan no longer intends to privatize PR, and the Privatization Commission has removed it from the list of SOEs identified for privatization.

Even though the government is still publicly committed to privatizing its national airline, the process has been stalled since early 2016 when three labor union members were killed during a violent protest of the government’s decision to convert PIA into a limited company.  The move would have allowed shares to be transferred to a non-government entity and pave the way for privatization.  The legislature eventually passed a bill, but it requires that the Pakistan government retain 51 percent equity in the airline in the event it is privatized, reducing the attractiveness of the company to potential investors.  In 2018, the Government of Pakistan extended bailout packages worth USD 300 million to PIA.

Established to avoid importing foreign steel, PSM has accumulated losses of approximately USD 3.77 billion per annum.  The company loses USD 5 million a week, and has not produced steel since June 2015, when the national gas company cut power supplies due to over USD 340 million in outstanding bills.  Like PIA, the government attempted to privatize PSM under the IMF program but was stymied by domestic and political opposition.  The government is reportedly considering leasing or selling a portion of PSM’s 19,000 acres, coupled with a basket of incentives that would provide for a 10-year tax holiday and duty-free import of any machinery and equipment upgrades to potential leases.

The Securities and Exchange Commission of Pakistan (SECP) introduced corporate social responsibility (CSR) voluntary guidelines in 2013, though adherence to the OECD guidelines is not known.

Privatization Program

Terms to purchase public shares of SOEs and financial institutions for both foreign and local investors are the same.  Under the 2013 IMF EFF program, the government identified 31 SOEs for either partial or total privatization.  In 2015, the government successfully offloaded stakes in several banks and publicly traded firms, and in 2016 sold its 40 percent stakes in PSE.  However, due to significant political resistance, the government postponed plans to privatize its largest and most inefficient SOEs, namely PIA, PSM, and several power generation and distribution companies.

Eight SOEs from the banking, energy, mining, and hospitality sectors are scheduled to be privatized by the end of 2019.  Foreign investors can participate after following guidelines established by the Privatization Commission.

The Privatization Commission (PC) claims the privatization process to be a transparent, easy to understand, and non-discriminatory 17 step process, available on its website: http://privatisation.gov.pk/?page_id=88 

8. Responsible Business Conduct

There is no unified set of standards defining responsible business conduct in Pakistan.  Though large companies, especially multi-national corporations, have an awareness of responsible business conduct standards, there is a lack of wider awareness.  The Pakistani government has not established standards or strategic documents specifically defining responsible business conduct standards and goals.  The Ministry of Human Rights published its most recent “Action Plan for Human Rights” in May 2017.  Although it does not specifically address responsible business conduct or business and human rights, one of its six thematic areas of focus is implementation of international and UN treaties.  Pakistan is signatory to nearly all International Labor Organization (ILO) conventions.

In late 2016 and early 2017, a series of explosions and a fire, occurred at the Gadani shipbreaking yards in Balochistan.  The incidents underscored the lack of safety and environmental standards in the industry.  The Prime Minister’s office launched a probe into the 2016 explosion and concluded that negligence by ship owners and government officials caused the incident.  The government suspended officials found guilty of negligence, and announced that families of the incident’s victims would receive compensation.  A subsequent January 2017 fire prompted officials to halt the scrapping of oil and liquid petroleum gas tankers at the shipyard.

International organization, civil society, NGO, and labor union contacts all note that there is a lack of adequate implementation and enforcement of labor laws.  Some NGOs, worker organizations, and business associations are working to promote responsible business conduct, but not on a wide scale.

Pakistan does not have domestic measures requiring supply chain due diligence for companies sourcing minerals originating from conflict-affected areas and does not participate in the Extractive Industries Transparency Initiative and/or the Voluntary Principles on Security and Human Rights.

9. Corruption

Pakistan was ranked 117 out of 180 countries on Transparency International’s 2018 Corruption Perceptions Index.  Following the institution of the 18th Amendment, corruption at the provincial level has increased, according to Transparency International.  The organization noted that corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotion, and relatively low salaries.

Bribes are criminal acts punishable by law but exist at all levels of government.  Although high courts are widely viewed as more credible, lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political figures.  Political involvement in judicial appointments increases the government’s influence over the court system.

NAB, Pakistan’s anti-corruption organization, suffers from insufficient funding and staffing.  Like NAB, the CCP’s mandate also includes anti-corruption authorities, but its effectiveness is also hindered by resource constraints.

Resources to Report Corruption

Justice (R) Javed Iqbal
Chairman
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
+92-51-111-622-622
chairman@nab.gov.pk

Sohail Muzaffar
Chairman
Transparency International
5-C, 2nd Floor, Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
+92-21-35390408-9
pakistan@gmail.com

10. Political and Security Environment

Despite improvements to the security situation in recent years, the presence of foreign and domestic terrorist groups within Pakistan continues to pose a significant danger to U.S. interests and citizens.  Terrorists may attack with little or no warning, targeting transportation hubs, markets, shopping malls, military installations, airports, universities, tourist locations, schools, hospitals, places of worship, and government facilities.  The embassies of many countries, including the United States, United Kingdom, Canada, Australia, and New Zealand, have issued travel advisories regarding travel to Pakistan, and many multinational companies operating in Pakistan employ private security and risk management firms to mitigate the significant threats to their business operations.  Even with improvements in the security situation, terrorist attacks remain frequent in Pakistan.  Despite high levels of violence in Karachi, carried out by criminal gangs with alleged political affiliations, targeted killings have largely declined since Pakistan’s paramilitary Rangers began an intensive campaign of operations in 2013 to counter violent crime.

The BOI, in collaboration with Provincial Investment Promotion Agencies, has coordinated airport-to-airport security and secure lodging for foreign investors.  To inquire about this service, investors can contact the BOI for additional information.

The embassy is not aware of any damage to projects and/or installations.  Abductions/kidnappings of foreigners for ransom remains a concern.

While security challenges exist in Pakistan, the country has not grown increasingly politicized or insecure in the past year.

11. Labor Policies and Practices

Pakistan has a complex system of labor laws.  Due to the 18th Amendment to the Constitution, the provinces manage jurisdiction over labor matters.  Each province is in the process of developing its own labor law regime, and the provinces are at different stages of labor law development.

In the Islamabad Capital Territory and provinces of Khyber Pakhtunkhwa and Sindh, the minimum wage for unskilled workers is PKR 15,000 per month (USD 106).  In Punjab, it is PKR 16,500 per month (USD 118), while in Baluchistan PKR 14,000 per month (USD 100).  Legal protections for laborers are also uneven across provinces, and implementation of labor laws is weak nationwide.  Lahore inspectorates have inadequate resources, which lead to inadequate frequency and quality of labor inspections.  On January 23, 2019, the Punjab Provincial Assembly passed the Punjab Domestic Workers Act 2019.  The law prohibits the employment of children under age 15 as domestic workers, and stipulates that children between 15 and 18 may only perform part-time, non-hazardous household work.  The law also mandates a series of protections and benefits, including limits to the number of hours worked weekly, and paid sick and holiday leave.  On January 25, 2017, the Sindh Provincial Assembly passed the Sindh Prohibition of Employment of Children Act, 2017.  The Senate passed the Domestic Workers (Employment Rights) Act in March 2016 (http://www.senate.gov.pk/uploads/documents/1390294147_766.pdf ), but the bill has not progressed in the National Assembly.  An amendment to the federal Employment of Children Act, 1991, which would raise the minimum age of employment to sixteen, has been pending in the National Assembly since January 2016.

According to Pakistan’s most recent labor force survey (conducted 2017-2018), the civilian workforce consists of approximately 65.5 million workers.  Women are extremely under-represented in the labor force.  The survey estimated overall labor participation at approximately 45 percent, with male participation at 68 percent and female participation at 20 percent.  The largest percentage of the labor force works in the agricultural sector (38.5 percent), followed by the services (38 percent), and industry/manufacturing (16 percent) sectors.  The official unemployment rate continued to hover at around 6 percent, but the figure is likely significantly higher for youth.  In 2018, the UN Population Fund estimated that 29 percent of Pakistan’s population was between the ages of 10 and 24 and according to 2017-18 labor force survey estimates unemployment for 15 to 24 year old was 10.5 percent.

Pakistan is a labor exporter, particularly to Gulf Cooperation Council (GCC) countries.  According to Pakistan’s Bureau of Emigration and Overseas Employment’s 2018 “Export of Manpower Analysis,” the bureau had registered more than 10.5 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries.  Pakistanis working overseas sent more than USD 19 billion in remittances each year between 2015 and 2018.

Pakistani government contacts say their workforce is insufficiently skilled.  Federal and provincial government initiatives such as the National Vocational and Technical Training Commission and the Punjab government’s Technical Education and Vocational Training Authority aim to increase the employability of the Pakistani workforce.  However, the ILO’s 2016-2020 Pakistan Decent Work Country Programme notes that “Neither a comprehensive national policy nor coherent provincial policies for skills and entrepreneurship development are being applied.”

The ILO’s 2016-2020 Pakistan Decent Work Country Program notes that “a small fraction of vulnerable workers are covered by social security in one form or another, while access to comprehensive social protection systems is also limited.”  The ILO’s 2014 Decent Work Country Profile states that in 2013, only 9.4 percent of the economically active population – excluding public sector employees – were contributing to formal social security systems such as old age, survivors’, and disability pensions.

Freedom of association is guaranteed under article 17 of Pakistan’s constitution.  However, the ILO indicates that the Pakistani state and employers have used “disabling legislation and repressive tactics” to make union formation and collective bargaining “extremely difficult.”  The Pakistan Institute of Labour Education and Research in its 2015 “Status of Labour Rights in Pakistan” noted that according to non-official data, there were 949 registered trade unions with a total membership of 1,865,141 – approximately four percent of the total estimated labor force.  Provincial labor departments are responsible for managing trade union and industrial labor disputes.  Each province has its own industrial relations legislation, and each has labor courts to adjudicate disputes.  Public sector workers, such as teachers and public health workers, have spearheaded recent strikes.

The ILO’s 2016-2020 Pakistan Decent Work Country Programme states that “exploitative labour practices in the form of child and bonded labour remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labour, worst forms of child labour, or forced labour.”  The report also identifies weak compliance with, and enforcement of, labor laws and regulations as contributing to poor working conditions – including unhealthy and unsafe workplaces –and the erosion of worker rights.

The Balochistan government, in collaboration with ILO, supported tripartite consultations regarding the Balochistan Prohibition of Employment of Children Bill.  The draft legislation prohibits employment of children in 39 worst forms of labor or hazardous labor, including domestic labor.  Negotiations were ongoing as of March 2018, and NGO and international organization contacts said they expected the Provincial Assembly to enact the law in 2018.

Pakistan is a Generalized System of Preferences beneficiary, which requires labor standards to be upheld.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) maintains an active portfolio of projects worth USD 352.7 million in Pakistan, including new investments in microfinance and hospital care in rural Pakistan.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $299,099 2017 $304,952 https://data.worldbank.org/country/pakistan 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $136 2017 $518 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Host country’s FDI in the United States ($M USD, stock positions) 2018 $27 2017 $224 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP 2018 1.3% 2017 14.1% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx 

* Source for Host Country Data: All host country statistical data used from State Bank of Pakistan which publishes data on a monthly basis.


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $42,447 100% Total Outward $1,928 100%
United Kingdom $12,378 29.2% United Arab Emirates $487 25.3%
Switzerland $6,221 14.7% Bangladesh $211 10.9%
Netherlands $3,891 9.2% United Kingdom $184 9.5%
China,P.R. Mainland $2,972 7% Bahrain $145 7.5%
Japan $2,065 4.9% Kenya $80 4.1%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $462.5 100% All Countries $151.8 100% All Countries $310.7 100%
Saudi Arabia $126.6 27.4% Saudi Arabia $121.2 79.8% UAE $107.9 34.7%
UAE $108.5 23.5% United Kingdom $10.1 6.6% USA $71.2 22.9%
USA $78.1 16.9% British Virgin Islands $9.6 6.3% Indonesia $39.4 12.7%
Indonesia $39.4 8.5% USA $6.9 4.5% Oman $26.6 8.6%
Oman $26.6 5.8% Luxemburg $1.03 0.68% Qatar $14.8 4.8%

14. Contact for More Information

Christopher Elms
Economic Officer
U.S. Embassy Islamabad
Diplomatic Enclave, Ramna 5
Islamabad, Pakistan
Phone: (+92) 051-201-4000
Email: ElmsC@state.gov

Thailand

Executive Summary

Thailand, the second largest economy in Association of Southeast Asian Nations (ASEAN) after Indonesia, is an upper middle-income country with pro-investment policies and well-developed infrastructure. The interim military coup government held elections on March 24, 2019 and 2014 coup leader General Prayut Chan-o-cha was elected by Parliament as Prime Minister on June 5.   Thailand celebrated the coronation of King Maha Vajiralongkorn May 4-6, 2019, further stabilizing the country. Despite some political uncertainty, Thailand continues to encourage foreign direct investment as a means of promoting economic development, employment, and technology transfer. In recent decades, Thailand has been a major destination for foreign direct investment, and hundreds of U.S. companies have invested in Thailand successfully. Thailand continues to encourage investment from all countries and seeks to avoid dependence on any one country as a source of investment.

The Foreign Business Act (FBA) governs most investment activity by non-Thai nationals. Many U.S. businesses also enjoy investment benefits through the U.S.-Thai Treaty of Amity and Economic Relations, signed in 1833 and updated in 1966. The Treaty allows U.S. citizens and U.S. majority-owned businesses incorporated in the United States or Thailand to engage in business on the same basis as Thai companies (national treatment) and exempts them from most FBA restrictions on foreign investment, although the Treaty excludes some types of business.  Notwithstanding their Treaty rights, many U.S. investors choose to form joint ventures with Thai partners who hold a majority stake in the company, leveraging their partner’s knowledge of the Thai economy and local regulations.

The Thai government maintains a regulatory framework that broadly encourages investment, though the process of rule-making and interpretation is not always transparent or predictable. Government policies generally do not restrict the free flow of financial resources to support product and factor markets, and credit is generally allocated on market terms rather than by directed lending.

The Board of Investment (BOI) is Thailand’s principal investment promotion authority. The BOI offers business support and investment incentives uniformly to qualified domestic and foreign investors through clearly articulated application procedures. Investment incentives include both tax and non-tax privileges.

The government launched the Eastern Economic Corridor (EEC) development plan in 2017. The EEC is a part of the “Thailand 4.0” economic development strategy introduced in 2016. Many planned infrastructural projects, such as high-speed trains, U-Tapao Airport commercialization, and Laem Chabang Port expansion, could provide opportunities for investments, and good and services support. Thailand 4.0 offers to incentives for investments in ten “new” targeted industries, namely advanced robotics, digital technology, integrated aviation, medical, biofuels/biochemical, defense manufacturing, and human resource development.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 36/ 99 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2018 27 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 44 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 15,006 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 5,950 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Thailand continues to welcome investment from all countries and seeks to avoid dependence on any one country as a source of investment. The FBA prescribes a wide range of business that may not be conducted by foreigners unless a relevant license has been obtained or an exemption applies. The term “foreigner” includes Thai-registered companies in which half or more of the capital is held by non-Thai individuals, foreign-registered companies, and Thai-registered companies that are themselves majority foreign-owned.  BOI, Thailand’s investment promotion agency, assists Thai and foreign investors to start and conduct businesses in targeted economic sectors by offering both tax and non-tax incentives.

Limits on Foreign Control and Right to Private Ownership and Establishment

Various Thai laws set forth foreign-ownership restrictions in certain sectors, primarily in services such as banking, insurance, and telecommunications. The FBA details the types of business activities reserved for Thai nationals. Foreign investment in those businesses must comprise less than 50 percent of share capital, unless specially permitted or otherwise exempt.

The following three lists detail restricted businesses for foreigners:

List 1. This contains activities non-nationals are prohibited from engaging in, including:  newspaper and radio broadcasting stations and businesses; rice and livestock farming; forestry and timber processing from a natural forest; fishery in Thai territorial waters and specific economic zones; extraction of Thai medicinal herbs; trading and auctioning of antique objects or objects of historical value from Thailand; making or casting of Buddha images and monk alms bowls; and land trading.

List 2. This contains activities related to national safety or security, arts and culture, traditional industries, folk handicrafts, natural resources, and the environment. Restrictions apply to the production, sale and maintenance of firearms and armaments; domestic transportation by land, water, and air; trading of Thai antiques or art objects; mining, including rock blasting and rock crushing; and timber processing for production of furniture and utensils. A foreign majority-owned company can engage in List 2 activities if Thai nationals or legal persons hold not less than 40 percent of the total shares and the number of Thai directors is not less than two-fifths of the total number of directors.

List 3. Restricted businesses in this list include:  accounting, legal, architectural, and engineering services; retail and wholesale; advertising businesses; hotels; guided touring; selling food and beverages; and other service-sector businesses. A foreign company can engage in List 3 activities if a majority of the limited company’s shares are held by Thai nationals. Any company with a majority of foreign shareholders (more than 50 percent) cannot engage in List 3 activities unless it receives an exception from the Ministry of Commerce under its Foreign Business License (FBL) application.

Thailand does not maintain an investment screening mechanism, but investors can receive additional incentives/privileges if they invest in priority areas, such as high-technology industries. Investors should contact the Board of Investment [https://www.boi.go.th/index.php?page=index  ] for the latest information on specific investment incentives.

The U.S. Commercial Service, U.S. Embassy Bangkok, is responsible for issuing a certification letter to confirm that a U.S. company is qualified to apply for benefits under the Treaty of Amity. The applicant must first obtain documents verifying that the company has been registered in compliance with Thai law. Upon receipt of the required documents, the U.S. Commercial Service office will then certify to the Foreign Administration Division, Department of Business Development, Ministry of Commerce (MOC) that the applicant is seeking to register an American-owned and managed company or that the applicant is an American citizen and is therefore entitled to national treatment under the provisions of the Treaty. For more information on how to apply for benefits under the Treaty of Amity, please e-mail: ktantisa@trade.gov.

Other Investment Policy Reviews

The World Trade Organization conducted a Trade Policy Review of Thailand in November 2015https://www.wto.org/english/tratop_e/tpr_e/tp426_e.htm  . The next review is scheduled for October 2020.

Business Facilitation

The MOC’s Department of Business Development (DBD) is generally responsible for business registration, which can be performed online or manually. A legal requirement that documentation must be submitted in Thai language has caused foreign entities to spend three to six months to complete the process, as they typically have to hire a law firm or consulting firm to handle their applications. Firms engaging in production activities also must register with the Ministry of Industry and the Ministry of Labor and Social Development.

To operate restricted businesses as defined by the FBA’s List 2 and 3, non-Thai entities must obtain a foreign business license, approved by the Council of Ministers (Cabinet) and/or Director-General of the MOC’s Department of Business Development, depending on the business category.

Effective June 9, 2017, the MOC removed certain business categories from FBA’s Annex 3 list. Businesses no longer subject to restrictions include regional office services and contractual services provided to government bodies and state-owned enterprises.

American investors who wish to take majority shares or wholly own businesses under FBA’s Annex 3 list may apply for protection under the U.S.-Thai Treaty of Amity. https://2016.export.gov/thailand/treaty/index.asp#P5_233  

Americans planning to invest in Thailand are advised to obtain qualified legal advice, especially considering Thai business regulations are governed predominantly by criminal, not civil, law. Foreigners are rarely jailed for improper business activities, but violations of business regulations can carry heavy criminal penalties. Thailand has an independent judiciary and government authorities are generally not permitted to interfere in the court system once a case is in process.

In March 2019, the MOC’s Department of Business Development completed an annual report on suggestions for FBA changes, particularly the possible removal of certain service businesses from FBA’s List 3.  The report is pending the Cabinet’s review, which is expected to take place after a new government assumes office.

A company is required to have registered capital of two million Thai baht per foreign employee in order to obtain work permits. Foreign employees must enter the country on a non-immigrant visa and then submit work permit applications directly to the Department of Labor. Application processing takes approximately one week. For more information on Thailand visas, please refer to http://www.mfa.go.th/main/en/services/4908/15388-Non-Immigrant-Visa- percent22B percent22-for-Business-and.html  .

In February 2018, the Thai government launched a Smart Visa program for foreigners with expertise in specialized technologies in ten targeted industries. Under this program, foreigners can be granted a maximum four-year visa to work in Thailand without having to obtain a work permit and can enjoy relaxed immigration rules for their spouses and children. More information is available at https://www.boi.go.th/index.php?page=detail_smart_visa&language=en.

Outward Investment

Thai companies are expanding and investing overseas, especially in neighboring ASEAN countries to take advantage of lower production costs, but also in the United States, Europe and Asia. A stronger domestic currency, rising cash holdings, and subdued domestic growth are helping to drive outward investment. Food, agro-industry, and chemical sectors account for the main share of outward flows. Thai corporate laws allow outbound investments in the form of an independent affiliate (foreign company), as a branch of a Thai legal entity, or by a financial investment abroad from a Thai company. BOI and the MOC’s Department of International Trade Promotion (DITP) share responsibility for promoting outward investment, with BOI focused on outward investment in leading economies and DITP covering smaller markets.

2. Bilateral Investment Agreements and Taxation Treaties

The 1966 iteration of the U.S.-Thai Treaty of Amity and Economic Relations allows U.S. citizens, and U.S. majority-owned businesses incorporated in the United States or Thailand, to engage in business on the same basis as Thai companies (national treatment). However, the FBA applies restrictions to U.S. investment in the following sectors:  communications; transportation; exploitation of land and other natural resources; and domestic trade in agricultural products.

In October 2002, the United States and Thailand signed a bilateral Trade and Investment Framework Agreement (TIFA), which established a forum to discuss bilateral trade and investment issues, such as intellectual property rights, customs, market-access barriers, and other areas of mutual concern.

Thailand has bilateral investment treaties with Argentina, Bahrain, Bangladesh, Belgium-Luxembourg Economic Union, Bulgaria, Cambodia, Canada, China, Croatia, Czech Republic, Egypt, Finland, Germany, Hong Kong, Hungary, Indonesia, Israel, Jordan, Democratic People’s Republic of Korea, Republic of Korea, Lao People’s Democratic Republic, Myanmar, Netherlands, Peru, Philippines, Poland, Romania, Russian Federation (signed, not in force), Slovenia, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan (signed, not in force), Turkey, United Arab Emirates, United Kingdom, Vietnam, and Zimbabwe (signed, not in force). Thailand is a member of the Regional Comprehensive Economic Partnership (RCEP), currently under negotiation.  Thailand is also preparing its application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force on December 30, 2018.

Thailand belongs to the 10-member Association of Southeast Asian Nations (ASEAN), a regional free-trade and economic bloc comprising a total population of 600 million. ASEAN has free trade agreements with Australia, New Zealand, China, India, Korea, and Hong Kong. ASEAN also has a comprehensive economic partnership with Japan and is pursuing FTA negotiations with the EU, Pakistan, and Canada.

Thailand and the United States concluded a bilateral tax treaty in 1996. Thailand signed the U.S.-Thailand Foreign Account Tax Compliance Act (FATCA) on March 4, 2016. Implementing legislation for FATCA, the Act on the Agreement between the Government of the United States of America and the Government of the Kingdom of Thailand to Improve International Tax Compliance and to Implement FATCA, BE 2560, went into effect in October 2017.

3. Legal Regime

Transparency of the Regulatory System

On March 24, Thailand held its first election since a military-led coup in May 2014. Election results are expected on or before May 9, with formation of a government to follow.

Under the military junta government, also known as the National Council for Peace and Order (NCPO), line ministries have drafted laws with little or no input from stakeholders, particularly international investors. In some cases, laws were passed quickly through the National Legislative Assembly, largely viewed as a “rubber stamp” legislature; in other cases, ministries have issued sudden notifications relying on the Prime Minister’s authority under Article 44 of the interim constitution, which empowers the NCPO leader to issue any order “for the sake of the reforms in any field, the promotion of love and harmony amongst the people in the nation, or the prevention, abatement or suppression of any act detrimental to national order or security, royal throne, national economy or public administration, whether the act occurs inside or outside the kingdom.” Such orders are deemed “lawful, constitutional and final.”

Foreign investors have, on occasion, expressed frustration that draft regulations are not made public until they are finalized, and that comments they submit on draft regulations they do see are not taken into consideration. Non-governmental organizations report, however, they are actively consulted by the government on policy, especially within the health sector, for example on policies related to pharmaceuticals, alcohol, infant formula, and meat imports, as well as on intellectual property policies. In other areas, such as digital and cybersecurity laws, there have been instances in which public outcry over leaked government documents has led to withdrawal and review of proposed legislation.

U.S. businesses have repeatedly expressed concern about the lack of transparency of the Thai customs regime, the significant discretionary authority exercised by Customs Department officials, and a system of giving rewards to officials and non-officials for seized goods based on a percentage of their sales price. The U.S. government and private sector have expressed concern about the inconsistent application of Thailand’s transaction valuation methodology and repeated use of arbitrary values by the Customs Department. Thailand’s new Customs Act, which entered into force on November 13, 2017, is a moderate step forward. The Act removed the Customs Department Director General’s authority and discretion to increase the Customs value of imports, and reduced the percentage of remuneration awarded to officials and non-officials from 55 percent to 40 percent of the sale price of seized goods (or of the fine amount). While a welcome development, reduction of this remuneration is insufficient to remove the personal incentives given Customs officials to seize goods and to address the conflicts of interest the system entails.

Consistent and predictable enforcement of government regulations remains problematic for investment in Thailand.   In 2017, the Thai government initiated a policy to cut down on red tape, licenses, and permits in order to encourage economic growth. The policy focused on reducing and amending certain outdated regulations in order to improve Thailand’s ranking on the World Bank “Ease of Doing Business” report. The policy reviewed national license and permit requirements, with the aim of eliminating redundant licenses and streamlining complex procedures for starting new businesses.

Gratuity payments to civil servants responsible for regulatory oversight and enforcement remain a common practice. Firms that refuse to make such payments can be placed at a competitive disadvantage when compared to other firms in the same field that do engage in such practices.

The Royal Thai Government Gazette (www.ratchakitcha.soc.go.th  ) is Thailand’s public journal of the country’s centralized online location of laws, as well as regulation notifications.

International Regulatory Considerations

While Thailand is a member of the World Trade Organization (WTO) and notifies most draft technical regulations to the Technical Barriers to Trade (TBT) Committee and the Sanitary and Phytosantitary Measures Committee, the country does not always follow WTO or other international standard-setting norms or guidance, preferring to set its own standards in many cases. In October 2015, the country ratified the WTO Trade Facilitation Agreement, which came into effect in February 2017. On March 7, 2018, the Thai Ambassador to the WTO was elected unanimously by 164 WTO members to serve as Chair of the WTO Dispute Settlement Body.

Legal System and Judicial Independence

Thailand has a civil code, commercial code, and a bankruptcy law. Monetary judgments are calculated at the market exchange rate. Decisions of foreign courts are not accepted or enforceable in Thai courts. Disputes such as the enforcement of property or contract rights have generally been resolved in Thai courts. Thailand has an independent judiciary that is generally effective in enforcing property and contractual rights. The legal process is slow in practice, and litigants or third parties sometimes influence judgments through extra-legal means.

There are three levels to the judicial system in Thailand:  the Court of First Instance, which handles most matters at inception; the Court of Appeals; and the Supreme Court. There are also specialized courts, such as the Labor Court, Family Court, Tax Court, the Central Intellectual Property and International Trade Court, and the Bankruptcy Court.

The Specialized Appeal Courts handles appeals from specialized courts. The Supreme Court has discretion whether to take a case that has been decided by the Specialized Appeal Court. If the Supreme Court decides not to take up a case, the Specialized Appeal Court decision stands.

Laws and Regulations on Foreign Direct Investment

The Foreign Business Act (FBA) governs most investment activity by non-Thai nationals. Foreign investment in most service sectors is limited to 49 percent ownership. Other key laws governing foreign investment are the Alien Employment Act (1978) and the Investment Promotion Act (1977). Many U.S. businesses enjoy investment benefits through the U.S.-Thailand Treaty of Amity and Economic Relations.

The 2007 Financial Institutions Business Act unified the legal framework and strengthened the Bank of Thailand’s (the country’s central bank) supervisory and enforcement powers. The Act allows the Bank of Thailand to raise foreign ownership limits for existing local banks from 25 percent to 49 percent on a case-by-case basis. The Minister of Finance can authorize foreign ownership exceeding 49 percent if recommended by the central bank. Details are available athttps://www.bot.or.th/English/AboutBOT/LawsAndRegulations/
SiteAssets/Law_E24_Institution_Sep2011.pdf
 
.

Apart from acquiring shares of existing local banks, foreign banks can enter the Thai banking system by obtaining new licenses, issued by the central bank and the Ministry of Finance. The 2008 Life Insurance Act and the 2008 Non-Life Insurance Act apply a 25 percent cap on foreign ownership of insurance companies and on foreign boards of directors. However, in January 2016 the Office of the Insurance Commission (OIC), the primary insurance industry regulator, notified that any Thai life or non-life insurance company wishing to have one or more foreigners hold more than 25 percent (but no more than 49 percent) of its total voting shares, or to have foreigners comprise more than a quarter (but less than half) of its total directors, may apply to the OIC for approval. Any foreign national wishing to hold more than 10 percent of the voting shares in an insurance company must seek OIC approval. With approval, a foreign national can acquire up to 49 percent of the voting shares.

Any foreign shareholder holding more than ten percent of the voting shares prior to the effective date of the notification is grandfathered in and may maintain the current shareholding, but must obtain OIC approval to increase it.  Finally, the Finance Minister, with OIC’s positive recommendation, has discretion to permit greater than 49 percent foreign ownership and/or a majority of foreign directors, when the operation of the insurance company may cause loss to insured parties or to the public.

For information on Thailand’s “One Start One Stop” investment center, please visit: http://osos.boi.go.th  . Investors in Thailand can visit the physical office, located on the 18th floor of Chamchuri Square on Rama 4/Phayathai Road in Bangkok.

Competition and Anti-Trust Laws

Thailand enacted an updated version of the Trade Competition Act on October 5, 2017. The updated Act covers all business activities, except:  state-owned enterprises exempted by law; government policies related to national security, public benefit, common interest and public utility; cooperatives, agricultural and cooperative groups, government agencies, and other enterprises exempted by the law.

The Office of Trade Competition Commission (OTCC) is an independent agency and the main enforcer of the Trade Competition Act. The OTCC, comprised of seven members nominated by a selection committee and endorsed by the Cabinet, advises the government on issuance of relevant regulations, ensures fair and free trade practices, investigates cases and complaints of unfair trade, and pursues criminal and disciplinary actions against those found guilty of unfair trade practices stipulated in the law. The law focuses on unlawful exercise of market dominance; mergers or collusion that could lead to monopoly, unfair competition and restricting competition; and unfair trade practices. Merger control thresholds and additional details will be provided in notifications and regulations to be issued at a later date.

The Act broadens the definition of a business operator to include affiliates and group companies, and broadens the liability of directors and management, subjecting them to criminal and administrative sanctions if their actions (or omissions) resulted in violations. The Act also provides more details about penalties in cases involving administrative court or criminal court actions. The amended Act has been noted as an improvement over the prior legislation and a step towards Thailand’s adoption of international standards in this area.

The government has authority to control the price of specific products under the Price of Goods and Services Act. The MOC’s Department of Internal Trade administers the law and interacts with affected companies, though the Committee on Prices of Goods and Services makes final decisions on products to add or remove from price controls. As of January 2019, the MOC increased the number of controlled commodities and services to 54 from 53 the previous year. Aside from these controlled commodities, raising prices of consumer products is prohibited without first notifying the Committee. The government uses its controlling stakes in major suppliers of products and services, such as Thai Airways and PTT Public Company Limited, to influence prices in the market. Thailand has extensive environmental-protection legislation, including the National Environmental Quality Act, the Hazardous Substances Act, and the Factories Act. Food purity and drug efficacy are controlled and regulated by the Thai Food and Drug Administration (with authority similar to its U.S. counterpart). The Ministry of Labor sets and administers labor and employment standards.

Expropriation and Compensation

Private property can be expropriated for public purposes in accordance with Thai law, which provides for due process and compensation. This process is seldom invoked and has been principally confined to real estate owned by Thai nationals and required for public works projects. In the past year, U.S. firms have not reported problems with property appropriation in Thailand.

Dispute Settlement

ICSID Convention and New York Convention

Thailand is a signatory to the New York Convention and enacted its own rules governing conciliation and arbitration procedures in the Arbitration Act of 2002. Thailand signed the Convention on the Settlement of Investment Disputes in 1985, but has not yet ratified it.

Investor-State Dispute Settlement

There have been several notable cases of investor-state disputes in the last fifteen years, but none involved U.S. companies. Currently, Thailand is engaged in a dispute with Australian firm Kingsgate Consolidated Limited over the government’s invocation of special powers to shut down a gold mine in early 2017 because of environmental damage and conflicts with the local population. Kingsgate, a major shareholder of the operator of the disputed mine, claimed the Thai government violated the Australia-Thailand Free Trade Agreement and commenced international arbitration proceedings against the country to recover losses incurred from the closure. The process is still continuing as of May 2019.

International Commercial Arbitration and Foreign Courts

Thailand’s Arbitration Act of 2002, modeled in part after the UNCITRAL Model Law, governs domestic and international arbitration proceedings. The Act states that “in cases where an arbitral award was made in a foreign country, the award shall be enforced by the competent court only if it is subject to an international convention, treaty, or agreement to which Thailand is a party.” The Thai Arbitration Institute (TAI) of the Alternative Dispute Resolution Office, Office of the Judiciary, and the Office of the Arbitration Tribunal of the Board of Trade of Thailand provide arbitration services for proceedings held in Thailand. In 2017, TAI adopted new rules aimed at addressing weaknesses in Thailand’s arbitration process. The new rules:  empower TAI to appoint arbitrators when any of the parties in dispute fails to do so; establish a 180-day duration for arbitration procedures; and mandate issuance of a final award within 30 days of the closure of pleadings.

An amendment to the Arbitration Act, which aims to allow foreign arbitrators to take part in cases involving foreign parties, was approved by the National Legislative Assembly in January 2019. As of May 2019, the new version of this Act is awaiting royal endorsement, after which it will be published in the Royal Gazette; both steps must occur before it enters into force. In addition, the semi-public Thailand Arbitration Center offers mediation and arbitration for civil and commercial disputes. Under very limited circumstances, a court can set aside an arbitration award. Thailand does not have a bilateral investment treaty or a free trade agreement with the United States.

Bankruptcy Regulations

Thailand’s bankruptcy law allows for corporate restructuring similar to U.S. Chapter 11 and does not criminalize bankruptcy. While bankruptcy is under consideration, creditors can request the following ex parte applications from the Bankruptcy Court:  an examination by the receiver of all the debtor’s assets and/or that the debtor attend questioning on the existence of assets; a requirement that the debtor provide satisfactory security to the court; and immediate seizure of the debtor’s assets and/or evidence in order to prevent the loss or destruction of such items.

The law stipulates that all applications for repayment must be made within one month after the Bankruptcy Court publishes the appointment of an official receiver. If a creditor eligible for repayment does not apply within this period, he forfeits his right to receive payment or the court may cancel the order to reorganize the business. If any person opposes a filing, the receiver shall investigate the matter and approve, partially approve, or dismiss the application. Any objections to the orders issued by the receiver may be filed with the court within 14 days after learning of the issued order.

The National Credit Bureau of Thailand (NCB) provides the financial services industry with information on consumers and businesses. In May 2018, the World Bank’s Doing Business Report ranked Thailand 24th out of 190 countries on resolving insolvency.

4. Industrial Policies

Investment Incentives

The Board of Investment is Thailand’s central investment promotion authority. BOI offers investment incentives to qualified domestic and foreign investors based on clear application procedures. To upgrade the country’s technological capacity, the BOI presently gives more weight to applications in high-tech, innovative, and sustainable industries, such as digital technology, “smart agriculture” and biotechnology, aviation and logistics, medical and wellness tourism, and other high-value services.

Two of the most significant privileges offered by the BOI for promoted projects are:

  • Tax privileges, such as corporate income tax exemptions, and tariff reductions or exemptions on the import of machinery and/or imported raw materials used in the investment.
  • Nontax privileges, such as permission to own land, permission to bring foreign experts to work on the promoted projects, exemptions on foreign ownership limitations of companies, and exemptions from work permit and visa rules.

Thailand’s flagship investment zone, the “Eastern Economic Corridor (EEC),” spans the provinces of Chachoengsao, Chonburi, and Rayong with a combined area of 5,129 square miles. The EEC leverages the adjacent Eastern Seaboard industrial area that has been an investment destination for more than 30 years. The Thai government aims to establish the EEC as a primary investment and infrastructure hub in ASEAN, serving as a central gateway to east and south Asia. Among the EEC development projects are:  smart cities; an innovation district (EECi); a digital park (EECd); an aerotropolis (EEC-A); and other state-of-the-art facilities to help promote EEC’s following targeted industries:

  • Next-generation automotives
  • Intelligent electronics
  • Advanced agriculture and biotechnology
  • Food processing
  • Tourism
  • Advance robotics and automation
  • Integrated aviation industry
  • Medical hub and total healthcare services
  • Biofuels and biochemicals
  • Digital technology
  • Defense industry
  • Human resource development

The EEC Act provides investment incentives and privileges. Investors will be able to obtain long-term land leases of 99 years (with an initial lease of up to 50 years and a renewal of up to 49 years). The public-private partnership approval process is shortened to approximately nine months. The BOI will offer corporate income tax exemptions of up to 13 years for strategic projects in the EEC area. Foreign experts who work in the EEC will be subject to a maximum personal income tax rate of 17 percent; a 15 percent personal income tax rate will apply to executives whose companies have International Business Centers in the EEC. Investment projects with a significant R&D, innovation, or human resource development component may be eligible for additional grants and incentives. Moreover, grants will be provided to support targeted technology development under the Competitive Enhancement Act. There will be a one-stop service to expedite multiple business processes for investors.

On March 26, 2019, the Thai Cabinet approved Royal Decrees cancelling grandfathered tax incentives under former incentive regimes for foreign investors who establish:  regional operating headquarters; international headquarters (including a treasury center); and international trading centers. The repeal will become effective June 1, 2019 for corporate income tax incentives and effective January 1, 2020 for individual income tax incentives.  The Ministry of Finance (MOF) asserts this measure is in response to a 2017 OECD report (2017 Progress Report on Preferential Regimes (Inclusive Framework on Base Erosion and Profit Shifting (BEPS) 2: Action 5); the report labelled Thailand’s regional/international headquarters and trading and treasury hub regimes as harmful tax practices. MOF also indicated its  actions will ensure Thailand will not be classified as ”Potentially Harmful” or ”Actually Harmful” by the Forum on Harmful Tax Practices (FHTP) and BEPS. The Thai government has announced current beneficiaries of the suspended regimes will be able to transition into a new scheme, the “International Business Center” (IBC) investment incentive program, provided the applicant meets the IBC regime’s to-be-announced conditions.

For additional information, contact the Thai Board of Investment, 555 Vibhavadi-Rangsit Road, Chatuchak, Bangkok 10900. Tel: 0-2553-8111. Website: www.boi.go.th  .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Industrial Estate Authority of Thailand (IEAT), a state-enterprise under the Ministry of Industry, has established a network of industrial estates in Thailand, including Laem Chabang Industrial Estate in Chonburi Province (eastern) and Map Ta Phut Industrial Estate in Rayong Province (eastern). Foreign-owned firms generally have the same investment opportunities in the industrial zones as Thai entities, but the IEAT Act requires that in the case of foreign-owned firms, the IEAT Committee must consider and approve the amount of space/land that such firms plan to buy or lease in industrial estates. In practice, there is no record of disapproval for requested land. Private developers are heavily involved in the development of these estates. The IEAT currently operates 9 estates, plus 41 more in conjunction with the private sector, in 15 provinces nationwide. Private-sector developers operate over 50 industrial estates, most of which have received promotion privileges from the Board of Investment.

The IEAT has established 12 special IEAT Free Zones reserved for industries manufacturing for export only. Businesses may import raw materials into and export finished products from these zones free of duty (including value added tax). These zones are located within industrial estates and many have customs facilities to speed processing. The free trade zones are located in Chonburi, Lampun, Pichit, Songkhla, Samut Prakarn, Bangkok (at Lad Krabang), Ayuddhya, and Chachoengsao. In addition to these zones, factory owners may apply for permission to establish a bonded warehouse within their premises to which raw materials, used exclusively in the production of products for export, may be imported duty free.

Thailand is focusing on improving trade and investment with neighboring countries. It is therefore establishing Special Economic Zones (SEZs) in ten provinces bordering neighboring countries e.g., Tak, Nong Khai, Mukdahan, Sa Kaeo, Trad, Narathiwat, Chiang Rai, Nakhon Phanom, and Kanchanaburi. Business sectors and industries that might benefit from tax and non-tax incentives offered in the SEZs include logistics, warehouses near border areas, distribution, services, tourism, labor-intensive factories, and manufacturers using raw materials from neighboring countries.

Performance and Data Localization Requirements

In 2018, Thailand enacted a Royal Decree on Foreign Worker Management (no.2), which replaced the Foreign Employment Act and the Royal Decree on the Management of Migrant Employment, to manage the employment of foreigners, regardless of industry, in a more systematic fashion. The new decree eliminates mandatory prison time for undocumented workers. It also narrows the range of penalties from a minimum of USD 157 to a maximum of USD 1,571 (THB 5,000-50,000) (compared to USD 63 to USD 3,142 (THB 2,000-100,000) under the prior law). The new decree also bans sub-contract employers from hiring migrant workers and requires employers to provide to migrant workers a copy of their employment contracts.

The decree prohibits employers and employment agencies from charging workers fees other than “personal expenses,” defined as passport fees, medical checks, and work permit fees. Employers may only deduct the actual cost of these personal expenses, and these deductions may not exceed 10 percent of any worker’s monthly salary. The law makes retention of worker documents illegal and prescribes mandatory penalties of between USD 12,517 to USD 25,142 (THB 400,000 to THB 800,000) and/or imprisonment of up to six months to employers who violate these rules. The decree also increases the grace period for migrant workers to change employers from 15 to 30 days. Employers and employment agencies are required by law to bear the cost of repatriating migrant workers back to their home country when workers resign or when their employment contract ends.

Thai law requires foreign workers to have a work permit issued by the Ministry of Labor in order to work legally in Thailand. The Ministry of Labor considers the following factors when deciding whether to issue a work permit:

  •  whether a Thai employee could perform the job;
  •  whether the foreigner is qualified for the job; and
  •  whether the job fits the present economic needs of the Kingdom.

Thai law also reserves 39 occupations for Thai workers; the Ministry of Labor will not grant work permits for foreigners to engage in these occupations, which include lawyers, architects, and civil engineers. Generally, employers must hire four Thai nationals for every one foreign employee.

Different requirements apply to companies promoted by the BOI, which typically result in greater flexibility and ease in obtaining work permits for foreign nationals. Such schemes apply equally to senior management and boards of directors. According to the Foreign Business Act, if a foreigner is the firm’s managing partner or the manager, the company is subject to the restrictions applicable to foreign businesses and the Foreign Business License application.

While the employment of foreigners in some sectors is subject to the foreign equity restrictions of the Foreign Business Act, exceptions can be granted as promotional privileges by BOI or IEAT, or, as a temporary measure, in the form of government approval issued by the Thai government. Exceptions can also be provided based on international treaties to which Thailand is a party. Under the Treaty of Amity and Economic Relations between Thailand and the United States, U.S. companies or nationals can be eligible for national treatment, allowing them, with some exceptions, to obtain the same treatment in their business dealings as Thai nationals.

The Thai government does not currently have any specific law governing “forced localization” policy, under which foreign investors must use domestic content in goods or technology, but it has encouraged such an approach through domestic preferences in procurement. While there are currently no requirements for foreign IT providers to turn over source code and/or provide access to surveillance, the Thai government in February 2019 passed new laws and regulations on cybersecurity and personal data protection that raise concerns over Thai authorities’ broad power to demand confidential and sensitive information without sufficient legal protections or a company’s ability to appeal or limit such access. IT providers have expressed concern that the new laws might place unreasonable burdens on them and have introduced new uncertainties in the technology sector. Thailand has implemented a requirement that all debit transactions processed by a domestic debit card network must use a proprietary chip. Regarding Thailand’s import permitting process for several agricultural products, such as soybean and milk, the government imposes separate domestic absorption rate requirements to purchase local products at fixed prices.

5. Protection of Property Rights

Real Property

Property rights are guaranteed by the Constitution against being condemned or nationalized without fair compensation. Thai government policy generally does not permit foreigners to own land, but there have been cases of granting official permission under certain laws or ministerial regulations for residential, business or even religious purposes. Foreigners can freely lease land, as the governing Civil and Commercial Code does not distinguish between foreign and Thai nationals in the exercise of lease rights. Foreign ownership of condominiums and buildings is also permitted under certain laws. Secured interests in property, such as mortgage and pledge, are recognized and enforced. Under Thai law, unoccupied property legally owned by foreigners or Thais may be subject to adverse possession by squatters or people who stay on that property for at least 10 years. According to the World Bank’s 2019 Doing Business report, Thailand’s Registering Property ranking rose to 66 from 68 in 2018.

Intellectual Property Rights

Thailand’s efforts to clamp down on widespread commercial IP counterfeiting and piracy have been enhanced by Prime Minister Prayut Chan-o-cha’s strong political commitment to IPR enforcement. The Prime Minister ordered the establishment of a 12-agency IPR Cabinet sub-committee and the development of a 20-year IP Roadmap as well as closer coordination among the country’s Internal Security Operations Command, law enforcement agencies, and IP rights holders. In December 2018, the National Broadcasting and Telecommunications Commission (NBTC), the country’s telecom regulator, the Royal Thai Police, and the Department of the Intellectual Property (DIP) at the Ministry of Commerce combined to set up a new “Center of Operational Policing for Thailand against Intellectual Property Violations and Crimes on the Internet Suppression” to expedite efforts to tackle online IPR violations.

Patents and Trademarks

Thailand’s patent regime generally provides protection for most inventions. The examination of patent applications through issuance of patents takes on an average of six to eight years. Patent issuance may take longer in certain technology sectors. In order to address the backlog problem, DIP hired 88 additional patent and trademark examiners over the last few years.  Additional examiners helped decrease the patent application backlog by 20 percent in 2018. As of September 2018, approximately 16,000 patent applications were pending for examination, according to DIP. With regard to trademarks, DIP takes on average 10-14 months for trademark approvals.

The Thai government is in the process of adopting an amendment to the Patent Act that would streamline the patent registration process and implement its international obligations under the Amendment of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) related to patent and public health, which Thailand ratified in January 2016.  The draft amendment is pending the legislature’s approval.

Starting in September 2017, rights owners can file for sound trademark registration, a development enabled by a July 2016 amendment of Thailand’s Trademark Act. Thailand acceded to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (Madrid Protocol) in August 2017, and the agreement entered into effect in November 2017. The Thai government is also working on an amendment to the Patent Act to prepare Thailand for accession to the Hague Agreement Concerning the International Registration of Industrial Designs.

Copyrights

Thailand’s amended Copyright Act came into effect on March 11, 2019. Thailand is a member of the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired or Otherwise Print Disabled. Thailand deposited the instrument of accession to the Marrakesh Treaty with the World Intellectual Property Organization (WIPO) on January 28, 2019.  

In addition, Thailand is in the process of a two-phase amendment of the Copyright Act. The first phase would enhance mechanisms to protect copyrights in the digital environment and prepare Thailand for accession to the WIPO Copyright Treaty; the second phase would prepare Thailand for accession to the WIPO Performances and Phonograms Treaty. The first-phase draft is under review by the Council of State, while the second phase amendment is in the drafting process.  

The Thai government amended the Computer Crime Act in 2017 to add IPR infringement as a predicate offense under Section 20, enabling IP right holders to file requests to either DIP or the Ministry of Digital Economy and Society for removal of IPR-infringing content from online computer systems or disabling of access to it. Online video providers and human rights advocates continue to voice serious concerns regarding use of the Computer Crimes Act to limit free speech and to compel internet service providers (ISP) to comply with Thai government requests to remove content or else face penalties.

Geographical Indications

Thailand’s Geographical Indications (GI) Act has been in force since April 2004. Thailand protects GIs, which identify goods by their specific geographical origins. The geographical origins identified by a GI must attribute to the reputation, qualities, or characteristics of the good. In Thailand, a registered trademark does not prevent a similar geographical name to be registered as a GI.

IP Enforcement

Thailand has provided ex-officio authority for border enforcement officials with respect to in-transit goods; set enforcement benchmarks; began monthly publishing of enforcement statistics online; and stepped up efforts to investigate IP cases. Thailand has a Court of Appeal for Specialized Cases, which hears appeals from the Central Intellectual Property and International Trade Court, including administrative appeals from DIP that already received a first instance decision from the Central Intellectual Property and International Trade Court.

In late 2017, Thailand was upgraded from the USTR Special 301 Priority Watch List, where it had been placed since 2007, to the Watch List. Currently, there are no Thai markets listed in the USTR Notorious Markets 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/  .

6. Financial Sector

Capital Markets and Portfolio Investment

The Thai government maintains a regulatory framework that broadly encourages and facilitates portfolio investment and largely avoids market-distorting support for specific sectors. The Stock Exchange of Thailand, the country’s national stock market, was set up under the Securities Exchange of Thailand Act B.E. 2535 in 1992. There is sufficient liquidity in the markets to allow investors to enter and exit sizeable positions. Government policies generally do not restrict the free flow of financial resources to support product and factor markets. The Bank of Thailand, the country’s central bank, has respected IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.

Credit is generally allocated on market terms rather than by “direct lending.” Foreign investors are not restricted from borrowing on the local market. In theory, the private sector has access to a wide variety of credit instruments, ranging from fixed term lending to overdraft protection to bills of exchange and bonds. However, the private debt market is not well developed; most corporate financing, whether for short-term working capital needs, trade financing, or project financing, requires borrowing from commercial banks or other financial institutions.

Money and Banking System

In general, a commercial bank in Thailand provides services of accepting deposits from the public, granting credit, buying and selling foreign currencies, buying and selling bills of exchange (including discounting or re-discounting, accepting, and guaranteeing bills of exchange).  Commercial banks also provide credit guarantees, payment, remittance and financial instruments for risk management, such as interest-rate derivatives and foreign-exchange derivatives. Additional business to support capital market development, such as debt and equity instruments, is allowed. A commercial bank may also provide other services, such as bank assurance and e-banking, which enhance its efficiency.

Thailand’s banking sector, with 14 domestic commercial banks, is sound and well-capitalized. As of December 2018, non-performing loan rates were low (around 2.93 percent) and the ratio of capital funds/risk assets (capital adequacy) was high (17.6 percent). Thailand’s largest commercial bank is Bangkok Bank, with assets totaling USD 96.5 billion as of December 2018. The combined assets of the five largest commercial banks totaled USD 413 billion, or 77 percent of the total assets of the Thai banking system, at the end of 2018.

Thailand’s central bank is the Bank of Thailand (BOT), which is headed by a Governor appointed for a five-year term. The BOT prints and issues banknotes and other security documents, promotes monetary stability and formulates monetary policies, manages the BOT’s assets, provides banking facilities to the government, acts as the registrar of government bonds, and provides banking facilities for financial institutions.

There are currently 11 registered foreign bank branches and four foreign bank subsidiaries operating in Thailand, including Citibank, Bank of America, and JP Morgan Chase. Foreign commercial banks can set up a branch in Thailand, once the applicant obtains a recommendation from the Bank of Thailand and a license from the Ministry of Finance. Foreign commercial bank branches are limited to three branches/ATMs and foreign commercial bank subsidiaries are limited to 20 branches and 20 off-premise ATMs per subsidiary. Foreign banks must maintain minimum capital funds of 125 million baht (USD 3.86 million at end of 2018 exchange rates) invested in government or state enterprise securities, or directly deposited in the Bank of Thailand. The number of expatriate management personnel is limited to six people at full branches, although Thai authorities frequently grant exceptions on the basis of need. There are no records of losses among banks in the past three years.

Non-residents can open and maintain foreign currency accounts without deposit and withdrawal ceilings. Any deposits in Thai Baht currency must be derived from one of the following sources:  conversion of foreign currencies; payment of goods and services; or capital transfers. Withdrawals are freely permitted, except the withdrawal of funds for credit to another non-resident person or purchase of foreign currency involving an overdraft.

Since mid-2017, the BOT has approved Thai domestic banks’ requests to develop financial innovations based on blockchain technology, but the system is being closely monitored under the BOT’s “Regulatory Sandbox guidelines.”

Thailand’s alternative financial services include cooperatives, micro-saving groups, the state village funds, and informal money lenders, who provide basic but expensive financial services to households, mostly in rural areas. These alternative financial services, with the exception of informal money lenders, are regulated by the government.

Foreign Exchange and Remittances

Foreign Exchange

There are no limitations placed on foreign investors for converting, transferring, or repatriating funds associated with an investment; however, supporting documentation is required. Any person who brings Thai Baht currency or foreign currency in or out of Thailand with aggregate amount exceeding USD 15,000 or the equivalent must declare the currency at a Customs checkpoint. Investment funds are allowed to be freely converted into any currency.

The exchange rate is generally determined by market fundamentals but is carefully scrutinized by the BOT under a managed float system. During periods of excessive capital inflows/outflows (i.e., exchange rate speculation), the central bank has stepped in to prevent extreme movements in the currency and to reduce the duration and extent of the exchange rate’s deviation from a targeted equilibrium.

Remittance Policies

Thailand imposes no limitations on the inflow or outflow of funds for remittances of profits or revenue for direct and portfolio investments. There are no time limitations on remittances.

Sovereign Wealth Funds

Thailand does not have a sovereign wealth fund and the Bank of Thailand is not pursuing the creation of such a fund. However, the International Monetary Fund has urged Thailand to create a sovereign wealth fund due to its large accumulated foreign exchange reserves (USD 205.6 billion as of December 2018.

7. State-Owned Enterprises

Thailand’s 56 state-owned enterprises (SOEs) have total assets of USD 422 billion and a combined net income of USD 8.3 billion (end of 2018 figures). They employ around 270,000 people, or 0.7 percent of the Thai labor force. Thailand’s SOEs operate primarily in service delivery, in particular in the energy, telecommunications, transportation, and financial sectors. The full list of SOEs is available at the website of the State Enterprise Policy Office under the Ministry of Finance: (www.sepo.go.th  ).

The Thai government generally defines SOEs as special agencies established by law for a particular purpose that are 100 percent owned by the government (through the Ministry of Finance as a primary shareholder). The government recognizes a second category of “limited liability companies/public companies” in which the government owns 50 percent or more of the shares. Of the 56 total SOEs, 43 are wholly-owned and 13 are majority-owned. Twelve of these companies are classed as limited liability companies. Five are publicly listed on the Stock Exchange of Thailand:  Thai Airways International Public Company Limited; Airports of Thailand Public Company Limited; PTT Public Company Limited; MCOT Public Company Limited; and Krung Thai Bank Public Company Limited. By regulation, at least one-third of SOE boards must be comprised of independent directors.

Private enterprises can compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives in most sectors, but there are some exceptions, such as fixed-line operations in the telecommunications sector.

According to officials at the State Enterprise Policy Committee (SEPO), Thai SOEs adhere to OECD guidelines on corporate governance, including guidelines relating to the state acting as an owner. Nevertheless, adherence to the OECD guidelines is not sufficient in Thailand to ensure a level playing field between SOEs and private sector enterprises, which are often disadvantaged in competing with Thai SOEs for contracts.

Generally, SOE senior management reports directly to a line minister and to SEPO. Corporate board seats are typically allocated to senior government officials or politically-affiliated individuals. The SEPO Committee purportedly tries to limit political interference in board appointments.

Privatization Program

The 1999 State Enterprise Corporatization Act provides a framework for conversion of SOEs into stock companies, and corporatization is viewed as an intermediate step toward eventual privatization. (Note: “corporatization” describes the process by which an SOE adjusts its internal structure to resemble a publicly-traded enterprise; “privatization” denotes that a majority of the SOE’s shares is sold to the public; and “partial privatization” refers to a situation in which less than half of a company’s shares are sold to the public.) Foreign investors are allowed to participate in privatizations, but restrictions are applied in certain sectors, as regulated by the FBA and the Act on Standards Qualifications for Directors and Employees of State Enterprises of 1975, as amended. However, privatizations have been on hold since 2006 largely due to strong opposition from labor unions.

A 15-member State Enterprises Policy Commission, or “superboard,” oversees reform of the country’s 56 SOEs. In March 2015, the superboard approved, in principle, the establishment of a holding firm to supervise 12 SOEs, which have been partially equitized and listed on the Stock Exchange of Thailand. The reform plan calls for SEPO to retain supervisory authority over SOEs that have been established by specific laws, including the Electricity Generating Authority of Thailand, the Metropolitan Electricity Authority, and the Provincial Electricity Authority. As of the end of 2018, the superboard is still in the process of advancing a new law that would reform SOEs and ensure transparent management decisions; however, privatization is not part of this process.

8. Responsible Business Conduct

In 2018, the United Nations Working Group on Business and Human Rights visited Thailand and commended the Thai government’s 2017 commitment to implement the UN Guiding Principles on Business and Human Rights (UNGP). Thailand does not have a National Action Plan on Responsible Business Conduct (RBC), nor does it maintain a National Contact Point (NCP) for OECD Guidelines for Multinational Enterprises. Various line ministries have taken steps to encourage RBC through integrated sustainable business practices focused on respecting human rights, environmental protection, labor relations, and financial accountability. The Ministry of Justice is currently drafting a National Action Plan on Business and Human Rights (NAP).

The Ministry of Industry’s Department of Industrial Works encourages the private sector to implement its Corporate Social Responsibility (CSR-DIW) standards as a precursor to achieving ISO 26000 standards (an international standard on CSR). In 2017, the Ministry of Industry joined the National Human Rights Committee, the Ministry of Justice, the Ministry of Foreign Affairs, the Ministry of Commerce, the Federation of Thai Industries, the Thai Bankers Association, the Thai Chamber of Commerce, and the Global Computing Network of Thailand in signing a memorandum of cooperation to advance implementation of the UNGP.

There are several local NGOs that promote and monitor RBC. Most such NGOs operate without hindrance, though a few have experienced intimidation as a result of their work monitoring civil rights issues. International NGOs continue to call on the Thai government and Thai companies with transboundary investments to act more responsibly with respect to human and labor rights.

9. Corruption

Thailand has a legal framework and a range of institutions to counter corruption. The Organic Law to Counter Corruption criminalizes corrupt practices of public officials and corporations, including active and passive bribery of public officials. The anti-corruption laws extend to family members of officials and to political parties.

Thai Procurement Regulations prohibit collusion amongst bidders. If an examination confirms allegations or suspicions of collusion among bidders, the names of those applicants must be removed from the list of competitors.

Thailand adopted its first national government procurement law in December 2016. Based on UNCITRAL model laws and the WTO Agreement on Government Procurement, the law applies to all government agencies, local authorities, and state-owned enterprises, and aims to improve transparency. Officials who violate the law are subject to 1-10 years imprisonment and/or a fine of up to USD 11,000.

Since 2010, the Thai Institute of Directors has built an anti-corruption coalition of Thailand’s largest businesses. Coalition members sign a Collective Action Against Corruption Declaration and pledge to take tangible, measurable steps to reduce corruption-related risks identified by third party certification. The Center for International Private Enterprise equipped the Thai Institute of Directors and its coalition partners with an array of tools for training and collective action.

Established in 2011, the Anti-Corruption Organization of Thailand (ACT) aims to encourage the government to create laws to reduce corruption. ACT has 51 member organizations drawn from the private, public and academic sectors. Their signature program is the “integrity pact.” Drafted by ACT and the Finance Ministry and based on a tool promoted by Transparency International, the pact forbids bribes from signatory members in bidding for government contacts. Member agencies and companies must adhere to strict transparency rules by disclosing and making easily available to the public all relevant bidding information such as the terms of reference and the cost of the project.

Thailand is a party to the UN Anti-Corruption Convention, but not the OECD Anti-Bribery Convention.

Thailand’s Witness Protection Act offers protection (to include police protection) to witnesses, including NGO employees, who are eligible for special protection measures in anti-corruption cases.

Transparency International’s Corruption Perceptions Index ranked Thailand 99th out of 180 countries in 2018. According to some studies, a cultural propensity to forgive bribes as a normal part of doing business and to equate cash payments with finders’ fees or consultants’ charges, coupled with the low salaries of civil servants, encourages officials to accept illegal inducements. U.S. executives with experience in Thailand often advise new-to market companies that it is far easier to avoid corrupt transactions from the beginning than to stop such practices once a company has been identified as willing to operate in this fashion. American firms that comply with the strict guidelines of the Foreign Corrupt Practices Act (FCPA) are able to compete successfully in Thailand. U.S. businessmen say that publicly affirming the need to comply with the FCPA helps to shield their companies from pressure to pay bribes.

Resources to Report Corruption

Contact at government agency or agencies responsible for combating corruption:

International Affairs Strategy Specialist
Office of the National Anti-Corruption Commission
361 Nonthaburi Road, Thasaai District, Amphur Muang Nonthaburi 11000, Thailand
Tel: +662-528-4800
Email: TACC@nacc.go.th

Contact at “watchdog” organization:

Dr. Mana Nimitmongkol
Secretary General
Anti-Corruption Organization of Thailand
44 Srijulsup Tower, 16th floor, Phatumwan, Bangkok 10330
Tel: +662-613-8863
Email: mana2020@yahoo.com

10. Political and Security Environment

On March 24, 2019, Thailand held its first national election since the 2014 military coup that ousted democratically elected Prime Minister Yingluck Shinawatra. On June 5, the newly-seated Parliament elected coup leader General Prayut Chan-o-cha to continue on in his role as Prime Minister. However, stark political divisions remain in the country.

Violence related to an ongoing Malay-Muslim insurgency in Thailand’s southernmost provinces has claimed more than 7,000 lives since 2004. Although the number of deaths and violent incidents has decreased year-over-year, efforts to end the ethno-nationalist insurgency have so far been unsuccessful. The government is currently engaged in peace talks with an insurgent umbrella group, but the principal insurgent faction refuses to participate. Almost all attacks have occurred in the three southernmost provinces of the country.

11. Labor Policies and Practices

In 2018, 38.4 million people were in Thailand’s formal labor pool, comprising 58 percent of the total population. Thailand’s official unemployment rates stood at 1.1 percent at the end of 2018, slightly less than 1.2 percent the previous year. Unemployment among youth (15-24 years old) is around 4.8 percent, while the rate is only 0.5 percent for adults over 25 years old. Well over half the labor force (55.3 percent) earns income in the informal sector, including through self-employment and family labor, which limits their access to social welfare programs.

Low fertility rates and an aging population, as well as a skills mismatch, is exacerbating labor shortages in many sectors. Despite provision of 15 years of universal, free education, Thailand continues to suffer from a skills mismatch that impedes innovation and economic growth. Manufacturing firms in Thailand consider the lack of skilled workers a top constraint for further investment and growth. However, as the second-largest economy in ASEAN, Thailand has an agile business sector and a large cohort of educated individuals who could increase productivity in the future. Regional income inequality and labor shortages, particularly in labor-intensive manufacturing, construction, hospitality and service sectors, have attracted millions of migrant workers, mostly from Burma, Cambodia, and Laos. In 2019, the International Organization for Migration estimated Thailand hosts 4.9 million migrant workers, or 13 percent of country’s labor force. Flows of documented migrant workers entering the country through formal work agreements, or “MOUs,” increased by 40 percent over the previous year to 442,726 in 2018. However, about two-thirds of registered migrant workers currently in Thailand initially entered the country through unauthorized channels, often without any primary identity documents from their countries of origin.

In 2018, the Thai government sought to strengthen labor migration management and increase protections for migrant workers by, first, working with neighboring source countries to make it easier for migrant workers to obtain primary identity documents and, second, registering 1.2 million previously undocumented migrant workers. Thailand is the first country in ASEAN to accede to the ILO Forced Labor Protocol (P29) and ILO Work in Fishing Convention (C188). Additional information on migrant workers issues and rights can be found in the U.S. Trafficking in Persons Report, as well as the Labor Rights chapter of the U.S. Human Rights report.

12. OPIC and Other Investment Insurance Programs

Under an agreement with the Thai government, the Overseas Private Investment Corporation (OPIC) provides debt financing, political risk insurance, and private equity capital to support U.S. investors and their investments. OPIC can provide debt financing, in the form of direct loans and loan guarantees, of up to USD 350 million per project for business investments with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others. OPIC political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment is also available for business investments in Thailand. In addition, OPIC supports five private equity funds that are eligible to invest in projects in Thailand. In all cases OPIC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount  Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $504,990  2017 $455,303  www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $16,110 2017 $15,006 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2018 $7,887 2017 $2,900 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP N/A N/A 2017 50.7% N/A

 

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $235,390 100% Total Outward $134,015 100%
Japan $86,600 37.0% China, P.R.: Hong Kong $22,127 16.5%
Singapore $32,946 14.4% Singapore $15,586 11.6%
China, P.R.: Hong Kong $21,030 8.9% Mauritius $10,480 7.8%
United States $16,110 7.3% Netherlands $9,276 6.9%
Netherlands $15,628 5.6% United States $7,887 5.9%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment:
https://www.bot.or.th/English/Statistics/EconomicAndFinancial/
Pages/StatInternationalInvestmentPosition.aspx
 

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $52,349 100% All Countries $30,095 100% All Countries $22,299 100%
Luxembourg $8,222 16% Luxembourg $7,888 26% Japan $2,604 12%
United States $7,331 14% United States $5,440 18% China, P.R. Mainland $2,557 12%
Ireland $5,108 10% Ireland $5,014 17% Laos DPR $2,094 9%
China, P.R.: Hong Kong $3,458 7% Singapore $2,512 8% United States $1,892 8%
Singapore $3,101 6% China, P.R.: Hong Kong $1,752 6% China, P.R.: Hong Kong $1,706 8%

14. Contact for More Information

U.S. Embassy Bangkok
Economic Section
BangkokEconSection@state.gov

Vietnam

Executive Summary

Vietnam continues to welcome foreign direct investment (FDI). In 2018, Vietnam attracted USD 19.1 billion of FDI, a 9.1 percent increase from 2017, while global foreign direct investment fell by nearly a fifth, according to the U.N. Conference on Trade and Development’s (UNCTAD) 2018 report. Vietnam’s 2018 GDP grew 7.08 percent, the highest rate since prior to the 2008 global financial crisis, thanks to strong FDI inflows and growth in the services and manufacturing sectors, productivity, private consumption, and exports.  

Continued strong FDI inflows are due in part to ongoing economic reforms, a young, and increasingly urbanized, population, political stability, and inexpensive labor. Despite the strong FDI inflows, significant challenges remain in the business climate, including corruption, a weak legal infrastructure and judicial system, poor intellectual property rights (IPR) enforcement, a shortage of skilled labor, restrictive labor practices, and impediments to infrastructure investment.

Examples of large investment projects approved in 2018 include a Hanoi-area “smart” residential township with USD 4.1 billion in Japanese investment; a USD 1.2 billion polypropylene factory, a liquefied natural gas (LNG) storage facility, and two electronics factories worth USD 500 million, all by Korean investors; and an additional USD 1.2 billion investment in an existing Singaporean resort.

Vietnam must continue to reform in order to maintain or boost competitiveness in the face of internal factors such as a sustained budget deficit, high debt levels, a weak domestic sector that has low linkages to the global supply chain, low productivity of state-owned enterprises (SOEs), and a financial sector burdened by non-performing loans.

The recently entered-into-force Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EV FTA), if approved, present significant potential benefits for Vietnam.  They are expected to fuel robust economic gains, in the form of more FDI, increased competitiveness of Vietnamese exports, and millions more jobs. These trends may accelerate if foreign companies relocate manufacturing facilities from China to Vietnam due to trade tensions, rising cost of Chinese labor, and China’s shift towards more high-tech industries.  Private-sector analysts predict that the electronics, textiles, shoes, and auto-parts sectors in Vietnam would benefit most.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 117 of 180 https://www.transparency.org/cpi2018
World Bank’s Doing Business Report “Ease of Doing Business” 2019 69 of 190 http://www.doingbusiness.org/en/data/exploreeconomies/vietnam
Global Innovation Index 2018 45 of 126 https://www.globalinnovationindex.org/

analysis-indicator  

U.S. FDI in partner country ($M USD, stock positions) 2017 $2,010 https://apps.bea.gov/international/factsheet/factsheet.cfm
World Bank GNI per capita 2017 $2,160 http://data.worldbank.org/

indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Vietnam continues to welcome FDI and foreign companies play an important role in the economy. According to the Government Statistics Office (GSO), FDI exports of USD 175 billion accounted for 72 percent of total exports in 2018 (compared to 47 percent in 2000).

Despite improvements in the business environment, including economic reforms intended to enhance competitiveness and productivity, Vietnam has benefited from global investors’ efforts to diversify their supply chains. Vietnam’s rankings fell in the most recent World Economic Forum Competitiveness Index (from 74/135 in 2017 to 77/140 in 2018) and World Bank Doing Business Index (from 68 in 2018 to 69 in 2019), but its raw scores improved compared to prior years. According to the 2018 Organization for Economic Cooperation and Development (OECD) Investment Policy Review, Vietnam has an “average” level of openness compared to other OECD countries, though it is second to only Singapore within ASEAN. The OECD ranked Vietnam’s openness to FDI as higher than that of South Korea, Australia, and Mexico.

Vietnam seeks to move up the global value chain by attracting FDI in sectors that will facilitate technology transfer, increase skill sets in the labor market, and improve labor productivity, specifically targeting high-tech, high value-added industries with good environmental safeguards. Assisted by the World Bank, the government is drafting a new FDI Attraction Strategy for 2030. This new strategy is intended to facilitate technology transfer and environmental protection, and will supposedly move away from tax reductions to other incentives, such as using accelerated depreciation and more flexible loss carry-forward provisions and focusing on value-added qualities instead of on sectoral categories.

Since the Prime Minister included the Provincial Competitiveness Index (PCI) as a target for improving national business competitiveness in Resolution 19 in 2014, PCI has become a major measurement for provincial economic governance policy reform. In January 2019, a new Resolution 02 also included PCI targets as a means to improve the business and investment environment in Vietnam.

Although there are foreign ownership limits (FOL), the government does not have investment laws discriminating against foreign investors; however, the government continues to favor domestic companies through various incentives. According to the OECD 2018 Investment Policy Review, SOEs account for one third of Vietnam’s gross domestic product and receive preferential treatment, including favorable access to credit and land. Regulations are often written to avoid overt conflicts and violations of bilateral or international agreements, but in reality, U.S. investors feel there is not always a level playing field in all sectors. In the 2018 Perceptions of the Business Environment Report, the American Chamber of Commerce (AmCham) stated: “Foreign investors need a level playing field, not only to attract more investment in the future, but also to maintain the investment that is already here. Frequent and retroactive changes of laws and regulations – including tax rates and policies – are significant risks for foreign investors in Vietnam.”

The Ministry of Planning and Investment (MPI) oversees an Investment Promotion Department to facilitate all foreign investments, and most of provinces and cities have investment promotion agencies. The agencies provide information, explain regulations, and offer support to investors when requested.

The semiannual Vietnam Business Forum allows for a direct dialogue between the foreign business community and government officials. The U.S.-ASEAN Business Council (USABC) also hosts multiple missions for its U.S. company members enabling direct engagement with senior government officials through frequent dialogues to try to resolve issues. In addition, the 2018 PCI noted 68.5 percent of surveyed companies stated that dialogues and business meetings with provincial authorities helped address obstacles and that they were satisfied with the way provincial regulators dealt with their concerns.  

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own businesses in Vietnam, except in six prohibited areas (illicit drugs, wildlife trading, prostitution, human trafficking, human cloning, and chemical trading). If a domestic or foreign company wants to operate in 243 provisional sectors, it must satisfy conditions in accordance with the 2014 Investment Law. Future amendments to the law are likely to narrow this list further, allowing firms to engage in more business areas. Foreign investors must negotiate on a case-by-case basis for market access in sectors that are not explicitly open under existing signed trade agreements. The government occasionally issues investment licenses on a pilot basis with time limits, or to specifically targeted investors.

Vietnam allows foreign investors to acquire full ownership of local companies, except when mentioned otherwise in international and bilateral commitments, including equity caps, mandatory domestic joint-venture partner, and investment prohibitions. For example, as specified in the Vietnam’s World Trade Organization (WTO) commitments, highly specialized and sensitive sectors (such as banking, telecommunication, and transportation) still maintain FOL, but the Prime Minister can waive these restrictions on a case-by-case basis. Vietnam also limits foreign ownership of SOEs and prohibits importation of old equipment and technologies more than 10 years old. No mechanisms disadvantage or single out U.S. investors.

Merger and acquisition (M&A) activities can be complicated if the target domestic company is operating in a restricted or prohibited sector. For example, when a foreign investor buys into a local company through an M&A transaction, it is difficult to determine which business lines the acquiring foreign company is allowed to maintain and, in many cases, the targeted company may be forced to reduce its business lines.

The 2017 Law on Technology Transfer came into effect in July 2018, along with its implementing documents Decree 76/2018/ND-CP and Circular 02/2018/TT-BKHCN. These require mandatory registration of technology transfers from a foreign country to Vietnam. This registration is separate from registration of intellectual property rights and licenses.  

Vietnam allows for five years of regulatory data protection (RDP) as part of its U.S.-Vietnam bilateral trade agreement obligations.  However, Vietnamese law requires companies to apply separately for RDP within the 12 months following receipt of market authorization for any country in the world. Specifically, decree No. 169/2018/ND-CP, effective from February 2018, tightened the regulatory process for the registration of medical devices and no longer accepted foreign classification results in Vietnam, lengthening procedural time and increasing expenses for foreign manufacturers.

Vietnamese authorities screen investment-license applications using a number of criteria, including: 1) the investor’s legal status and financial capabilities; 2) the project’s compatibility with the government’s “Master Plan” for economic and social development and projected revenue; 3) technology and expertise; 4) environmental protection; 5) plans for land-use and land-clearance compensation; 6) project incentives including tax rates, and 7) land, water, and sea surface rental fees. The decentralization of licensing authority to provincial authorities has, in some cases, streamlined the licensing process and reduced processing times. However, it has also caused considerable regional differences in procedures and interpretations of investment laws and regulations. Insufficient guidelines and unclear regulations can prompt local authorities to consult national authorities, resulting in additional delays. Furthermore, the approval process is often much longer than the timeframe mandated by laws. Many U.S. firms have successfully navigated the investment process, though a lack of transparency in the procedure for obtaining a business license can make investing riskier.

Provincial People’s Committees approve all investment projects, except the following:

  • The National Assembly must approve investment projects that:
    • have a significant environmental impact;
    • change land usage in national parks;
    • are located in protected forests larger than 50 hectares; or
    • require relocating 20,000 people or more in remote areas such as mountainous regions.
  • The Prime Minister must approve the following types of investment project proposals:
    • building airports, seaports, or casinos;
    • exploring, producing and processing oil and gas;  
    • producing tobacco;
    • possessing investment capital of more than VND 5,000 billion (USD 233 million);
    • including foreign investors in sea transportation, telecommunication or network infrastructure, forest plantation, publishing, or press; and
    • involving fully foreign-owned scientific and technology companies or organizations.

Other Investment Policy Reviews

Vietnam went through an OECD Investment Policy Review in 2018. The WTO reviewed Vietnam’s trade policy and the report is online. (https://www.wto.org/english/tratop_e/tpr_e/tp387_e.htm  ).

U.N. Conference on Trade and Development’s (UNCTAD) conducted an investment policy review in 2009. (https://unctad.org/en/pages/PublicationArchive.aspx?publicationid=521  )

Business Facilitation

Vietnam’s business environment continues to improve due to new laws that have streamlined the business registration processes.

The 2018 PCI report found that 75 percent of companies rated paperwork and procedures as simple, compared to 51 percent in 2015. Vietnam decreased duplicate and overlapping inspections with only 10 percent of companies reporting such cases in 2018, compared to 25 percent in 2015. However, many firms still felt the entry costs remain too high and 16 percent reported waiting over one month to complete all required paperwork (aside from getting a business license) to become fully legal. In addition, a 2018 AmCham position paper cited very frequent and largely unnecessary post-import audits as creating burdens for companies. Multiple U.S. companies report facing recurring and unpredictable tax audits based on assumptions or calculations not in alignment with international standards.

Vietnam’s nationwide business registration site is http://dangkykinhdoanh.gov.vn  . In addition, as a member of the UNCTAD international network of transparent investment procedures, information on Vietnam’s investment regulations can be found online (http://vietnam.eregulations.org/  ). The website provides information for foreign and national investors on administrative procedures applicable to investment and income generating operations, including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal and regulatory citations for seven major provinces. The 2019 World Bank’s Doing Business Report stated it took on average 17 days to start a business compared to 22 days in 2018. Vietnam is one of the few countries to receive a 10-star rating from UNCTAD in business registration procedures.

Outward Investment

The government does not have a clear mechanism to promote or incentivize outward investments. The majority of companies engaged in overseas investments are large SOEs, which have strong government-backed financial resources. The government does not implicitly restrict domestic investors from investing abroad. Vietnamese companies have increased investments in the oil, gas, and telecommunication sectors in various developing countries and countries with which Vietnam has close political relationships. According to a government’s most recent report, between 2011-2016, SOE PetroVietnam made USD 7 billion in outbound investments out of a total of USD 12.6 billion from all SOEs.

2. Bilateral Investment Agreements and Taxation Treaties

Vietnam maintains trade relations with more than 200 countries, and has 66 bilateral investment treaties (BITs) and 26 treaties with investment provisions. It is a party to five free trade agreements (FTAs) with ASEAN, Chile, the Eurasian Customs Union, Japan, and South Korea. As a member of ASEAN, Vietnam also is party to ASEAN FTAs with Australia, New Zealand, China, India, Japan, South Korea, and Hong Kong.   

In addition, CPTPP entered into force January 14, 2019, in Vietnam. Once fully implemented, CPTPP will form a trading bloc representing 495 million consumers and 13.5 percent of global GDP – worth a total of USD 10.6 trillion.  

In July 2018, the EU and Vietnam agreed on the final text of the EV FTA and the EU-Vietnam Investment Protection Agreement (EV IPA), which are due to be voted upon by the European Parliament in 2019.

Vietnam is a participant in the Regional Comprehensive Economic Partnership (RCEP) negotiations, which include the 10 ASEAN countries and Australia, China, India, Japan, South Korea, and New Zealand, and it is negotiating FTAs with other countries, including Israel. A full list of signed agreements to which Vietnam is a party is on the UNCTAD website:  http://investmentpolicyhub.unctad.org/IIA/CountryBits/229#iiaInnerMenu  .

Vietnam has signed double taxation avoidance agreements with 80 countries, listed at http://taxsummaries.pwc.com/ID/Vietnam-Individual-Foreign-tax-relief-and-tax-treaties  . The United States and Vietnam concluded and signed a Double Taxation Avoidance Agreement (DTA) in 2016, but it is still awaiting ratification by the U.S. Congress.

There are no systematic tax disputes between the government and foreign investors. However, an increasing number of U.S. companies disputed tax audits, which resulted in retroactive tax assessments. U.S. businesses generally attribute these cases to unclear, conflicting, and amended language in investment and tax laws and the government’s desire for revenue to reduce chronic budget deficits. These retroactive tax cases against U.S. companies can obscure the true risks of operating in Vietnam and give some U.S. investors pause when deciding whether to expand operations.

Decree 20/2017/ND-CP, effective since May 2017, introduced many new transfer-pricing reporting and documentation requirements, as well as new guidance on the tax deductibility of service and interest expenses. The Ministry of Finance (MOF) is drafting revisions to its Law on Tax Administration and expects to submit the draft law to the National Assembly for review and approval in 2019.

3. Legal Regime

Transparency of the Regulatory System

U.S. companies often report that they face significant challenges with inconsistent regulatory interpretation, irregular enforcement, and unclear laws. A 2017 survey of AmCham members in the ASEAN region found that, more than in any other ASEAN country, American companies perceive a lack of fair law enforcement in Vietnam, which heavily affects their ability to do business in the country. The 2018 PCI report found that access to land, taxes, and social insurance were the most burdensome administrative procedures. However, the report also found improvements in the area of post-entry regulations (regulations businesses face after they start operations), and the burden of administrative procedures was declining. In addition, according to that report, corruption has become less prevalent in certain areas for foreign-invested enterprises (FIEs).

In Vietnam, the National Assembly passes laws, which serve as the highest form of legal direction, but which often lack specifics. The central government, with the Prime Minister’s approval, issues decrees, which provide guidance on a law’s implementation. Individual ministries issue circulars, which provide guidance as to how that ministry will administer a law or a decree. Ministries draft laws and circulate for review among related ministries. Once the law is cleared through the various ministries, the government will post the law for a 60-day comment period. During the comment period or ministry review, if there are major issues with the law, the law will go back to the ministry that drafted the law for further revisions. Once the law is ready, it is submitted to the Office of Government (OOG) for approval, and then submitted to the National Assembly for a series of committee and plenary-level reviews. During this review, the National Assembly can send the law back to the drafting ministry for further changes. For some special or controversial laws, the Communist Party’s Politburo will review via a separate process.

Drafting agencies often lack the resources needed to conduct adequate scientific or data-driven assessments. In principle, before issuing regulations, agencies are required to conduct policy impact assessments that consider economic, social, gender, administrative, and legal factors. The quality of these assessments varies, however.

Regulatory authority exists in both the central and provincial governments, and foreign companies are bound by both central and provincial government regulations. Vietnam has its own accounting standards to which publicly listed companies are required to adhere.

The MOF updates the Vietnam Accounting Standards to match IFRS from time to time. In 2013, it set out a road map for public companies to apply 10 to 20 simple IFRS standards by 2020, 30 standards by 2023, and fully comply with IFRS by 2025. However, some companies already prepare financial statements in line with International Financial Reporting Standards (IFRS) in the interest of reporting to foreign investors.

The Ministry of Justice (MOJ) is in charge of ensuring that government ministries and agencies follow administrative processes. The Ministry 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 make subsequent draft versions unavailable to the public. The centralized location where key regulatory actions are published can be found at http://vbpl.vn/  .

While Vietnam’s legal framework might comply with international norms in some areas, the biggest issue continues to be enforcement. For example, while anti-money laundering (AML) statutes comply with international standards, Vietnam has prosecuted very few AML cases so far. Therefore, while all state agencies participate in reviewing the regulatory enforcement under their legal mandates, regulatory review and enforcement mechanisms remain weak.

While general information is publically 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 2018 reached 61 percent, down 0.3 percent from 2017. However, the official public-debt figures exclude the debt of certain SOEs. This poses a risk to its public finances, as the state is ultimately liable for the debts of these companies. Vietnam could improve its fiscal transparency by making its executive budget proposal widely and easily accessible to the general public long before the National Assembly enacted the budget; including budgetary and debt expenses in the budget; ensuring greater transparency of off-budget accounts; and 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), but that goal appears to be long term in nature. To date, the greatest success of the AEC has been tariff reductions. As a result, more than 97 percent of intra-ASEAN trade is tariff-free, and less than 5 percent is subject to tariffs above 10 percent.

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

The legal system is a mix of customary, French, and Soviet 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. Various laws and regulations regulate contracts, with each type of contract subject to specific regulations.

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, and the lawmakers’ intention is indeed arbitration-friendly.

Under the revised 2015 Civil Code, all contracts are “civil contracts” subject to uniform rules. In foreign civil contracts, parties may choose foreign laws as a reference for their agreement, if the application of the law does not violate the basic principles of Vietnamese law. When the parties to a contract are unable to agree on an arbitration award, they can bring the dispute to court.

The 2005 Commercial Law regulates commercial contracts between businesses. Specific regulations provide specific forms of contracts, depending on the nature of the deals. 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 People’s Procuracy is responsible for prosecuting criminal activities as well as supervising judicial activities.

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.

Vietnam lacks an independent judiciary, and there is a lack of 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, the risk of corruption in judicial rulings is significant, as 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. In addition, extremely low judicial salaries engender corruption.

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.

Laws and Regulations on Foreign Direct Investment

The 2014 Investment Law aimed to improve the investment environment. Previously, Vietnam used a “positive list” approach, meaning that foreign businesses were only allowed to operate in a list of specific sectors outlined by law. Starting in July 2015, Vietnam implemented a “negative list” approach, meaning that foreign businesses are allowed to operate in all areas except for six prohibited sectors or business lines. In November 2016, the National Assembly amended the Investment Law to reduce the list of 267 provisional business lines to 243; subsequent amendments will likely further narrow this list, allowing firms to engage in more business areas.

The law also requires foreign and domestic investors to 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. Since June 2017, foreign investors can choose to apply for ERC and Investment Registration Certificate (IRC) separately or through a “one-stop-shop” process, which saves time and cost. However, large-scale projects still require a high-level approval before receiving an IRC. This is often a lengthy process. Investment procedures for the seven major provinces of Binh Dinh, Danang, Hai Phuong, Hanoi, Ho Chi Minh City (HCMC), Phu Yen, and Vinh Phuc can be found at https://vietnam.eregulations.org/  .

Competition and Anti-Trust Laws

In 2018, Vietnam passed a new Law on Competition, which will come into effect on July 1, 2019. While the 2014 Law on Competition only applied to activities, transactions, and agreements originating inside Vietnam, the new law applies to those originating inside and outside Vietnam that negatively affect competitiveness in Vietnam. The revised law included punishments to minimize impediments to competition created by government agencies and introduced leniency towards firms and individuals, as an incentive to align with international practices and improve the effectiveness of the law.

Unlike the 2014 Law on Competition, which specified that a firm was exercising market power if it had 30 percent or more of market share, the revised law contains more criteria to determine market power, including firm size, financial ability, advantages on technology and infrastructure, etc. The new law does not forbid market concentration for firms with combined market share over 50 percent unless the market concentration significantly constrains competition.

The law charges the National Competition Commission under the Ministry of Industry and Trade (MOIT) with competition management. The Commission will support the Trade Minister on competition management, conduct investigations, and review requests for exemptions.

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.

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 this is still under consideration.

Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning that foreign arbitral awards rendered by a recognized international arbitration institution should be respected by Vietnamese courts without a review of cases’ merits. Only a limited number of foreign awards have been submitted to the MOJ and local courts for enforcement so far, and almost none have successfully made it through the appeals process to full enforcement. 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. However, in practice, this is not always the case.

Investor-State Dispute Settlement

The government is not a signatory to a treaty or investment agreement in which binding international arbitration of investment disputes is recognized, and has yet to sign a BIT or FTA with the United States. Although the law states that the court should recognize and enforce foreign arbitral awards, Vietnamese courts may reject these judgements 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 Vietnam government was a respondent state in seven disputes. More details are available at https://investmentpolicyhub.unctad.org/ISDS/CountryCases/229?partyRole=2  

International Commercial Arbitration and Foreign Courts

Vietnam’s legal system remains underdeveloped and is 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.

In February 2017, the government issued Decree No. 22/2017/ND-CP (Decree 22) on commercial mediation, which came into effect in April 2017. Decree 22 spells out in detail the principle procedures for commercial mediation. More information on Decree 22 can be found at http://eng.viac.vn/decree-no-.-22/2017/nd-cp-on-commercial-mediation-a487.html  .

The Law on Commercial Arbitration took effect in 2011. Currently there are no foreign arbitration centers in Vietnam, although the Arbitration Law permits foreign arbitration centers to establish branches or representative offices. Foreign and domestic arbitral awards are legally enforceable in Vietnam; however, in practice it can be very difficult.

As a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Vietnam is required to recognize and enforce foreign arbitral awards within its jurisdiction, with very few exceptions.

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. According to the 2018 PCI report, 20 percent of surveyed foreign companies had a contract dispute. Only 39 percent of private domestic companies and two percent of foreign firms were willing to use the courts to resolve ongoing disputes in 2018, due to concerns related to time, costs, and potential bribery during the process. Companies turned to other methods such as arbitration or using influential individuals trusted by both parties.

Bankruptcy Regulations

In 2014, Vietnam revised its Bankruptcy Law to make it easier for companies to declare bankruptcy. 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 2019 Ease of Doing Business Report, Vietnam ranked 133 out of 190 for resolving insolvency. The report noted that it still takes on average five years to conclude a bankruptcy case in Vietnam, and the recovery rate on average is only 21 percent. The courts have not improved bankruptcy case processing speed.  

The Credit Information Center of the State Bank of Vietnam provides credit information services.

4. Industrial Policies

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.

In addition, projects in the following areas are entitled to investment incentives such as lower corporate income tax, exemption of import tariffs, 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; primary or vocational education; and those located in remote areas or in industrial zones.

According to the OECD’s 2018 Investment Policy Review, Vietnam has an expansionary tax policy aimed at stimulating investment. Vietnam’s corporate income tax rate is highly competitive regionally at 20 percent.

Vietnam has also offered non-tax incentives, including exemption or reduction of infrastructure-use fees and land-use fees; assistance with recruitment and training of skilled labor; and assistance with immigration and residence procedures.

Vietnam promotes foreign investment in certain priority sectors, and in geographic regions that are remote or underdeveloped. The government encourages investment in the following areas: production of new materials, new energy sources, metallurgy and chemical industries; manufacturing of high-tech products, biotechnology, information technology, mechanical engineering; agricultural, fishery and forestry production; salt production; generation of new plant varieties and animal species; ecology and environmental protection; research and development; knowledge-based services; processing and manufacturing; labor-intensive projects (using 5,000 or more full-time laborers); infrastructure projects; education and training; and health and sports development.

Although Vietnam seeks FDI in infrastructure, including the energy sector, it has been reluctant to give government guarantees that investors often seek, due to its concerns about reaching its public-debt ceiling of 65 percent of GDP.  (In 2018, its public debt was 61 percent of GDP.) This has delayed some approvals of large-scale projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

In recent years, Vietnam has prioritized efforts to establish free trade zones (FTZs). 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 industrial zones 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 keepers 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.

Performance and Data Localization Requirements

Vietnam does not mandate that businesses hire local workers, including for senior management roles or the board of directors. However, companies must prove their efforts to hire suitable local employees were unsuccessful before recruiting foreigners. This does not apply to board members elected by shareholders or capital contributors. In February 2016, the government issued Decree No.11/2016/ND-CP, guiding a number of articles of the Labor Code on foreigners working in Vietnam, which entered into force in April 2016. Decree 11 included positive changes, including changes to the conditions, paperwork, and timeline for work-permit applications and exemptions, and clarification that the work-permit and exemption-certificate requirements did not apply to foreigners coming to work for less than 30 days with less than 90 days of cumulative working time in one year.

In October 2018, the government issued Decree No. 140/2018/ND-CP (Decree 140), which amends various decrees on investment, business conditions, and administration procedures, and Decree No. 143/2018/ND-CP (Decree 143) on compulsory social insurance for foreigners working in Vietnam. Decree 140 streamlines the work-permit process for foreigners working in Vietnam. Decree 143 requires foreign individuals with a work permit, practicing certificate, or practicing license, and working under a labor contract with an indefinite term or a definite term of one year or more with a company in Vietnam, to participate in a mandatory social insurance scheme, which previously was applicable to Vietnamese workers only.  

The government has been increasingly adopting policies to encourage or require foreign investors to use domestic content in goods and technology. For example, Circular 14/2015/TT-BKHDT applied high tariffs to imported automotive parts to protect domestic production and encourage foreign auto manufacturers to source component parts locally. Another example is Decree 54/2017/ND-CP, which stipulates foreign invested entities can import drugs into Vietnam, but are not permitted to transport, store, or distribute drugs.

In June 2018, the National Assembly approved a Law on Cybersecurity, effective January 1 2019, which requires cross-border services to store data of Vietnamese users in Vietnam, despite sustained international and domestic opposition to the regulation.  The law’s data-localization provisions are broad and vague, with subsequent draft guidance implying the data-localization requirements will only apply to firms that do not comply with strict online content removal requests from the government. Foreign firms and legal experts await implementing decrees expected in mid-2019 to clarify how the government intends to implement the law. In 2015, the National Assembly issued the Law on Network Information Security, effective July 1, 2016, which included obligations to disclose proprietary information as a condition to enter the market, overly broad definitions of personal information, overly broad provisions requiring “cooperation with the Government” regarding access to data, and requirements to decrypt encrypted information held by third parties. MOF is also proposing draft legislation in 2019 to request cross-border service providers via internet protocols to have a representative office in Vietnam, citing the necessity of local office requirements for taxation purposes.

There are currently no measures preventing or unduly impeding companies from freely transmitting customer or other business-related data outside of Vietnam. The most important regulation is Decree 72/2013/ND-CP, on the management, provision, and use of internet services and online information. While Decree 72 technically requires organizations establishing “general websites,” or social networks and companies providing online gaming services or services across mobile networks to maintain at least one server in Vietnam, in practice the regulation is only applied to domestic firms, and then only sporadically. It also establishes requirements for storing certain types of data (personally identifiable information of users, user activity logs, etc.), but it is unclear if that information must be stored on a local server. In 2016, the Ministry of Information and Communications (MIC) issued Circular 38/2016/TT-BTTT, one of the implementing circulars of Decree 72. The circular does not require localization of servers, though it does require offshore service providers with a large number of users in Vietnam to comply with local content restrictions. Specific requirements under Circular 38 apply to offshore entities that provide cross-border public information into Vietnam (including websites, social networks, online applications, search engines and other similar forms of services) that (a) have more than one million hits from Vietnam per month or (b) lease a data center to store digital information in Vietnam in order to provide its services.

Provisions of the new cybersecurity law require firms to hand over unencrypted user information upon request by law enforcement. However, application of this requirement hinges on issuance of implementing decrees, expected in mid-2019. Vietnam has no international commitments in this area and does not permit cross-border online gaming. Therefore, gaming providers tend to establish a joint venture with a Vietnamese company and locate one server in Vietnam. Regarding financial data localization, Circular 31 requires backup information, but does not impede cross-border data flows.

When Vietnam joined the WTO in 2007, it established minimum commitments on market access for U.S. goods and services, as well as equal treatment for Vietnamese and foreign companies. Vietnam undertook commitments on goods (tariffs, quotas, and ceilings on agricultural subsidies) and services (provisions of access to foreign-service providers and related conditions). It has also committed to implementing agreements on intellectual property (the Trade-Related Aspects of Intellectual Property Rights Agreement), customs valuation, technical barriers to trade, sanitary and phytosanitary measures, import licensing provisions, anti-dumping and countervailing measures, and rules of origin. As part of its WTO accession, Vietnam also committed to remove performance requirements that are inconsistent with the agreement on Trade-Related Investment Measures (TRIMs). The 2014 Investment Law specifically prohibits the following: giving priority to domestic goods or services; compulsory purchases from a specific domestic firm; export of goods or services at a fixed percentage; restricting the quantity, value, or type of goods or services exported or sourced domestically; fixing import goods at the same quantity and value as goods exported; requirements to achieve certain local content ratios in manufacturing goods; stipulated levels or values on research and development activities; supplying goods or services in a particular location; and mandating the establishment of head offices in a particular location.

The government updates, on an ad hoc basis, the list of investment priority high-tech products and companies investing in research and development for items that are entitled to the highest tax incentives and may be eligible for funding from the National High-Tech Development Program. Companies that develop infrastructure for high-tech parks will also receive land incentives.

5. Protection of Property Rights

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 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.

The MONRE is drafting amendments to the 2013 Land Law, which would focus on several major issues, including eradicating the farmland acquisition quota, increasing cases of land recovery by the State, assigning district-level administrators rather than provincial-level administrators to accurately set land prices, and allowing foreigners to own homes in Vietnam. MONRE expects to submit the draft law to the National Assembly for review and approval in 2020.    

State protection of property rights is still evolving, as the State can expropriate land for socio-economic development. 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 defined “socio-economic” development, and there are many outstanding legal disputes between landowners and local authorities. 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.

In addition to land, the State’s collective property includes “forests, rivers and lakes, water supplies, wealth lying underground or coming from the sea, the continental shelf and the air, the funds and property invested by the government in enterprises, and works in all branches and fields – the economy, culture, society, science, technology, external relations, national defense, security – and all other property determined by law as belonging to the State.”

The Housing Law and Real Estate Business Law extended “land-use rights” to foreign investors, allowing titleholders to conduct property transactions, including mortgages. Foreign investors can lease land for renewable periods of 50 years, and up to 70 years in some poor areas of the country.

In June 2018, the National Assembly decided to delay indefinitely the debate on and adoption of the controversial draft Law on Special Administrative and Economic Zones. The law aimed to loosen regulations on foreign investors, permitting them to lease land in the Van Don, Bac Van Phong, and Phu Quoc Special Administrative and Economic Zones for up to 99 years. The National Assembly’s decision followed widespread protests against the proposed law.  

Some investors have encountered difficulties amending investment licenses to expand operations onto land adjoining existing facilities. Investors also note that local authorities may intend to increase requirements for land-use rights when current rights must be renewed, particularly in instances when the investment in question competes with Vietnamese companies.

Intellectual Property Rights (IPR)

The legal basis for IPR includes the 2005 Civil Code, the 2005 Intellectual Property (IP) Law as amended in 2009, the 2015 Penal Code, and implementing regulations and decrees. Vietnam has joined the Paris Convention on Industrial Property and the Berne Convention on Copyright; the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations; the Patent Cooperation Treaty; the Madrid Protocol; and the International Convention for the Protection of New Varieties of Plants. It has worked to meet its commitments under these international treaties. The Vietnamese government has ratified the revised Trade-Related Aspects of Intellectual Property Rights protocol, which took effect on January 23, 2017.  On January 1, 2018, the 2015 Penal Code entered into force with clearer guidelines on the application of criminal penalties for certain acts of IPR infringement or piracy. For the first time, commercial entities can be liable for violations. On June 12, 2018, the National Assembly passed a new Law on Competition, eliminating outdated IP-related unfair competition provisions and bringing guidelines in line with Vietnam’s other IP laws. The government also issued Decree No. 22/2018/ND-CP, which replaced a 2006 regulation and updated copyright guidelines under the Civil Code and Law on IP. However, enforcement agencies still lack clarity and experience in how to impose criminal penalties on IPR violators and continue to wait for further implementing guidelines. On June 19, 2018, the Prime Minister issued Directive No. 17/CT-TTg to strengthen the fight against smuggling, commercial fraud, and the production and trade of low-quality foods and fake goods, pharmaceuticals, and cosmetics.

Circular No. 16/2016/TT-BKHCN, which amends and supplements a number of articles of Circular No. 01/2007/TT-BKHCN, one of the core regulations in the Vietnam IP system, came into force on January 15, 2018. IP attorneys expect the circular will have a significant, positive impact on patent and trademark examination procedures, but also expect further revisions in 2019 and in the IP Law revision. The National Assembly ratified the CPTPP on November 2, 2018, and Vietnam intends to amend laws, including the Law on Intellectual Property, to align with the international treaty by 2021. With technical support from the World Intellectual Property Organization (WIPO), Vietnam in 2017 also completed a National Strategy for Intellectual Property to create a roadmap for promoting innovation and a more effective IP framework by 2030.

Although Vietnam has made progress in establishing a legal framework for IPR protection, significant problems remain and new challenges are emerging. The country remains on the Special 301 Watch List. The rate of unlicensed software in Vietnam is still high, at 74 percent, according to the Software Alliance’s latest data, representing a commercial value of USD 492 million. In 2018, Vietnam had mixed results in its efforts to protect IPR. Vietnam’s continued integration into the global economic community, as well as increasing domestic pressure for IP protections, may stimulate positive change. Nevertheless, infringement and piracy remained commonplace, and the impact of digital piracy and the increasing prevalence of counterfeit goods sold online continued to undermine the IPR environment. The increasingly sophisticated capabilities of domestic counterfeiters, coupled with developing smuggling routes through Vietnam’s porous borders, were also worrisome trends. There are ten ministries sharing some level of responsibility for IPR enforcement and protection, which often leads to duplication or confusion. Additionally, the roles and power of these ministries and agencies varies widely. In October 2018, the MOIT upgraded the Market Surveillance Agency, the country’s leading IP enforcement agency, to the Directorate of Market Surveillance (DMS). The move requires all 63 provincial-level market surveillance departments to report directly to the national agency rather than to local provincial governments, improving coordination and efficiency among enforcement agencies.

In 2018, the Intellectual Property Office of Vietnam (IP Vietnam) reported receiving 108,375 IP applications of all types (an increase of 5.9 percent compared to 2017), of which 63,617 were registered for industrial property rights (up 8.7 percent compared to 2017). IP Vietnam reported granting 2,212 patents in 2018 (up 27 percent from 2017). Industrial designs registrations reached 2,360 in 2018 (up 4.1 percent from 2017). In total, IP Vietnam granted more than 29,040 protection titles for industrial property, out of more than 63,617 applications in 2018 (up 8.1 percent from 2017). The DMS processed 6,149 counterfeit and IP infringement cases and collected USD 5,500 in fines.  The most infringed products were agricultural materials, agricultural and pharmaceutical products, and spare automobile parts.  

The Copyright Office of Vietnam received and settled seven copyright petitions, and received and settled 12 requests for copyright assessment in 2018. In 2018, the Ministry of Culture, Sports, and Tourism Inspectorate carried out inspections for software licensing compliance and discovered 46 violations that resulted in fines of USD 58,000, a 15 percent decrease in fines from 2017.

For more information, please see the following reports from the U.S. Trade Representative:

Special 301 Report:

https://ustr.gov/issue-areas/intellectual-property/special-301/2018-special-301-review  

Notorious Markets Report: https://ustr.gov/sites/default/files/files/Press/Reports/2017 percent20Notorious percent20Markets percent20List percent201.11.18.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/  .

6. Financial Sector

Capital Markets and Portfolio Investment

While the government has acknowledged the need to strengthen both the capital and debt markets, there has been little progress, leaving the banking sector as the primary capital source for Vietnamese companies. Challenges to raising capital domestically include insufficient transparency in Vietnam’s financial markets and non-compliance with internationally accepted accounting standards.

Vietnam welcomes foreign portfolio investment; however, Morgan Stanley Capital International (MSCI) continues to classify 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 in an effort to reach its goal of meeting the “emerging market” criteria in 2020 and attracting more foreign capital. The UK-based FTSE Russell’s decision to place Vietnam on its watch list for possible reclassification as a “Secondary Emerging Market” in September 2018 could also encourage faster reforms.  

The government is drafting amendments to the Securities Law (revised in 2010) along with decrees, circulars, and guiding documents, and is targeting submission to the National Assembly for approval late in 2019. These will likely include comprehensive changes on securities trading, corporate governance, share issuance, and most notably foreign ownership limits (FOL), to help move Vietnam toward emerging market status.

The State Securities Commission (SSC) under the MOF regulates Vietnam’s two stock exchanges, the HCMC Stock Exchange (HOSE), which lists larger companies, and the Hanoi Stock Exchange (HNX), which has smaller companies, bonds, and derivatives. Vietnam also has a market for unlisted public companies (UPCOM) at the Hanoi Securities Center, where many equitized SOEs first list their shares (due to lower transparency requirements) before moving to the HOSE or HNX. In January 2019, the Prime Minister approved a plan to establish the Vietnam Stock Exchange (VSE) as a MOF wholly state-owned company, which would own both the HOSE and HNX.

There is sufficient liquidity in the markets to enter and maintain sizable positions.  Stock and fund certificate liquidity increased in 2018, reaching an average trading value per session of around USD 280 million, up 30 percent from 2017. Combined market capitalization at the end of 2018 was approximately USD 169 billion, equal to 80 percent of Vietnam’s GDP, with the HOSE accounting for USD 124 billion, the HNX USD 8 billion, and the UPCOM USD 37 billion. Bond market capitalization reached over USD 50 billion in 2018, the majority of which were government bonds, largely held by domestic commercial banks. Insurance firms also were noticeably more active government bond investors in 2018.  

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 charge relatively high interest rates for new loans because they must continue to service existing non-performing loans (NPLs). Domestic companies, especially small and medium enterprises (SMEs), often have difficulty accessing credit. Foreign investors are generally able to obtain local financing.

Money and Banking System

Since recovering from the 2008 global downturn, Vietnam’s banking sector has been stable. However, despite various banking reforms, the sector continues to be concentrated at the top and fragmented at the bottom. Based on its 2018 survey, the central bank, the State Bank of Vietnam (SBV), estimated that 50 percent of Vietnam’s population is underbanked or does not have bank accounts, due to an inherent distrust of the banking sector; the ingrained habit of holding assets in cash, foreign currency, and gold; and the limited use of financial technology tools. However, this SBV estimate appears significantly understated, with the likely percentage being closer to 70 percent.  The World Bank’s The 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.

The banking sector’s estimated total assets in 2018 were USD 481 billion, of which USD 207 billion belonged to seven state-owned and majority state-controlled commercial banks, accounting for 44 percent of total assets. Though grouped under 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-controlled by SBV. In addition, the SBV holds 100 percent of Agribank, Global Petro Commercial Bank (GPBank), Construction Bank (CBBank), and Oceanbank.  

In addition, there were nine foreign-owned banks (HSBC, Standard Chartered, Shinhan, Hong Leong, Woori Bank, Public Bank, CIMB Bank, ANZ, and United Overseas Bank), 49 branches of foreign banks, 52 representatives of foreign credit institutions, and two joint-venture banks (Vietnam-Russia Bank and Indovina Bank).

Vietnam has made progress in recent years to reduce its NPLs, but most domestic banks remain under-capitalized with high NPL levels that continue to drag on economic growth. Accurate NPL data is not available and the central bank frequently underreports the level of NPLs. In 2018, the NPL ratio on the banks’ balance sheets reportedly went down to 2.4 percent, from 2.5 percent in 2017, while the off-balance sheet NPL ratio remain unpublished. The SBV attributes the declining NPL level to the uptrend of the property markets and its application of the National Assembly’s 2017 Resolution 42 which helps credit institutions and the Vietnam Asset Management Company (VAMC) to repossess collateral and better manage bad loans. Under its Development Strategy of the Vietnam Banking Sector to 2025, the SBV aims to reduce the NPL ratio at the banks and the VAMC to below 3 percent by 2020 (excluding poorly performing banks under a separate structure.)

Other issues in the banking sector include state-directed lending by state-owned commercial banks, cross-ownership, related-party lending under non-commercial criteria, and preferential loans to SOEs that crowd out credit to SMEs. By law, banks must maintain a minimum-chartered capital of VND 3 trillion (roughly USD 134 million); however, Vietnam is moving towards adoption of Basel II standards in 2020.

Currently, the total FOL in a Vietnamese bank is 30 percent, with a 5 percent limit for non-strategic individual investors, a 15 percent limit for non-strategic institutional investors, and a 20 percent limit for strategic institutional partners. Prudential measures and regulations apply the same to domestic and foreign banks. To meet the capital adequacy ratio required by Basel II, many banks are seeking overseas capital, and calling for relaxation of the FOL.

We are unaware of any lost correspondent-banking relationships in the past three years. However, after the SBV took over three failing banks (Ocean Bank, Construction Bank, and GP Bank), and placed Dong A Bank under special supervision in 2015, correspondent-banking relationships with those banks may have been limited.

The government is trying to leverage Vietnam’s high adoption rate of mobile and smart phones to promote financial inclusion, increase use of electronic payments, and shift Vietnam towards a cashless society. Although the SBV announced plans to implement a “regulatory sandbox” for financial technology (fintech) activities to inform its future updates to the legal framework, it has not yet published details and has licensed only 26 organizations to provide cashless services. Fintech is rapidly gaining market acceptance as many banks have implemented QR code payments and others have deployed online payment services. Nearly 100 fintech startups have reportedly launched in Vietnam, operating mainly in the e-payments space. However, these startups must overcome many legal mechanisms and policies, such as obtaining licenses.  No foreign e-payments fintech companies have such licenses yet.

Cryptocurrencies remain prohibited as legal tender, preventing the issuance, supply, and use of Bitcoin and other similar virtual currency as a means of payment. Failure to comply can result in criminal prosecution. However, in 2018, the MOJ reportedly submitted to the Prime Minister’s office for approval a crypto-assets proposal, though it has yet to make public any details.

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no restrictions on foreign investors converting and repatriating earnings or investment capital from Vietnam. However, funds associated with any form of investment cannot be freely converted into any world currency.

The SBV has a mechanism to determine the interbank reference exchange rate. In order to provide flexibility in responding to exchange rate volatility, the SBV announces a daily interbank reference exchange rate. The rate is determined based on the previous day’s average interbank exchange rates, taking into account movements in the currencies of Vietnam’s major trading and investment partners.

Remittance Policies

Vietnam mandates all monetary transactions must be in Vietnamese Dong (VND), and allows foreign businesses to remit lawful profits, capital contributions, and other legal investment activity revenues in foreign currency authorized credit institutions. There are no time constraints on remittances or limitations on outflow; however, outward foreign currency transactions require supporting documents (such as audited financial statements, import/foreign-service procurement contracts and proof of tax obligation fulfillment, and approval of the SBV on loan contracts etc.). Foreign investors are also required to submit notification of profit remittance abroad to tax authorities at least seven working days prior to the remittance.

The inflow of foreign currency to 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

The State Capital Investment Corporation (SCIC) technically qualifies as a sovereign wealth fund (SWF), as its mandate includes investing dividends and proceeds from privatization.  The Ministry of Finance transferred oversight of SCIC and 18 other large SOEs to the Committee for Management of State Capital at Enterprises (CMSC) in November 2018, following the CMSC’s launch in September 2018 and the issuance of the Prime Minister’s Decree 131 defining its functions, tasks, powers, and organizational structure.

As of August 31, 2018, the SCIC had invested in 139 businesses, with nearly USD 866.3 million in state capital (book value). The SCIC does not manage or invest balance-of-payment surpluses, official foreign currency operations, government transfer payments, fiscal surpluses, or surpluses from resource exports. SCIC’s primary mandate is to manage the non-privatized portion of SOEs. The SCIC invests 100 percent of its portfolio in Vietnam, and the SCIC’s investment of dividends and divestment proceeds does not appear to have any ramifications for U.S. investors. The SCIC budget is reasonably transparent, audited, and can be found at http://www.scic.vn/  .

7. State-Owned Enterprises

According to the World Bank, SOEs would benefit from a “modern corporate governance system that separates state ownership rights from regulatory functions and implements an objective and transparent mechanism for the selection of CEOs and board members.” The government framework for wholly owned SOEs is fragmented, incoherent, and the management of SOEs is not in line with sound corporate governance. To improve corporate governance and SOE efficiency, the government established the CMSC in 2018. The government’s aim was to separate state ownership from regulatory oversight of 19 large centrally owned SOEs by moving their supervision away from the line ministries to CMSC.

Vietnam currently has over 500 wholly owned SOEs – including seven groups, 57 corporations, and 441 other enterprises managed by ministries and localities, according to the Ministry of Finance. Vietnam does not publish a full list of SOEs and they operate in nearly every industrial sector. However, in 2016, the government issued Decision 58/2016/QD-TTg (Decision 58) specifying the industries and areas in which the government will have wholly owned and majority-owned enterprises, including electricity distribution, airport management and operation, large-scale mineral mining, production of basic chemicals, and telecommunications services with network infrastructure, among others.

While SOEs have boards of directors, these boards are not independent. After CMSC’s establishment, it took over the oversight of the 19 largest SOEs. Aside from the CMSC’s supervision of the 19 largest SOEs, ministries govern the remaining centrally owned SOEs, while provincial governments run local SOEs. CMSC, ministries, and local governments all can appoint their staff to the boards. For SOEs with majority shares owned by government, the government ministries, and provincial governments still have the right to appoint executive staff of the companies. SOE senior officials do not typically retain their government positions, but they still retain links to the government, and may return to government service once they terminate their employment with the SOE.

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. However, in the 2018 PCI report, the percentage of surveyed firms that believe provincial authorities favored SOEs declined from 41 percent in 2017 to 32 percent in 2018.

In 2015, the government issued Decree 81/2015/ND-CP to require SOEs to implement strict information disclosure procedures in accordance with listed company requirements. However, because there is no clear punishment for violations, SOEs have little incentive to follow the decree. Although over 40 percent of SOEs disclose the required information, MPI confirmed the quality of reporting was insufficient to assess the SOEs’ transparency. Although there are penalties for insufficient disclosure and non-disclosure, these penalties are not significant enough to improve information disclosure.

Privatization Program

Vietnam has been working to reform the SOE sector for over 15 years. Because SOE share sales have historically only transferred a nominal interest (2 to 3 percent) to the private sector, the process of privatization (also known as equitization) has been slow. Inadequate regulations specifying equitization procedures and pressure from vested interests present the biggest obstacles. Decree 58 specified sectors targeted for equitization, including airport management and related services, mineral mining and extraction, financial service and banking, chemical manufacturing, rice wholesale, petro and oil importation, telecommunications, rubber and coffee processors, and electricity distribution. It appears the government plans to sell or partially privatize the best, most efficient SOEs first to quickly raise cash, but has been slow to address inefficiencies in the rest.

Although the government appears more committed to privatization due to fiscal budget pressures and the necessity of expanding the private sector for continued economic growth, it has yet to meet its annual SOE equitization targets. After some notable large deals (Vinamilk in 2016 and Sabeco in 2017), the government released decision 1232/2017/QD-TTg in 2017, which listed 406 additional SOEs it would divest in the period 2017-2020, along with specific target divestment percentages. The decision aimed to reduce the number of wholly owned SOEs to about 150 by 2020. However, only 12 SOEs were equitized in 2018 against a target of 85 and share proceeds totaled less than USD 1 billion and divestments USD 880 million. The MOF expects the process to speed up in 2019 with equitization and divestment proceeds of over USD 2 billion. 

Foreign investors can invest in SOEs. SOE share bidding process information can be found at https://www.hsx.vn/Modules/Auction/Web/AucInfoList?fid=271f94f836a14eb0a7d2207c05f7a39e  https://www.hnx.vn/en-gb/dau-gia/lich-dau-gia.html  , and http://www.scic.vn/english/index.php/investment.html  . SOE financial information is available on http://business.gov.vn/C percentC3 percentB4ngb percentE1 percentBB percent91Th percentC3 percentB4ngtin/Th percentC3 percentB4ngtindoanhnghi percentE1 percentBB percent87p.aspx  .

8. Responsible Business Conduct

The government has issued regulations intended to protect the public from adverse business practices in relation to labor rights, consumer protection, and environmental protection. However, the enforcement of these laws is weak. The Enterprise Law allows shareholders to take court action against the management of a company and can nullify fully, or partly, a resolution of a shareholder general meeting through a court order or an arbitration decision. Companies are required to publish their corporate social responsibility activities, corporate governance work, information of related parties and transactions, and compensation of the 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, and awareness of CSR programs is increasing among large domestic companies. The Vietnam Chamber of Commerce and Industry (VCCI) conducts CSR training and highlights corporate engagement on a dedicated website (http://www.csr-vietnam.eu/  ) in partnership with the UN. In addition, 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 the VCCI and the Ministry of Labor, Invalids, and Social Affairs (MOLISA), to promote business practices in Vietnam in line with international norms and standards. Discussions on ethical business standards during negotiations of the Trans-Pacific Partnership (TPP) and the CPTPP – in addition to the gradual introduction of CSR practices by some multinational corporations over the years – have helped to shift social expectations around business responsibilities in Vietnam.

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 contact point or ombudsman for stakeholders to get information or raise concerns about RBC. Vietnam may make additional strides in labor rights and ethical business practices in its revised Labor Code, due for discussion by the National Assembly in 2019.  

The 2005 Law on Enterprises in theory regulates corporate governance in line with OECD corporate governance principles. However, corporate governance standards are relatively weak in Vietnam, which ranks lower than Thailand, the Philippines, and Indonesia, according to the most recent Asia Development Bank (ADB) 2017 report on ASEAN listed companies.

The government does not have regulations encouraging companies to adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas, but many multinational companies already comply. In 2016, the Prime Minister called on the MOIT to implement the Extractive Industries Transparency Initiative (EITI) in order to improve the efficiency of the minerals extraction industry. However, to date, Vietnam has not agreed to do so. Vietnam remains only an observer in EITI. Decree 158/2016/ND-CP came into effect in January 2017 and provides guidelines for implementing the Mineral Law, which may improve transparency in the mining sector.

For labor rights regulations, see Section 11 on Labor Policies and Practices, and 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/).

Environmental Protection

Vietnam’s current legal framework for environmental protection is fragmented and often confusing, while enforcement of environmental crimes and violations is weak and ineffective.  The government has issued many legal documents regulating the environment, including the revision of the Environmental Protection Law of 2014, the Constitution of 2013, the Law on Water Resources of 2012, the Law on Fisheries of 2017, as well as hundreds of decrees and circulars that guide the implementation of these laws. While these legal documents specify civil penalties for environmental crimes, the penalties are rarely high enough to have a deterrent effect. There are virtually no criminal penalties in the law. Additionally, some industry sectors have little regulation. For example, government and industry contacts note that inspections of pollution emission testing devices rarely occur. When they do, it is often following advance notice that enables the firm being inspected to show compliance, regardless of how non-compliant its normal operations may be.  

Historically, Vietnam has prioritized economic growth over environmental protection. In 2016, after a massive fish kill gained nationwide attention, the Ministry of Environment and Natural Resources embarked on an ambitious plan to update Vietnam’s environmental laws and regulations.  This effort is ongoing and will likely result in newer, and moderately stronger, environmental protections.

While Vietnam’s legal framework is marginal, enforcement of environmental laws is weak and ineffective. For example, the Law on Environmental Protection requires that entities, individuals, and households that discharge waste must classify the waste for recycling and reuse. However, violations of this provision are rampant and rarely punished. The 2017 Law on Fisheries stipulates that fishing organizations and individuals must follow set standards when catching fish, specifies significant financial penalties for individuals and organizations engaged in illegal fishing, and prohibits the use of explosives for fishing. However, in practice, violations of these regulations are quite common.

Vietnam is a party to the Convention on International Trade in Endangered Species, and enacted new penalties in its 2015 Penal Code, which took effect on January 1, 2018. However, Vietnam rarely investigates or arrests wildlife traffickers. Although the lack of official statistics makes an official accounting impossible, according to an analysis by members of civil society groups, the number of arrests and prosecutions has actually decreased since the new stricter law went into effect.

9. Corruption

Transparency International’s 2017 Corruption Perception Index (CPI) determined Vietnam had taken positive steps to improve some areas of its anti-corruption legal framework and policies. However, Vietnam’s 2018 rank of 117 out of 180 in the CPI global index reflects the country’s continuing challenges. Also according to the 2018 PCI report, corruption declined, with 55 percent of enterprises reporting paying informal charges (bribes), which equaled up to 10 percent of their revenue. The CPI report recommends more sustained effort by government agencies and cooperation from businesses. Firms need to improve management controls, strengthen legal understanding and compliance, and strive to operate with integrity.

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 business and investments has created overlapping jurisdictions and bureaucratic procedures that, in turn, create opportunities for corruption.

In November 2018, Vietnam’s legislature revised its 2005 anti-corruption law to strengthen asset-reporting requirements for government officials and set strict penalties for corrupt practices. However, many officials lamented the law does not provide sufficient oversight authorities to Vietnam’s legislature or government agencies to ensure its full implementation. Furthermore, the law does not recognize the role of civil society or an independent mechanism to promote government accountability and transparency.

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 (CPV) General Secretary Nguyen), the Government Inspectorate, and line ministries and agencies. Formed in 2007, the Central Steering Committee for Anti-Corruption, since February 2013, has been under the CPV Central Commission of Internal Affairs. The National Assembly provides oversight to the operations of government ministries. Civil Society Organizations (CSOs) have encouraged the government to establish a single independent agency with oversight and enforcement authority, and to ensure enforcement.

A new Penal Code came into effect in January 2018, which introduced a number of provisions relating to corporate criminal liability and corruption, increased the risks for businesses in the country. While the previous Vietnamese criminal code only provided for criminal liability for individuals, now corporate entities can face criminal sanctions too. The new Penal Code also criminalizes private-sector corruption—something that was absent from Vietnam’s previous anti-corruption regime.

Vietnam signed the UN Anticorruption Convention in December 2003 and ratified it in August 2009. The law does not cover family members of officials, but does cover ranking members of the Communist Party.

The government increased its scrutiny of conflict-of-interest concerns in public procurement since late 2016. To signal the government’s seriousness about reforming government procurement, the Prime Minister approved in July 2016 a 10-year master plan for procurement, including developing the national e-Government Procurement Application to promote online tendering and increase transparency and reduce corruption opportunities. In January 2019, with help from the ADB and the World Bank, the government implemented an e-bidding public procurement site, which will supplement its existing e-procurement portal.

There are laws prohibiting companies from bribing public officials. While some private companies have internal controls, ethics, and compliance programs to detect and prevent bribery of government officials, the government does not require companies to establish such internal codes of conduct.

Since 2016, the government has embarked on a large anti-corruption initiative. As a result, perceptions of corruption, and the burden of administrative procedures, are both declining. While high-profile arrests have grabbed the focus of the news media, there has been less attention paid to institutional changes meant to prevent corrupt activities, including greater transparency and civil-service reforms to encourage accountability.

According to the 2018 PCI, there were statistically significant declines in three core indicators of corruption: 1) the share of firms believing informal charges are common; 2) the estimated bribe payments by firms as a share of revenue; and 3) whether commissions are necessary to win government procurement contracts. Although the 2018 PCI results indicate signs of declining corruption, surveyed companies reported that it took more than a month to complete necessary paperwork to start their business and obtain certificates for technical regulatory conformity and certificates of qualification for doing conditional business lines. The report concluded that government authorities were more cautious to approve big projects due to fear of being swept up and implicated in the ongoing, widespread anti-corruption campaign.

The 2018 PCI findings are consistent with the results of UN Development Program’s 2018 annual Provincial Administrative Performance Index (PAPI) survey.

Resources 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
Phone: +84-24-37153532
Fax: +84-24-37153443
kieuvien@towardstransparency.vn  

10. Political and Security Environment

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 social, environmental, and labor injustices. There have been anti-China protests on multiple occasions since 2008. In May 2014, Vietnam experienced large protests against China’s movement of its Haiyang Shiyou Oil Rig 981 into Vietnam’s territorial waters. Anti-China protests resulted in at least one death and dozens of injuries among the plant’s Chinese workers; protesters separately destroyed and looted multiple foreign-owned factories.

In April 2016, after the Formosa Steel plant discharged toxic pollutants into the ocean and caused a massive fish death, 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, including influential blogger Nguyen Ngoc Nhu Quynh (aka “Mother Mushroom,” who was released in 2018 and now resides in the United States), labor activist Hoang Duc Binh, and videographer Nguyen Van Hoa.

Nationwide protests erupted in June 2018 in response to the proposed Special Administrative Economic Zone Law. The protests, reportedly the largest since 1975, drew tens of thousands of Vietnamese citizens in Ho Chi Minh City and six other provinces who objected to the law’s tax and lease benefits for companies investing in three Economic Zones. Many believed Chinese investors were the primary beneficiaries of this bill, leading to widespread fears of growing Chinese investment and economic influence in Vietnam. Responding to the protests and other pushback against the law, the government ultimately decided to delay its passage indefinitely.

The protests had little effect on the operations of U.S. companies.

The government increased its anti-corruption efforts in 2016, resulting in a number of arrests and convictions of senior officials across the public and private sector. In January 2018, the party stripped former Politburo member and Ho Chi Minh Secretary Dinh La Thang of his party membership and he was sentenced to 20 years in prison for mismanagement of state assets during his tenure as Chairman of state-owned PetroVietnam (PVN) between 2009 and 2011. Thang was tried with 22 other defendants for their alleged roles in corrupt practices at PVN and its subsidiaries.

11. Labor Policies and Practices

According to official government statistics, in 2018 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 15-to-39 year olds currently accounting for about half of the total labor force. This demographic structure represents Vietnam’s best opportunity to make significant economic strides in the coming decades. Despite the strong shift towards urbanization, the majority of workers are still located in rural areas, making up over 68 percent of the total labor force.  

The official labor participation rate was over 78 percent of the total population, based on the most recent data available in 2017. The official unemployment and underemployment rates hover around 2 percent; however, this figure is likely underreported by counting people who have multiple, low-paying informal jobs, along with those with one formal job. The official unemployment rate among youth, defined as those between the ages of 15 and 24 years, was 7 percent in 2018.  Wages have grown 9 percent since 2017 to an average of USD 2,160 per year.

Despite relatively high literacy rates, enrollment, and graduation rates for primary and secondary education, less than 20 percent of the employed population have ever attended college or received vocational training or mid-term professional training. Those who complete a post-secondary degree are often unprepared with the types of skills necessary to enter a highly skilled workforce. Many Vietnamese companies report a shortage of workers with adequate skills.  While there is a shortage of educated and skilled labor, Vietnam is a labor surplus country, with a un- and under-employed labor force that serves as an abundant source of migrant labor regionally as well as globally.

Shortages or Surpluses of Specialized Labor Skills

According to World Economic Forum’s 2017 Global Human Capital Index (the most recent available), Vietnam ranked 64th overall (after fellow ASEAN countries Singapore (11), Malaysia (33), and Thailand (40)). Many businesses reported it is difficult to find skilled labor in Vietnam. The government is aware of the deficiencies in higher education and vocational training, and admits the need for reform in order to increase the skills of its labor force. To this end, the Law on Vocational Education took effect in 2015, which stressed the importance of vocational training in human resource development, as well as the government’s strategy for vocation education through 2020. In addition, the national employment fund, managed by the MOLISA, will sponsor targeted vocational training programs for poor households, youth, members of the military, and entrepreneurs.  

Foreign nationals are restricted to employment in high-skilled professions, such as managers, executives, and consultants. The government relatively readily grants work-permits for high-skilled foreign workers, especially those at multinational corporations and NGOs.

Nearly 84,000 foreigners were working in Vietnam in 2017 (the most recent year available) compared to 12,600 in 2004, and the country was developing policies and methods to collect social insurance payments from these workers.  

Layoffs and Unemployment Insurance

An employer is permitted to lay off employees because of technological changes or changes in organizational structure (in cases of a merger, consolidation, or cessation of operation of one or several departments), or where the employer faces economic difficulties. If these changes lead to the termination of two or more employees, the employer, in conjunction with the local trade union, is required to form and implement a “labor usage plan.” Companies can terminate two or more employees only after consultation with the local trade union and after a 30-day notice to the provincial labor authority.

The employer must pay a job-loss allowance for a laid-off employee who had regularly worked for the employer for at least 12 full months. The job-loss allowance is equal to one month’s salary for each year of service with the employer. After layoffs, workers will receive unemployment benefits if they contributed to the unemployment fund for at least 12 months.  

There are no waivers made to labor requirements to attract foreign investment.

Collective Bargaining

The constitution affords the right of association and the right to demonstrate, but limits the exercise of these rights, including preventing workers from organizing or joining independent unions of their choice. While workers may choose whether to join a union and at which level (local or “grassroots,” provincial, or national), the law requires every union to be under the legal purview and control of the country’s only trade union confederation, the Vietnam General Confederation of Labor (VGCL), an organization run by the CPV.

The law gives the VGCL exclusive authority to recognize unions and confers on VGCL upper-level trade unions the responsibility to establish workplace unions. The law also limits freedom of association by not allowing trade unions full autonomy in administering their affairs. The law confers on the VGCL ownership of all trade-union property and gives it the right to represent lower-level unions.  Union members do not elect trade union leaders and officials; the CPV appoints them.

Chapter 5 of the Labor Code provides conditions for collective bargaining. Although collective bargaining is not a new concept in Vietnam, the quality of collective bargaining agreements (CBA) is limited. Vietnam had approximately 27,866 CBAs accounting for 68 percent of unionized enterprises, according to 2017 figures. While CBAs are weakly enforced, VGCL in recent years has collaborated with the International Labor Organization (ILO) to pilot multi-employer CBAs in some industrial zones and sectoral CBAs in the textile sector.

Labor Dispute Resolution Mechanisms

The 2012 revised Labor Code introduced a process of mediation and arbitration for labor disputes. The law allows trade unions and employer organizations to facilitate and support collective bargaining, and requires companies to establish a mechanism to enable management, and the workforce to exchange information, and to consult on subjects that affect working conditions. Regulations require conducting workplace dialogues every three months. The Labor Code stipulates that trade unions have the right and responsibility to organize and lead strikes and establishes certain substantive and procedural restrictions on strikes. Strikes that do not arise from a collective labor dispute, or do not adhere to the process outlined by law, are illegal. The law makes a distinction between “interest-based” disputes (“a dispute arising out of the request of the workers’ collective on the establishment of a new working condition … in the negotiation process between the workers’ collective and the employers”) and “rights-based” disputes (“a dispute between the workers’ collective with the employer arising out of different interpretation and implementation of provisions of labor laws, collective bargaining agreements, internal working regulations, other lawful regulations and agreements.”) In contravention of international standards, the law forbids strikes over “rights-based” disputes. This includes strikes arising out of economic and social policy measures that are not a part of a collective negotiation process, as they are both outside the law’s definition of protected “interest-based” strikes.

The Labor Code prescribes an extensive and cumbersome process of mediation and arbitration before a lawful strike over an interest-based collective dispute can occur. Before workers may hold a strike, they must submit their claims through a process involving a conciliation council (or a district-level labor conciliator where no union is present). If the two parties do not reach a resolution, unions must submit claims to a provincial arbitration council. Unions (or workers’ representatives where no union is present) have the right either to appeal decisions of provincial arbitration councils to provincial people’s courts, or to strike. Individual workers may take cases directly to the people’s court system, but in most cases they may do so only after conciliation has been attempted and failed.  

If a workplace trade union does not exist, the law requires that an “immediate upper-level trade union” must perform the tasks of a grassroots union, even where workers have not so requested or have voluntarily elected not to organize. For non-unionized workers to organize a strike, they must request that the strike “be organized and led by the upper-level trade union,” and if non-unionized workers wish to bargain collectively, the upper-level VGCL union must represent them.

The law prohibits strikes by workers in businesses that serve the public or that the government considers essential to the national economy, defense, public health, and public order. “Essential services” include electricity production, post and telecommunications, maritime and air transportation, navigation, public works, and oil and gas production. The law stipulates strikers may not be paid wages while they are not at work. By law, individuals participating in strikes declared illegal by a people’s court and found to have caused damage to their employer are liable for damages. The law also grants the prime minister the right to suspend a strike considered detrimental to the national economy or public safety.

Strikes in Vietnam

According to VGCL, there have been 6,000 strikes in Vietnam since 1990, though most were not VGCL-led.  More than 73 percent of the 189 strikes in the first eight months of 2018 occurred at foreign direct-investment companies (mainly Korean, Taiwanese, Japanese, and Chinese companies), and nearly 40 percent occurred in the southern economic zone area in Binh Duong, Dong Nai, and Ba Ria-Vung Tau provinces and HCMC, according to the VGCL. None of the strikes followed the authorized conciliation and arbitration process, and thus authorities considered them illegal “wildcat” strikes. The government, however, took no action against the strikers and, on occasion, actively mediated agreements in the workers’ favor. For example, in 2018 the Prime Minister had dialogues with 1,000 workers in the northern region, and with 3,000 workers in the south, and 2,000 workers in the central region during 2016-2017. In some cases of government mediation, the government imposed heavy fines on employers, especially of foreign-owned companies, that engaged in illegal practices that led to strikes.

Gaps in Compliance in Law or Practice with International Labor Standards

Vietnam has been a member of the ILO since 1992, and has ratified five of the core ILO labor conventions (Conventions 100 and 111 on discrimination, Conventions 138 and 182 on child labor, and Convention 29 on forced labor). While the constitution and law prohibit forced or compulsory labor, Vietnam has not ratified Convention 105 dealing with forced labor as a means of political coercion and discrimination, or Conventions 87 and 98 on freedom of association and collective bargaining, although the government is currently taking steps toward ratification.  Under the 1998 Declaration on Fundamental Principles and Rights at Work, however, all ILO members, including Vietnam, have pledged to respect and promote core ILO labor standards, including those regarding association, the right to organize, and collective bargaining.

Vietnam’s legal framework on child labor appears generally in accordance with international standards, however, the Labor Code allows children under age 13 to work in “specific work regulated by the MOLISA.” Since 2012, the U.S. Department of Labor’s List of Goods Produced by Child Labor or Forced Labor has included Vietnamese garments, produced with child labor and forced labor, and bricks, produced with child labor, in violation of international standards.  Vietnamese garments are also included in a list of products produced by forced or indentured child labor under Executive Order 13126: Prohibition of Acquisition of Products Produced by Forced or Indentured Child Labor. Based on the results of Vietnam’s National Child Labor Survey, in 2016, the U.S. Department of Labor included 14 additional goods produced by child labor in Vietnam to the List of Goods Produced by Child Labor or Forced Labor: cashews, coffee, fish, footwear, furniture, leather, pepper, rice, rubber, sugarcane, tea, textiles, timber, and tobacco.

The government has increasingly acknowledged the issue of child labor in recent years and is a participant in a five-year, USD 8 million project implemented by the ILO to enhance national capacity to reduce and prevent child labor. The government is also in the process of enhancing its policy and regulatory framework for occupational safety and health (OSH).  The OSH law, passed in June 2015, extends OSH protections to all workers, including the informal economy, and includes the establishment of an injury compensation system for workers in the informal economy, which constitutes more than 60 percent of the workforce. The ILO is assisting the government with the drafting of implementing regulations for the law and finalizing a national OSH program for 2016-2020.

In January 2018, Penal Code amendments entered into effect, criminalizing all forms of labor trafficking of adults and prescribing penalties of five to 10 years’ imprisonment and fines of approximately USD 860 to USD 4,300 (VND 20-100 million). The amendments also criminalized labor trafficking of children under the age of 16 and prescribed penalties of seven to 12 years imprisonment and fines of USD 2,150 to USD 8,620 (VND 50-200 million). NGOs continued to report occurrences of forced labor of men, women, and children within the country. Labor recruitment firms, most of which were affiliated with SOEs, and unlicensed brokers reportedly charged workers seeking international employment higher fees than the law allows, doing so with impunity. Those workers incurred high debts and were thus more vulnerable to forced labor, including debt bondage.

As part of the government’s 2016-20 National Plan of Action for Children and National Program for Child Protection, the government continued efforts to prevent child labor and specifically targeted children in rural areas, disadvantaged children, and children at risk of exposure to hazardous work conditions. The Vietnam National Child Labor Survey 2012 report (the most recent data available) categorized 1.75 million working children as “child laborers,” accounting for 9.6 percent of the national child population or 62 percent of children engaged in economic activities. Of child laborers, 40 percent were girls, nearly 85 percent lived in rural areas, and 60 percent belonged to the 15-17 age group. Some children started work as young as age 12 and nearly 55 percent did not attend school (5 percent of whom would never attend school). Agriculture was the most common sector for child laborers, accounting for 67 percent of all child labor, while 15.7 percent worked in construction/manufacturing and 16.7 percent in services. There were reports of children between ages 10 and 18, and some as young as six, producing garments under forced-labor conditions. International and domestic NGOs noted successful partnerships with provincial governments to implement national-level policies combating child labor.  

It is illegal to establish independent labor unions and therefore, no government-sanctioned domestic labor NGOs can organize workers. Independent labor activists seeking to form unions separate from the Communist Party-run VGCL or inform workers of their labor rights sometimes suffer government harassment. However, government-sanctioned local labor NGOs have supported VGCL’s efforts to raise awareness of worker rights and occupational safety and health issues and to support internal and external migrant workers. Multiple international labor NGOs collaborated with the VGCL to provide training to VGCL-affiliated union representatives on labor organizing, collective bargaining, and other trade union issues. The ILO-International Finance Corporation (IFC) Better Work project reported that management interference in the activities of the trade union was one of the most significant issues in garment factories in the country.  

Credible reports, including from the ILO-IFC Better Work 2017 Annual Report, indicated that factories exceeded legal overtime thresholds and did not meet legal requirements for rest days. The ILO-IFC report stated that, while a majority of factories in the program complied with the daily limit of four hours of overtime, 77 percent exceeded monthly limits (30 hours) and 72 percent exceeded annual limits (300 hours). In addition, and because of the high prevalence of Sunday work, 44 percent of factories failed to provide at least four days of rest per month to all workers.

MOLISA is the principal labor authority, and it oversees the enforcement of the labor law, administers labor relations policy, and promotes job creation. The Labor Inspections Department is responsible for workplace inspections to confirm compliance with labor laws and occupational safety and health standards. Inspectors may use sanctions, fines, withdrawal of operating licenses or registrations, closures of enterprises, and mandatory training. Inspectors may take immediate measures when they have reason to believe there is an imminent and serious danger to the health or safety of workers, including temporarily suspending operations, although such measures were rare. MOLISA acknowledged shortcomings in its labor inspection system and emphasized the number of labor inspectors countrywide, fewer than 1,000 for a country of 96 million people, was insufficient.

New Labor Related Laws or Regulations

Planned amendments to Vietnam’s Labor Code were delayed until 2019. According to current plans, the government will make public the draft Labor Code for public comment in April-May 2019 and will submit the draft to the National Assembly for discussion in October 2019. The National Assembly will likely not pass a labor law until 2020, at the earliest. Lack of consensus about increasing the retirement age (from 60 to 62 to men and from 55 to 60 for women), among other issues, has delayed the process. Although progress has been slow, recent shifts within MOLISA leadership may signal more progress and reforms on labor issues in comparison with previous years, including on challenging issues such as industrial relations.  

The CPTPP and EV FTA, if passed, may help advance labor reform in Vietnam.  In particular, the EV FTA would require Vietnam to publish a timeline for ratifying the three remaining core ILO conventions: Convention 98 (on the right to collective bargaining) in 2019; Convention 105 (abolition of forced labor) in 2020; and Convention 87 (freedom of association and protection of the right to organize) in 2023. The most important of these are Convention 98 and 87 as they would allow trade unions, currently dominated by the VGCL, 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.  

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) signed a bilateral agreement with Vietnam in 1998, and Vietnam joined the Multilateral Investment Guarantee Agency (MIGA) in 1995.

In October 2018, OPIC became the U.S. International Development Finance Corporation (USIDFC) under the 2018 Build Act. The USIDFC will help support developing countries move through the transitory stage from non-market to market economies with an emphasis toward U.S. assistance and foreign policy objectives. The U.S. Congress authorized the USIDFC to make loans or loan guarantees (including in local currency) and to acquire equity or financial interests as a minority investor. It also will provide insurance or reinsurance to private-sector entities and qualifying sovereign entities. Moreover, the USIDFC will provide technical assistance, administer special projects, establish enterprise funds, issue obligations, and charge and collect service fees.

In October 2016, the then-OPIC President visited Vietnam to develop private-sector investment opportunities. In January 2017, former Secretary of State John Kerry along with OPIC presented a letter of intent to Fulbright University Vietnam (FUV) to support the design and construction of the university’s main campus in HCMC, which will bolster the university’s academic programs as well as expand enrollment up to 7,000 students. In June 2017, FUV recruited students for its 2018 school year. In November 2017, the then-OPIC President presented a letter of intent to Virginia-based energy company AES to support its construction of a LNG terminal and 2,250 megawatt combined cycle power plant in Vietnam which would provide around 5 percent of the country’s power generation capacity, but the project has yet to be approved.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

  Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (USD $M) 2018 $236,500 2017 $223,780 https://data.worldbank.org/country/vietnam  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or international Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (USD $M, stock positions) 2018 $9,334 2017 $2,010 BEA data available at

https://apps.bea.gov/international/factsheet/factsheet.cfm  

Host country’s FDI in the United States (USD $M, stock positions) 2018 N/A 2017 $73 BEA data available at

https://apps.bea.gov/international/factsheet/factsheet.cfm  

Total inbound stock of FDI as percent host GDP 2018 15% NA NA N/A


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment* Outward Direct Investment**
Total Inward Amount 100% Total Outward Amount 100%
Japan $8,598 24% N/A
South Korea $7,212 20%  
Singapore $5,071 14%  
Hong Kong $3,231 9%  
China $2,564 7%  
“0” reflects amounts rounded to +/- USD 500,000.

*No IMF Data Available; Vietnam’s Foreign Investment Agency under the Ministry of Planning and Investment (fia.mpi.gov.vn)

**No local data available


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total* Equity Securities** Total Debt Securities**
All Countries Amount 100% All Countries Amount 100% All Countries Amount 100%
Singapore $1,801 18% N/A N/A
British Virgin Islands $1,331 13%    
Hong Kong $1,294 13%    
South Korea $1,283 13%    
China $802 8%    

*No IMF Data Available; Vietnam’s Foreign Investment Agency under the Ministry of Planning and Investment (fia.mpi.gov.vn)
**No local data available

14. Contact for More Information

Economic Section
U.S. Embassy
7 Lang Ha, Ba Dinh, Hanoi, Vietnam
+84-24-3850-5000
InvestmentClimateVN@state.gov