Policies Toward Foreign Direct Investment

Under the Private Investment Law of 2005 (PIL), qualified domestic or foreign entities may invest in all sectors of the economy.  Article 16 of the PIL states that approved domestic and foreign companies with similar objectives are subject to the same rights under Afghan law and the same protections against discriminatory governmental actions.

The Ministry of Commerce and Industries (MOCI) has taken on the role of promoting business growth, investment, and trade.  The High Commission on Investment (HCI) is responsible for investment policy making. The HCI includes the Ministers of Agriculture, Finance, Foreign Affairs, Mines and Petroleum, and the Governor of the Central Bank (Da Afghanistan Bank). The Minister of Commerce and Industries chairs the HCI.  The High Economic Council (HEC), which is chaired by the President and includes both the HCI members and representatives from academia and the private sector, also plays a role in investment policy development.

The HEC, HCI, MOCI, and the Afghan Chamber of Commerce and Industries are tasked with maintaining a dialogue and resolving business disputes with the government.

On July 29, 2016, Afghanistan was formally admitted to the WTO, which could bring about a number of benefits for Afghanistan after full implementation, including improving prospects for foreign direct investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under the PIL, foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity, and freely acquire and dispose of interests in business enterprises.

While there is no requirement for foreigners to secure Afghan partners, the Afghan Constitution and the PIL prohibit foreign ownership of land.  In practice most foreign firms find it necessary to work with an Afghan partner. Foreign land ownership is not permitted, however, foreigners may lease land for up to 50 years.

Although the HCI has authority to limit the share of foreign investment in some industries, specific economic sectors, and specific companies, that authority has never been exercised.  In practice, investments may be 100 percent foreign owned.

Article 5 of the PIL prohibits investment in nuclear energy and gambling establishments.

Investment in certain sectors, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources, and infrastructure (defined as power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the HCI, in consultation with relevant government ministries.  The HCI may choose to apply specific requirements for investments in restricted sectors. Direct investment exceeding USD 3,000,000 requires HCI approval of the investment application.

Other Investment Policy Reviews

There have been no third-party investment policy reviews by the OECD, WTO, or UNCTAD in the past six years.

Afghanistan’s last major investment policy review was the Afghanistan National Development Strategy (ANDS), which was developed with the assistance of the United Nations Development Program (UNDP) and covered the period 2008-2013.  That strategy attempted to guide development investments in the focus areas of (1) agriculture and rural rehabilitation, (2) human capacity development, and (3) economic development and infrastructure, through high-priority programs chosen for contributions to job creation, broad geographic impact, and likelihood of attracting additional investment.

Business Facilitation

The Ministry of Commerce and Industry (MoCI) is responsible for business facilitation.  The HCI and HEC are responsible for investment and economic policy making.

Foreign or domestic companies investing in Afghanistan must obtain a corporate registration from the Afghanistan Central Business Registry (ACBR) and a Tax Identification Number issued by the Department of Revenue.

The websites for registration are:

• http://www.acbr.gov.af/registration.html  
• http://ard.mof.gov.af/en/page/information/service-standards/issue-of-taxpayer-identification-number  

Companies operating in the security, telecommunications, agriculture, and health sectors require additional licenses from relevant ministries.  Companies seeking licenses to provide consultancy, legal, or audit services must meet requirements for education or related experience for top officers.

To begin the process for initial issuance of licenses, renewals, and material changes to the license, foreign firms must submit a letter of interest to the Afghan Center of Business Registers.  From there, the Ministry of Commerce and Industry (MoCI) will process the request, and notify the foreign firm how to proceed in obtaining the license.

While registering a business can take as little as two days, it often takes longer and may require a local attorney’s help.

Ease of doing business reforms in 2016 led MOCI to begin issuing licenses for three years, as opposed to one year, to attract investment.  Obtaining a business license is relatively simple, however, applications for renewal are contingent upon certification from the Ministry of Finance (MOF) that all tax obligations have been met.  Some companies have seen MOCI license renewals delayed while the MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede license renewal.

Outward Investment

The government does not promote or incentivize outward investment.  Due to the security situation capital flight is a concern.

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service.  There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market-clearing rate.

The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.  The MOF has in some instances frozen the domestic bank accounts of companies over tax disputes, which has effectively served to prohibit transfers of capital.

In 2004, Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States.  Afghanistan does not have a bilateral investment treaty (BIT) with the United States. Afghanistan has BITs with Germany, Iran, and Turkey.

Afghanistan has signed multiple trade, economic, and investment agreements/memoranda of understanding with other countries.  The most significant is the Afghanistan Pakistan Transit Trade Agreement (APTTA), signed in 2010.

The United States, European Union, Canada, India, and Japan have granted Afghan exports preferential import tariffs under their Generalized Systems of Preference.  Afghanistan is a member of the Economic Cooperation Organization (ECO), the South Asia Free Trade Area (SAFTA), the South Asian Association for Regional Cooperation (SAARC), and of Central Asian Regional Economic Cooperation (CAREC).  The Afghan government has stated its intent to formally join the Transport Corridor Europe Caucasus Asia organization (TRACECA).

Afghanistan does not have a bilateral taxation treaty with the United States.

The Embassy believes many U.S. firms and U.S.-related entities are working with the Afghan government to resolve persistent differences over dividend taxes, vendor withholding tax obligations, taxation of U.S. government assistance, and other tax and contract disputes.

Investment Incentives

The Public Procurement Law, revised in 2016, retains the preference for national sources and domestic products that was codified in the Public Procurement Law of 2005.  In public statements since ratification, President Ghani has continued to emphasize the importance of giving preference to domestic products in order to create jobs. Foreign firms can receive the benefit of a domestic firm by partnering with a domestic firm.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Afghan Airfield Economic Development Commission (AAEDC), established in 2015, has taken the lead on drafting a new Special Economic Zone (SEZ) law, which was released for public comment in early 2019.  If passed, the law will provide the legal foundation for all types of export processing zones.

Performance and Data Localization Requirements

The Afghan government does not require the use of domestic content in goods or technology related to data storage.  There are no requirements for foreign IT providers to turn over source code and/or provide access for surveillance purposes.

The Government of Afghanistan operates over 30 active state-owned enterprises (SOEs), almost all of which are wholly-owned.  About 11,000 people are employed in sectors including public security, construction, transport, telecommunications, agriculture, and extractives.  Net income for all the SOEs is around USD 13 million; few are profitable. All SOEs are overseen and regulated by the Ministry of Finance and directly operated by specific ministries depending on the nature of the operations.  The Law on State Owned Enterprises includes specific targets for research and development investment, social development measures, and employee profit sharing, but compliance is negligible.

The Afghan government is also a stakeholder in 13 state-owned corporations (SOCs), entities that have independent boards and are not operated or directly supervised by the government.  SOEs and SOCs make up a small share of overall economic activity, although a few SOCs have significant market share in their sectors, including Afghan Telecom (Aftel), Ariana Afghan Airlines, and the electrical utility DABS (Da Afghanistan Breshna Sherkat).

Afghanistan does not have a centralized ownership entity for SOEs; the Ministry of Finance is responsible for all SOE oversight.

Afghan and foreign firms routinely cite corruption as an obstacle to doing business, whether in permitting and licensing, government procurement, meeting regulatory requirements, or taxation.  Various corruption watchdog reports regularly indicate corruption is endemic throughout society. For example, systemic corruption at border crossings hampers development of the licit market economy.  Afghan officials collect bribes in exchange for undervaluing, under-weighing, or not scanning shipments, which facilitates smuggling of illegal goods and the illicit trade of legal goods, while also weakening Afghan revenue collection and regulatory institutions.

The practice of criminalizing commercial complaints is commonly used to settle business disputes or to extort money from wealthy international investors.  The government does not implement criminal penalties for official corruption effectively, and officials are reported to frequently engage in corrupt practices with impunity.  There are reports of low-profile corruption cases successfully tried and of lower-level officials removed for corruption.

President Ghani has made anti-corruption efforts a high priority, and the government has seen some success in reform of procurements and customs.  In 2016, the government opened the Anti-Corruption Justice Center (ACJC) to investigate and try corruption cases. The ACJC has successfully convicted some government officials for corruption.  These high-level initiatives are positive steps though corruption remains a major issue. Disputes over land and land grabbing have risen over the last decade. Press reports indicate that government officials take land without compensation in exchange for contracts or political favors.  Occasionally, provincial governments confiscate land without due process or compensation to build public facilities.

UN Anticorruption Convention, OECD Convention on Combating Bribery

Afghanistan has signed and ratified the UN Anticorruption Convention. Afghanistan is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

The Afghan Government body responsible for combating corruption is the High Office of Oversight & Anti-Corruption. Prosecutorial authority resides with the Attorney General’s Office.

Afghan Government Point of Contact:

Dr. Yama Torabi
Head of Secretariat of High Council on Rule of Law and Anti-Corruption: (HCRoLAC)
+93 799 271 624)
Email: yama.torabi@gmail.com

Watchdog Organization Contact:

Sayed Ikram Afzali, Executive Director
Integrity Watch Afghanistan
Emal: ikram.afzali@iwaweb.org

The U.S. Department of State continues to warn Americans against travel to Afghanistan.  U.S. citizens should review the Consular Information Sheet and Travel Warning for Afghanistan for the most up-to-date information on the security situation and possible threats.

Anti-government and political violence are common and public concerns regarding security constrain economic activity.  Security is a primary concern for investors. Foreign firms operating in country report spending a significant percentage of revenues on security infrastructure and operating expenses.

Afghanistan suffers a critical shortage of skilled labor.  Only 31 percent of the population over the age of 15 can read and write.  Decades of war, emigration, low education levels, and a lack of training facilities have resulted in a scarcity of skilled labor, qualified managers, and educated professionals.  The Central Statistical Organization reports the 2018 unemployment rate was 8.8 percent, although the youth unemployment rate is estimated to be as high as 40 percent.

A 2005 labor regulation allows for the employment of foreign workers but requires priority be given to equally qualified Afghan workers.  Under the law on Foreigners Employment in Afghanistan, foreigners can be employed on the basis of a work permit issued by the Ministry of Labor and Social Affairs.  Work permits are issued for one year and are renewable. Foreign citizens traveling to Afghanistan for employment are required to obtain business visas and work permits.

The formal sector labor law contains some restrictions on termination of employment.  The law provides for the right of workers to join and form independent unions and to conduct legal strikes and bargain collectively, and the government generally respects these rights.  Broadly, labor-management relations are undeveloped. Freedom of association and the right to bargain collectively are generally respected, but most workers and employers are not aware of these rights.  This was particularly true of workers in rural areas or agriculture. In urban areas, the majority of workers participate in the informal sector as day laborers in construction, where there are neither unions nor collective bargaining.  The 2007 Labor Law guarantees basic workers’ rights, such as wages, overtime, leave, and other benefits, and bans forced labor and child labor. The 2017 Trafficking in Persons law punishes forced and child labor with a maximum 12-year sentence.

Comprehensive data on workplace accidents are unavailable, though there have been several reports of poor and dangerous working conditions.  Although the law prohibits children under 14 from working, UNESCO reported 7.5 percent of children under 14 work, primarily in agriculture, domestic work, carpet-making, and brick kilns.

Since 2003, OPIC has committed more than USD 295 million in financing and political risk insurance to support 38 projects in Afghanistan.  OPIC operates its programs in Afghanistan under the Investment Incentive Agreement, which the Afghan government signed in 2004.

Table 1: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Policies Towards Foreign Direct Investment

China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate, growing middle class, and an expanding consumer base that demands diverse, high quality products.  FDI has historically played an essential role in China’s economic development. In recent years, due to stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and national treatment for foreign enterprises through general improvements to the business environment. They also have made efforts to strengthen China’s legal and regulatory framework to enhance broader market-based competition.  Despite these efforts, the on-the-ground reality for foreign investors in China is that the operating environment still remains closed to many foreign investments across a wide range of industries.

In 2018, China issued the nationwide negative list that opened up a few new sectors to foreign investment and promised future improvements to the investment climate, such as leveling the playing field and providing equal treatment to foreign enterprises.  However, despite these reforms, FDI to China has remained relatively stagnant in the past few years. According to MOFCOM, total FDI flows to China slightly increased from about USD126 billion in 2017 to just over USD135 billion in 2018, signaling that modest market openings have been insufficient to generate significant foreign investor interest in the market.  Rather, foreign investors have continued to perceive that the playing field is tilted towards domestic companies. Foreign investors have continued to express frustration that China, despite continued promises of providing national treatment for foreign investors, has continued to selectively apply administrative approvals and licenses and broadly employ industrial policies to protect domestic firms through subsidies, preferential financing, and selective legal and regulatory enforcement.  They also have continued to express frustration over China’s weak protection and enforcement of IPR; corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cybersecurity and personal data-related requirements; increased emphasis on requirements to include CCP cells in foreign enterprises; and an unreliable legal system lacking in both transparency and rule of law.

China seeks to support inbound FDI through the MOFCOM “Invest in China” website (www.fdi.gov.cn  ).  MOFCOM publishes on this site laws and regulations, economic statistics, investment projects, news articles, and other relevant information about investing in China.  In addition, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments.

• American Chamber of Commerce China 2019 American Business in China White Paper: https://www.amchamchina.org/policy-advocacy/white-paper/  
• American Chamber of Commerce China 2019 Business Climate Survey: https://www.amchamchina.org/policy-advocacy/business-climate-survey/  
• U.S.-China Business Council’s 2018 China Business Environment Member Survey: https://www.uschina.org/reports/uscbc-2018-member-survey  
• EU Chamber’s 2018 Business Confidence Survey: http://www.europeanchamber.com.cn/en/publications-business-confidence-survey  .
• MOFCOM’s Investment Promotion Website: http://www.fdi.gov.cn/1800000121_10000161_8.html  

Limits on Foreign Control and Right to Private Ownership and Establishment

In June 2018, the Chinese government issued the nationwide negative list for foreign investment that replaced the Foreign Investment Catalogue.  The negative list identifies industries and economic sectors restricted or prohibited to foreign investment. Unlike the previous catalogue that used a “positive list” approach for foreign investment, the negative list removed “encouraged” investment categories and restructured the document to group restrictions and prohibitions by industry and economic sector.  Foreign investors wanting to invest in industries not on the negative list are no longer required to obtain pre-approval from MOFCOM and only need to register their investment.

The 2018 foreign investment negative list made minor modifications to some industries, reducing the number of restrictions and prohibitions from 63 to 48 sectors.  Changes included: some openings in automobile manufacturing and financial services; removal of restrictions on seed production (except for wheat and corn) and wholesale merchandizing of rice, wheat, and corn; removal of Chinese control requirements for power grids, building rail trunk lines, and operating passenger rail services; removal of joint venture requirements for rare earth processing and international shipping; removal of control requirements for international shipping agencies and surveying firms; and removal of the prohibition on internet cafés.  While market openings are always welcomed by U.S. businesses, many foreign investors remain underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization. Foreign investors continue to point out these openings should have happened years ago and now have occurred mainly in industries that domestic Chinese companies already dominate.

The Chinese language version of the 2018 Nationwide Negative List: http://www.ndrc.gov.cn/zcfb/zcfbl/201806/W020180628640822720353.pdf .

Ownership Restrictions

The foreign investment negative list restricts investments in certain industries by requiring foreign companies enter into joint ventures with a Chinese partner, imposing control requirements to ensure control is maintained by a Chinese national, and applying specific equity caps.  Below are just a few examples of these investment restrictions:

Examples of foreign investments that require an equity joint venture or cooperative joint venture for foreign investment include:

• Exploration and development of oil and natural gas;
• Printing publications;
• Foreign invested automobile companies are limited to two or fewer JVs for the same type of vehicle;
• Market research;
• Preschool, general high school, and higher education institutes (which are also required to be led by a Chinese partner);
• General Aviation;
• Companies for forestry, agriculture, and fisheries;
• Establishment of medical institutions; and
• Commercial and passenger vehicle manufacturing.

Examples of foreign investments requiring Chinese control include:

• Selective breeding and seed production for new varieties of wheat and corn;
• Construction and operation of nuclear power plants;
• The construction and operation of the city gas, heat, and water supply and drainage pipe networks in cities with a population of more than 500,000;
• Water transport companies (domestic);
• Domestic shipping agencies;
• General aviation companies;
• The construction and operation of civilian airports;
• The establishment and operation of cinemas;
• Basic telecommunication services;
• Radio and television listenership and viewership market research; and
• Performance agencies.

Examples of foreign investment equity caps include:

• 50 percent in automobile manufacturing (except special and new energy vehicles);
• 50 percent in value-added telecom services (excepting e-commerce);
• 51 percent in life insurance firms;
• 51 percent in securities companies;
• 51 percent futures companies;
• 51 percent in security investment fund management companies; and
• 50 percent in manufacturing of commercial and passenger vehicles.

Investment restrictions that require Chinese control or force a U.S. company to form a joint venture partnership with a Chinese counterpart are often used as a pretext to compel foreign investors to transfer technology against the threat of forfeiting the opportunity to participate in China’s market.  Foreign companies have reported these dictates and decisions often are not made in writing but rather behind closed doors and are thus difficult to attribute as official Chinese government policy. Establishing a foreign investment requires passing through an extensive and non-transparent approval process to gain licensing and other necessary approvals, which gives broad discretion to Chinese authorities to impose deal-specific conditions beyond written legal requirements in a blatant effort to support industrial policy goals that bolster the technological capabilities of local competitors.  Foreign investors are also often deterred from publicly raising instances of technology coercion for fear of retaliation by the Chinese government.

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

China is not a member of the OECD.  The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995.  The most recent OECD Investment Policy Review for China was completed in 2008 and a new review is currently underway.

OECD 2008 report: http://www.oecd.org/daf/inv/investment-policy/oecdinvestmentpolicyreviews-china2008encouragingresponsiblebusinessconduct.htm  .

In 2013, the OECD published a working paper entitled “China Investment Policy: An Update,” which provided updates on China’s investment policy since the publication of the 2008 Investment Policy Review.

• OECD 2013 Update: http://www.oecd.org/china/WP-2013_1.pdf 
• OECD Regulatory Restrictiveness Survey: http://www.oecd.org/investment/fdiindex.htm  

World Trade Organization (WTO)

China became a member of the WTO in 2001.  WTO membership boosted China’s economic growth and advanced its legal and governmental reforms.  The sixth and most recent WTO Investment Trade Review for China was completed in 2018. The report highlighted that China continues to be one of the largest destinations for FDI with inflows mainly in manufacturing, real-estate, leasing and business services, and wholesale and retail trade.  The report noted changes to China’s foreign investment regime that now relies on the nationwide negative list and also noted that pilot FTZs use a less restrictive negative list as a testbed for reform and opening.

• WTO Investment Trade Review for China: https://www.wto.org/english/tratop_e/tpr_e/tp475_e.htm  
• International Monetary Fund (IMF) information on China: http://www.imf.org/external/country/Chn/  
• FDI Statistics from MOFCOM: http://www.fdi.gov.cn/1800000121_10000177_8.html  

Business Facilitation

China made progress in the World Bank’s Ease of Doing Business Survey by moving from 78th in 2017 up to 46th place in 2018 out of 190 economies.  This was accomplished through regulatory reforms that helped streamline some business processes including improvements related to cross-border trading, setting up electricity, electronic tax payments, and land registration.  This ranking, while highlighting business registration improvements that benefit both domestic and foreign companies, does not account for major challenges U.S. businesses face in China like IPR protection and forced technology transfer.

• World Bank Ease of Doing Business: http://www.doingbusiness.org/rankings  
• World Bank Investing Across Borders: http://iab.worldbank.org/data/exploreeconomies/china  

The Government Enterprise Registration (GER), an initiative of the United Nations Conference on Trade and Development (UNCTAD), gave China a low score of 1.5 out of 10 on its website for registering and obtaining a business license.  In previous years, the State Administration for Industry and Commerce (SAIC) was responsible for business license approval. In March 2018, the Chinese government announced a major restructuring of government agencies and created the State Administration for Market Regulation (SAMR) that is now responsible for business registration processes.  According to GER, SAMR’s Chinese website lacks even basic information, such as what registrations are required and how they are to be conducted.

• UNCTAD GER: https://ger.co/  
• SAMR Business Registration Information: http://www.saic.gov.cn/  

The State Council, which is China’s chief administrative authority, in recent years has reduced red tape by eliminating hundreds of administrative licenses and delegating administrative approval power across a range of sectors.  The number of investment projects subject to central government approval has reportedly dropped significantly. The State Council also has set up a website in English, which is more user-friendly than SAMR’s website, to help foreign investors looking to do business in China.

The State Council Information on Doing Business in China: http://english.gov.cn/services/doingbusiness  

The Department of Foreign Investment Administration within MOFCOM is responsible for foreign investment promotion in China, including promotion activities, coordinating with investment promotion agencies at the provincial and municipal levels, engaging with international economic organizations and business associations, and conducting research related to FDI into China.  MOFCOM also maintains the “Invest in China” website.

MOFCOM “Invest in China” Information: http://www.fdi.gov.cn/1800000121_10000041_8.html  

Despite recent efforts by the Chinese government to streamline business registration procedures, foreign companies still complain about the challenges they face when setting up a business.  In addition, U.S. companies complain they are treated differently from domestic companies when setting up an investment, which is an added market access barrier for U.S. companies. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China.  The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular Chinese corporate entity or investment vehicle.

Outward Investment

Since 2001, China has initiated a “going-out” investment policy that has evolved over the past two decades.  At first, the Chinese government mainly encouraged SOEs to go abroad and acquire primarily energy investments to facilitate greater market access for Chinese exports in certain foreign markets.  As Chinese investors gained experience, and as China’s economy grew and diversified, China’s investments also have diversified with both state and private enterprise investments in all industries and economic sectors.  While China’s outbound investment levels in 2018 were significantly less than the record-setting investments levels in 2016, China was still one of the largest global outbound investors in the world. According to MOFCOM outbound investment data, 2018 total outbound direct investment (ODI) increased less than one percent compared to 2017 figures.  There was a significant drop in Chinese outbound investment to the United States and other North American countries that traditionally have accounted for a significant portion of China’s ODI. In some European countries, especially the United Kingdom, ODI generally increased. In One Belt, One Road (OBOR) countries, there has been a general increase in investment activity; however, OBOR investment deals were generally relatively small dollar amounts and constituted only a small percentage of overall Chinese ODI.

In August 2017, in reaction to concerns about capital outflows and exchange rate volatility, the Chinese government issued guidance to curb what it deemed to be “irrational” outbound investments and created “encouraged,” “restricted,” and “prohibited” outbound investment categories to guide Chinese investors.  The guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, sports teams, and “financial investments that create funds that are not tied to specific investment projects.” The guidance encouraged outbound investment in sectors that supported Chinese industrial policy, such as Strategic Emerging Industries (SEI) and MIC 2025, by acquiring advanced manufacturing and high-technology assets.  MIC 2025’s main aim is to transform China into an innovation-based economy that can better compete against – and eventually outperform – advanced economies in 10 key high-tech sectors, including: new energy vehicles, next-generation IT, biotechnology, new materials, aerospace, oceans engineering and ships, railway, robotics, power equipment, and agriculture machinery. Chinese firms in MIC 2025 industries often receive preferential treatment in the form of preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors.  The outbound investment guidance also encourages investments that promote China’s OBOR development strategy, which seeks to create connectivity and cooperation agreements between China and countries along the Chinese-designated “Silk Road Economic Belt and the 21st-century Maritime Silk Road” through an expansion of infrastructure investment, construction materials, real estate, power grids, etc.

China has 109 Bilateral Investment Treaties (BITs) in force and multiple Free Trade Agreements (FTAs) with investment chapters.  Generally speaking, these agreements cover topics like expropriation, most-favored-nation treatment, repatriation of investment proceeds, and arbitration mechanisms.  Relative to U.S.-negotiated BITs and FTA investment chapters, Chinese agreements are generally considered to be weaker and offer less protections to foreign investors.

A list of China’s signed BITs:

• http://tfs.mofcom.gov.cn/article/Nocategory/201111/20111107819474.shtml  
• http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu  .

The United States and China last held BIT negotiations in January 2017.  China has been in active bilateral investment agreement negotiations with the EU since 2013.  The two sides have exchanged market access offers and have expressed an intent to conclude talks by 2020.  China also has negotiated 17 FTAs with trade and investment partners, is currently negotiating 14 FTAs and FTA-upgrades, and is considering eight further potential FTA and FTA-upgrade negotiations.  China’s existing FTA partners are Maldives, Georgia, ASEAN, Republic of Korea, Pakistan, Australia, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, and Taiwan.  China concluded its FTAs with Maldives and Georgia in 2017.

China’s signed FTAs:

• http://fta.mofcom.gov.cn/index.shtml  
• http://fta.mofcom.gov.cn/english/index.shtml  

The United States and China concluded a bilateral taxation treaty in 1984.

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import and/or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  Preferential treatment often occurs in specific sectors that the government has identified for policy support, like technology and advanced manufacturing, and will be specific to a geographic location like a special economic zone (like FTZs), development zone, or a science park.  The Chinese government has also prioritized foreign investment in inland China by providing incentives to invest in seven new FTZs located in inland regions (2017) and offering more liberalizations to foreign investment through its Catalogue of Priority Industries for Foreign Investment in Central and Western China that provides greater market access to foreign investors willing to invest in less developed areas in Central and Western China.

While state subsidies has long been an area that foreign investors have criticized for distorting competition in certain industries, Chinese officials have publicly pledged that foreign investors willing to manufacture products in China can equally participate in the research and development programs financed by the Chinese government.  The Chinese government has also said foreign investors have equal access to preferential policies under initiatives like Made in China 2025 and Strategic Emerging Industries that seek to transform China’s economy into an innovation-based economy that becomes a global leader in future growth sectors.  In these high-tech and advanced manufacturing sectors, China needs foreign investment because it lacks the capacity, expertise, and technological know-how to conduct advanced research or manufacture advanced technology on par with other developed economies.  Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries: new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment.  While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national level indicate China’s continued commitment to developing these sectors.  Foreign investment plays an important role in helping China move up the manufacturing value chain.  However, there are a large number of economic sectors that China deems sensitive due to broadly defined national security concerns, including “economic security,” which can effectively close off foreign investment to those sectors.

Foreign Trade Zones/Free Ports/Trade Facilitation

China has customs-bonded areas in Shanghai, Tianjin, Shantou, Guangzhou, Dalian, Xiamen, Ningbo, Zhuhai, Fuzhou, and parts of Shenzhen.  In addition to these official duty-free zones identified by China’s State Council, there are also numerous economic development zones and “open cities” that offer preferential treatment and benefits to investors, including foreign investors.

In September 2013, the State Council in conjunction with the Shanghai municipal government, announced the Shanghai Pilot Free Trade Zone that consolidated the geographical area of four previous bonded areas into a single FTZ.  In April 2015, the State Council expanded the pilot to include new FTZs in Tianjin, Guangdong, and Fujian. In March 2017, the State Council approved seven new FTZs in Chongqing, Henan, Hubei, Liaoning, Shaanxi, Sichuan, and Zhejiang, with the stated purpose to integrate these areas more closely with the OBOR initiative – the Chinese government’s plan to enhance global economic interconnectivity through joint infrastructure and investment projects that connect China’s inland and border regions to the rest of the world.  In October 2018, the Chinese government rolled out plans to convert the entire island province of Hainan into an FTZ that will take effect in 2020. This FTZ aims to provide a more open and high-standard trade and investment hub focused on improved rule of law and financial services. In addition to encourage tourism development, the Hainan FTZ will also seek to develop high-tech industries while preserving the ecology of the island. The goal of all China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects eventually to introduce in other parts of the domestic economy.

The FTZs should offer foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ “negative list,” or on the list of industries and economic sectors restricted or prohibited for foreign investment.  The State Council published an updated FTZ negative list in June 2018 that reduced the number of restrictions and prohibitions on foreign investment from 95 items down to 45. The most recent negative list did not remove many commercially significant restrictions or prohibitions compared to the nationwide negative list also released in June 2018.

Although the FTZ negative list in theory provides greater market access for foreign investment in the FTZs, many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to other opportunities in other parts of China.  According to Chinese officials, over 18,000 entities have registered in the FTZs. The municipal and central governments have released a number of administrative and sector-specific regulations and circulars that outline the procedures and regulations in the zones.

Performance and Data Localization Requirements

As part of China’s WTO accession agreement, China promised to revise its foreign investment laws to eliminate sections that imposed export performance, local content, balanced foreign exchange through trade, technology transfer, and create research and development center requirements on foreign investors as a prerequisite to enter China’s market.  As part of these revisions, China committed to only enforce technology transfer requirements that do not violate WTO standards on IP and trade-related investment measures. In practice, however, China has not completely lived up to these promises with some U.S. businesses reporting that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that helps develop certain domestic industries and support the local job market.  Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for foreign firms that have already invested in the province or municipality. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or provide IP licenses to Chinese firms, often at below market rates. These practices not only run contrary to WTO principles but hurt the competitive position of foreign investors.

China also called to restrict the ability of both domestic and foreign operators of “critical information infrastructure” to transfer personal data and important information outside of China while also requiring those same operators to only store data physically in China.  These potential restrictions have prompted many firms to review how their networks manage data. Foreign firms also fear that calls for use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or that foreign companies may be pressured to disclose source code and other proprietary information, putting IP at risk.  In addition, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect gives preference to domestic firms and their technology. These requirements not only hinder operational effectiveness but also potentially puts in jeopardy IP protection and overall competitiveness of foreign firms operating in China.

China has approximately 150,000 SOEs which are wholly owned by the state.  Around 50,000 (33 percent) are owned by the central government and the remainder by local governments.  The central government directly controls and manages 96 strategic SOEs through the State-owned Assets Supervision and Administration Commission (SASAC), of which around 60 are listed on stock exchanges domestically and/or internationally.  SOEs, both central and local, account for 30 to 40 percent of total GDP and about 20 percent of China’s total employment.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.

SASAC regulated SOEs: http://www.sasac.gov.cn/n2588035/n2641579/n2641645/c4451749/content.html  .

China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.

During the November 2013 Third Plenum of the 18th Party Congress – a hallmark session that announced economic reforms, including calling for the market to play a more decisive role in the allocation of resources – President Xi Jinping called for broad SOE reforms.  Cautioning that SOEs still will remain a key part of China’s economic system, Xi emphasized improved SOE operational transparency and legal reforms that would subject SOEs to greater competition by opening up more industry sectors to domestic and foreign competitors and by reducing provincial and central government preferential treatment of SOEs.  The Third Plenum also called for “mixed ownership” economic structures, providing greater economic balance between private and state-owned businesses in certain industries, including equal access to factors of production, competition on a level playing field, and equal legal protection.

At the 2018 Central Economic Work Conference, Chinese leaders said in 2019 they will promote a greater role for the market, as well as renewed efforts on reforming SOEs – to include mixed ownership reform.  In delivering the 2019 Government Work Report, Premier Li Keqiang pledged to improve corporate governance, including allowing SOE company boards, rather than SASAC, to appoint senior leadership. 

OECD Guidelines on Corporate Governance

SASAC participates in the OECD Working Party on State Ownership and Privatization Practices (WPSOPP).  Chinese officials have indicated China intends to utilize OECD SOE guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  However, despite China’s Third Plenum commitments in 2013 (i.e., to foster “market-oriented” reforms in China’s state sectors), Chinese officials and SASAC have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  China has also committed to implement the G-20/OECD Principles of Corporate Governance, which apply to all publicly-listed companies, including listed SOEs.

Chinese law lacks unified guidelines or a governance code for SOEs, especially among provincial or locally-controlled SOEs.  Among central SOEs managed by SASAC, senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s Party secretary

The lack of management independence and the controlling ownership interest of the State make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail, presumably due to the close relationship with the CCP.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.  In addition, SOEs enjoy preferential access to a disproportionate share of available capital, whether in the form of loans or equity.

In its September 2015 Guiding Opinions on Deepening the Reform of State-Owned Enterprises, the State Council instituted a system for classifying SOEs as “public service” or “commercial enterprises.”  Some commercial enterprise SOEs were further sub-classified into “strategic” or “critically important” sectors (i.e., with strong national economic or security importance).  SASAC has said the new classification system would allow the government to reduce support for commercial enterprises competing with private firms and instead channel resources toward public service SOEs.

Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers that have produced mixed results.  However, analysts believe minor reforms will be ineffective as long as SOE administration and government policy are intertwined.

A major stumbling block to SOE reform is that SOE regulators are outranked in the CCP party structure by SOE executives, which minimizes SASAC and other government regulators’ effectiveness at implementing reforms.  In addition, SOE executives are often promoted to high-ranking positions in the CCP or local government, further complicating the work of regulators.

During the Third Plenum of the CCP’s 18th Central Committee, in 2013, the CCP leadership announced that the market would play a “decisive role” in economic decision making and emphasized that SOEs needed to focus resources in areas that “serve state strategic objectives.”  However, experts point out that despite these new SOE distinctions, SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Moreover, the application of China’s Anti-Monopoly Law, together with other industrial policies and practices that are selectively enforced by the authorities, protects SOEs from private sector competition.

China is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO, although Hong Kong is listed.  During China’s WTO accession negotiations, Beijing signaled its intention to join GPA.  And, in April 2018, President Xi announced his intent to join GPA, but no timeline has been given for accession.

Investment Restrictions in “Vital Industries and Key Fields”

The intended purpose of China’s State Assets Law is to safeguard and protect China’s economic system, promoting “socialist market economy” principles that fortify and develop a strong, state-owned economy.  A key component of the State Assets Law is enabling SOEs to play the leading role in China’s economic development, especially in “vital industries and key fields.”  To accomplish this, the law encourages Chinese regulators to adopt policies that consolidate SOE concentrations to ensure dominance in industries deemed vital to “national security” and “national economic security.” This principle is further reinforced by the December 2006 State Council announcement of the Guiding Opinions Concerning the Advancement of Adjustments of State Capital and the Restructuring of State-Owned Enterprises, which called for more SOE consolidation to advance the development of the state-owned economy, including enhancing and expanding the role of the State in controlling and influencing “vital industries and key fields relating to national security and national economic lifelines.”  These guidelines defined “vital industries and key fields” as “industries concerning national security, major infrastructure and important mineral resources, industries that provide essential public goods and services, and key enterprises in pillar industries and high-tech industries.”

Around the time the guidelines were published, the SASAC Chairman also listed industries where the State should maintain “absolute control” (e.g., aviation, coal, defense, electric power and the state grid, oil and petrochemicals, shipping, and telecommunications) and “relative control” (e.g., automotive, chemical, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, nonferrous metal, and science and technology).  China has said these lists do not reflect its official policy on SOEs.  In fact, in some cases, regulators have allowed for more than 50 percent private ownership in some of the listed industries on a case-by-case basis, especially in industries where Chinese firms lack expertise and capabilities in a given technology Chinese officials deemed important at the time.

Parts of the agricultural sector have traditionally been dominated by SOEs.  Current agriculture trade rules, regulations, and limitations placed on foreign investment severely restrict the contributions of U.S. agricultural companies, depriving China’s consumers of the many potential benefits additional foreign investment could provide.  These investment restrictions in the agricultural sectors are at odds with China’s objective of shifting more resources to agriculture and food production in order to improve Chinese lives, food security, and food safety.

Privatization Program

At the November 2013 Third Plenum, the Chinese government announced reforms to SOEs that included selling shares of SOEs to outside investors.  This approach is an effort to improve SOE management structures, emphasize the use of financial benchmarks, and gradually take steps that will bring private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, these reforms have been gradual, as the Chinese government has struggled to implement its SOE reform vision and often opted to utilize a preferred SOE consolidation approach. In the past few years, the Chinese government has listed several large SOEs and their assets on the Hong Kong stock exchange, subjecting SOEs to greater transparency requirements and heightened regulatory scrutiny.  This approach is a possible mechanism to improve SOE corporate governance and transparency. Starting in 2017, the government began pushing the mixed ownership model, in which private companies invest in SOEs and outside managers are hired, as a possible solution, although analysts note that ultimately the government (and therefore the CCP) remains in full control regardless of the private share percentage.  Over the last year, President Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the State as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

Corruption remains endemic in China.  The lack of an independent press, along with the lack of independence of corruption investigators, who answer to and are managed by the CCP, all hamper the transparent and consistent application of anti-corruption efforts.

Chinese anti-corruption laws have strict penalties for bribes, including accepting a bribe, which is a criminal offense punishable up to life imprisonment or death in “especially serious” circumstances.  Offering a bribe carries a maximum punishment of up to five years in prison, except in cases with “especially serious” circumstances, when punishment can extend up to life in prison.

In August 2015, the NPC amended several corruption-related parts of China’s Criminal Law.  For instance, bribing civil servants’ relatives or other close relationships is a crime with monetary fines imposed on both the bribe-givers and the bribe-takers; bribe-givers, mainly in minor cases, who aid authorities can be given more lenient punishments; and instead of basing punishments solely on the specific amount of money involved in a bribe, authorities now have more discretion to impose punishments based on other factors.

In February 2011, an amendment was made to the Criminal Law, criminalizing the bribing of foreign officials or officials of international organizations.  However, to date, there have not been any known cases in which someone was successfully prosecuted for offering this type of bribe.

In March 2018, the NPC approved the creation of the National Supervisory Commission (NSC), a new government anti-corruption agency that resulted from the merger of the Ministry of Supervision and the CCP’s Central Commission for Discipline Inspection (CCDI).  The NSC absorbed the anti-corruption units of the Supreme People’s Procuratorate, and those of the National Bureau of Corruption Prevention.  In addition to China’s 89 million CCP members, the new commission has jurisdiction over all civil servants and employees of state enterprises, as well as managers in public schools, hospitals, research institutes, and other public service institutions.  Lower-level supervisory commissions have been set up in all provinces, autonomous regions, municipalities, and the Xinjiang Production and Construction Corps.  The NPC also passed the State Supervision Law, which provides the NSC with its legal authorities to investigate, detain, and punish public servants.

The CCDI remains the primary body for enforcing ethics guidelines and party discipline, and refers criminal corruption cases to the NSC for further investigation.

President Xi Jinping’s Anti-Corruption Efforts

Since President Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  President Xi labeled endemic corruption as an “existential threat” to the very survival of the CCP that must be addressed.  Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to thoroughly root out corruption.  Judicial reforms are viewed as necessary to institutionalize the fight against corruption and reduce the arbitrary power of CCP investigators, but concrete measures have emerged slowly.  To enhance regional anti-corruption cooperation, the 26th Asia-Pacific Economic Cooperation (APEC) Ministers Meeting adopted the Beijing Declaration on Fighting Corruption in November 2014.

According to official statistics, from 2012 to 2018 the CCDI investigated 2.17 million cases – more than the total of the preceding ten years.  In 2018 alone, the CCP disciplined around 621,000 individuals, up almost 95,000 from 2017.  However, the majority of officials only ended up receiving internal CCP discipline and were not passed forward for formal prosecution and trial.  A total of 195,000 corruption and bribery cases involving 263,000 people were heard in courts between 2013 and 2017, according to the Supreme People’s Court.  Of these, 101 were officials at or above the rank of minister or head of province.  In 2018, a large uptick of 51 officials at or above the provincial/ministerial level were disciplined by the NSC.  One group heavily disciplined in recent years has been the discipline inspectors themselves, with the CCP punishing more than 7,900 inspectors since late-2012.  This led to new regulations being implemented in 2016 by CCDI that increased overall supervision of its investigators.

China’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 5,000 fugitives suspected of corruption.  In 2018 alone, CCDI reported that 1,335 fugitives suspected of official crimes were apprehended, including 307 corrupt officials mainly suspected for graft.  Anecdotal information suggests the Chinese government’s anti-corruption crackdown oftentimes is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, China’s health authority issued “black lists” of firms and agents involved in commercial bribery.  Several blacklisted firms were foreign companies.  Additionally, anecdotal information suggests many Chinese government officials responsible for approving foreign investment projects, as well as some routine business transactions, are slowing approvals to not arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity.

While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.  Some citizens who have called for officials to provide transparency and public accountability by disclosing public and personal assets, or who have campaigned against officials’ misuse of public resources, have been subject to criminal prosecution.

United Nations Anti-Corruption Convention, OECD Convention on Combating Bribery

China ratified the United Nations Convention against Corruption in 2005 and participates in APEC and OECD anti-corruption initiatives.  China has not signed the OECD Convention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.

Resources to Report Corruption

The following government organization receives public reports of corruption:

Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number: +86 10 12388.

The risk of political violence directed at foreign companies operating in China remains low.  Each year, government watchdog organizations report tens of thousands of protests throughout China.  The government is adept at handling protests without violence, but given the volume of protests annually, the potential for violent flare-ups is real.  Violent protests, while rare, have generally involved ethnic tensions, local residents protesting corrupt officials, environmental and food safety concerns, confiscated property, and disputes over unpaid wages.

In recent years, the growing number of protests over corporate M&A transactions has increased, often because disenfranchised workers and mid-level managers feel they were not included in the decision process.  China’s non-transparent legal and regulatory system allows the CCP to pressure or punish foreign companies for the actions of their governments. The government has also encouraged protests or boycotts of products from certain countries, like Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions.  Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the decision to deploy the Thermal High Altitude Area Defense (THAAD) to the Korean Peninsula, which led to Lotte closing and selling its China operations; and high-profile cases of gross mistreatment of Japanese firms and brands in 2011 and 2012 following disputes over islands in the East China Sea.  Recently, some reports suggest China has retaliated against some Canadian companies and products as a result of a domestic Canadian legal issue that impacted a large Chinese enterprise.

There have also been some cases of foreign businesspeople that were refused permission to leave China over pending commercial contract disputes.  Chinese authorities have broad authority to prohibit travelers from leaving China (known as an “exit ban”) and have imposed exit bans to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate government investigations.  Individuals not directly involved in legal proceedings or suspected of wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations. Exit bans are often issued without notification to the foreign citizen or without a clear legal recourse to appeal the exit ban decision.

In the past few years, Chinese authorities have detained or arrested several foreign nationals, including American citizens, and have refused to notify the U.S. Embassy or allow access to the American citizens detained for consular officers to visit.  These trends are in direct contravention of recognized international agreements and conventions.

For U.S. companies operating in China, finding adequate human resources remains a major challenge.  Finding, developing, and retaining domestic talent, particularly at the management and highly-skilled technical staff levels, remain difficult challenges often cited by foreign firms.  In addition, labor costs continue to be a concern, as salaries along with other inputs of production have continued to rise. Foreign companies also continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent to relocate to China.  These labor concerns contribute to a small, but growing, number of foreign companies relocating from China to the United States, Canada, Mexico, or other parts of Asia.

Chinese labor law does not protect rights such as freedom of association and the right of workers to strike.  China to date has not ratified the United Nations International Labor Organization conventions on freedom of association, collective bargaining, and forced labor, but it has ratified conventions prohibiting child labor and employment discrimination.  Foreign companies often complain of difficulty navigating China’s ever-evolving labor laws, social insurance laws, and different agencies’ implementation guidelines on labor issues. Compounding the complexity, local characteristics and the application by different localities of national labor laws often vary.

Although required by national law, labor contracts are often not used by domestic employers with local employees.  Without written contracts, employees struggle to prove employment, thus losing basic labor rights like claiming severance and unemployment compensation if terminated, as well as access to publicly-provided labor dispute settlement mechanisms.  Similarly, regulations on agencies that provide temporary labor (referred to as “labor dispatch” in China) have tightened, and some domestic employers have switched to hiring independent service provider contractors in order to skirt the protective intent of these regulations.  These loopholes incentivize employers to skirt the law because compliance leads to substantially higher labor costs. This is one of many factors contributing to an uneven playing field for foreign firms that compete against domestic firms that circumvent local labor laws.

Establishing independent trade unions is illegal in China.  The law allows for worker “collective bargaining”; however, in practice, collective bargaining focuses solely on collective wage negotiations – and even this practice is uncommon.  The Trade Union Law gives the All-China Federation of Trade Unions (ACFTU), a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  The ACFTU’s priority task is to “uphold the leadership of the Communist Party,” not to protect workers’ rights or improve their welfare. The ACFTU and its provincial and local branches aggressively organize new constituent unions and add new members, especially in large multinational enterprises, but in general, these enterprise-level unions do not actively participate in employee-employer relations.  The absence of independent unions that advocate on behalf of workers has resulted in an increased number of strikes and walkouts in recent years.

ACFTU enterprise unions issue a mandatory employer-borne cost of 2 percent of payroll for membership.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages occur with increasing regularity, especially in labor intensive and “sunset” industries (i.e., old and declining industries such as low-end manufacturing).  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution have generally been ineffective in resolving labor disputes in China.  Some localities actively discourage acceptance of labor disputes for arbitration or legal resolution. Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

In the aftermath of the Chinese crackdown on Tiananmen Square demonstrations in June 1989, the United States suspended Overseas Private Investment Corporation (OPIC) programs in China.  OPIC honors outstanding political risk insurance contracts. The Multilateral Investment Guarantee Agency, an organization affiliated with the World Bank, provides political risk insurance for investors in China.  Some foreign commercial insurance companies also offer political risk insurance, as does the People’s Insurance Company of China.

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

*China’s National Bureau of Statistics (90.031 trillion RMB converted at 6.8 RMB/USD estimate)
** Statistics gathered from China’s Ministry of Commerce official data

Table 3: Sources and Destination of FDI

Source: IMF Coordinated Direct Investment Survey (CDIS)

Table 4: Sources of Portfolio Investment

Data not available.

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.

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.

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.

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 

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

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.

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.

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.

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

* 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

Table 4: Sources of Portfolio Investment

Policies Towards Foreign Direct Investment

Tajikistan has traditionally courted state-led investment and external loans from larger regional neighbors, including China, Russia, and Iran.  In 2018, China remained Tajikistan’s largest investor, with investments totaling USD 228 million, or 77 percent of total foreign direct investment (FDI) to Tajikistan.  For the last 10 years, China has invested over USD 2.25 billion in Tajikistan, making it Tajikistan’s largest investment partner.

In 2018, the Tajik government increased efforts to attract investments from the Gulf States.  Saudi Arabia invested USD 160.2 million in Tajikistan from 2007-2017.  In addition, Qatar has invested USD 384.5 million in a high-rise luxury apartment complex and the construction of the region’s largest mosque.  Qatar’s central bank is investigating banking opportunities in Tajikistan.

Anecdotally, dozens of foreign-owned companies in Tajikistan have complained to resident European and U.S. officials about continual inspections and arbitrary and discriminatory application of the tax code to exact burdensome payments.

Despite a general deterioration in the investment climate, progressive legislative action on a few issues may yield positive results.  The government abolished a cotton fiber tax in June 2016, reduced the sales tax by one percent in January 2017, and simplified the tax system making a larger population of small-scale entrepreneurs eligible for more favorable tax treatment.

Tajikistan’s Investment Law (Article 7) guarantees equal rights for both local and foreign investors.  According to this law, foreigners can invest by jointly owning shares in existing companies with other Tajik companies or Tajik citizens; by creating fully foreign-owned companies; or by concluding agreements with legal entities or citizens of Tajikistan that provide for other forms of foreign investment activity.  Foreign firms may acquire assets, including shares and other securities, as well as land leasing and mineral usage rights.  Foreign firms may also exercise all property rights to which they are entitled, either independently or shared with other Tajik companies and citizens of Tajikistan.  Most of Tajikistan’s current international agreements provide most-favored-nation status.

Although Tajik law recognizes the sanctity of contracts, the country’s judicial system is opaque and enforcement is poor.  The country’s tax policy is neither predictable nor always favorable to legitimate business interests.  Business representatives note that the Tajik government typically takes an opportunistic interest in private companies that turn a profit.

Tajikistan’s legal code does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment.  To receive permission and licenses for operation, however, a foreign investor must navigate a complicated, cumbersome, and often corrupt bureaucratic system.

Several Tajik government agencies are responsible for investment promotion, but they frequently have competing interests.  The Committee on Investments and State Property Management (https://www.investcom.tj/ ) chiefly facilitates FDI.  In addition, state-owned enterprise Tajinvest under the Committee on Investments and State Property Management is responsible for attracting investment into Tajikistan https://www.tajinvest.tj ).

Tajikistan has established several formal mechanisms to maintain open channels of communication with existing and potential investors.  With EBRD support, the government established a Consultative Council on the Improvement of the Investment Climate in 2007.  This annual council provides a formal venue for dialogue with donors, international financial institutions, and members of the private sector (https://ehost.tj/) 

In January 2015, the government established a National Entrepreneurship Day, annually celebrated in October.  Nevertheless, investors continue to claim that many of their complaints to the government go unheeded.

Limits on Foreign Control and Right to Private Ownership and Establishment

Tajikistan’s legislation provides a right for all forms of foreign and domestic ownership to establish business enterprises and engage in remunerative activity.  There are no limits on foreign ownership or control of firms and no sector-specific restrictions that discriminate against market access.  Local law considers all land and subsoil resources to belong exclusively to the state, although initial efforts to establish a private land market are underway.

Tajikistan’s legislation allows for 100 percent foreign ownership of local companies.  In the context of jointly-owned companies, local partners generally seek to possess a controlling share (51 percent or more) at the initial stage of business development and in some cases may seek to increase their stake over time.

All sectors of Tajikistan’s economy are open to foreign participation with the exception of aviation, defense, security, and law enforcement, which require special government permission for the operation of such types of businesses or services.  Tajikistan does not restrict foreign investment; it does not mandate local stakeholder equity positions or local partnership.  In some cases, the government requires specific licenses.  There are no mandatory IP/technology transfer requirements.

Tajikistan’s government maintains an investment screening mechanism for inbound foreign investments involving government interests, including investments into Free Economic Zones, issuing approval or rejection statements in particular for investments requiring government financial support or state guarantees.  The Committee on Investments and State Property Management is responsible for filing and coordinating foreign investment project proposals as they pass through the review pipeline.  The government takes particular interest in determining whether the proposed project may impact the county’s national security and/or economic performance.

Investors must submit their proposals for screening to all relevant government agencies.  This process can be lengthy and cumbersome.  The Committee on Investments and State Property Management circulates the investor’s proposal among the relevant government offices and ministries with instructions to review and then provide a formal opinion.  If a ministry objects to the proposed investment activity, it submits an official note to the Committee on Investments and State Property Management.

Screening proposals often involve background checks on the company, the person(s) representing the company, and identification of a financial source to comply with anti-money laundering regulations.  U.S. businesses have not identified screening mechanisms as a barrier to investment.

The purpose of the investment screening process is to ensure that a proposed investment/project does not violate Tajik laws.  The review process could reject the proposal and the Tajik government may flag it as “incomplete.”  Applicants may appeal the government’s decision by submitting a claim to the Tajik Economic Court.

Other Investment Policy Reviews

The United Nations Conference on Trade and Development (UNCTAD) presented a draft Investment Policy Review of Tajikistan in November 2015 to stakeholders from the government, local and international private sector, and civil society and development partners.  The final report was published on August 10, 2016 (http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1596 )

Tajikistan has not conducted a WTO Trade Policy Review and the WTO has not scheduled a review of Tajikistan in 2018.

Countries for which OECD, WTO (in context of a trade policy), and UNCTAD have conducted IPRs include:

(http://www.oecd.org/investment/countryreviews.htm 

http://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm 

http://unctad.org/en/Pages/DIAE/Investment percent20Policy percent20Reviews/Investment-Policy-Reviews.aspx )

Some international and local consulting companies in the recent years produced ratings, guides and reports on investment and business in Tajikistan:

2018 Fitch Rating:  https://www.fitchsolutions.com/country-risk-sovereigns/economics/potential-imf-deal-could-ease-downside-risks-tajikistans-economic-growth-17-10-2018 

2018 Fitch Rating: https://www.fitchsolutions.com/country-risk-sovereigns/tajikistan-afghanistan-border-region-rising-threat-stability-19-10-2018?fbclid=IwAR09uP-Uawou5rAyMghgKM642qRz9W9fpJZPSe78LmrsSBN0BW2tKSGmolY 

2017 RSM Guide to Doing Business (https://www.rsm.global/tajikistan/insights/corporate-literature/guide-doing-business-tajikistan )

2017 Tajik Chamber of Commerce (http://tpp.tj/business-guide2017/rus/content_rus.html )

2016 Deloitte Investment and Tax Guide (https://www2.deloitte.com/kz/en/pages/tajikistan/articles/doing-business-tajikistan.html )

Business Facilitation

Although the Tajik government has simplified the business registration process by adopting a single-window registration system, that process still requires significant legal and human resources, government connections, and time.  The Tax Committee is the primary agency responsible for business registration (www.andoz.tj).  In addition to obtaining the state registration through a single-window, a company must also register with the Social Protection Agency (www.nafaka.tj); Statistics Agency under the President of Tajikistan (www.stat.tj); Ministry of Labor, Migration, and Employment (www.mehnat.tj); Sanitary-Epidemiological Service at the Ministry of Health (www.moh.tj); as well as with local authorities, municipal services, and other agencies.  According to the country’s regulations, registering a business should take less than five business days; in reality, it may take several days or even months due to the inappropriate and illegal actions of registering agencies.  The Tajik government must notarize all businesses.

The Committee on Investments and State Property Management is the key agency that collects information and project proposals from investors.  However, numerous other agencies are involved in the investment coordination process, making it cumbersome.

According to the Tajik Tax Code, there are three types of enterprises:  1. Small-scale businesses with turnover up to USD 100,000 during a 12 months period.  2. Medium-scale businesses with annual turnover from USD 100,000 to USD 2.5 million, and 3. Large-scale companies from USD 2.5 million annual turnover.  The international donor community, in coordination with the government, funds a number of projects that stimulate development of small and medium enterprises in Tajikistan.

Outward Investment

The Tajik government does not promote outward investments.  Private companies from Tajikistan have invested in Kazakhstan, Uzbekistan, Kyrgyzstan, Turkey, Russia, the United Kingdom, the United States, and the UAE, primarily in trade, food processing, real estate, and business development.

The Tajik government does not restrict domestic investors from investing abroad.

Tajikistan signed bilateral investment treaties (BITs) with Austria, Azerbaijan, Belarus, Belgium, China, the Czech Republic, France, Germany, India, the Islamic Republic of Iran, Kazakhstan, the Republic of Korea, Kuwait, Lithuania, Luxembourg, the Republic of Moldova, Mongolia, the Netherlands, Pakistan, Slovakia, Spain, Switzerland, and Turkey.  It has also signed BITs with Algeria, Armenia, the Belgium-Luxembourg Economic Union, Indonesia, Kyrgyzstan, Qatar, the Russian Federation, the Syrian Arab Republic, Thailand, Turkmenistan, Ukraine, the United Arab Emirates, and Vietnam that are awaiting parliamentarian approval.  BIT information is available at: http://investmentpolicyhub.unctad.org/IIA/CountryBits/206 

Tajikistan’s other investment agreements include: the Eurasian Investment Agreement with Belarus, Kazakhstan, Kyrgyzstan, and the Russian Federation (came into force December 2, 2015); the Economic Cooperation Organization Investment Agreement (not yet in force); the European Community-Tajikistan Partnership Agreement with the European Union; the Commonwealth of Independent States Investor Rights Convention with Armenia, Belarus, Kazakhstan, Kyrgyzstan, and the Republic of Moldova; the Energy Charter Treaty; the Organization of the Islamic Conference Investment Agreement; and the U.S.-Central Asia Trade and Investment Framework Agreement (TIFA).

Tajikistan became a signatory to the Trade and Investment Framework Agreement among the United States, Uzbekistan, Turkmenistan, Kyrgyzstan, Kazakhstan, and Tajikistan in 2004.  Tajikistan does not have a bilateral Free Trade Agreement with the United States.  Moreover, Tajikistan is subject to the Jackson-Vanik amendment to the Trade Act of 1994.  Tajikistan does not participate in United States Trade Representative (USTR)’s Generalized System of Preferences program.

Tajikistan does not have a Free Trade Agreement or an Association Agreement in force with the European Union.  Tajikistan, however, is a beneficiary of the EU’s Generalized System of Preferences (GSP) program, a bilateral trade arrangement through which the EU provides preferential access to its market to developing countries and territories in the form of reduced tariffs for their goods when entering the EU market.  Tajikistan is also considering filing an application to the EU’s GSP+ program, which will provide it additional preferences when trading with EU countries.  Preferential imports from Tajikistan are heavily concentrated in two sectors, industrial products – such as base metals – and textiles.

Tajikistan currently has bilateral agreements to avoid double taxation with Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Brunei, China, Czech Republic, Finland, India, Indonesia, the Islamic Republic of Iran, Japan, Kazakhstan, Kuwait, Kyrgyz Republic, Latvia, Luxembourg, Moldova, Pakistan, Poland, Romania, Russia, South Korea, Switzerland, Thailand, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, and the United Kingdom.  The provisions of double tax agreements prevail over Tajik domestic law.  Although Tajikistan is not a member of the Eurasian Economic Union (ECC), and therefore not a party to its trade agreements, it nevertheless pledged in 1992 to uphold certain USSR treaty obligations, including an Income Tax Treaty that entered into force in 1976.

Although Tajikistan adopted a new national tax code in January 2013, its tax system remains internally inconsistent and administratively burdensome.  Investors should also be aware that any financial transfers from parent companies to branches within Tajikistan will be taxed as revenue.

Investors who qualify for a value-added tax (VAT) exemption on imported materials should be aware that they must submit applications for exemption no later than January 1 and that any exemption granted will expire December 31 of that year.  Often, the government does not grant exemptions until October, leaving a short window to file.  While the exemption applies retroactively for the calendar year, the Tajik government has said the tax code has no legal mechanism to authorize refunds of VAT paid prior to the date the government granted the exemption.

According to Article 110 of Tajikistan’s Tax Code, new production companies are profit tax exempt for 12 months from the date of state registration.  A company receives a two-year profit tax break if it invests USD 200,000-USD 500,000.  A company receives a three-year profit tax break if investments are USD 500,000-USD 2 million.  A company receives a four-year profit tax break if investment are USD 2-USD 5million.  A foreign company receives a five-year profit tax break if it invests over USD 5 million.  Should the government change its tax code after an investment is made, the investor has the right to keep the initial conditions.

The Convention between the United States of America and the Union of Soviet Socialist Republics on Matters of Taxation, signed in Washington, June 29, 1973, which entered into force January 29, 1976, is currently in force between the United States and Tajikistan based on principles of succession.  The Tajik government does not recognize this treaty and requested the United States sign a new double taxation treaty with Tajikistan.   (https://www.irs.gov/businesses/international-businesses/tajikistan-tax-treaty-documents ).

Investment Incentives

According to statements by President Rahmon, there are 240 tax, regulatory, and legal incentives for businesses.  According to IFC Business Regulation and Investment Policy project, there are 97 incentives for investments.  In practice, businesses and investors cannot access or utilize most of these incentives.

The Tajik government has officially expressed an interest in attracting FDI but has taken little practical action to do so.  In 2016, Tajikistan’s government approved an ambitious National Development Strategy 2016-2030, which highlights the critical role of private sector investment.  According to this strategy, the Tajik government plans to attract as much as USD 55 billion in FDI by 2030.  Given the country’s business and tax environment, however, this plan appears to be more aspirational than realistic.  The Committee on Investments and State Property Management’s website lists government-promoted investment opportunities (https://www.investcom.tj/ ).

Foreign Trade Zones/Free Ports/Trade Facilitation

The Tajik government has established four Free Economic Zones (FEZs), which offer reduced taxes and customs fees to both foreign and domestic businesses.  To be eligible for preferential tax treatment, manufacturing companies must invest a minimum of USD 500,000, trading companies USD 50,000, and service and consulting companies USD 10,000.

Performance and Data Localization Requirements

According to the Tajik Law on Audits, at least 70 percent of the workforce must be local employees at local companies.  If the CEO of the company is foreign, then the percentage of local staff should be at least 75 percent.  The Tajik government can waive this requirement.

In June 2015, the Minister of Labor, Migration and Employment announced that for large-scale projects implemented in Tajikistan, which are signed between the Tajik government and either a company registered in another country or a government of another country, at least 80 percent of the workforce must be locally hired.  Depending on the qualifications of the local labor force, Tajik authorities may increase this requirement to 90 percent.

Tajik legislation permits foreigners to hold senior management and directorial positions.

It is possible to obtain visas and residence/work permits, but applicants are required to provide documentary support, and most permits cannot exceed one year.  According to Article 3 of government resolution #529, foreign worker permission procedures, investors and depositors with more than USD 500,000 in investments do not require work permits for one year from the date of state registration.

Relevant ministries must review and approve all investment proposals.

The government does not practice a forced localization policy.  The Tajik government requires all telecommunication service providers to install surveillance equipment.  Russia provides the equipment and technology as a part of the Collective Security Treaty Organization agreement.

The government does not impede the transmission of customer or other business-related data outside the economy/country’s territory unless the data violates anti-terrorist and anti-extremist laws and policies.

In 2017 Tajikistan’s Telecommunication’s agency formally completed a unified communication center (single gateway), monopolizing internet access.

State-owned enterprises (SOEs) are active in travel, automotive/ground transportation, energy, mining, metal manufacturing/products, food processing/packaging, agriculture, construction, building and heavy equipment, services, finance, and information and communication sectors.  The government divested itself of smaller SOEs in successive waves of privatization, but retained ownership of the largest Soviet-era enterprises and any sector deemed to be a natural monopoly.

The government appoints directors and boards to SOEs, but there are no clear governance and internal control procedures.  Tajik SOEs do not adhere to the Organisation for Economic Co-operation and Development (OECD) Guidelines on Corporate Governance for SOEs.  Tajik government fully controls SOEs.  When SOEs are involved in investment disputes, it is highly likely that the domestic courts will find in the SOE’s favor.  Court processes are generally non-transparent and discriminatory.

The Committee for Investments and State Property Management maintains a database of all SOEs in Tajikistan, but does not make this information publicly available.

Major SOEs include:

• Travel: Tajik Air, Dushanbe International Airport, Kulob Airport, Qurghonteppa Airport, Khujand Airport, and Tajik Air Navigation;
• Automotive & Ground Transportation: Tajik Railways;
• Energy & Mining: Barqi Tojik, TajikTransGas, Oil, Gas, and Coal, and VostokRedMet;
• Metal Manufacturing & Products: Tajik Aluminum Holding Company (TALCO), and several TALCO subsidiary companies
• Agricultural, Construction, Building & Heavy Equipment: Tajik Cement; Food Processing & Packaging: Konservniy Combinat Isfara;
• Services: Dushanbe Water and Sewer, Vodokanal Khujand, and ZhKX (water utility company);
• Finance: AmonatBonk (state savings bank), TajikSarmoyaguzor (state investments), TajikSugurta (state insurance);
• Information and Communication: Tajik Telecom, Tajik Postal Service, and TeleRadioCom

In sectors that are open to private sector and foreign competition, SOEs receive a larger percentage of government contracts/business than their private sector competitors.  As a general rule, private companies cannot compete successfully with SOEs unless they have good government connections.

SOEs purchase goods and services from, and supply them to, private sector and foreign firms through the Tajik government’s tender process.  Tajikistan has undertaken a commitment, as part of its WTO accession protocol, to initiate accession to the Government Procurement Agreement (GPA).  At present, however, GPA does not cover Tajik SOEs.

Per government policy, private enterprises cannot compete with SOEs under the same terms and conditions with respect to market share (since the government continually increases the role and number of SOEs in any market), products/services, and incentives.  Private enterprises do not have the same access to financing as SOEs.  Most lending from state-owned banks is politically directed.

Local tax law makes SOEs subject to the same tax burden and tax rebate policies as their private sector competitors, but the Tajik government favors SOEs and regularly writes off tax arrears for SOEs.

Privatization Program

The Tajik government conducted privatization on an ad-hoc basis in the 1990s, and then again in the early 2000s.  The government plans to split national electrical utility Barqi-Tojik into three public/private partnerships, responsible for generation, transmission, and distribution, by the end of 2020, but progress has been slow.

Foreign investors are able to participate in Tajikistan’s privatization programs.

There is a public bidding process, but the privatization process is not transparent.  Privatized properties have been subject to re-nationalization, often because Tajik authorities claim on illegal privatization process.

Tajikistan has enacted anti-corruption legislation, but enforcement is selective, and generally ineffective in combating corruption of public officials.  Tajikistan’s parliament approved new amendments to the criminal code in February 2016.  Now, individuals convicted of crimes related to bribery may be released in return for payment of fines (roughly USD 25 for each day they would have served in prison had they been convicted under the previous criminal code).

Tajikistan’s anti-corruption laws officially extend to family members of officials and political parties.  Tajikistan’s laws provide conditions to counter conflict of interest in awarding contracts.

The Tajik government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials.  Prosecutions for corruption are primarily politically motivated.

Private companies do not use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.

Tajikistan became a signatory to the UN’s Anticorruption Convention in 2006.  Tajikistan is not a party to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

Tajik authorities do not provide protection to NGOs involved in investigating corruption.

U.S. firms have identified corruption as an obstacle to investment and have reported instances of corruption in government procurement, award of licenses and concessions, dispute settlements, regulations, customs, and taxation.

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

Sulaimon Sultonzoda, Head
The Agency for State Financial Control and Fight with Corruption
78 Rudaki Avenue, Dushanbe
992 37 221-48-10; 992 27 234-3052
info@anticorruption.tj; agenti@anticorruption.tj

(The agency requests that contact be made via a form on their website – www.anticorruption.tj)

United Nations Development Program
39 Aini Street, Dushanbe
+992 44 600-56-00
registry.tj@undp.org

Tajikistan has a recent history of politically motivated violence.  Its civil war lasted from 1992 to 1997, resulting in the death of over 50,000 people.  Since the end of the country’s civil war in 1997, however, political violence has been rare.  There was a minor uprising in September 2015.

Tajikistan is governed by an authoritarian ruler who has consolidated power over the past years by silencing opposition voices and ending multi-party democracy.  As part of its security efforts, the Tajik government has placed numerous restrictions on religious, media, and civil freedoms.  The state, as an extension of the regime, furthers the interests of the ruling elite, often to the detriment of the business community.  The government demonstrates little appreciation for democratic principles, with many in authority advancing different views on political, social, and civil freedom issues: democratic reform by some is viewed as a threat to important political and financial interests.  Government institutions are often unwilling or unable to protect human rights, the judiciary is not independent, and the court system does not present Tajiks with a fair or effective forum in which to seek protection.  Law enforcement institutions often overuse their authority to monitor, question or detain a wide spectrum of individuals, and the State Committee on National Security (GKNB) exercises a wide degree of influence in all aspects of government.  Corruption is pervasive and endemic, and government officials are generally not held accountable for their actions.

As of December 2018, the official unemployment rate in Tajikistan was 2.5 percent, but this does not include the roughly one million citizens (12.5 percent of the population) that seasonally migrate in search of work in other countries – primarily to Russia.

According to information provided by the Ministry of Labor, Migration, and Employment, Tajikistan’s labor force is 5.2 million workers strong.  Due to demographic growth, the World Bank estimates that demand for jobs exceeds job growth by a ratio of two to one.

Unskilled labor is widely available, but skilled labor is often in short supply, since many Tajiks with marketable skills have chosen to emigrate due to limited domestic employment opportunities.  Corruption in secondary schools and universities means degrees may not accurately reflect an applicant’s level of professional training or competency.

Due to its weak education system, Tajikistan’s domestic labor force is generally becoming less skilled, and is ill equipped to provide international standards of customer service and management.  Foreign businesses and NGOs report difficulty recruiting qualified staff for their organizations in all specialties.

The Ministry of Labor, Migration and Employment announced a plan to expand its network of training centers at which Tajik workers can become more marketable.  The curriculum at these centers is primarily focused on the migrant community, offering training in English, Russian, culture, and history.  It also provides certification of a worker’s existing skills, and short-term vocational training as welders, electricians, tractor operators, textile workers, and confectioners.

Article 36 of Tajikistan’s labor code gives employers the right to change workers’ contracts (remuneration, hours, responsibilities, etc.) due to fluctuating market conditions.  If the worker does not accept the amended contract, the employer may terminate the worker, but the worker can claim a severance payment equivalent to two months’ salary.

Tajikistan’s labor code does not include any provisions for waiving labor regulations to attract or retain investments, but the Tajik government has waived the 70 percent requirement for the employment of Tajik workers in some cases.

There are no special regulations regarding treatment of labor in Tajikistan’s four free economic zones.

The labor market favors employers.  Although the majority of workers are technically unionized, most are not aware of their rights, and few unions effectively advocate for workers’ rights.  The Tajik government controls unions.  The national trade union federation has not had many disputes with the government.  Tajikistan has no formal labor dispute resolution mechanisms.  Although collective bargaining can occur, it is rare. There were no significant labor strikes in Tajikistan.

Tajikistan’s labor code regulates employer-employee relations.  The domestic labor code includes reference to international labor standards but employers may frequently violate or misinterpret the procedure.

Tajik authorities did not officially register any strikes in 2018.

The Overseas Private Investment Corporation (OPIC) is active in Tajikistan. OPIC has recently supported a potato chip factory, the campus expansion at the University of Central Asia, and consulting companies.

Tajikistan signed an investment incentive agreement with the United States in 1992, with provisions for issuing investment insurance, loans, and guarantees administered by OPIC.

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

Table 3: Sources and Destination of FDI

Agency on Statistics at the President of Tajikistan

Table 4: Sources of Portfolio Investment

IMF’s Coordinated Portfolio Investment Survey (CPIS) does not list Tajikistan.