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China

Executive Summary

The People’s Republic of China (PRC) is the top global Foreign Direct Investment (FDI) destination after the United States due to its large consumer base and integrated supply chains.  In 2019, China made some modest openings in the financial sector and passed key pieces of legislation, including a new Foreign Investment Law (FIL).  China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors.  Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, industrial policies such as Made in China 2025 (MIC 2025), as well as pressures on U.S. firms to transfer technology as a prerequisite to gaining market access.  These restrictions shield Chinese enterprises – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition with foreign companies.

The Chinese Communist Party (CCP) in 2019 marked the 70th anniversary of its rule, amidst a wave of Hong Kong protests and international concerns regarding forced labor camps in Xinjiang.  Since the CCP 19th Party Congress in 2017, CCP leadership has underscored Chairman Xi Jinping’s leadership and expanded the role of the party in all facets of Chinese life:  cultural, social, military, and economic.  An increasingly assertive CCP has caused concern among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than CCP political dictates.

Key investment announcements and new developments in 2019 included:

  • On March 17, 2019, the National People’s Congress passed the new FIL that effectively replaced previous laws governing foreign investment.
  • On June 30, 2019, the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of China’s three “lists” to guide FDI.  Two “negative lists” identify the industries and economic sectors from which foreign investment is restricted or prohibited based on location, and the third list identifies sectors in which foreign investments are encouraged.  In 2019, some substantial openings were made in China’s financial services sector.
  • The State Council also approved the Regulation on Optimizing the Business Environment and Opinions on Further Improving the Utilization of Foreign Investment, which were intended to assuage foreign investors’ mounting concerns with the pace of economic reforms.

While Chinese pronouncements of greater market access and fair treatment of foreign investment are welcome, details and effective implementation are needed to improve the investment environment and restore investors’ confidence.  As China’s economic growth continues to slow, officially declining to 6.1% in 2019 – the slowest growth rate in nearly three decades – the CCP will need to deepen its economic reforms and implementation.  Moreover, the emergence of the Coronavirus (COVID-19) pandemic in Wuhan, China in December 2019, will place further strain on China’s economic growth and global supply chains.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
Transparency International’s Corruption Perceptions Index 2019 137 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 31 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 14 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 USD116,518 https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 USD9,460 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

3. Legal Regime

Transparency of the Regulatory System

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange.  Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days.  U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  Government agencies often do not make available for public comment and proceed to publish “normative documents” (opinions, circulars, notices, etc.) or other quasi-legal measures to address situations where there is no explicit law or administrative regulation in place.  When Chinese officials claim an assessment or study was made for a law, the methodology of the study and the results are not made available to the public.  As a result, foreign investors face a regulatory system rife with inconsistencies.

In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders.  Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law.  The World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions to the domestic court system; not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.

For accounting standards, Chinese companies use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China.  Companies listed overseas or in Hong Kong may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.

International Regulatory Considerations

As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.  However, China continues to issue draft technical regulations without proper notification to the TBT Committee.

Legal System and Judicial Independence

The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.”  The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC).  While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes, including in Beijing, Guangzhou, and Shanghai.  In October 2018, the National People’s Congress approved the establishment of a national SPC appellate tribunal to hear civil and administrative appeals of technically complex intellectual property (IP) cases.

China’s constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, or powerful individuals.  In practice, regulators heavily influence courts, and the Chinese constitution establishes the supremacy of the “leadership of the communist party.”  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, was passed on March 2019 and came into force on January 1, 2020, replacing China’s previous foreign investment framework.  The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law and, where applicable, the Partnership Enterprise Law.  The FIL intends to abolish the case-by-case review and approval system on market access for foreign investment and standardize the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document.  The FIL also seeks to address common complaints from foreign business and government by explicitly banning forced technology transfers, promising better IPR protection, and establishing a complaint mechanism for investors to report administrative abuses.  However, foreign investors complain that the FIL and its implementing regulations lack substantive guidance, providing Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

In addition to the FIL, in 2019, the State Council issued other substantive guidelines and administrative regulations, including:

System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Notice 6);

  • Regulation on Optimizing the Business Environment (Order No. 722); and
  • Opinions on Further Improving the Utilization of Foreign Investment (Opinions 2019).

Other relevant legislation issued by government entities in 2019, include:

Draft legislation issued by other government entities in 2020:

  • Draft Amendments to the Anti-Monopoly Law;

In addition to central government laws and implementation guidelines, ministries and local regulators have issued over 1,000 rules and regulatory documents that directly affect foreign investments within their geographical areas.  While not comprehensive, a list of published and official Chinese laws and regulations is available at:  http://www.gov.cn/zhengce/ .

FDI Laws on Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative or market access lists do not require MOFCOM pre-approval.  However, investors have complained that in practice, investing in an industry not on the negative list does not guarantee a foreign investor “national treatment,” or treatment no less favorable than treatment accorded to a similarly-situated domestic investor.  Foreign investors must still comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits.  When a foreign investment needs ratification from the NDRC or a local development and reform commission, that administrative body is in charge of assessing the project’s compliance with a panoply of Chinese laws and regulations.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and consulting agencies acting on behalf of Chinese domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.

Competition and Anti-Trust Laws

The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels.  The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies.  SAMR issues new implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in AML enforcement.  Generally, SAMR has sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.  In 2019, the agency put into effect provisions on abuse of market dominance, prohibition of monopoly agreements, and restraint against abuse of administrative powers to restrict competition.  In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and expanded factors to consider abuse of market dominance by Internet companies.  (This is the first step in a lengthy process to amend the AML.)  SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition.

While these are seen as positive measures, foreign businesses have complained that enforcement of competition policy is uneven in practice and tends to focus on foreign companies.   Foreign companies have expressed concern that the government uses AML enforcement as an extension of China’s industrial policies, particularly for companies operating in strategic sectors.  The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security.   U.S. companies have expressed concerns that SAMR consults with other Chinese agencies when reviewing M&A transactions, allowing other agencies to raise concerns, including those not related to antitrust enforcement, in order to block, delay, or force transacting parties to comply with preconditions in order to receive approval.  Foreign companies have also complained that China’s enforcement of AML facilitated forced technology transfer or licensing to local competitors.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

China is a contracting state to the Convention on the Settlement of Investment Disputes (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  Chinese legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law adopted in 1994, the Civil Procedure Law adopted in 1991 (later amended in 2012), the law on Chinese-Foreign Equity Joint Ventures adopted in 1979 (amended most recently in 2001), and a number of other laws with similar provisions.  The Arbitration Law embraced many of the fundamental principles of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.

Investor-State Dispute Settlement  (ISDS)

Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and international arbitration, as well as its emphasis on state sovereignty.  China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement.  As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under the OBOR initiative, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months.  Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors.  On July 19, 2019, China submitted its proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III.  Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law.  However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body. including supporting the study of a permanent appellate body.

International Commercial Arbitration and Foreign Courts

Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.  Besides CIETAC, there are also provincial and municipal arbitration commissions.  A foreign party may also seek arbitration in some instances from an offshore commission.  Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.  The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases.  Rulings in some cases are open to the public.
In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to the OBOR initiative.  The first CICC was established in Shenzhen, followed by a second court in Xi’an.  The court held its first public hearing on May 2019, involving a Chinese company suing an Italian company, and issued its first ruling on March 2020, siding with the Chinese company.  Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts.  Unlike other international courts, foreign judges are not permitted to be part of the proceedings.  Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law.  Local contacts and academics note that to-date, the CICC has not reviewed any OBOR or infrastructure related cases and question the CICC’s ability to provide “equal protection” to foreign investors.

China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States.  However, under Chinese law, local courts must prioritize China’s laws and other regulatory measures above foreign court judgments.

Bankruptcy Regulations

China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law, which applied to all companies incorporated under Chinese laws and subject to Chinese regulations.  However, courts routinely rejected applications from struggling businesses and their creditors due to the lack of implementation guidelines and concerns over social unrest.  Local government-led negotiations resolved most corporate debt disputes, using asset liquidation as the main insolvency procedure.  Many insolvent Chinese companies survived on state subsidies and loans from state-owned banks, while others defaulted on their debts with minimal payments to creditors.  After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms.  China now has more than 90 U.S.-style specialized bankruptcy courts.  In 2019, the government added new courts in Beijing, Shanghai and Shenzhen.  Court-appointed administrators—law firms and accounting firms that help verify claims, organize creditors’ meetings, and list and sell assets online as authorities look to handle more cases and process them faster.  China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017.  While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome.  According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.

4. Industrial Policies

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 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.  The Chinese government incentivizes foreign investors to participate in initiatives like MIC 2025 that seek to transform China into an innovation-based economy.  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 levels 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, foreign investment remains closed off to many economic sectors that China deems sensitive due to broadly defined national or economic security concerns.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies.  China gradually scaled up its FTZ pilot program to 12 FTZs, launching an additional six FTZs in 2019.  China’s FTZs are in: Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan provinces.  The goal of all of 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 to eventually introduce in other parts of the domestic economy.  The FTZs promise 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 from which foreign investment is restricted or prohibited.  However, the 2019 FTZ negative list lacked substantive changes, and many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to opportunities in other parts of China.  The stated purpose of FTZs is also to integrate these areas more closely with the OBOR initiative.

Performance and Data Localization Requirements

As part of China’s WTO accession agreement, the PRC government promised to revise its foreign investment laws to eliminate sections that imposed on foreign investors requirements for export performance, local content, balanced foreign exchange through trade, technology transfer, and research and development as a prerequisite to enter China’s market.  In practice, China has not completely lived up to these promises.  Some U.S. businesses report that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that help 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.

Furthermore, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China.  Restrictions exist on the transfer of personal information of Chinese citizens outside of China.  These restrictions have prompted many firms to review how their networks manage data.  Foreign firms also fear that PRC laws call for the use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or pressure foreign companies to disclose source code and other proprietary intellectual property.  In October 2019, China adopted a Cryptography Law that includes restrictive requirements for commercial encryption products that “involve national security, the national economy and people’s lives, and public interest.”  This broad definition of commercial encryption products that must undergo a security assessment raises concerns that implementation will lead to unnecessary restrictions on foreign information and communications technology (ICT) products and services.  Further, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect give preference to domestic firms.  These requirements potentially jeopardize IP protection and overall competitiveness of foreign firms operating in China.

5. Protection of Property Rights

Real Property

The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if the renewal does not conflict with other public interest claims.  Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects.  Investors often complain about insufficient compensation in these cases.  In rural China, collectively owned land use rights are more complicated.  The registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests.  China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, but such debt must be acquired through state-owned asset management firms, and PRC officials often use bureaucratic hurdles to limit foreigners’ ability to liquidate assets.

Intellectual Property Rights

In 2019, China’s legislature promulgated multiple reforms to China’s IP protection and enforcement systems.  In January, the Guidelines on Interim and Preliminary Injunctions for Intellectual Property Disputes came into force. These SPC guidelines provide added clarity to the IP injunction process and offer additional procedural safeguards for trade secret cases.  In April, the Standing Committee of the National People’s Congress passed amendments to the Trademark Law, the Anti-Unfair Competition Law (AUCL), and the Administrative Licensing Law, among other legislation that increases the potential punitive penalty for willful infringement to up to five times the value of calculated damages.  China also amended the Administrative Licensing Law to provide administrative penalties for government officials who illegally disclose trade secrets or require the transfer of technology for the granting of administrative licenses.  Similarly, in March, China’s State Council revised several regulations that U.S. and EU enterprises and governments had criticized for discriminating against foreign technology and IP holders.  Finally, in November, the Amended Guidelines for Patent Examination came into effect.  This measure provides further procedural guidance and defines patentability requirements for stem cells and graphical user interfaces.

Despite the changes to China’s legal and regulatory IP regime, some aspects of China’s IP protection regime fall short of international best practices.  Ineffective enforcement of Chinese laws and regulations remains a significant obstacle for foreign investors trying to protect their IP, and counterfeit and pirated goods manufactured in China continue to pose a challenge.  U.S. rights holders continued to experience widespread infringement of patents, trademarks, copyrights, and trade secrets, as well as problems with competitors gaming China’s IP protection and enforcement systems.  In some sectors, Chinese law imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies.  Chinese policies can effectively require U.S. firms to localize research and development activities, making their IP much more susceptible to theft or illicit transfer.  These practices are documented in the 2019 Section 301 Report released by the Office of the U.S. Trade Representative (USTR).  The PRC also remained on the Priority Watch List in the 2020 USTR Special 301 Report, and several Chinese physical and online markets were listed in the 2019 USTR Review of Notorious Markets for Counterfeiting and Piracy.  Under the recently signed U.S.-China Phase One trade agreement, China is required to make a number of structural reforms to its IP regime, which will be captured in an IP action plan.

For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

6. Financial Sector

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly-developed, and multi-tiered capital market.  Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the second largest stock market in the world with over USD5 trillion in assets.  China’s bond market has similarly expanded significantly to become the third largest worldwide, totaling approximately USD13 trillion.  Direct investment by private equity and venture capital firms has increased significantly, but has faced setbacks due to China’s capital controls, which complicate the repatriation of returns.  In December 2019, the State Council and China’s banking and securities regulatory authorities issued a set of measures that would remove in 2020 foreign ownership caps in select segments of China’s financial sector.  Specifically, foreign investors can wholly own insurance and futures firms as of January 1, asset management companies as of April 1, and securities firms as of December 1, 2020.

China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.  As of 2019, over 40 sovereign entities and private sector firms, including Daimler and Standard Chartered HK, have since issued roughly USD48 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, and wealth management and trust products.  However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.

The Monetary and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend, but abandoned the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which will serve as an anchor reference for Chinese lenders.  The LPR is based on the interest rate for one-year loans that 18 banks offer their best customers.  Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises.

The China Banking and Insurance Regulatory Commission (CBIRC) oversees China’s roughly 4,000 lending institutions.  At the end of the first quarter of 2019, Chinese banks’ total assets reached RMB 276 trillion (USD40 trillion).  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders.  Reflecting the level of weakness among these banks, in November 2019, the PBOC announced that about one in 10 of China’s banks received a “fail” rating following an industry-wide review.  The assessment deemed 420 firms, all rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: below two percent as of the end of 2019.  However, analysts believe the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 66 percent in 2019) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In December 2019, the Coronavirus (COVID-19) pandemic emerged in Wuhan, China.  In response, the PBOC established a variety of programs to stimulate the economy, including a re-lending scheme of USD4.28 billion and a special credit line of USD50 billion for policy banks.  In addition, the Ministry of Industry and Information Technologies established a list of companies vital to COVID-19 efforts, which would be eligible to receive additional loans and subsidies from the Ministry of Finance.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators over the last several years have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products.  These measures have achieved positive results: the share of trust loans, entrusted loans, and undiscounted bankers’ acceptances dropped a total of seven percent in 2019 as a share of total social financing (TSF) – a broad measure of available credit in China.  TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.7 percent in 2019.  In October 2019, the CBIRC announced that foreign owned banks will be allowed to establish wholly-owned banks and branches in China.  However, analysts noted there are often licenses and other procedures that can drag out the process in this sector, which is already dominated by local players.  Nearly all of China’s major banks have correspondent banking relationships with foreign banks, including the Bank of China, which has correspondent banking relationships with more than 1,600 institutions in 179 countries and regions.  Foreigners are eligible to open a bank account in China, but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches.  Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight that reduced its foreign currency reserves by about USD1 trillion, stabilizing to around USD3 trillion today.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.  Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE).  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced the USD50,000 quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2019, the U.S. Treasury Department designated China a “currency manipulator,” given China’s large-scale interventions in the foreign exchange market.  Treasury removed this designation in January 2020.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including investment, profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements.  The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed and is frequently completed within one or two working days of the submission of complete documents.  For remittance of interest and principal on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principal and interest.  Banks will then check if the repayment volume is within the repayable principal.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched to help diversify China’s foreign exchange reserves.  Established in 2007 with USD200 billion in initial registered capital, CIC currently manages over USD940 billion in assets as of the close of 2018 and invests on a 10-year time horizon.  CIC has since evolved into three subsidiaries:

  • CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, multi-asset and real estate investments, private equity (including private credit) fund investments, co-investments, and minority investments as a financial investor.
  • CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investment in long-term assets.
  • Central Huijin makes equity investments in Chinese state-owned financial institutions.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors, including financial services, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunications, and utilities.  China also operates other funds that function in part like sovereign wealth funds, including:  China’s National Social Security Fund, with an estimated USD325 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in OBOR partner countries.  Chinese state-run funds do not report the percentage of their assets that are invested domestically.  However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs.  The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives.  CIC generally adopts a “passive” role as a portfolio investor.

7. State-Owned Enterprises

China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments.  SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment.  Non-financial SOE assets totaled roughly USD30 trillion.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.  In addition to wholly-owned enterprises, state funds are spread throughout the economy, such that the state may also be the majority or largest shareholder in a nominally private enterprise.  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.  A comprehensive, published list of all Chinese SOEs does not exist.

PRC officials have indicated China intends to utilize OECD guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results.  However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  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.  Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (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.  SOE executives outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms.  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.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.

Privatization Program

Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired.  The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach.  Recently, 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.

8. Responsible Business Conduct

General awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope, and are frequently cast aside when other economic priorities supersede RBC priorities.  In addition, China lacks mature and independent non-governmental organizations (NGOs), investment funds, worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.  The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or expand operations, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a significant challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.  As part of these efforts, Chinese ministries have signed several memoranda of understanding with international organizations such as the OECD to cooperate on RBC initiatives.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

9. Corruption

Since 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.  Xi labeled endemic corruption an “existential threat” to the very survival of the CCP.  Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to root out corruption.  In 2018, the CCP amended the constitution to enable the CCP’s Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official and those involved in corrupt officials’ dealings.  From 2012 to 2019, the NSC-CCDI claimed it investigated 2.78 million cases – more than the total of the preceding 10 years.  In 2019 alone, the NSC-CCDI investigated 619,000 cases and disciplined approximately 587,000 individuals, of whom 45 were officials at or above the provincial or ministerial level.  The PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 7,500 fugitives suspected of corruption who were living in other countries.  The PRC did not notify host countries of these operations.  In 2019 alone, NSC-CCDI reported apprehending 2,041 alleged fugitives suspected of official crimes, including 860 corrupt officials, as well as recovering about USD797.5 million in stolen money.

Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “black lists” of firms and agents involved in commercial bribery, including several foreign companies.  Anecdotal information suggests many PRC officials responsible for approving foreign investment projects, as well as some routine business transactions, delayed approvals so as not to 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.

China ratified the United Nations Convention against Corruption in 2005 and participates in the Asia-Pacific Economic Cooperation (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.

10. Political and Security Environment

Foreign companies operating in China face a low risk of political violence.  However, protests in Hong Kong in 2019 exposed foreign investors to political risk due to Hong Kong’s role as an international hub for investment into and out of China.  The CCP also punished companies that expressed support for Hong Kong protesters — most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting the Hong Kong protesters.  In the past, the PRC government has also encouraged protests or boycotts of products from countries like the United States, South 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 South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD) to the Korean Peninsula; and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei Chief Financial Officer Meng Wanzhou.

PRC authorities also 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 clear legal recourse to appeal the exit ban decision.

11. Labor Policies and Practices

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms.  In addition, labor costs, including salaries along with other production inputs, continue to rise.  Foreign firms continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent.  Chinese labor law does not provide for freedom of association or protect the right to strike.  The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination.  Foreign companies complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor contract laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage.  Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated.  Moreover, in 2018 and 2019, there were multiple U.S. government, media, and NGO reports that persons detained in internment camps in Xinjiang were subjected to forced labor in violation of international labor law and standards.  In October 2019, CBP issued a Withhold Release Order barring importation into the United States of garments produced by Hetian Taida Apparel Co., Ltd. in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws.  The Commerce Department added 28 Chinese commercial and government entities to its Entity List for their complicity in human rights abuses.

The All China Federation of Trade Unions (ACFTU) is the only union recognized under the law.  Establishing independent trade unions is illegal.  The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations.  The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages regularly occur.  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes.  Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S.  FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year   Amount Year Amount
Host Country Gross Domestic Product (GDP ($M USD) 2019*   $14,380,000 2018 $13,608,000 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S.  FDI in partner country ($M USD, stock positions) 2018(**)     $109,958 2018          $116,518 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) 2018(**)      $39,557 2018          $39,473 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total Inbound Stock as a % of GDP 2018(**) 15.9% 2018 12.1% UNCTAD data available at
https://unctad.org.en/Pages/DIAE/
World%
 

20Investment%20Report/
Country-Fact-Sheets.aspx 
 

*China’s National Bureau of Statistics (converted at 6.8 RMB/USD estimate)
**China’s 2019 Yearbook (Annual Economic Data from China’s Economic Ministries:  MOFCOM, NBS, and Ministry of Finance)

Table 3:  Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $2,814,067 100% Total Outward $1,982,270 100%
China, PR: Hong Kong $1,378,383 48.96% China, PR: Hong Kong $958,904 48.37%
British Virgin Islands $302,553 10.75% Cayman Islands $237,262 11.96%
Japan $166,817 6.13% British Virgin Islands $119,658 6.03%
Singapore $115,035 4.08% United States $67,038 3.38%
Germany $78,394 2.78% Singapore $35,970 1.81%
“0” reflects amounts rounded to +/- USD 500,000.

Source:  IMF Coordinated Direct Investment Survey (CDIS)

Table 4:  Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $560,250 100% All Countries $303,4000 100% All Countries $256,849 100%
China, PR: Hong Kong $179,672 32.0% China, PR: Hong Kong $121,883 40.1% China, PR: Hong Kong $57,789 22.5%
Cayman Islands $47,917  8.5% Cayman Islands  $28,323  9.3% British Virgin Island  $38,230 14.8%
British Virgin Island $40,270  7.1% Luxembourg  $8,786  2.8% Cayman Islands  $19,594 7.6%
Luxembourg  $13,712  2.4% Japan  $7,012  2.3% Germany  $7,660 2.9%
Germany  $12,294  2.1% Ireland  $6,829  2.2% Singapore  $7,122 2.7%

14. Contact for More Information

Mayra Alvarado
Investment Officer – U.S.  Embassy Beijing Economic Section
55 Anjialou Road, Chaoyang District, Beijing, P.R.  China
+86 10 8531 3000
beijinginvestmentteam@state.gov

India

Executive Summary

India’s GDP growth in 2019 declined to the slowest rate in over six years. Prior to the onset of the COVID-19 pandemic, the International Monetary Fund had reduced its growth prediction for FY 2020 to 4.8 percent from a previous estimate of 6.1 percent. The slowing growth reflected a sharp decline in private sector consumption and reduced activity in manufacturing, agriculture, and construction. The stock of foreign direct investment (FDI) in India has declined a full percentage point over the last six years according to data from the Department for Promotion of Industry and Internal Trade (DPIIT). This mirrors a similar drop in Indian private investment during the same period.

Non-performing assets continue to hold back banks’ profits and restrict their lending, particularly in the state banking sector. The collapse of the non-bank financial company Infrastructure Leasing & Financial Services (IL&FS) in 2018 led to a credit crunch that largely continued throughout 2019 and hampered consumer lending.

Demographic increases mean India must generate over ten million new jobs every year – a challenge for the economy and policy makers. While difficult to measure, given the large size of the informal economy, several recent studies, in 2017-18 suggest India’s unemployment rate has risen significantly, perhaps event to a 40-year high.

The Government of India has announced several measures to stimulate growth, including lowering the corporate tax rate, creating lower personal income tax brackets, implementing tax exemptions for startups, establishing ambitious targets for divestment of state-owned enterprises, withdrawing a surcharge imposed on foreign portfolio investors, and providing cash infusions into public sector banks. India’s central bank, the Reserve Bank of India (RBI), also adopted a monetary policy that was accommodative of growth, reducing interest rates by a cumulative 135 basis points throughout 2019 to 5.15 percent. However, transmission remained a problem as banks, already struggling with large volumes of non-performing assets pressuring their balance sheets, were hesitant to lend or pass on the RBI’s rate cuts to consumers.

The government actively courts foreign investment. In 2017, the government implemented moderate reforms aimed at easing investments in sectors such as single brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the so-called Automatic Route. India has continued to make major gains in the World Bank’s Ease of Doing Business rankings in 2019, moving up 14 places to number 63 out of 190 economies evaluated. This jump follows India’s gain of 23 places in 2018 and 30 places in 2017.

Nonetheless, India remains a difficult place to do business and additional economic reforms are necessary to ensure sustainable and inclusive growth. In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate to store all “data related to payments systems” only in India went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data both to achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India. The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that are considered “critical” can only be stored in India. The Bill is based on the conclusions of a ten-person Committee of Experts, established by the Ministry of Information Technology (MeitY) in July 2017.

On December 26, 2018, India unveiled new restrictions on foreign-owned e-commerce operations without any prior notification or opportunity to submit public comments. While Indian officials argue that these restrictions were mere “clarifications” of existing policy, the new guidelines constituted a major regulatory change that created several extensive new regulatory requirements and onerous compliance procedures. The disruption to foreign investors’ businesses was exacerbated by the refusal to extend the February 1, 2019 deadline for implementation.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 80 of 180 https://www.transparency.org/
cpi2019
World Bank’s Doing Business Report 2019 63 of 190 https://www.doingbusiness.org/
en/rankings?region=south-asia
Global Innovation Index 2019 52 of 127 https://www.wipo.int/
global_innovation_index/en/2019/
U.S. FDI in partner country ($M USD, stock positions) 2018 $44,458 https://apps.bea.gov/
international/factsheet
World Bank GNI per capita 2018 $2009.98 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

2. Bilateral Investment Agreements and Taxation Treaties

India made public a new model Bilateral Investment Treaty (BIT) in December 2015. This followed a string of rulings against Indian firms in international arbitration. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors to first exhaust all local judicial and administrative remedies before entering into international arbitration. The Indian government also announced its intention to abrogate all BITs negotiated on the earlier model BIT. The government has served termination notices to roughly 58 countries, including EU countries and Australia. Currently 14 BITs are in force. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).

In September 2018, Belarus became the first country to execute a new BIT with India. The Belarus – India BIT is predominantly based on the new Model BIT. In December 2018, Taipei Cultural & Economic Centre (TECC) in India signed a BIT with India Taipei Association (ITA) in Taipei. The TECC is the representative office of the government in Taipei in India and is responsible for promoting bilateral relations between Taiwan and India. By December 2019, two BITs/ JIS have been concluded but not yet signed with Brazil and Cambodia. Several BITs and joint interpretative statements are under discussion such as with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius and Oman. The complete list of agreements can be found at: https://dea.gov.in/bipa. 

Bilateral Taxation Treaties

India has a bilateral taxation treaty with the United States, available at: https://www.irs.gov/pub/irs-trty/india.pdf 

3. Legal Regime

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry; for example, approval for higher FDI in the insurance sector came with a new requirement for “Indian management and control.” On most occasions the rules are framed after thorough discussions by the competent government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts.

In December 2018, India unveiled new “Guidelines” on foreign-owned e-commerce operations that imposed restrictions disproportionately affecting over $20 billion in combined investments by U.S. companies. As of February 1, 2019, these platforms may not offer exclusive discounts; sell products from companies in which they own a stake; or have any vendor who sources more than 25 percent of their retail stock from a single source. The Guidelines were issued without prior notification or opportunity to provide public comments. While Indian officials argue this was a mere “clarification” of existing policy, the new Guidelines constituted a major regulatory change that severely affected U.S. investors’ operations and business models. The refusal of Indian authorities to extend the deadline for implementation beyond just over one month, further exacerbated the undue and unnecessary disruption to U.S. investors.

The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html 

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1994, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations per Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian Judicial Structure provides for an integrated system of courts to administer both central and state laws. The legal system has a pyramidal structure, with the Supreme Court at the apex, and a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provide that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

Laws and Regulations on Foreign Direct Investment

The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy (http://dipp.nic.in/foreign-direct-investment/foreign- direct-investment-policy). DPIIT makes policy pronouncements on FDI through Press Notes/Press Releases, which are notified by the RBI as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000). These notifications are effective on the date of the issued press release, unless otherwise specified. The judiciary does not influence FDI policy measures.

The government has introduced a “Make in India” program as well as investment policies designed to promote manufacturing and attract foreign investment. “Digital India” aims to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to commercialize and grow. The “Smart Cities” project intends to open up new avenues for industrial technological investment opportunities in select urban areas. The U.S. Government continues to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.

Competition and Anti-Trust Laws

The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, is now taking cases against mergers, cartels, and abuse of dominance, as well as conducting capacity-building programs for bureaucrats and business officials. Mergers meeting certain thresholds must be notified to the CCI for its review. Upon receipt of a complaint, or upon its own enquiry, if the CCI is of the opinion that there exists a prima facie case, it must direct its investigative arm (the Director General) to investigate. Currently the Director General is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.

Expropriation and Compensation

The government has taken steps to provide greater clarity in regulation. In 2016, the government successfully carried out the largest spectrum auction in the country’s history. India also has transfer pricing rules that apply to related party transactions. The government implemented the Goods and Services Tax (GST) in July 2017, which reduced the complexity of tax codes and eliminated multiple taxation policies. It also enacted the Insolvency and Bankruptcy Code in 2016, which offers uniform, comprehensive insolvency legislation for all companies, partnerships and individuals (other than financial firms).

Though land is a State Government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list, thus both the Indian Parliament and State Legislatures can make laws on this subject. Legislation approved by the Central Government is used as guidance by the State Governments. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, but continues to be a complicated process due to the lack of an effective legal framework. Land sales require adequate compensation, resettlement of displaced citizens, and 70% approval from landowners. The displacement of poorer citizens is politically challenging for local governments.

Dispute Settlement

India made resolving contract disputes and insolvency easier with the establishment of a modern bankruptcy regime with the enactment in 2016 and subsequent implementation of the Insolvency and Bankruptcy Code (IBC). Among the areas where India has improved the most in the World Bank’s Ease of Doing Business Ranking the past three years has been under the resolving insolvency metric. The World Bank Report noted that the 2016 law has introduced the option of insolvency resolution for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent companies can restore their financial well-being or close down. The Code has put in place effective tools for creditors to successfully negotiate and effectuated greater chances for creditors to realize their dues. As a result, the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar and the time taken for resolving insolvency also came down significantly from 4.3 years to 1.6 years. (https://www.ibbi.gov.in/uploads/publication/62a9cc46d6a96690e4c8a3c9ee3ab862.pdf 

India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with most of the world. Judgments of foreign courts are enforceable under multilateral conventions, including the Geneva Convention. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.

India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying any arbitral award. Seven cases are currently pending, the oldest of which dates to 1983. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although no progress has been made in establishing the office. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.

InvestorState Dispute Settlement

According to the United Nations Conference on Trade and Development, India has been a respondent state for 25 investment dispute settlement cases, of which 11 remain pending (http://investmentpolicyhub.unctad.org/ISDS/CountryCases/96?partyRole=2 ).

Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or through the use of ad hoc proceedings.

International Commercial Arbitration and Foreign Courts

Alternate Dispute Resolution (ADR)

Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most commonly used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.

Dispute Resolutions Pending

An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches and judges, inordinate delays in filling judicial vacancies, and only 14 judges per one million people. Almost 25 percent of judicial vacancies can be attributed to procedural delays.

Bankruptcy Regulations

According to the World Bank, it used to take an average of 4.3 years to recover funds from an insolvent company in India, compared to 2.6 years in Pakistan, 1.7 years in China and 1.8 years in OECD countries. The introduction and implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC focused on creditor-driven insolvency resolution, and offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms).

The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions. The government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. Supplementary legislation would create a new institutional framework, consisting of a regulator, insolvency professionals, information utilities, and adjudicatory mechanisms that would facilitate formal and time-bound insolvency resolution process and liquidation.

In August 2016, the Indian Parliament passed amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These amendments were geared at improving the effectiveness of debt recovery laws and helping address the problem of rising bad loans for domestic and multilateral banks. It will also help banks and financial institutions recover loans more effectively, encourage the establishment of more asset reconstruction companies (ARCs) and revamp debt recovery tribunals.

4. Industrial Policies

The regulatory environment in terms of foreign investment has been eased to make it investor- friendly.  The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy.  The Indian government does issue guarantees to investments but only in case of strategic industries.

Foreign Trade Zones/Free Ports/Trade Facilitation

The government established several foreign trade zone initiatives to encourage export-oriented production.  These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs).  In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official.  So far, three NIMZs have been accorded final approval and 13 have been accorded in-principle approval.  In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been 12 established as NIMZs.  SEZs are treated as foreign territory; businesses operating within SEZs are not subject to customs regulations, nor have FDI equity caps.  They also receive exemptions from industrial licensing requirements and enjoy tax holidays and other tax breaks.  EPZs are industrial parks with incentives for foreign investors in export-oriented businesses.  STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods, income tax holidays, exemption from excise tax on capital goods, components, and raw materials, and a waiver on sales taxes. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in,  https://www.stpi.in/  http://www.fisme.org.in/export_schemes/DOCS/B- 1/EXPORT%20ORIENTED%20UNIT%20SCHEME.pdf and http://www.makeinindia.com/home. 

Performance and Data Localization Requirements

Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India.  State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent local content.  However, PMA for government procurement limits access to the most cost effective and advanced ICT products available.  In December 2014, PMA guidelines were revised and reflect the following updates:

  1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.
  2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.
  3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:
    1. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
    2. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.
    3. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.
  4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7500), whichever is higher.

In January 2017, the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement.  A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website:  http://meity.gov.in/esdm/pma. 

Research and Development

The Government of India allows for 100 percent FDI in research and development through the automatic route.

Data Storage & Localization

In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations.  In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018.  The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity.  U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols.  Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India.  The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that is considered “critical” can only be stored in India.  The Bill is based on the conclusions of a ten-person Committee of Experts, established by MeitY in July 2017.

5. Protection of Property Rights

Real Property

Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates—normally senior local government officials—notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.

In other urban areas, and in areas where illegal settlements have been built up, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of

the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021. Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.

In 2016, India introduced its first regulator in the real estate sector in the form of the Real Estate Act. The Real Estate Act, 2016 aims to protect the rights and interests of consumers and promote uniformity and standardization of business practices and transactions in the real estate sector. Details are available at: http://mohua.gov.in/cms/TheRealEstateAct2016.php 

Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.

To establish a business, various government approvals and clearances are required, including incorporation of the company and registration under the State Sales Tax Act and Central and State Excise Acts. Businesses that intend to build facilities on land they own are also required to take the following steps: register the land; seek land use permission if the industry is located outside an industrially zoned area; obtain environmental site approval; seek authorization for electricity and financing; and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.

The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx . Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity.

In India, a registered sales deed does not confer title ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.

Intellectual Property Rights

In 2018, India became a signatory to the WIPO Centralized Access to Search and Examination (CASE) and Digital Access Service (DAS) agreements.  The CASE system enables patent offices to securely share and search examination documentation related to patent applications, and DAS provides details of the types of applications managed by individual digital libraries together with any operational procedures and technical requirements.  However, the provision of Indian law prescribing criminal penalties for failure to furnish information pertaining to applications for a patent for the “same or substantially the same invention” filed in any country outside India remains in place.

Prime Minister Modi’s courtship of multinationals to invest and “Make in India” has not yet addressed longstanding hesitations over India’s lack of effective intellectual property rights (IPR) enforcement.  Despite the release of the National IPR Policy and the establishment of India’s first intellectual property (IP) crime unit in Telangana in 2016, India’s IP regime continues to fall short of global best practices and standards.  U.S. engagement has not yet translated into the progress and/or actions on IPR that were anticipated under the previous U.S. administration.  Some “Notorious Markets” across the country continue to operate, while many smaller stores sell or deal with pirated content across the country. U.S. and Indian Government officials continued to engage on IPR issues.  U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S.  Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications.  India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.

U.S. and Indian Government officials continued to engage on IPR issues.  U.S. government representatives continued to meet government officials and industry stakeholders on IPR-related matters in 2018 and 2019, including during visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent Trademark Office (USPTO), the U.S.  Intellectual Property Enforcement Coordinator, and the Departments of State, Commerce, and Agriculture. India has made efforts to streamline its IP framework through administrative actions and awareness programs and is in the process of reducing its decade-long backlog of patent and trademark applications.  India also addresses IPR in its recently established Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts.

Although India’s copyright laws were amended in 2012, the amendments have not been fully implemented. Without an active copyright board in place to determine royalty rates for authors, weak enforcement of copyright regulations, and the widespread issue of pirated copyrighted materials are all contributing factors to why copyright law requires more emphasis on implementation.

The Delhi High Court diluted the publishing industry’s and authors’ rights and expanded the definition of fair use judgment, by allowing photocopiers to copy an entire book for educational purposes without seeking prior permission of the copyright holder.  The movie industry identified new illegal cam cording hubs of operation in Indore and Noida, and the Telangana police cracked down on two syndicates that used under-age children to illegally record movies.  After years of advocacy by industry groups, especially the Indian office of the Motion Picture Association (MPA), the GOI released a draft Cinematography Bill for comment in December 2018, which contained anti-cam cording legislation.  Industry groups welcomed this move, which included criminal and financial penalties for offenders.  The bill is now awaiting Parliamentary approval.  However, the penalties for infringement and IP theft are significantly weakened from those suggested in the initial draft legislation in 2013.

The music industry remains concerned about a Section 31D memorandum that the Department of Industry and Policy Promotion (DIPP), now DPIIT,-issued announced in September 2016 to announce that all online transmissions fall under the statutory licensing provisions of section 31D of the Copyright Act.  The memo places internet service providers on par with radio broadcasters, allowing them to provide music on their websites by paying the same royalties to copyright societies, two percent of ad revenues.  The industry argues that most of the websites have little to no ad revenue, and some may be hosted on servers outside India, which makes collection of royalties challenging.  However, in February 2017, India issued a notice to all event organizers that they would have to pay music royalties to artists when played at an event. On a more positive note, in April 2019, the Bombay High Court issued its decision in Tips Industries LTD v. Wynk Music LTD (Airtel) that statutory licensing under section 31D of the Copyright Act does not cover Internet transmissions (streaming), but rather is limited to traditional television and radio broadcasts.  The Court also stated that Section 31D was an exception to copyright and must be distinctly interpreted.   It is not clear if this judgement will move the Government of India to withdraw DPIIT’s 2016 memo. However, in 2019, the DPIIT proposed amendments to the Copyright Rules that would, in contravention to the plain statutory text, broaden the scope of the statutory licensing exception to encompass not only radio and television broadcasting, but also Internet broadcasting.

2018 was a year of great difficulty in the agriculture and biotechnology space, which has been reeling from the aftermath of a coordinated attack in 2016 and 2017 on the Monsanto Corporation’s India operations (reported in our 2016 and 2017 Special 301 submissions).  In 2017, the Protection of Plant Varieties and Farmers Rights Act (PPVFRA) removed the long-standing requirement for breeders to produce a “No-Objection-Certificate” from the patentee of a particular genetically modified (GM) trait.  The move was nearly unprecedented and removed a key preemptive tool for breeders to diligently ensure stakeholders are consulted and patentee’s innovations are not being infringed upon or used without permission.

In April 2018, the Delhi High Court judgment struck down a patent held by Monsanto in a summary judgment.  In a series of decisions on this matter, most recently in August, 2019, the Supreme Court overturned Delhi High Court Divisional Bench judgement of April 2018 and reinstated the March 2017 Single Judge decision, pointing to the Divisional Bench failing to have confined itself to the examination of the validity of the order of injunction granted by the Single Judge 2017 decision.   Issues remain complex and unsettled.  The GM Licensing Guidelines remain in draft form but could have significant and wide-ranging implications for Monsanto and many other IP holders.  Moreover, follow-on decisions and administrative legal actions could set important Indian legal precedents for stopping a patent, the role of the PVPFRA and its relationship to biological innovation, the application of administrative regulations regarding price and term of a patent, and the interplay between the Patents Act, PVPFRA, and the Biodiversity Act.  It is worth noting that in December 2015, Monsanto terminated more than 40 of its license agreements with Indian companies for nonpayment of licensing fees.  The Indian licensees subsequently challenged Monsanto’s patents in court on several grounds, including challenging the validity of the patent and efficacy of the technology.

The Government of India’s refusal to repudiate Ministry of Agriculture and Farmers Welfare’s GM licensing guidelines has already resulted in withdrawal of next-generation innovative biotechnology from the Indian marketplace and has given pause to many other companies who seek to protect their innovative products.  Other biotech-led industries are also following this development and are greatly concerned, as the action reaches beyond compulsory licensing under the Patents Act.

Indian law still does not provide any statutory protection for trade secrets. After a workshop conducted in October 2016, DIPP agreed to provide guidance to start-ups on trade secrets.  The Designs Act allows for the registration of industrial designs and affords a 15-year term of protection.

Other long-standing concerns remain. Since 2012, outstanding concerns that have not been addressed either in the IP Policy or by Government of India include; Section 3(d) of India’s Patent Act, which creates confusing criteria on “enhanced efficacy” for the patentability of pharmaceutical products;  draft biotechnology licensing regulations from the Ministry of Agriculture which are mandatory, overly prescriptive, and  severely limit the value of IPR; remaining lack of clarity on the conditions under which compulsory licensing may be allowed; lack of a copyright board; lack of a trade secrets law; lack of data exclusivity legislation; lack of an early dispute resolution mechanism for patents ; lack of a legislative framework facilitating public-private partnership in government-funded research  (along the lines of  Bayh-Dole in the United States); weak IP enforcement; and overall unwillingness to make IPR a priority within the Indian government.  All these measures across various sectors create uncertainty at best, and at worst perceptions of a hostile business environment.

In addition, the Patent Act requires patentees to regularly report on a commercial scale “the working” of their patents.  This is implemented by filing a required annual form called Form 27 on patent working.  The current requirement to file Form 27 is not only onerous and costly for patentees and ill-suited to the reality of patented technology, it also hinders any incentives to invent and advance innovation.

Standard Essential Patents (SEPs) and fair, reasonable, and non-discriminatory (FRAND) licensing criteria and systems are another concerning area.  Discussions on FRAND licensing terms restarted in 2019 but did not include stakeholders.  Several cases are pending before the Delhi High Court surrounding the issue of royalty payments for standard essential patents.  While initial indications from Delhi High Court proceedings are encouraging, a 2016 GOI discussion paper on SEPs raised concerns related to active government involvement in setting standards and determining FRAND royalties.  Some decisions from the Competition Commission of India (CCI) have been inconsistent with the Delhi High Court, creating confusion related to the development of SEP policy and practices in India.

Another area of concern is the global blocking order against “Intermediaries”.  A Delhi High Court judge issued an interim injunction directing Google, Facebook, YouTube, Twitter, and other “intermediaries” to remove – on a global basis – content uploaded to their platforms allegedly defaming the guru Baba Ramdev.  The judgment moved beyond traditional “geo-blocking,” in which take down orders are limited to specific geographic regions.  Facebook has challenged the judgment before a Division Bench.

In 2019, we observed that public notice and comment procedures on policy – including on IPR related issues – were often not followed.  Stakeholders were not properly notified of meetings with agencies to discuss concerns, including for changes to critical issues like price controls on medical devices or changes to key policies.  Moreover, Mission India remains concerned that when stakeholder input is solicited, it is often disregarded and/or ignored during the final determination of a policy.

India actively engages at multilateral negotiations, including the Trade Related Aspects of Intellectual Property Rights (TRIPS) Council.  As a result, in April 2017, the MOHFW issued a notification that amended the manufacturing license form (Form 44), taking out any requirement to notify the regulator if the drug, for which manufacturing approval was being sought, is under patent or not.  The GOI cited their view that Form 44 provisions were outside the scope of their WTO TRIPS agreement commitments as justification for the change.  Industry contracts point to the clear benefit this change has delivered to the Indian generic pharmaceutical industry, which now has an even easier path to manufacture patented drugs for years, while IP holders are forced to discover the violation and challenge the infringement in separate courts.  These negotiations will have an impact on innovation, trade, and investment in IP-intensive products and services.

Developments Strengthening the Rights of IP Holders

Clarification of Patentability Criteriathe Delhi High Court added clarity on the matter of the patentability criterion under Section 3(k) of the India Patents Act, ruling in Ferid Allani vs UOI & Ors that there is no absolute bar on the patentability of computer programs.  Additionally, ‘technical effect’ or ‘technical contribution’ must be taken into consideration during examination when determining the patent eligibility of a computer program.

Bombay High Court Clarifies 31(D) of the Copyright Act: Ruling on “Tips Industries vs. Wynk Music,” the Bombay High Court stated that the extension of the Copyright Act, 2016’s Section 31(D) to the internet is flawed logic and unsound in law.  The court also noted that Section 31(D) is an exception to copyright and must be strictly interpreted.  It is to be seen if this judgement helps Government of India in withdrawing of DPIIT memo of 2016.

Delhi High Court Confronts Online Piracy: The Delhi High Court decided that approved site take down requests will apply to those sites with addresses specifically listed in the request as well as similar sites that operate under different addresses.  This “dynamic injunction” is meant to eliminate the need for complainants to approach courts with new requests should a banned site reappear under a new address.

The Delhi High Court in July 2019 took steps to address the “gridlock” of the Intellectual Property Appellate Board (IPAB).  IPAB was established in 2003 to adjudicate appeals over patents, trademarks, copyrights, and other decisions, but lacked the necessary number of technical members to form a quorum and make judgements, resulting in a significant backlog.  To clear the backlog of cases, the court decided that until the appointments were filled, the chairman and available technical members could issue decisions despite lacking a quorum.  If no technical members were available, the IPAB chairman could consult a scientific advisor from the panel of scientific advisors appointed under Section 115 of the 1970 Patents Act.  Additionally, in October 2019, the court permitted the current IPAB chairman to serve past his term – which ended in September 2019, reinstating him until a replacement takes over.

6. Financial Sector

Capital Markets and Portfolio Investment

Total market capitalization of the Indian equity market stood around $2.2 trillion as of December 31, 2019. The benchmark Standard and Poor’s (S&P) BSE (erstwhile Bombay Stock Exchange) Sensex recorded gains of about 14 percent in 2019. Nonetheless, Indian equity markets were tumultuous throughout 2019. The BSE Sensex generally gained from the beginning of the year until July 5, when Finance Minister Nirmala Sitharaman introduced a tax increase on foreign portfolio investment in her post-election Union Budget for the remainder for FY 2020.  The Sensex declined, erasing all previous gains for the year as the new tax led to a rapid exodus of foreign portfolio investors from the market.  The market continued to fluctuate even after the tax increase was repealed on August 23 until September 20, when the Finance Minister made a surprise announcement to slash corporate tax rates.  After that, the Sensex surged and hit a record high of 41,854 on December 20. However, even as the benchmark Sensex hit record highs, the midcap and small cap indices disappointed investors with a year of negative returns.  The Sensex’s advance was driven by a handful of stocks; two in particular Reliance Industries Ltd. and ICICI Bank Ltd. accounted for about half the gain.   Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies.  It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC).  SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange.  SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms.  They can also set up domestic asset management companies to manage funds.  All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and to FDI policy.  FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.  Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines.  Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.

Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines.  Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.  External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling as prescribed by the RBI, funds are used for outward FDI, or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.

Total external commercial borrowings through both the approval and automatic route increased 61.45 percent year-on-year to $50.15 billion as of December 2019, according to the Reserve Bank of India’s data.

The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market.  FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds. In October 2019, the RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs).  This was based on the recommendations of the task force on offshore rupee markets to examine and recommend appropriate policy measures to ensure the stability of the external value of the Rupee (https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=937).    The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

Money and Banking System

The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18.25 percent of their net demand and time liabilities in government securities. The RBI plans to reduce this by 25 basis points every quarter until the investment requirement reaches 18 percent of their net demand and time liabilities.

PSBs currently face two significant hurdles: capital constraints and poor asset quality. As of September 2019, gross non-performing loans represented 9.3 percent of total loans in the banking system, with the public sector banks having an even larger share at 12.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years is driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. With the new bankruptcy law (IBC) in place, banks are making progress in non-performing asset recognition and resolution. As of December 2019, the resolution processes have been approved in 190 cases Lengthy legal challenges have posed the greatest obstacle, as time spent on litigation was not counted against the 270 day deadline.

In July 2019, Parliament amended the IBC to require final resolution within 330 days including litigation time. To address asset quality challenges faced by public sector banks, the government injected $30 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CRAR) improved to 13.5 percent in September 2019 from 12.2 in March 2019. In 2019, the Indian authorities also announced a consolidation plan entailing a merger of 10 public sector banks into 4, thereby reducing the total number of public sector banks from 18 to 12.

Women in the Financial Sector

Women in India receive a smaller portion of financial support relative to men, especially in rural and semi-urban areas. In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000. The Acting Finance Minister Piyush Goyal while delivering the 2019 budget speech mentioned that 70 percent of the beneficiaries of MUDRA initiative are women. Under the MUDRA initiative, 155.6 million loans have been disbursed amounting to $103 billion. Following the Global Entrepreneurship Summit (GES) 2017, government agency the National Institute for Transforming India (NITI Aayog), launched a Women’s Entrepreneurship Platform, https://wep.gov.in/, a single window information hub which provides information on a range of issues including access to finance, marketing, existing government programs, incubators, public and private initiatives, and mentoring. About 5,000 members are currently registered and using the services of the portal said a NITI Aayog officer who has an oversight of the project.

Foreign Exchange and Remittances

Foreign Exchange

The RBI, under the Liberalized Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 (https://www.rbi.org.in/Scripts/Fema.aspx ).

Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi ). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5 percent of investment brought into India or USD $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Capital account transactions are open to foreign investors, though subject to various clearances. NRI investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or FIPB.

FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10 percent.

The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification (https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf ) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.

Remittance Policies

Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.

Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.

Sovereign Wealth Funds

The FY 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. So far, the Canada Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Authority, Australian Super, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance have committed investments into the NIIF Master Fund, alongside Government of India. NIIF Master Fund now has $2.1 billion in commitments with a focus on core infrastructure sectors including transportation, energy and urban infrastructure.

7. State-Owned Enterprises

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises (http://dpe.gov.in ), controls and formulates all the policies pertaining to SOEs, and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken a number of steps to improve the performance of SOEs, also called the Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. Reforms carried out in the 1990s focused on liberalization and deregulation of most sectors and disinvestment of government shares. These and other steps to strengthen CPSE boards and enhance transparency evolved into a more comprehensive governance approach, culminating in the Guidelines on Corporate Governance of State-Owned Enterprises issued in 2007 and their mandatory implementation beginning in 2010. Governance reforms gained prominence for several reasons: the important role that CPSEs continue to play in the Indian economy; increased pressure on CPSEs to improve their competitiveness as a result of exposure to competition and hard budget constraints; and new listings of CPSEs on capital markets.

According to the Public Enterprise Survey 2018-19 as of March 2019 there were 348 central public sector enterprises (CPSEs) with a total investment of $234 billion, of which 248 are operating CPSEs. The report puts the number of profit-making CPSEs at 178, while 70 CPSEs were incurring losses. The government tried to unsuccessfully privatize the state-run loss- incurring airline Air India.

Foreign investments are allowed in the CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp.  While the CPSEs face the same tax burden as the private sector, on issues like procurement of land they receive streamlined licensing that private sector enterprises do not.

Privatization Program

Despite the financial upside to disinvestment in loss-making state-owned enterprises (SOEs), the government has not generally privatized its assets as they have led to job losses in the past, and therefore engender political risks. Instead, the government has adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving the efficiency of SOEs.

In recent years, however the government has begun to look to disinvestment proceeds as a major source of revenue to finance its fiscal deficit. For the first time in seven years, the government met its disinvestment target in fiscal year 2017-18, generating $15.38 billion against a target of $11.15 billion. For FY 2020, the government increased the disinvestment target of $12.3 billion but managed to generate only $2.5 billion till December 2019 The Government of India’s plan to sell state-owned carrier Air India could not happen in FY 2020. The Indian Government constituted inter-ministerial panel recommended 100 percent stake sale in Air India to make it more lucrative as against a 76 percent stake sale last year. Government did say that they have received some good bids, but the process might go to a back burner because of the COVID19 pandemic and its resulting impact on the economy.

Foreign institutional investors can participate in these disinvestment programs subject to these limits: 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. The limit is 20 percent of the paid-up capital in the case of public sector banks. There is no bidding process. The shares of the SOEs being disinvested are sold in the open market. Detailed policy procedures relating to disinvestment in India can be accessed at: https://dipam.gov.in/disinvestment-policy 

8. Responsible Business Conduct

Among Indian companies there is a general awareness of standards for responsible business conduct. The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013 and is responsible for regulating the corporate sector in accordance with the law. The MCA is also responsible for protecting the interests of consumers by ensuring competitive markets.

The Companies Act of 2013 also established the framework for India’s corporate social responsibility (CSR) laws. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track CSR activities provide recommendations in some cases for effective use of CSR funds. MCA released the National Guidelines on Responsible Business Conduct, 2018 (NGRBC) on March 13, 2019 (an improvement over the existing National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business, 2011), as a means to nudge businesses to contribute towards wider development goals while seeking to maximize their profits. The NGRBC is dovetailed with the United Nations Guiding Principles on Business & Human Rights (UNGPs).

A CRISIL study reported that cumulative spending on CSR since it was mandated is more than $ 7 billion (Rs.50,000 crores) including $ 4.85 billion (Rs. 34,000 crores) by listed companies and nearly $ 2.7 billion (Rs.19,000 crores) by unlisted ones. The study further noted that overall, 1,913 companies met the government’s eligibility criteria but 667 of them could not spend for various reasons. About 153 companies spent 3 percent or more as against the mandated 2 percent of profits. In terms of spending, energy companies were front runners to spend $ 322 million (Rs. 2,253 crore) or 23 percent of the overall spending followed by manufacturing, financial services and information technology services. The preferred spending heads were education, skill development, healthcare, and sanitation and preferred areas being National Capital region, Karnataka and Maharashtra. The study however noted that there could be shrink both in terms of number of companies and their total spend after the Companies (Amendment) Act 2017 where the eligibility criteria is now based on financials of the “immediately preceding financial year” rather than the earlier stipulation of “any three preceding “immediately preceding financial year” rather than the earlier stipulation of “any three preceding financial years.”

India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.

India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.

9. Corruption

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India showed marginal improvement and scored 41 out of 100 in Transparency International’s 2018 Corruption Perception Index, with a ranking of 78 out of the 180 countries surveyed (as compared to a score of 40 out of 100 and ranked 81 in 2017).

Corruption is addressed by the following laws: the Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels. The amendments also elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector on the basis of allegations of revenue loss to the exchequer.

In November 2016, the Modi government ordered that INR 1000 and 500 notes, comprising approximately 86 percent of cash in circulation, be demonetized to curb “black money,” corruption, and the financing of terrorism. An August 2018 RBI report stated 99 percent of demonetized cash was deposited in legitimate bank accounts, leading analysts to question if the exercise enabled criminals to launder money into the banking system. Digital transactions increased due to demonetization, as mobile banking inclusion jumped from 40 percent to 60 percent of the populace. India is investigating 1.8 million bank accounts and 200 individuals associated with unusual deposits during demonetization, and banks’ suspicious transaction reports quadrupled to 473,000 in 2016. On August 7, SEBI directed stock exchanges to restrict trading and audit 162 suspected shell companies on the basis of large cash deposits during demonetization.

The Benami Transactions (Prohibition) Amendment Act of 2016 entered into effect in November 2016, and strengthened the legal and administrative procedures of the Benami Transactions Act 1988, which was ultimately never notified. (Note: A benami property is held by one person, but paid for by another, often with illicit funds.) Analysts expect the government to issue a roadmap in 2017-2018 to begin implementing the Act. In May 2017, the Real Estate (Regulation and Development) Act, 2016 came into effect. The Act will regulate India’s real estate sector, which is notorious for its corruption and lack of transparency.

In November 2016, India and Switzerland signed a joint declaration to enter into an Agreement on the Exchange of Information (AEOI) to automatically share financial information on accounts held by Indian residents, beginning in 2018. India also amended its Double Taxation Avoidance Agreement with Singapore, Cyprus, and Mauritius in 2016 to prevent income tax evasion. The move follows the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which replaced the Income Tax (IT) Act of 1961 regarding the taxation of foreign income. The new Act penalizes the concealment of foreign income, as well as provides criminal liability for foreign income tax evasion.

In February 2014, the government enacted the Whistleblower Act, intended to protect anti- corruption activists, but it has yet to be implemented. Experts believe that the prosecution of corruption has been effective only among the lower levels of the bureaucracy; senior bureaucrats have generally been spared. Businesses consistently cite corruption as a significant obstacle to FDI in India and identify government procurement as a process particularly vulnerable to corruption. To make the Whistle Blowers Protection Act, 2014 more effective, the government proposed an amendment bill in 2015. This bill is still pending with the Upper House of Parliament; however anti-corruption activists have expressed concern that the bill will dilute the Act by creating exemptions for state authorities, allowing them to stay out of reach of whistleblowers.

The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. As yet, the government has established no monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act, 2011, may afford some protection once it has been fully implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act 2013, which created a national anti- corruption ombudsman and requires states to create state-level ombudsmen within one year of the law’s passage. Till December 2018, the government had not appointed an ombudsman. (Note: An ombudsman was finally appointed in March 2019.)

UN Anticorruption Convention, OECD Convention on Combatting Bribery

India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Matt Ingeneri
Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000 ingeneripm@state.gov

Ashutosh Kumar Mishra
Executive Director
Transparency International, India
Lajpat Bhawan, Room no.4
Lajpat Nagar,
New Delhi – 110024 +91 11 2646 0826
info@transparencyindia.org

10. Political and Security Environment

Prime Minister Modi’s BJP-led National Democratic Alliance government won a decisive mandate in the May 2019 elections, winning a larger majority in the Lok Sabha (lower house of Parliament) than in 2014. The new government’s first 100 days of its second term were marked by the removal of special constitutional status from the state of Jammu and Kashmir (J&K) The government’s decision to remove J&K autonomy was preceded by a heavy paramilitary build-up in the State, arrests of local opposition leaders, and cutting of mobile phone and Internet services. Internet connections have since been largely opened, but with continued severe limitations on data download speeds to the extent that everyday activities of Kashmiris often take hours or need to be completed outside the region.

A number of areas of India suffered from terrorist attacks by separatists, including Jammu and Kashmir and some states in India’s northeast.

In December 2019, the government passed the Citizenship Amendment Act (CAA), which promises fast-tracked citizenship to applicants from six minority religious groups from Afghanistan, Bangladesh, and Pakistan, but does not offer a similar privilege to Muslims from these countries. The new law sparked widespread protests that sometimes-included violence by demonstrators, government supporters, and security services.

Travelers to India are invited to visit the U.S. Department of State travel advisory website at: https://travel.state.gov/content/passports/en/country/india.html for the latest information and travel resources.

11. Labor Policies and Practices

Although there are more than 20 million unionized workers in India, unions still represent less than 5 percent of the total work force. Most of these unions are linked to political parties. Unions are typically strong in state-owned enterprises. A majority of the unionized work force can be found in the railroads, port & dock, banking and insurance sectors. According to provisional figures form the Ministry of Labor and Employment (MOLE), over 1.74 million workdays were lost to strikes and lockouts during 2018. Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation.

India’s labor regulations are very stringent and complex, and over time have limited the growth of the formal manufacturing sector. In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages legislation in 2019. This Code combines four previously existing statutes- The Payment of Wages Act, the Minimum Wages Act, the Payment of Bonus Act, and the Equal Renumeration Act- into one code to simplify compliance procedures for employers. Minimum industrial wages vary by state, ranging from about $2.20 per day for unskilled laborers to over $9.30 per day for skilled production workers.  Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act of 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people, although some states including Haryana, Madhya Pradesh, Rajasthan, and Maharashtra have increased the threshold to 300 people. RBI approval is also required for foreign banks to close branches.  Permission is generally difficult to obtain, which has resulted in the increasing use of contract workers (i.e. non- permanent employees) to circumvent the law.  Private firms successfully downsize through voluntary retirement schemes.

Since the current government assumed office in 2014, much of the movement on labor laws has taken place at the state level, particularly in Rajasthan, where the government has passed major amendments to allow for quicker hiring, firing, laying off, and shutting down of businesses. The Ministry of Labor and Employment launched a web portal in 2014 to assist companies in filing a single online report on compliance with 16 labor-related laws. The government has also drafted a Code on Industrial Relations that is currently being reviewed by a parliamentary committee. India’s major labor unions have opposed labor reforms, arguing that they compromise workers’ safety and job security.

In March 2017, the Maternity Benefits Act was amended to increase the paid maternity leave for women from 12 weeks to 26 weeks.  The amendment also makes it mandatory for all industrial establishments employing 50 or more workers to have a creche for babies to enable nursing mothers to feed the child up to 4 times in a day.

In August 2016, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December 2016, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.

There are no reliable unemployment statistics for India due to the informal nature of most employment. A 2019 report from India’s National Statistics Commission claimed that the official unemployment rate in India rose to 6.1 percent in 2018, a 45-year high. In contrast, the unemployment rate was only 2.2 percent the last time when the commission conducted this survey in 2012. The government acknowledges a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. The current government has established a Ministry of Skill Development and has embarked on a national program to increase skilled labor.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

The United States and India signed an Investment Incentive Agreement in 1987. This agreement covered the Overseas Private Investment Corporation (OPIC) and its successor agency, the U.S. International Development Finance Corporation (DFC). DFC is the U.S. Government’s development finance institution, launched in January 1, 2020, to incorporate OPIC’s programs as well as the Direct Credit Authority of the U.S. Agency for International Development. Since 1974, DFC (under its predecessor agency, OPIC) has provided support to over 200 projects in India in the form of loans, investment funds, and political risk insurance.

As of March 2020, DFC’s current outstanding portfolio in India comprises more than $1.7 billion, across 50 projects. These commitments are concentrated in utilities, financial services (including microfinance), and impact investments that include agribusiness and healthcare. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) 2019 $2.92 trillion 2018 $2.791 trillion https://data.worldbank.org/
country/india
 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (stock positions) 2019 $28.34*billion 2019 $45.9 billion https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States (stock positions) 2015 $9.2*billion 2018 $5.0 billion https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP N/A N/A 2019 15.1% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

*The Indian government source for GDP is: https://www.indiabudget.gov.in/economicsurvey/doc/Statistical-Appendix-in-English.pdf  The Indian government source for FDI statistics is: http://dipp.nic.in/publications/fdi-statistics  and the figure is the cumulative FDI from April 2000 to December 2017. The DIPP figures include equity inflows, reinvested earnings and “other capital,” and are not directly comparable with the BEA data. Outward FDI data has been sourced from: http://ficci.in/study-  page.asp?spid=20933&deskid=54531  

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 456,911 100% Total Outward N/A 100%
Mauritius 141,925 31% N/A N/A N/A
Singapore 94,651 21% N/A N/A N/A
Japan 33,081 7% N/A N/A N/A
Netherlands 30,884 7% N/A N/A N/A
United States 28,349 6% N/A N/A N/A
“0” reflects amounts rounded to +/- USD 500,000.

Note: Outward Direct InvestmentAccording to India Brand Equity Foundation (IBEF) of the Department of Commerce, Ministry of Commerce and Industry, the outward FDI from India in equity, loan and guaranteed issue stood at US$ 12.59 billion in FY2018-19.
Source: Inward FDI DIPP, Ministry of Commerce and Industry
Outward Investments (July 2018-December 2018) RBI

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 3,374 100% All Countries 2,010 100% All Countries 1,723 100%
United States 2218 59% United States 614 31% United States 1604 93%
China, P.R. Mainland 605 16% China, P.R. Mainland 605 30% Brazil 51 3%
Luxembourg 317 8% Luxembourg 317 16% Mauritius 27 2%
Mauritius 144 4% Mauritius 117 6% France 20 1%
Indonesia 63 2% Indonesia 63 3% United Kingdom 19 1%

14. Contact for More Information

Matt Ingeneri
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri New Delhi +91 11 2419 8000
+91 11 2419 8000
IngeneriPM@state. gov

Macau

Executive Summary

Macau became a Special Administrative Region (SAR) of the People’s Republic of China (PRC) on December 20, 1999. Macau’s status since reverting to Chinese sovereignty is defined in the Sino-Portuguese Joint Declaration (1987) and the Basic Law. Under the concept of “one country, two systems” articulated in these documents, Macau enjoys a high degree of autonomy in economic matters, and its economic system is to remain unchanged for 50 years following the 1999 reversion to Chinese sovereignty. The Government of Macau (GOM) maintains a transparent, non-discriminatory, and free-market economy. The GOM is committed to maintaining an investor-friendly environment.

In 2002, the GOM ended a long-standing gaming monopoly, awarding two gaming concessions and one sub-concession to consortia with U.S. interests. This opening encouraged substantial U.S. investment in casinos and hotels and has spurred rapid economic growth.

Macau is today the biggest gaming center in the world, having surpassed Las Vegas in terms of gambling revenue. U.S. investment over the past decade is estimated to exceed USD 23.8 billion. In addition to gaming, Macau hopes to position itself as a regional center for incentive travel, conventions, and tourism, though to date it has experienced limited success in diversifying its economy. In 2007, business leaders founded the American Chamber of Commerce of Macau.

Macau also seeks to become a “commercial and trade cooperation service platform” between mainland China and Portuguese-speaking countries. The GOM has various policies to promote these efforts and to create business opportunities for domestic and foreign investors.

In September 2016, the GOM announced its first Five-Year Development Plan (2016-2020). Highlights include establishing a trade cooperation service platform between mainland China and Portuguese-speaking countries, improving the structure of industries, increasing the quality of life, protecting the environment, and strengthening government efficiency.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index N/A x of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report N/A x of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index N/A x of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2016 USD 2,541 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 USD 79,110 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

3. Legal Regime

Transparency of the Regulatory System

The GOM has transparent policies and laws that establish clear rules and do not unnecessarily impede investment. The basic elements of a competition policy are set out in Macau’s Commercial Code.

The GOM will normally conduct a three-month public consultation when amending or making legislation, including investment laws, and will prepare a draft bill based on the results of the public consultation. The lawmakers will discuss the draft bill before putting it to a final vote. All the processes are transparent and consistent with international norms.

Public comments received by the GOM are not made available online to the public. The draft bills are made available at the Legislative Assembly’s website http://www.al.gov.mo/zh/, while this website http://www.io.gov.mo/ links to the GOM’s Printing Bureau, which publishes laws, rules, and procedures.

Macau’s anti-corruption agency the Commission Against Corruption (known by its Portuguese acronym CCAC) carries out ombudsman functions to safeguard rights, freedoms, and legitimate interests of individuals and to ensure the impartiality and efficiency of public administration.

Macau’s law on the budgetary framework (Decree 15/2017) aims to reinforce monitoring of public finances and to enhance transparency in the preparation and execution of the fiscal budget.

International Regulatory Considerations

Macau is a member of WTO and adopts international norms. The GOM notified all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Macau, as a signatory to the Trade Facilitation Agreement (TFA), has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Under “one country, two systems”, Macau maintains Continental European law as the foundation of its legal system, which is based on the rule of law and the independence of the judiciary. The current judicial process is procedurally competent, fair, and reliable. Macau has a written commercial law and contract law. The Commercial Code is a comprehensive source of commercial law, while the Civil Code serves as a fundamental source of contractual law. Courts in Macau include the Court of Final Appeal, Intermediate Courts, and Primary Courts. There is also an Administrative Court, which has jurisdiction over administrative and tax cases. These provide an effective means for enforcing property and contractual rights. At present, the Court of Final Appeal has three judges; the Intermediate Courts have nine judges; and the Primary Courts have 31 judges. The Public Prosecutions Office has 38 prosecutors.

Laws and Regulations on Foreign Direct Investment

Macau’s legal system is based on the rule of law and the independence of the judiciary. Foreign and domestic companies register under the same rules and are subject to the same set of commercial and bankruptcy laws (Decree 40/99/M).

Competition and Anti-Trust Laws

Macau has no agency that reviews transactions for competition-related concerns, nor a competition law. The Commercial Code (Law No. 16/2009) contains basic elements of a competition policy with regard to commercial practices that can distort the proper functioning of markets. While the GOM has stated that existing provisions are adequate and appropriate given the scale and scope of local economy, it announced in March 2019 that it was studying a fair competition law that would protect against monopolies and price-fixing. The GOM has since not disclosed the progress of the study.

Expropriation and Compensation

The U.S. Consulate General is not aware of any direct or indirect actions to expropriate. Legal expropriations of private property may occur if it is in the public interest. In such cases, the GOM will exchange the private property with an equivalent public property based on the fair market value and conditions of the former. The exchange of property is in accordance with established principles of international law. There is no remunerative compensation.

Dispute Settlement

ICSID Convention and New York Convention

Both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Macau. The Law on International Commercial Arbitration (Decree 55/98/M) provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is aware of one previous investment dispute involving U.S. or other foreign investors or contractors and the GOM. In March 2010, a low-cost airline carrier was reportedly forced to cancel flight services because of a credit dispute with its fuel provider, triggering events which led to the airline’s de-licensing. Macau courts declared the airline bankrupt in September 2010. The airline’s major shareholder, a U.S. private investment company, filed a case in the Macau courts seeking a judgment as to whether a GOM administrative act led to the airline’s demise. The Court of Second Instance held hearings in May and June 2012. In November 2013, the Court of Second Instance rejected the appeal. Private investment disputes are normally handled in the courts or via private negotiation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center or the World Trade Center Macau Arbitration Center.

International Commercial Arbitration and Foreign Courts

Macau has an arbitration law (Decree 55/98/M), which adopts the UN Commission on International Trade Law (UNCITRAL) model law for international commercial arbitration. The GOM accepts international arbitration of investment disputes between itself and investors. Local courts recognize and enforce foreign arbitral awards.

Macau established the World Trade Center Macau Arbitration Center in June 1998. The objective of the Center is to promote the resolution of disputes through arbitration and conciliation, providing the disputing parties with alternative resolutions other than judicial litigation.

Foreign judgments in civil and commercial matters may be enforced in Macau. The enforcement of foreign judgments is stipulated in Articles 1199 and 1200 of the Civil Procedure Code. A foreign court decision will be recognized and enforced in Macau, provided that it qualifies as a final decision supported by authentic documentation and that its enforcement will not breach Macau’s public policy.

Bankruptcy Regulations

Commercial and bankruptcy laws are written under the Macau Commercial Code, the Civil Procedure Code, and the Penal Code. Bankruptcy proceedings can be invoked by an application from the bankrupt business, by petition of the creditor, or by the Public Prosecutor. There are four methods used to prevent the occurrence of bankruptcy: the creditors meeting, the audit of the company’s assets, the amicable settlement, and the creditor agreement. According to Articles 615-618 of the Civil Code and Article 351-353 of the Civil Procedure Code, a creditor who has a justified fear of losing the guarantee of his credits may request seizure of the assets of the debtor. Bankruptcy offenses are subject to criminal liability.

There is no credit bureau or other credit monitoring authority serving Macau’s market.

4. Industrial Policies

Investment Incentives

To attract foreign investment, the GOM offers investment incentives to investors on a national treatment basis. These incentives are contained in Decrees 23/98/M and 49/85/M and are provided so long as companies can prove they are doing one of the following: promoting economic diversification, contributing to the promotion of exports to new unrestricted markets, promoting added value within their activity’s value chain, or contributing to technical modernization. There is no requirement that Macau residents own shares. These incentives are categorized as fiscal incentives, financial incentives, and export diversification incentives.

Fiscal incentives include full or partial exemption from profit/corporate tax, industrial tax, property tax, stamp duty for transfer of properties, and consumption tax. The tax incentives are consistent with the WTO Agreement on Subsidies and Countervailing Measures, as they are neither export subsidies nor import substitution subsidies as defined in the WTO Agreement. In 2019, the GOM put forward an enhanced tax deduction for research and development (R&D) expenditure incurred for innovation and technology projects by companies whose registered capital reached USD 125,000, or whose average taxable profits reached USD 62,500 per year in three consecutive years. The tax deduction amounts to 300 percent for the first USD 375,000 of qualifying R&D expenditure and 200 percent for the remaining amount, subject to a limit of USD 1.9 million in total). In addition, income received from Portuguese speaking countries is exempt from the corporate tax, provided such income has been subject to tax in its place of origin.

Two new laws to encourage financial leasing activities in Macau became effective in April 2019. Under the new regime, the minimum capital requirement of a financial leasing company is reduced from USD 3.75 million to USD 1.25 million. In addition, the acquisition by the financial leasing company of a property exclusively for its sole use has an exemption of up to USD 62,500 from a stamp duty.

Financial incentives include government-funded interest subsidies. Export diversification incentives include subsidies given to companies and trade associations attending trade promotion activities organized by IPIM. Only companies registered with Macau Economic Services (MES) may receive subsidies for costs such as space rental or audio-visual material production. Macau also provides other subsidies for the installation of anti-pollution equipment.

Foreign Trade Zones/Free Ports/Trade Facilitation

Macau is a free port; however, there are four types of dutiable commodities: liquors, tobacco, vehicles, and petrol (gasoline). Licenses must be obtained from the MES prior to importation of these commodities.

In order to promote the MICE (meetings, incentives, conventions, and exhibitions) and logistics industries in Macau, the GOM has accepted the ATA Carnet (Admission Temporaire/Temporary Admission), an international customs document providing an efficient method for the temporary import and re-export of goods that eases the way for foreign exhibitions and businesses.

The latest CEPA addition established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

Macau does not follow a forced localization policy in which foreign investors must use domestic content in goods or technology.

There are no requirements by the GOM for foreign IT providers to turn over source code and/or provide access to surveillance (i.e., backdoors into hardware and software or turning over keys for encryption).

According to the Personal Data Protection Act (Decree 8/2005), if there is transfer of personal data to a destination outside Macau, the opinion of the Office for Personal Data Protection — the regulatory authority responsible for supervising and enforcing the Act — must be sought to confirm if such destination ensures an adequate level of protection.

In December 2019, Macau’s Cybersecurity Law came into force. With this law, public and private network operators in certain industries have to meet obligations, including providing real-time access to select network data to Macau authorities, with the stated aim of protecting the information network and computer systems. For example, network operators must register and verify the identity of users before providing telecommunication services. The new law creates new investment and operational costs for affected businesses, and has raised some privacy and surveillance concerns.

One major U.S. cloud computing company reported that Macau’s Gaming Inspection and Coordination Bureau had refused permission for potential clients in the gaming sector to export personal data-to-data centers located outside of Macau.

5. Protection of Property Rights

Real Property

Private ownership of property is enshrined in the Basic Law. There are no restrictions on foreign property ownership. Macau has a sound banking mortgage system, which is under the supervision of the Macau Monetary Authority (MMA). There are only a small number of freehold property interests in the older part of Macau.

According to the Cartography and Cadaster Bureau, 21 percent of land parcels in Macau do not have clear title, for unknown reasons. Industry observers commented that no one knows whether these land parcels will be privately or publicly owned in the future.

The Land Law (Decree 10/2013) stipulates that provisional land concessions cannot be renewed upon their expiration if their leaseholders fail to finish developing the respective plots of land within a maximum concession period of 25 years. The leaseholders will not only be prohibited from renewing the undeveloped concessions – regardless of who or what caused the non-development – but also have no right to be indemnified or compensated.

Intellectual Property Rights

Macau is a member of the World Intellectual Property Organization (WIPO). Macau is not listed in USTR’s Special 301 Report. Macau has acceded to the Bern Convention for the Protection of Literary and Artistic Works. Patents and trademarks are registered under Decree 97/99/M. Macau’s copyright laws are compatible with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, and government offices are required to use only licensed software. The GOM devotes considerable attention to intellectual property rights enforcement and coordinates with copyright holders. Source Identification Codes are stamped on all optical discs produced in Macau. The MES uses an expedited prosecution arrangement to speed up punishment of accused retailers of pirated products. The copyright protection law has been extended to cover online privacy. Copyright infringement for trade or business purposes is subject to a fine or maximum imprisonment of four years.

Macau Customs maintains an enforcement department to investigate incidents of intellectual property (IP) theft. Macau Customs works closely with mainland Chinese authorities, foreign customs agencies, and the World Customs Organization to share best practices to address criminal organizations engaging in IP theft. In 2019, Macau Customs seized a total of 3,849 pieces of counterfeit goods, including 3,329 garments, 7 leather products, and 513 electronic appliances. In 2019, the MES filed a total of 15,391 applications for trademark registrations.

In 2019, the MES filed a total of 15,391 applications for trademark registrations.

6. Financial Sector

Capital Markets and Portfolio Investment

Macau allows free flows of financial resources. Foreign investors can obtain credit in the local financial market. The GOM is stepping up its efforts to develop finance leasing businesses and exploring opportunities to establish a system for trade credit insurance in order to take a greater role in promoting cooperation between companies from Portuguese-speaking countries.

Since 2010, the People’s Bank of China (PBoC) has provided cross-border settlement of funds for Macau residents and institutions involved in transactions for RMB bonds issued in Hong Kong. Macau residents and institutions can purchase or sell, through Macau RMB participating banks, RMB bonds issued in Hong Kong and Macau. The Macau RMB Real Time Gross Settlements (RMB RTGS) System came into operation in March 2016 to provide real-time settlement services for RMB remittances and interbank transfer of RMB funds. The RMB RTGS System is intended to improve risk management and clearing efficiency of RMB funds and foster Macau’s development into an RMB clearing platform for trade settlement between China and Portuguese-speaking countries. In December 2019, the PBoC canceled an existing quota of RMB 20,000 exchanged in Macau for each individual transaction.

Macau has no stock market, but Macau companies can seek a listing in Hong Kong’s stock market. Macau and Hong Kong financial regulatory authorities cooperate on issues of mutual concern. Under the Macau Insurance Ordinance, the MMA authorizes and monitors insurance companies. There are 11 life insurance companies and 13 non-life insurance companies in Macau. Total gross premium income from insurance services amounted to USD 2.7 billion in the third quarter of 2019.

In October 2018, the Legislative Assembly took steps to tackle cross-border tax evasion. Offshore institutions in Macau, including credit institutions, insurers, underwriters, and offshore trust management companies, will be abolished by the end of 2020. Decree 9/2012, in effect since October 2012, stipulates that banks must compensate depositors up to a maximum of MOP 500,000 (USD 62,500) in case of a bank failure. To finance the deposit protection scheme, the GOM has injected MOP 150 million (USD 18.75 million) into the deposit protection fund, with banks paying an annual contribution of 0.05 percent of the amount of protected deposits held.

Money and Banking System

The MMA functions as a de facto central bank. It is responsible for maintaining the stability of Macau’s financial system and for managing its currency reserves and foreign assets. At present, there are thirty-one financial institutions in Macau, including 12 local banks and 19 branches of banks incorporated outside Macau. There is also a finance company with restrictive banking activities, two financial leasing companies and a non-bank credit institution dedicated to the issuance and management of electronic money stored value card services. In addition, there are 11 moneychangers, two cash remittance companies, two financial intermediaries, six exchange counters, and one representative office of a financial institution. The BoC and Industrial and Commercial Bank of China (ICBC) are the two largest banks in Macau, with total assets of USD 79.8 billion and USD 33.9 billion, respectively. Banks with capital originally from mainland China and Portugal had a combined market share of about 86 percent of total deposits in the banking system at the end of 2016. Total deposits amounted to USD 83.8 billion by the end of 2019. In the fourth quarter of 2019, banks in Macau maintained a capital adequacy ratio of 14.2 percent, well above the minimum eight percent recommended by the Bank for International Settlements. Accounting systems in Macau are consistent with international norms.

The MMA prohibits the city’s financial institutions, banks and payment services from providing services to businesses issuing virtual currencies or tokens.

Foreign Exchange and Remittances

Foreign Exchange

Profits and other funds associated with an investment, including investment capital, earnings, loan repayments, lease payments, and capital gains, can be freely converted and remitted. The domestic currency, Macau Official Pataca (MOP), is pegged to the Hong Kong Dollar at 1.03 and indirectly to the U.S. Dollar at an exchange rate of approximately MOP 7.99 = USD 1. The MMA is committed to exchange rate stability through maintenance of the peg to the Hong Kong Dollar.

Although Macau imposes no restrictions on capital flows or foreign exchange operations, exporters are required to convert 40 percent of foreign currency earnings into MOP. This legal requirement does not apply to tourism services.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies. Macau does not restrict the remittance of profits and dividends derived from investment, nor does it require reporting on cross-border remittances. Foreign investors can bring capital into Macau and remit it freely.

A Memorandum of Understanding on AML actions between MMA and PBoC, increased information exchanges between the two parties, as well as cooperation on onsite inspections of casino operations. Furthermore, Macau’s terrorist asset-freezing law, which is based on United Nations (UN) Security Council resolutions, requires travelers entering or leaving with cash or other negotiable monetary instruments valued at MOP 120,000 (USD 15,000) or more to sign a declaration form and submit it to the Macau Customs Service.

In December 2019, the PBoC increased a daily limit set on the amount of RMB-denominated funds sent by Macau residents to personal accounts held in mainland China from RMB 50,000 to RMB 80,000.

Sovereign Wealth Funds

The International Monetary Fund (IMF) suggested in July 2014 that the GOM invest its large fiscal reserves through a fund modeled on sovereign wealth funds to protect the city’s economy from economic downturns. In November 2015, the GOM decided to establish such a fund, called the MSAR Investment and Development Fund (MIDF), through a substantial allocation from the city’s ample fiscal reserves. However, the GOM in 2019 withdrew a draft bill that proposed the use of USD 7.5 billion to seed the MIDF over public concerns about the government’s supervisory capability. The MMA said it will conduct a consultation in mid-2020 to help the public better understand the regulations and operations of the fund.

7. State-Owned Enterprises

Macau does not have state-owned enterprises (SOEs). Several economic sectors – including cable television, telecommunications, electricity, and airport/port management, are run by private companies under concession contracts from the GOM. The GOM holds a small percentage of shares (ranging from one to 10 percent) in these government-affiliated enterprises. The government set out in its Commercial Code the basic elements of a competition policy with regard to commercial practices that can distort the proper functioning of markets. Court cases related to anti-competitive behavior remain rare.

Privatization Program

The GOM has given no indication in recent years that it has plans for a privatization program.

8. Responsible Business Conduct

The six gaming concessionaires that dominate Macau’s economy pay four percent of gross gaming revenues to the government to fund cultural and social programs in the SAR. Several operators also directly fund gaming addiction rehabilitation programs. Some government-affiliated entities maintain active corporate social responsibility (CSR) programs. For example, Companhia de Electricidade de Macau, an electric utility, provides educational programs and repair services free-of-charge to underprivileged residents. One of the nine aspects that the GOM will consider for the renewal of gaming licenses is casino operators’ CSR performance. In November 2019, the Business Awards of Macau presented the Gold Award to Galaxy Entertainment Group for its corporate social responsibility initiatives.

Macau is not a member of the OECD, and hence, the OECD Guidelines for Multinational Enterprises are not applicable to Macau companies.

9. Corruption

Mainland China extended in February 2006 the United Nations Convention Against Corruption to Macau. Macau has laws to combat corruption by public officials and the private sector. Anti-corruption laws are applied in a non-discriminatory manner and effectively enforced. One provision stipulates that anyone who offers a bribe to foreign public officials (including officials from mainland China, Hong Kong, and Taiwan) and officials of public international organizations in exchange for a trade deal could receive a jail term of up to three years or fines.

The CCAC is a member of the International Association of Anti-Corruption Authorities and a member of the Anti-Corruption Action Plan for Asia and the Pacific. The CCAC’s guidelines on prevention and repression of corruption in the private sector and a booklet Corruption Prevention Tips for Private Companies provide rules of conduct that private companies must observe. In January 2019, the GOM completed a public consultation on public procurement in order to create a legal framework through which the GOM will seek to promote an efficient and transparent regime. The GOM expected that a draft bill will be ready in the second half of 2020.

Resources to Report Corruption

CHAN Tsz King, Commissioner
Commission Against Corruption
105, Avenida Xian Xing Hai, 17/F, Centro Golden Dragon, Macau
+853- 2832-6300
ccac@ccac.org.mo

10. Political and Security Environment

Macau is politically stable. The U.S. Consulate General is not aware of any incidents in recent years involving politically motivated damage to projects or installations.

11. Labor Policies and Practices

Macau’s unemployment rate in January 2020 was 1.7 percent. Foreign businesses cite a constant shortage of skilled workers – a result of the past decade’s boom in entertainment facilities – as a top constraint on their operations and future expansion. The government is studying proposals to resolve the human resources problem. For example, Macau has labor importation schemes for unskilled and skilled workers who cannot be recruited locally. However, both local and foreign casino operators in Macau are required by law to employ only Macau residents as croupiers. Taxi and bus drivers must also be local residents. There is no such restriction imposed on any other sector of the economy.

Macau does not have any policies that waive labor laws in order to attract or retain investment. The rights for workers to form trade unions and to strike are both enshrined in the Basic Law, but there are no laws in Macau that specifically deal with those rights. The law does not provide that workers can collectively bargain, and while workers have the right to strike, there is no specific protection in the law from retribution if workers exercise this right. Labor unions are independent of the government and employers, by law and in practice.

According to the Labor Relations Law, a female worker cannot be dismissed, except with just cause (e.g., willful disobedience to orders given by superiors, or violation of regulations on occupational hygiene and safety), during her pregnancy or within three months of giving birth. In practice, either the employer or the employee may rescind the labor contract with or without just cause. In general, any circumstance that makes it impossible to continue the labor relation can constitute just cause for rescission of the contract. If the employer terminates the contract with the worker without just cause, the employer must pay the employee severance pay. In addition, Macau’s social security system, which is regulated by Decree 84/89/M, provides local workers with economic aid when they are old, unemployed, or sick.

Workers who believe they were dismissed unlawfully can bring a case to court or lodge a complaint with the Labor Affairs Bureau. Even without formal collective bargaining rights, companies often negotiate with unions, although the government may act as an intermediary. There is no indication that past disputes or appeals were subject to lengthy delays.

The Labor Relations Law does not contain provisions regarding collective bargaining, which is not common at the company or industry level.

The GOM has put measures in place to replace some foreign workers with Macau residents. Macau has a law imposing criminal penalties for employers of illegal migrants and preventing foreign workers from changing employers in Macau. The government has used the proceeds of a tax on the import of temporary workers for retraining local unemployed people.

Effective September 1 2019, the statutory minimum hourly wage rate increased from USD 3.8 to USD 4.0. The Legislative Assembly is discussing a draft bill on mandating across-the-board minimum wages.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Overseas Private Investment Corporation coverage is not available in Macau.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $55,040 2018 $55,084 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or internationalSource of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $398 N/A N/A BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $51 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2018 67% 2018 53% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

* Source for Host Country Data: Macau Statistics and Census Service

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 34,911 100% Total Outward 2,930 100%
China, P.R.: Hong Kong 9,800 28% China, P.R.: Mainland 1,631 56%
British Virgin Islands 9,123 26% China, P.R.: Hong Kong 1,141 39%
China, P.R.: Mainland 6,241 18% Cayman Islands 74 3%
Cayman Islands 6,078 17% British Virgin Islands 70 2%
Portugal 1,134 3% Cyprus 0 0%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 11,324,581 100% All Countries 7,929,155 100% All Countries 3,395,426 100%
Cayman Islands 1,686,670 15% Cayman Islands 1,234,954 16% Canada 505,494 15%
United Kingdom 1,346,345 12% United Kingdom 929,469 12% Cayman Islands 451,716 13%
Japan 1,003,988 9% Japan 775,570 10% United Kingdom 416,876 12%
Canada 975,929 9% Canada 470,435 6% C Japan 228,418 7%
France 558,074 5% Switzerland 442,195 6% Netherlands, The 184,339 5%

14. Contact for More Information

U.S. Consulate General Hong Kong
26 Garden Road, Central
Hong Kong SAR, PRC
+852-2841-2489
information_resource_center_hk@yahoo.com

Taiwan

Executive Summary

Taiwan is an important market in regional and global trade and investment.  It is one of the world’s top 25 economies in terms of gross domestic product (GDP) and was the United States’ 10th largest trading partner in 2019.  An export-dependent economy of 23 million people with a highly skilled workforce, Taiwan is also a key link in global supply chains, a central hub for shipments and transshipments in East Asia, and a major center for advanced research and development (R&D).

Taiwan welcomes and actively courts foreign direct investment (FDI) and partnerships with U.S. and other foreign firms.  The administration of President Tsai Ing-wen aims to promote economic growth in part by increasing domestic investment and FDI.  Taiwan authorities offer investment incentives and seek to leverage Taiwan’s strengths in advanced technology, manufacturing, and R&D.  Expanded investment by the central authorities in physical and digital infrastructure across Taiwan complements this investment promotion strategy.  The authorities convene an interagency monthly meeting to address common investment issues, such as land scarcity.  Some Taiwan and foreign investors regard Taiwan as a strategic relocation alternative to insulate themselves against potential supply chain disruptions resulting from regional trade frictions.  In January 2019, the Taiwan government launched a reshoring initiative aimed to lure Taiwanese companies to shift production back to Taiwan from the People’s Republic of China (PRC) in response to rising tariffs on Taiwan’s critical electronics manufacturing industry.

Taiwan’s finance, wholesale and retail, and electronics sectors remain top targets of inward FDI, although Taiwan attracts a wide range of U.S. investors, including in advanced technology, digital, traditional manufacturing, and services sectors.  The United States is Taiwan’s second largest single source of FDI after the Netherlands, through which some U.S. firms choose to invest.  In 2018, according to U.S. Department of Commerce data, the total stock of U.S. FDI in Taiwan reached USD 17.5 billion.  U.S. services exports to Taiwan totaled USD 10 billion in 2018.  Leading services exports from the U.S. to Taiwan were in the intellectual property (industrial processes), transport, and travel sectors.

Structural impediments in Taiwan’s investment environment include: excessive or inconsistent regulation; market influence exerted by domestic and state-owned enterprises (SOEs) in the utilities, energy, postal, transportation, financial, and real estate sectors; foreign ownership limits in sectors deemed sensitive; and regulatory scrutiny over the possible participation of PRC-sourced capital.  Taiwan has among the lowest levels of private equity investment in Asia, although private equity firms are increasingly pursuing opportunities in the market.  Foreign private equity firms have expressed concern about a lack of transparency and predictability in the investment approvals and exit processes, as well as regulators’ reliance on administrative discretion in rejecting some transactions.  These challenges are especially apparent in sectors deemed sensitive for national security reasons but that allow foreign ownership.  Businesses have questioned the feasibility of Taiwan’s long-term energy policy in light of plans to phase out nuclear power by 2025 and increase use of LNG and renewables.

The Taiwan authorities have introduced new rules to help establish a modern regulatory framework for a thriving digital economy, but their reluctance to accommodate certain new business models, such as sharing economy platforms, presents a stark contrast to Taiwan’s efforts to position itself as a global innovation hub.  Taiwan in late 2016 implemented new rules mandating a 60-day public comment period for draft laws and regulations emanating from regulatory agencies, but the new rules have not been consistently applied.  Proposed amendments to foreign investment regulations, if passed, would help promote inward investment through streamlined reporting and approval procedures.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 28 of 180  https://www.transparency.org/cpi2019
World Bank’s Doing Business Report 2020 15 of 190 http://www.doingbusiness.org/en/data/
exploreeconomies/taiwan-china
Global Innovation Index 2019 N/A
U.S. FDI in partner country ($M USD, historical stock positions) 2018 USD 17,530 https://apps.bea.gov/iTable/iTable.cfm?reqid=2&step=1&isuri=1#reqid=2&step=1&isuri=1
World Bank GNI per capita 2018 N/A http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

3. Legal Regime

Transparency of the Regulatory System

Taiwan generally maintains transparent regulatory and accounting systems that conform to international standards.  Publicly listed Taiwan companies have fully adopted International Financial Reporting Standards (IFRS) since 2015, and synchronized accounting standards with IFRS 9 and IFRS 15 in 2018.  In January 2019, Taiwan adopted IFRS 16. Ministries generally originate business-related draft legislation and submit it to the Executive Yuan for review.  Following approval by the Executive Yuan, draft legislation is forwarded to the Legislative Yuan for consideration.  Legislators can also propose legislation.  While the cabinet level agencies are the main contact windows for foreign investors prior to entry, foreign investors also need to abide by local government rules including those related to transportation services and environmental protection, among others.

Draft laws, rules, and orders are published on The Executive Yuan Gazette Online for public comment.  The Taiwan authorities on December 25, 2015, first instituted a 14-day public comment period for new rules but extended it to no less than 60 days beginning December 29, 2016.  All draft regulations and laws are required to be available for public comment and advanced notice, unless they meet certain criteria allowing a shorter window.  While welcomed by the U.S. business community, the 60-day comment period is not uniformly applied.  Draft laws and regulations of interest to foreign investors are regularly shared with foreign chambers of commerce for their comments.  For the ongoing amendment to the Statute for Investment by Foreign Nationals, the authorities held several regional public hearing and professional consultations meetings before finalizing its draft for the Executive Yuan review.

These announcements are also available for public comment on the NDC’s public policy open discussion forum at https://join.gov.tw/index.  Foreign chambers of commerce and Taiwan business groups’ comments on proposed laws and regulations, as well as Taiwan ministries’ replies, are publicly posted on the NDC website.  In October 2017, the NDC launched a separate policy discussion forum specifically for startups, which can be found online at http://law.ndc.gov.tw/,  serving as the main platform to harmonizing regulatory requirements governing innovative businesses and startups operation.

The Executive Yuan Legal Affairs Committee oversees the enforcement of regulations.  Ministries are responsible for enforcement, impact analysis, draft amendments to existing laws, and petitions to laws pursuant to their individual authorities.  Impact assessments may be completed by in-house or private researchers.  To enhance Taiwan’s regulatory coherence in the wake of regional economic integration initiatives, the NDC in August 2017 released a Regulatory Impact Analysis Operational Manual as a practical guideline for central government agencies.

Taiwan regularly discloses government finance data to the public, including all debts incurred to all levels of government.  Past information is also retrievable in a well-maintained fiscal database.  Taiwan’s national statistics agency also publishes contingent debt information each year.

International Regulatory Considerations

Taiwan is not a member of any regional economic grouping.  Although Taiwan is not a member of many international organizations, it voluntarily adheres to or adopts international norms, including in the area of finance, such as IFRS.  MOEA in July 2014 notified other Taiwan agencies of the requirement to notify the WTO of all draft regulations covered by the WTO’s Agreement on Technical Barriers to Trade and the Agreement on Sanitary and Phytosanitary Measures.  Taiwan is a signatory to the Trade Facilitation Agreement (TFA) and has met some of the customs facilitation requirement specified in the TFA, such as single-window customs services and preview of the origin.  In January 2018, citing tax parity for domestic retailers and the risk of fraud, Taiwan lowered the de minimis threshold from NTD 3,000 (USD 100) to NTD 2,000 (USD 67), an approach regarded as contrary to facilitating customs clearance and trade, especially for small- and medium-sized U.S. businesses.  NDC is in the process of drafting proposed amendment to the Personal Information Protection Act and related regulations to meet the European Union’s General Data Protection Regulation (GDPR) standards and obtain adequacy status.

Legal System and Judicial Independence

Taiwan has a codified system of law.  In addition to the specialized courts, Taiwan has a three-tiered court system composed of the District Courts, the High Courts, and the Supreme Court. The Compulsory Enforcement Act provides a legal basis for enforcing the ownership of property.  Taiwan does not have discrete commercial or contract laws.  A variety of different laws regulate businesses and specific industries, such as the Company Law, the Commercial Registration Law, the Business Registration Law, and the Commercial Accounting Law. Taiwan’s Civil Code provides the basis for enforcing contracts.

Taiwan’s court system is generally viewed as independent and free from overt interference by other branches of government.  Taiwan established its Intellectual Property Court in July 2008 in response to the need for a more centralized and professional litigation system for IPR disputes.  There are also specialized divisions in the District Courts and High Courts to deal with labor disputes.  Foreign court judgments are final and binding and enforced on a reciprocal basis.  Companies can appeal regulatory decisions in the court system.

Laws and Regulations on Foreign Direct Investment

Regulations governing FDI principally derive from the Statute for Investment by Foreign Nationals and the Statue for Investment by Overseas Chinese.  These two laws permit foreign investors to transact either in foreign currency or the NTD.  The laws specify that foreign-invested enterprises must receive the same regulatory treatment accorded local firms.  Foreign companies may invest in state-owned firms undergoing privatization and are eligible to participate in publicly financed R&D programs.

Amendments the Legislative Yuan passed in June 2015 to the Merger and Acquisition Act clarified investment review criteria for mergers and acquisition transactions.  The Investment Commission is drafting amendments to the Statute for Investment by Foreign Nationals in an aim to simplify the investment review process, including an amendment that would replace a pre-investment approval requirement with a post-investment reporting system for investments under a USD 1 million threshold, which is considered too low by many stakeholders.  Ex ante approval would still be required for investments in restricted industries and those exceeding the threshold.  The new proposal would also allow the authorities to impose various penalties for violations of the law.  Guidance that previously required special consideration of the impact of a private equity fund’s investment has been folded into the set of general evaluation criteria for foreign investment in important industries.  The MOEA in November 2016 released a supplementary document to clarify required documentations for different types of investment applications.  This document, which was last revised in 2018 and in Chinese only, can be found at http://www.moeaic.gov.tw/download-file.jsp?do=BP&id=5dRl9fU97Fk= .

All foreign investment related regulations, application forms, and explanatory information can be found on the Investment Commission’s website, at http://run.moeaic.gov.tw/MOEAIC-WEB-SRC/OfimDownloadE.aspx 

The Invest in Taiwan Portal also provides other relevant legal information of interest to foreign investors, such as labor, entry and exit regulations, at https://investtaiwan.nat.gov.tw/showPageeng1031003?lang=eng&search=1031003 

Competition and Anti-Trust Laws

Taiwan’s Fair Trade Act was enacted in 1992.  Taiwan’s Fair Trade Commission (TFTC) examines business practices that might impede fair competition.  In October 2017, TFTC imposed a USD 774 million antitrust fine on a U.S. technology company.  The MOEA publicly expressed concern about the ruling’s potential impact on foreign investment.  TFTC in 2018 reached a settlement with this U.S. company, lowering its fine to USD 90 million, and the company promised to make USD 700 million investment in Taiwan.

Expropriation and Compensation

According to Taiwan law, the authorities may expropriate property whenever such a course is determined to be necessary for the public interest, such as for national defense, public works, and urban renewal projects.  The U.S. government is not aware of any recent cases of nationalization or expropriation of foreign-invested assets in Taiwan.  There are no reports of indirect expropriation or any official actions tantamount to expropriation.  Under Taiwan law, no venture with 45 percent or more foreign investment may be nationalized, as long as the 45 percent capital contribution ratio remains unchanged for a period of 20 years after the establishment of the foreign business.  Taiwan law requires fair compensation be paid within a reasonable period when the authorities expropriate constitutionally protected private property for public use.

Dispute Settlement

ICSID Convention and New York Convention

In part due to its unique political status, Taiwan is neither a member of the International Centre for the Settlement of Investment Disputes (ICSID) nor a signatory to the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).  It also is not a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Investor-State Dispute Settlement

Foreign investment disputes with the Taiwan authorities are rare.  Taiwan resolves disputes according to its domestic laws and based on national treatment or investment guarantee agreements.  Taiwan has entered into bilateral investment agreements with countries including Singapore, Thailand, Malaysia, and India.  Taiwan does not have an investment agreement with the United States.  Taiwan’s bilateral investment agreements serve to promote and protect foreign investments.  DOIS is not aware of investment disputes involving U.S. investors, although there have been reports of disputes between U.S. investors and their local Taiwan partners.

International Commercial Arbitration and Foreign Courts

Parties to a dispute may pursue mediation by a court, a mediation committee of a town or city, and/or the Public Procurement Commission.  Mediation is generally non-binding unless parties agree otherwise.  Civil mediation approved by a court has the same power as a binding ruling under civil litigation.  The Judicial Yuan announced that alternative dispute resolution will be one of the issues addressed in an upcoming National Judicial Conference.  Arbitration associations in Taiwan include the Chinese Arbitration Association, Taiwan Construction Arbitration Association, Labor Dispute Arbitration Association, and Chinese Construction Industry Arbitration Association in Taiwan.

A court order on recognition and enforcement must be obtained before a foreign arbitral award can be enforced in Taiwan.  Any foreign arbitral award may be enforceable in Taiwan, provided that it meets the requirements of Taiwan’s Arbitration Act.  In November 2015, the Legislative Yuan amended the Arbitration Act to stipulate that a foreign arbitral award, after an application for recognition has been granted by a court, shall be binding on the parties and have the same force as a final judgment of a court, and is enforceable.  Taiwan referred to the United Nations Commission on International Trade Law (UNCITRAL) model law when the Arbitration Act was revised in 1998.

Bankruptcy Regulations

Taiwan has a bankruptcy law that guarantees creditors the right to share the assets of a bankrupt debtor on a proportional basis.  Secured interests in property are recognized and enforced through a registration system.  Bankruptcy is not criminalized in Taiwan.  Corporate bankruptcy is generally governed by the Company Act and the Bankruptcy Act, while the Consumer Debt Resolution Act governs personal bankruptcy.  The quasi-public Joint Credit Information Center is the only credit-reporting agency in Taiwan.  In 2018, there were 217 rulings on bankruptcy petitions.

4. Industrial Policies

Investment Incentives

The Statute for Industrial Innovation provides the legal basis for offering tax credits for companies’ R&D expenditures.  MOEA also operates several R&D subsidy programs.  MOEA’s target industries for investment are IoT (including Asia Silicon Valley-related investments), smart machinery, biotechnology and biopharmaceuticals, green energy, national defense, the circular economy, and agriculture.  Investors can receive tax incentives for investing in free trade zones, public construction, and biotechnology or biopharmaceuticals.  Investment support from the central authorities may be available for priority projects.  Industrial zones, export processing zones, science parks, and local governments offer various types of subsidies, financing, and tax deductions.  Investors may receive low-interest loans or subsidies for participating in industrial R&D and industry revitalization programs.  R&D tax credits, equivalent to 15 percent of total R&D expenditures, are available only to companies who file corporate income taxes in Taiwan.  The Act for the Recruitment and Employment of Foreign Professionals passed in October 2017 offers relaxed visa requirements and high-earner tax deductions to foreign professionals.  For a detailed list of investment incentives programs, please refer to the Invest in Taiwan website at https://investtaiwan.nat.gov.tw/showPage?lang=eng&search=1031001   To promote Taiwan’s green energy industry, Taiwan authorities are considering a national guarantee mechanism to facilitate financing green energy investment.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are seven free trade/free port zones:  Anping, Kaohsiung, Keelung, Suao, Taichung, Taipei, and Taoyuan International Airport.  The authorities have relaxed restrictions on the movement of merchandise, capital, and personnel into and out of these zones.  As part of a broader restructuring and to increase the competitiveness of Taiwan’s ports, the Ministry of Transportation and Communication established the Taiwan International Ports Corporation (TIPC) in 2012 to manage commercial activities of Taiwan’s ports and free trade zones.  TIPC facilitates cooperation with foreign shipping operations and related businesses.  In addition to preferential tariff and fees, the foreign labor ceiling for manufacturers in the free ports zones is 40 percent.  Kaohsiung Port also serves as a London Metal Exchange (LME) delivery port of primary aluminum, aluminum alloy, copper, lead, nickel, tin, and zinc.

Performance and Data Localization Requirements

Taiwan does not mandate local employment, but the authorities have incentivized foreign companies to hire more local staff with preferential measures, such as in the mutual fund industry.  Except for restricted industries on the negative list, there is no restriction on foreigners taking roles in senior management or on boards of directors.  Foreign investors have long expressed concerns over difficulties in recruiting skilled executives and professionals.  The Act for the Recruitment and Employment of Foreign Professionals that took effect February 2018 aims to attract foreign professionals through simplified policies regarding work, visa, and residence, and increased benefits on retirement, insurance, and tax obligations.  As of 2019, more than 500 people have obtained the Employment Gold Card, which includes a visa, work permit, alien resident certificate, and re-entry permit; 24 percent of the recipients were Americans. Taiwan does not mandate any forced localization or performance requirements and does not ask software firms to disclose their source code.  In September 2019, the Taiwan Financial Supervisory Commission amended rules to allow banks to store data on overseas cloud servers, as long as Taiwan regulators can obtain information for such operations and maintain the right to execute on-site examinations.

5. Protection of Property Rights

Real Property

Interests in property are enforced in Taiwan, and it maintains a reliable recording system for mortgages and liens.  Taiwan law protects the land use rights of indigenous peoples.  Taiwan’s Land Act stipulated that forests, fisheries, hunting grounds, salt fields, mineral deposits, sources of water, and lands lying within fortified and military areas and those adjacent to national frontiers may not be transferred or leased to foreigners.  Based on the Ministry of Interior’s (MOI) Operational Regulations for Foreigners to Acquire Land Rights in Taiwan, foreigners coming from countries that provide Taiwan residents the same land rights will be allowed to acquire or set the same rights in Taiwan.  In May 2015, the Cadastral Clearance Act was passed to promote better land registration management.  As in other investment categories, Taiwan has specific regulations governing property acquisition by PRC investors.

Intellectual Property Rights

Taiwan is not a member of the World Intellectual Property Organization (WIPO), but adheres to key international agreements such as the Berne Convention and the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS).  Reflecting progress in Taiwan’s IPR legal regime and enforcement, the Office of the U.S. Trade Representative removed Taiwan from the Special 301 Watch List in 2009.  The United States continues to monitor a number of IPR issues in Taiwan, including online piracy of copyrighted materials, illegal textbook copying on university campuses, end-user piracy of software, satellite signal theft, corporate trade secret theft, and weak pharmaceutical patent protections.  The importation and transshipment of counterfeit products, mainly from the PRC, continues to be a problem.  The United States is actively working with Taiwan authorities to address these issues.

Taiwan’s legislature in 2017 passed an amendment to the Pharmaceutical Affairs Act introducing a patent linkage system aiming for better protection of innovative pharmaceuticals, and the implementing regulations were introduced in 2019 to include biologics and biosimilars.  Proposed amendments to the Copyright Act, which features 93 amendments and 17 new articles seeking to prevent intellectual property infringement in the digital age, are still under legislative review.  The Legislative Yuan has passed articles that would impose two-year criminal penalty or monetary fines up to NTD 500,000 (USD 16,700) for selling pirated TV boxes.   In December 2019, the Legislative Yuan passed amendment to the Trade Secrets Act, which would allow prosecutors to issue a confidentiality preservation order over all information received and produced during investigations.  Taiwan also passed amendment to the National Intelligence Work Act in 2019 to allow Taiwan’s intelligence agencies to collect information about illegal trade secret theft on behalf of foreign countries.  Taiwan’s emphasis on improving its trade secrets protection regime has resulted in not only amendments to the Trade Secrets Act but also a major judicial ruling in favor of a U.S.-based investor over a local firm in a high-profile trade secrets theft case.

Taiwan’s National Police Agency reported that the value of trademark, copyright, and trade secret violation in 2019 totaled NTD 12.1 billion (USD 403 million), 11.3 percent up from the NTD 10.9 billion (USD 360 million) in 2018.  Taiwan Customs reported 186 cases, or 111,525 items involving seizures of imported counterfeit branded goods in 2019, with the majority of the violations in footwear, clothing, and pharmaceutical industries.  Taiwan prosecutes IP infringement, and imposes up to five years prison time for copyright violations, in addition to monetary fines.  Affirmed IP infringement cases by the Prosecutors’ Offices of the District Courts totaled 6,315 cases in 2019, a 10.8 percent decline over the previous year, and nearly 57 percent of the cases were not indicted.

A trademark or patent applicant must file an application with Taiwan’s Intellectual Property Office (TIPO).  TIPO normally renders a decision within six months after it receives all supporting documents.  If the application is approved, the mark or patent will be published and registered after the applicant pays registration fees within two months upon receiving the approval notice.  Taiwan has Patent Prosecution Highway (PPH) agreements with the United States (2011), Japan (2012), Spain (2013), the Republic of Korea (2015), and Poland (2017), with 455 requests to the United States filed in 2019.

In July 2018, TIPO hosted its first hearing for patent invalidation proceedings under the new invalidation mechanism.  The hearings are considered a procedural alternative to administrative appeal and are expected to increase efficiency in resolving patent disputes.

Patent holders may request that Taiwan Customs authorities suspend clearance and detain goods suspected of infringing their patent rights.  An affected rights holder must submit a written statement detailing the infringement allegation and a security deposit equivalent to the import value.  If final judgment confirms that the detained goods have infringed the patentee’s rights, the owner of the detained goods will be responsible for all relevant expenses incurred.

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

6. Financial Sector

Capital Markets and Portfolio Investment

Taiwan authorities welcome foreign portfolio investment in the Taiwan Stock Exchange (TWSE) and Taipei Stock Exchange, with foreign investment accounting for approximately 40 percent of TWSE capitalization in the past few years.  Taiwan allows the establishment of offshore banking, securities, and insurance units to attract a broader investor base.  The Financial Supervisory Commission (FSC) utilizes a negative list approach to regulating local banks’ overseas business not involving the conversion of the NTD.

Taiwan’s capital market is mature and active.  As of the end of 2019, there were 942 companies listed on the TWSE, with a total market trading volume of USD 882 billion (including transactions of stocks, Taiwan Depository Receipts, exchange traded funds, and warrants).  Foreign portfolio investors are not subject to a foreign ownership ceiling, except in certain restricted companies, and are not subject to any ceiling on portfolio investment.  The turnover ratio in the TWSE dropped to 73 percent in 2019, likely indicating more investors were willing to hold their positions for longer.  Payments and transfers resulting from international trade activities are fully liberalized in Taiwan.  A wide range of credit instruments, all allocated on market terms, are available to both domestic- and foreign-invested firms.

Money and Banking System

Taiwan’s banking sector is healthy, tightly regulated, and competitive, with 36 banks servicing the market.  The sector’s non-performing loan ratio has remained below 1 percent since 2010, with a sector average of 0.21 in December 2019.  Capital-adequacy ratios (CAR) are generally high, and several of Taiwan’s leading commercial lenders are government-controlled, enjoying implicit state guarantees.  The sector as a whole had a CAR of 14.07 percent as of December 2019, far above the Basel III regulatory minimum of 10.5 percent required by 2019.  Taiwan banks’ liquidity coverage ratio, which was required by Basel III to reach 100 percent by 2019, averaged 139.6 percent in December 2019.  Taiwan’s banking system is mostly deposit-funded and has limited exposure to global financial wholesale markets.  Regulators have encouraged local banks to expand to overseas markets, especially in Southeast Asia, and to minimize exposure in the PRC.  Taiwan Central Bank statistics show that Taiwan banks’ PRC net exposure on an ultimate risk basis reached USD 68.1 billion in the fourth quarter of 2019, trailing the United States’ USD 86.4 billion.  Taiwan’s largest bank in terms of assets is the wholly state-owned Bank of Taiwan, which had USD 171 billion of assets as of December 2019.  Taiwan’s eight state-controlled banks (excluding the Taiwan Export and Import Bank) jointly held nearly USD 820 billion, or 48 percent of the banking sector’s total assets.

Foreign Exchange and Remittances

Foreign Exchange

The Taiwan Central Bank operates as an independent agency and state-owned company under the Executive Yuan, free from political interference.  The Central Bank’s mandates are to maintain financial stability, develop Taiwan’s banking business, guard the stability of the NTD’s external and internal value, and promote economic growth within the scope of the three aforementioned goals.

Foreign banks are allowed to operate in Taiwan as branches and foreign-owned subsidiaries, but financial regulators require foreign bank branches to limit their customer base to large corporate clients.  To promote the asset management business in Taiwan, starting in May 2015, foreigners holding a valid visa entering Taiwan have been allowed to open an NTD account with local banks with passports and an ID number issued by the immigration office, replacing the previous dual-identification (passport and resident card) requirements.  Please refer to the Taiwan Bankers’ Association’s webpage: https://www.ba.org.tw/EnglishVer/BusinessEngDetail/2   for detailed information regarding various types of bank services (credit card, loans, etc.) for foreigners in Taiwan.

Foreign Exchange

There are few restrictions in place in Taiwan on converting or transferring direct investment funds.  Foreign investors with approved investments can readily obtain foreign exchange from designated banks.  The remittance of capital invested in Taiwan must be reported in advance to the Investment Commission, but the Commission’s approval is not required.  Funds can be freely converted into major world currencies for remittance, but in order to retain funds in Taiwan they must be held in currency denominations offered by banks.  In addition to commonly used U.S. dollar, euro, and Japanese yen-denominated deposit accounts, most Taiwan banks offer up to 15 foreign currency denominations.  The exchange rate is based on the market rate offered by each bank.  The NTD fluctuates under a managed float system.

Remittance Policies

There are no restrictions on remittances deriving from approved direct investment and portfolio investment.  No prior approval is required if the cumulative amount of inward or outward remittances does not exceed the annual limit of USD 5 million for an individual or USD 50 million for a corporate entity.  Declared earnings, capital gains, dividends, royalties, management fees, and other returns on investment may be repatriated at any time.  For large transactions requiring the exchange of NTD into foreign currency that could potentially disrupt Taiwan’s foreign exchange market, the Taiwan Central Bank may require the transaction to be scheduled over several days.  There is no written guideline on the size of such transactions, but according to law firms servicing foreign investors, amounts in excess of USD 100 million may be affected.  Capital movements arising from trade in merchandise and services, as well as from debt servicing, are not restricted.  No prior approval is required for movement of foreign currency funds not involving conversion between NTD and foreign currency.

Sovereign Wealth Funds

Taiwan does not have a sovereign wealth fund. Taiwania Capital Management Company, a partially government-funded investment company, was established in October 2017 to help promote investment in innovative and other target industries.  In December 2018, Taiwania raised USD 350 million for two funds investing in IOT and biotech industries.

7. State-Owned Enterprises

According to the NDC, there are 17 SOEs with stakes by the central authorities exceeding 50 percent, including official agencies such as the Taiwan Central Bank.  Please refer to the list of all central government, majority-owned SOEs available online at https://ws.ndc.gov.tw/001/administrator/10/relfile/0/1295/374a165c-c930-461e-bb5b-07893b3e5ea2.doc .  Some existing SOEs are large in scale and exert significant influence in their industries, especially monopolies such as Taiwan Power (Taipower) and Taiwan Water.  MOEA has stated that Taipower’s privatization will not take place in the near future but plans to restructure it as a new holding company under Electricity Industry Act revisions passed in January 2017 that will gradually liberalize power generation and distribution.  CPC Corporation (formerly China Petroleum Corporation) controls over 70 percent of Taiwan’s gasoline retail market.  In August 2014, the Aerospace Industrial Development Corporation (AIDC) was successfully privatized through a public listing on the TWSE, and MOEA’s stake in AIDC declined to 35.2 percent by the end of 2019.  The Labor Insurance Bureau ceased to be an SOE in 2014 but remained under the Ministry of Labor (MOL).  Taiwan authorities retain control over some SOEs that were privatized, including through managing appointments to boards of directors.  These enterprises include Chunghwa Telecom, China Steel, China Airlines, Taiwan Fertilizer, Taiwan Salt, CSBC Corporation (shipbuilding), Yang Ming Marine Transportation, and eight public banks.

In 2018 (latest data available), the 17 SOEs together had net income of NTD 347 billion (USD 11.6 billion), up 1.5 percent from the NTD 342 billion (USD 11.4 billion) in 2017.  The SOEs’ average return on equities continued to decline from a recent peak of 11.13 percent in 2015 to 9.83 percent in 2018.  These 17 SOEs employed a total of 118,359 workers.

Taiwan has not adopted the OECD Guidelines on Corporate Governance for SOEs.  In Taiwan, SOEs are defined as public enterprises in which the government owns more than 50 percent of shares.  Public enterprises with less than a 50 percent government stake are not subject to Legislative Yuan supervision, but authorities may retain managerial control through senior management appointments, which may change with each administration.  Public enterprises owned by local governments exist primarily in the public transportation sector, such as regional bus and subway services.  Each SOE operates under the authority of the supervising ministry, and government-appointed directors should hold more than one-fifth of an SOE’s board seats.  The Executive Yuan, the Ministry of Finance, and MOEA have criteria in place for selecting individuals for senior management positions.  Each SOE has a board of directors, and some SOEs have independent directors and union representatives sitting on the board.

Taiwan acceded to the WTO’s Agreement on Government Procurement (GPA) in 2009.  Taiwan’s central and local government entities, as well as SOEs, are now all covered by the GPA.  Except for state monopolies, SOEs compete directly with private companies.  SOEs’ purchases of goods or services are regulated by the Government Procurement Act and are open to private and foreign companies via public tender.  Private companies in Taiwan have the same access to financing as SOEs.  Taiwan banks are generally willing to extend loans to enterprises meeting credit requirements.  SOEs are subject to the same tax obligations as private enterprises and are regulated by the Fair Trade Act as private enterprises.  The Legislative Yuan reviews SOEs’ budgets each year.

Privatization Program

There are no privatization programs in progress.  Taiwan’s most recent privatization, of AIDC in 2014, included imposition of a foreign ownership ceiling of 10 percent due to the sensitive nature of the defense sector.  In August 2017, Taiwan authorities identified CPC Corporation, Taipower Company, and Taiwan Sugar as their next privatization targets.  Following passage of the Electricity Industry Act amendments in January 2017, the authorities planned to submit a Taipower privatization plan within six to nine years after successfully separating Taipower’s power distribution/sales business from its power generation business.

8. Responsible Business Conduct

The Taiwan public has high expectations for and is sensitive to responsible business conduct (RBC), in part due to concerns about such issues as food safety and environmental pollution.  Taiwan authorities actively promote RBC.  MOEA and the FSC have issued guidelines on ethical standards and internal control mechanisms to urge businesses to take responsibility for the impact of their activities on the environment, consumers, employees, and communities.  MOEA maintains an online newsletter to publicize best practices and raise awareness of the latest RBC-related developments in Taiwan and abroad. The Taiwan Stock Exchange conducts an annual review of corporate governance performance of all publicly listed companies.

Taiwan authorities place a high priority in addressing and promoting socially responsible investment.  In 2015, the authorities mandated that publicly listed companies with more than NTD 10 billion (USD 333 million) in capital and firms with direct impact on consumers such as food processing, restaurants, chemicals, and financial prepare annual social responsibility reports.  Starting in 2017, the capital threshold for mandatory reporting was lowered to NTD 5 billion (USD 167 million).  More than 500 of the TWSE’s 907 listed companies have issued annual social responsibility reports.  To promote more profit-sharing with employees, Taiwan’s Securities and Futures Act mandates that all publicly listed companies establish a compensation committee.  In November 2018, the Act was amended to mandate all publicly listed companies disclose average employee compensation and wage adjustment information.  In addition to the Taiwan Top Salary 100 index and the Taiwan Corporate Governance 100 index that were respectively launched in 2014 and 2015, Taiwan Index Plus, an indexing subsidiary under the TWSE, together with FTSE Russel in December 2017 launched the FTSE4Good TIP Taiwan ESG Index, to help investors integrate environmental, social and governance (ESG) considerations into their portfolios.

In response to food safety and environmental protection problems, Taiwan authorities have imposed stricter monetary penalties on violators and launched a registration platform for food industry suppliers to track food ingredients used in the industry’s production chain.  Taiwan authorities encourage Taiwan firms to adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas and many Taiwan listed companies have voluntarily enclosed conflict minerals free statement in their annual social responsibility reports.  In 2019, 15 Taiwan companies were included in the Dow Jones Sustainability World Index.  Taiwan does not participate in the Extractive Industries Transparency Initiative.

9. Corruption

Taiwan has implemented laws, regulations, and penalties to combat corruption, including in public procurement. The Act on Property-Declaration by Public Servants mandates annual properties declaration for senior public services officials and their immediate family members.    In 2019, there were 59 violations found by the Control Yuan and a total of USD 480 thousand of fines were imposed.   The Corruption Punishment Statute and Criminal Code contain specific penalties for corrupt activities, including maximum jail sentences of life in prison and a maximum fine of up to NTD 100 million (USD 3.3 million).  Laws provide for increased penalties for public officials who fail to explain the origins of suspicious assets or property.  The Government Procurement Act and the Act on Recusal of Public Servants Due to Conflict of Interest both forbid an incumbent and former procurement personnel and their relatives from engaging in related procurement activities.  Although not a UN member, Taiwan voluntarily adheres to the UN Convention against Corruption and published its first country report in March 2018.

Guidance titled Ethical Corporate Management Best Practice Principles for all publicly listed companies was revised in November 2014.  It asks publicly listed companies to establish an internal code of conduct and corruption-prevention measures for activities undertaken with government employees, politicians, and other private sector stakeholders.  The Ministry of Justice is drafting a Whistle Blowers Protection Act aiming to effectively combat illegal behaviors in both government agencies and the private sector.  The Anti-money Laundering Act implemented June 2017 requires the mandatory reporting of financial transactions by individuals listed in the Standards for Determining the Scope of Politically Exposed Persons Entrusted with Prominent Public Function, Their Family Members and Close Associates, and by the first-degree lineal relatives by blood or by marriage; siblings, spouse and his/her siblings, and the domestic partner equivalent to spouse of these politically exposed individuals.  The U.S. government is not aware of cases where bribes have been solicited for foreign investment approval.

Resources to Report Corruption

Agency Against Corruption, Ministry of Justice
Overall Planning Division
No. 318, 2nd floor, Song-jiang Road, Taipei
aac2043@mail.moj.gov.tw
https://www.aac.moj.gov.tw/7170/278724/BossmailUsual 

Transparency International Taiwan
https://www.transparency.org/country/TWN 
http://www.tict.org.tw/ 
Dr. YEH, I Jan
Executive Director
TI Chinese Taipei
5F, No.111 Mu-Cha Road, Section 1
Taipei, Taiwan 11645
Tel: +886-2-2236-2204
Email: tict@tict.org.tw

10. Political and Security Environment

Taiwan is a young and vibrant multi-party democracy.  The transitions of power in both local and presidential elections have been peaceful and orderly.   There are no recent examples of politically motivated damage to foreign investment.

11. Labor Policies and Practices

Against a strong domestic economic rebound, Taiwan’s unemployment rate in 2019 edged up to 3.73 percent, while the unemployment rate for people aged between 15 and 24 years also rose from 11.5 percent in 2018 to 11.9 percent.  MOI data show that 47 percent of Taiwan’s population aged above 15 years is at least college-educated.  An official labor force survey indicated that atypical employment has hit 819,000 in 2019, and among the 819,000 atypical workers, 278,000 had at least college education.

The size of Taiwan’s labor force is decreasing as the society ages.  Taiwan transitioned from an “aging society” to an “aged society” in 2018.  In 2019, 15.3 percent of its population are 65 years old or above, up from 10.6 percent in 2009.  Taiwan’s total fertility rate in 2018 was 1.06, remaining one of the lowest in the world.  As of December 2019, there were 718,058 foreign laborers in Taiwan, of which 456,601 were working in the industrial sector.  The Labor Standard Act and the Act of Gender Equality in Employment are universally applied to both domestic and foreign workers, with the exception that domestic foreign helpers are not covered by the Labor Standard Act.

Taiwan Ministry of Labor (MOL) data indicated that, while labor shortage rates remained stable at around 3 percent in the manufacturing industry, the rates have been increasing over past few years in services industries such as food and accommodation, information and communication, art and entertainment, recreation, and real estate activities.  Industry groups have long claimed that a lack of blue-collar workers is one of the major issues facing manufacturers operating in Taiwan and have urged the authorities to increase the ceiling on foreign workers.  To attract Taiwan businesses to relocate back to Taiwan, Taiwan authorities lifted foreign workers ceiling for specific industries, but the foreign workers ceiling across the board remained at 40 percent of total employees.  Taiwan businesses are also urging the authorities to ease work visa requirements to recruit foreign professionals, especially the skilled white-collar labor in the information technology sector.  However, Taiwan’s low wage growth compared with neighboring economies poses a challenge for talent recruitment and retention.  Taiwan issued 31,125 working permits to foreign professionals in 2019, and 23.5 percent of them were from Japan, followed by 13.5 percent from Malaysia, and 11.8 percent from the United States.  21.7 percent of foreign professionals work in the manufacturing industry.  Taiwan authorities sponsor training and certificate programs for college graduates to increase the talent pool for the manufacturing industry.

Private companies are not subject to rules requiring the hiring of nationals.  Employers may institute unpaid leave with employees’ consent but must notify the labor authorities and continue to make health insurance, labor insurance, and pension contributions.  Taiwan provides unemployment relief based on the Employment Insurance Law, vocational training allowances for jobless persons, and employment subsidies to encourage hiring.  Labor laws are not waived in order to attract or retain investment.

Labor unions have become more active in Taiwan over the past decade, and the Collective Agreement Act outlines the negotiation mechanism for collective bargaining in order to protect labor’s interests in the negotiations.  The number of effective collective bargaining agreements increased from 723 in 2018 to 772 in 2019, mainly due to an increase of such agreements with corporate unions.  If a proposal is refused, a union may submit an application for arbitration to the MOL’s Committee for Dispute Resolution for Unfair Labor Practices.  Taiwan has labor dispute resolution mechanisms in operation at all levels of labor, and the number of dispute cases filed slightly dropped 26,649 in 2018 to 26,435 in 2019, with disputes over wages accounting for more than 40 percent of total dispute cases. Taiwan also introduced an arbitration mechanism in 2011 to preempt disputes through a professional and neutral mediation system.

Labor relations in Taiwan are generally harmonious.  Although Taiwan is not a member of the International Labor Organization (ILO), it adheres to ILO conventions on the protection of workers’ rights.  Taiwan law, including related regulations and statutory instruments, protects the right to join independent unions, conduct legal strikes, and bargain collectively.  Taiwan’s labor authorities have announced the increasing frequency and coverage of labor inspections.  A new Labor Incident Act took effect in January 2020 mandates the establishment of special labor courts, which would help improve labor right through accelerated dispute resolution and reduced financial cost for labor filing employment lawsuits.

Improving labor welfare is the one of the core themes pursued by the current Tsai administration.  Minimum monthly wage has been raised since 2017 to NTD 23,800 (USD 793) in 2020.  MOL is also drafting a bill aiming to replace the current annual minimum wage review panel with a Minimum Wage Act.  In March 2018, Taiwan amended the Labor Standard Act to address foreign investor community’s concerns over rules governing rest days, overtime work, and overtime pay.  In December 2019, the Middle-aged and Elderly Employment Promotion Act was passed to promote employment opportunities for employees aged above 45 years, but the effective implementation date has yet to be announced.

There have been strikes in the aviation industry since 2016.  During the Lunar New Year peak travel week in 2019, pilots at the state-controlled flag carrier China Airlines, of which Taiwan government owns a 35 percent stake, launched a 160-hour strike.  In June, flight attendants at Taiwan’s second largest airline Eva Air also launched a 488-hour strike when the peak summer travel season started.  Under public pressure, the Ministry of Transportation and Communications proposed a draft amendment to MOL, suggesting MOL stipulate a seven-to-ten-day notice requirement if any union, particularly in the transportation industry, plans to strike.

Link to the U.S. Department of State Human Rights Report on Taiwan: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/taiwan/

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $611,255 2018 $608,132 https://unctad.org/en/Pages/statistics.aspx
Foreign Direct Investment Host Country Statistical source* USG or international statistical source

 

U.S. FDI in partner country ($M USD, stock positions) 2019 $24,614 2018 $17,530 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) 2019 $17,965 201-8 $10,592 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2019 29.1 2018 17.2 UNCTAD data available at
https://unctadstat.unctad.org/wds/
TableViewer/tableView.aspx
 

* Source for Host Country Data:  GDP: Directorate General of Budget, Accounting, and Statistics; FDI: Investment Commission, Ministry of Economic Affairs

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

Table 4: Sources of Portfolio Investment
Data not available.

14. Contact for More Information

Arati Shroff
Deputy Chief, Economic Section, American Institute in Taiwan
100 Jinhu Road, Taipei, Taiwan
+886-2-2162-2000
ShroffA@state.gov