Transparency of the Regulatory System
Timor-Leste’s regulatory system is still in its formative stages, according to U.S. companies. The existing tax, labor, environment, health and safety, and other laws and policies do not present obvious impediments to investment. Property rights, however, remain an issue that foreign investors and businesses have identified as concerning. A comprehensive land law was promulgated in 2017, but requires an additional decree law before it can be implemented.
In 2011 and 2012, the government issued a number of tax assessments on private firms (both foreign and domestic) stretching back several years, with compounded interest plus penalties. Several of the affected firms have contested these assessments. In February 2016, the government reached a negotiated settlement with one private firm on most of the outstanding assessments.
The Ministry of Finance launched an online Procurement Portal in 2011, intended to increase transparency by providing equal access to information on government tenders and procurement contracts. However, updates are inconsistent and not all tenders appear to be included in the site. In 2012, the government hired an internationally recognized firm to serve as its procurement agent for major projects but concerns about nontransparent and unfair procurement practices remain. The Audit Chamber, under the Court of Appeals, is responsible for reviewing government procurements above USD 5 million. In 2016, the Audit Chamber rejected the government’s proposed USD 720 million contract with a large Korean company for a development on the south coast claiming it was non-compliant with fundamental norms currently in place in Timor-Leste. The government appealed the decision, and the company withdrew from the process in June 2016 before a decision on the appeal.
In 2018 and 2019, the Ministry of Finance launched the ASYCUDA system in Aportil, the organization managing international port customs, and International Airport of Nicolao Lobato as part of the fiscal reform process with the aim of improving efficiency, customer service, and transparency. The government hopes to facilitate trade by implementing a modern and reliable system to track and manage imports and exports.
In June 2013, with assistance from the International Finance Corporation, the government established the Business Registration and Verification Service (SERVE) as a one-stop business registration center for both foreign and domestic investors. SERVE is the government’s attempt to streamline the business registration process to less than five days from start to finish. Prior to the opening of SERVE, business operators had to visit three different government ministries to complete a process that could take upwards of one year. SERVE has registered over 20,000 businesses, approximately half of which are construction-related enterprises.
In addition to registering businesses, SERVE can also issue business licenses for what it determines to be low-risk undertakings. The Ministry of Commerce, Industry, and the Environment must issue business licenses for high-risk endeavors. Currently, both business registration and licensing are free. However, there are proposals to institute a small fee for business license renewals. The initial business license is valid for 12 months, with renewals also generally valid for 12 months.
Parliament and parliamentary committees regularly hold hearings and debates on proposed laws. For certain major legislation, the government holds limited public consultations or solicits public comment.
There are no known informal regulatory processes outside of the government. Regulations are adopted and implemented at the national level, and most oversight occurs in the capital, although some agencies have staff at the district level that monitor compliance. Regulations are published in the national journal in advance of their entry into force, although applicable information may be difficult to find for those entering the market.
International Regulatory Considerations
Timor-Leste has a pending application for full membership into the Association of Southeast Asian Nations (ASEAN) and served as President of the Community of Portuguese Speaking Countries from 2014-2016 and also part of Macau Economic Forum (between China and CPLP). Some report the government views building these international ties as part of its effort to increase investment opportunities within the country. Timor-Leste is also pursuing trilateral economic cooperation with Indonesia and Australia to boost cross-country investment and exploring membership in the Commonwealth.
Reforms currently underway in Timor-Leste’s fiscal and economic systems aim to bring the country into compliance with ASEAN standards. The Timor-Leste ASEAN Mobilization Plan (TLAMP) aims to bring all the relevant line ministries into compliance with ASEAN economic best practices.
Timor-Leste was accepted as an observer to the WTO in 2016, and its Working Party for accession was established in December 2016.
Legal System and Judicial Independence
The Portuguese law system heavily influences Timor-Leste’s civil law system. Timor-Leste applies Indonesian law, which was in force until August 1999, as a subsidiary source of law for issues not yet addressed in Timorese legislation, including the commercial code. The justice system – police, prosecutors, and courts – are still evolving and short-staffed. Until October 2014, when Timor-Leste’s Parliament voted to dismiss all foreign judges, prosecutors, and advisors from the judiciary, the government relied upon significant numbers of foreign experts and advisors to augment local resources. In the immediate wake of the dismissals, companies have reported that a significant backlog in cases grew. Observers note the backlog has since lessened, but waiting times to bring a case before a judge remain long.
The Office of the Prosecutor General continues to accumulate experience and capacity to establish and implement case management and other essential systems. Timor-Leste has courts of first instance and a court of appeal. However, courts operate in only four of the thirteen districts, and customary law governs most cases at the local level. Additional courts outlined in the Constitution and legislation, such as specialized tax courts, have not yet been established. The U.S. Embassy is not aware of any major court cases testing the sanctity of contracts or enforcement of contracts processed to conclusion; however, one U.S. oil company successfully argued tax cases against the government in Dili District Court. The company came to a confidential negotiated settlement with the government in the remaining pending cases.
In January 2019, the Council of Ministers approved judicial reform to create a new mechanism for resolving conflicts – Conciliation and Arbitration – with the objective of reducing pending court cases. This reform would create specialized sections in district courts that would include commercial law and contracts sections among others.
Laws and Regulations on Foreign Direct Investment
The Timorese legal system is based on a mix of Indonesian laws and regulations, acts passed by the United Nations Transitional Administration, and post-independence Timorese legislation, which is modeled on Portuguese civil law. The country is working on a review of its legislation to harmonize the system, but has yet to undergo a comprehensive overhaul of the overlapping yet disparate systems. Timor-Leste has two official languages, Tetun and Portuguese, and two working languages, Indonesian and English; all new legislation is enacted in Portuguese and is based on the civil law tradition.
In January 2019, President Lu-Olo promulgated an amended version of the 2005 Petroleum Activities Law. The amended law states that decisions regarding the state’s participation in petroleum operations will be approved by the Council of Ministers, which can delegate this competency to the Prime Minister. The law also removes the 20 percent limit on state participation in oil projects. The law states the Petroleum Fund can directly finance (rather than via the state budget) petroleum operations – domestic or international. Finally, the law removes the requirement of a preliminary review by the Audit Court.
The Private Investment Law (Law No.14/2011) specifies the conditions and incentives for both domestic and foreign investment and guarantees full equality before the law for international investors. Other major laws affecting incoming foreign investment include the Companies Code of 2004, the Commercial Registration Code, and the Taxation Act of 2008. In accordance with article 30 of the Private Investment Law, the Government of Timor-Leste announced the establishment of a Specialized Investment Agency, a one-stop-shop for investment and export promotion on January 5, 2015. The agency became TradeInvest Timor-Leste in November 2015. The agency has the responsibility to promote Timorese exports and investment opportunities in the country and to encourage domestic entrepreneurship. A new private investment policy, tax codes, and customs agencies are part of the ongoing fiscal reform effort that is designed to align Timorese legislation and regulation with best practices in ASEAN (under the ASEAN Comprehensive Investment Agreement) and under UNCTAD (United Nations Conference on Trade and Development).
Competition and Anti-Trust Laws
Timor-Leste does not have a competition or anti-trust law.
Expropriation and Compensation
Timor-Leste does not yet have a separate expropriation law. However, both Article 54 of the Constitution and the Private Investment Law permit the expropriation or requisition of private property in the public interest only if just proper compensation is paid to the investor. The Private Investment Law calls for the equal treatment of foreign and national investors in expropriation cases and prohibits nationalization policies or land policies that deliberately target the property of investors.
Before expropriation occurs, the affected occupants or claimants, if non-occupying, are given 30 days to leave the property and 10 days for filing cases at the local courts. If no claims are filed during the 10 days, the occupants should clear the property before being evicted. During the last five years, expropriation primarily affected urban squatters occupying state property. The government relocated significant numbers of residents for large development projects in Oecusse and Suai. Two known private investments in Dili have negotiated with the government to remove residents as part of the investment agreement.
ICSID Convention and New York Convention
Timor-Leste is a member state to the International Centre for Settlement of Investment Disputes (ICSID Convention). It is not a signatory party to the convention of the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Timor-Leste’s Court of Appeals must first recognize a foreign judgment or arbitral award in order for it to be enforced in the country.
Investor-State Dispute Settlement
The domestic court system handles civil disputes, but is not properly equipped for the demands currently placed upon it. The Timorese justice system suffers from a shortage of qualified judges and attorneys, incomplete and piecemeal national legislation, and insufficient geographical coverage. New legislation is enacted in Portuguese, while many legislators, prosecutors, judges, attorneys, police officers, plaintiffs, and defendants do not speak the language. Legal professionals lack specialized technical expertise to address complicated commercial or tax cases. The country’s sole Legal Training Center focuses on developing competency in Portuguese language at the expense of technical legal expertise.
The government pursued international arbitration against at least one private company in a tax dispute. There were four cases filed against the company in Singapore in arbitration in 2014. After more than a year of process, both sides signed a negotiated agreement in February 2016 that resolved most of the pending cases.
International Commercial Arbitration and Foreign Courts
Alternative dispute resolution is consistent with Timorese traditional justice systems, but there is no formal system yet in place. The Council of Ministers approved the Arbitration, Mediation, and Conciliation Law in December 2016 as part of the fiscal reform efforts, but the law has not yet received parliamentary approval.
Certain foreign investors have reported that the domestic court system is not properly equipped to handle commercial or tax disputes, and that most legal professionals lack specialized expertise or training in these types of cases.
The Council of Ministers approved an insolvency law in March 2017, but parliament did not act on the law. In 2019, the World Bank ranked the country 168 of 190 in resolving insolvency.