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2.10 Selected products subject to export licensing and prohibitions
Source: Customs Department, Ministry of Economy and Finance. Export promotion and investment incentives Export and investment promotion policies of the Cambodian government are discussed in detail in the trade facilitation and investment sections below. Nevertheless, as these incentives affect the trade regime, we briefly discuss them in this section. Export and investment promotion, embodied in the law on Investment, has been a cornerstone of the government’s investment strategy. Under the investment law, the CDC provides a wide range of tax incentives to investors approved by the agency. The law on investment also provides investor guarantees including: i) free repatriation of capital and profits derived from operations in Cambodia, ii) the purchase and sale of foreign exchange and iii) transfers and all other types of international settlements. These incentives are available to investors operating in sectors listed in the First Schedule of the Law on investment law. Available tax incentives include the following.
Based on a published criterion (in the form of a matrix) the government can offer corporate tax holidays of up to eight years. So far only a handful of investors have been awarded a tax holiday and none have been awarded for longer than four years. According to customs, more than 80 per cent of total duty and tax exemptions are derived from the Law on Investment. Many countries provide various import duty exemption schemes to exporters, since sourcing materials at international prices is considered essential for exporters to remain internationally competitive. Fewer countries provide duty exemptions to investors supplying the domestic market and on imports of capital goods. Duty exemption schemes may include duty drawback facilities or duty suspension schemes or a straight duty exemption to exporters as in the case of Cambodia. All schemes have strengths and weaknesses. The advantage of duty exemption scheme or duty suspension schemes over a duty draw back facility is that they avoid tying up exporters’ working capital in the scheme as they do not have to prepay duties, which they would have to do in the draw back facility. When interest rates are high the duty drawback facility can be expensive for exporters, especially if authorities delay the return of prepaid duties, which is a common complaint of exporters participating in these schemes in other countries. In Cambodia, investors entitled to import duty exemptions must provide the CDC with a detailed list of import requirements over the next 12 months. This list, known as the Master List, provides detail information on the type, volume and value of imported goods. A producer wishing to modify the lists must request permission from the CDC. For most firms, projecting such detailed information in advance is very difficult to do since demand conditions in their markets change frequently. This is particularly the case for garment producers. Demand conditions in the garment market constantly change from season to season and, thus, orders from overseas vary according to the season and the buyer’s market. Therefore, to remain competitive it is paramount that garment producers remain flexible in their production process using the right materials and designs and delivering on time. This requires frequent changes in their fabric requirements and often modification of their sewing machines compatible with the requested designs and patterns. To overcome the inflexibility inherent in the Master List, producers need to anticipate all possible material requirements, thus, inflating their projected import needs in their Master List. CDC officials are empowered to modify this list if they have grounds to believe that the exporter is inflating material requirements. This is reported to often result in a ‘negotiated’ list, with all the attendant problems associated with discretion in the process. The CDC will carry out an audit of this list to ensure that the investor did import the goods as stated. Investors complain that this is a time consuming and costly exercise. The RGC is currently considering ways to improve the investment process and reviewing the tax incentive regime in view of improving its effectiveness. Apart from import duty exemptions on materials required by exporters, and aside from the issue of WTO consistency, the effectiveness of tax incentives — such as tax holidays — for investment is uncertain. Proximity to markets, availability of skilled manpower at relatively low cost, adequacy of essential infrastructure and a stable economic, political and regulatory environment may be more important determinants than tax breaks on the investment decision process. Further, these arrangements come at a cost in terms of foregone budgetary revenue, impose a greater tax burden on those not entitled to tax breaks, and they cause distortions in terms of resource allocation (for example, oversupply, bottlenecks) between activities that receive concessions and those that do not. The Indonesian experience with tax holidays is recounted in box 2.11. The same lessons emerge from other countries. In Bangladesh, open ended tax holidays have been used extensively with no demonstrable impact on attracting FDI. 2.11 The Indonesian experience with tax holidays Incentives for investment, most notably tax holidays, are common in many developing and developed economies. The main aim of these incentives is to encourage domestic investment and attract FDI, and thereby develop a local industry. While it is difficult to judge the extent to which the incentives have actually increased investment in Cambodia there are grounds for doubting their effectiveness, based on evidence for other countries in the region. Indonesia’s own experience with tax holidays provides ample evidence that a country can attract investment without establishing discriminatory tax arrangements. In the 1970s and early 1980s Indonesia offered foreign investors tax holidays. But in 1984 Indonesia became one of the very few developing economies to eliminate tax holidays. At the time tax holidays were eliminated there were concerns that foreign investment to Indonesia would fall and that Indonesia would be left behind neighboring countries (whose government’s offered tax holidays to investors) as Indonesia was then considered as a ‘high cost’ economy. New foreign investment did drop immediately after tax holidays were removed, but soon recovered and grew rapidly until the crisis in 1997. The return of foreign investment is clear from Figure I. Number of Approved FDI Projects, 1978 to 1996
Source: Indonesian Investment Coordination Board 2001. Perhaps most striking, Indonesia’s share of regional FDI inflows actually increased after the Indonesian government eliminated tax holidays even though neighboring governments continued to offer substantial tax holidays. This is striking because if tax holidays were a decisive factor in the location decisions of investors then one would expect foreign investment in Indonesia to have fallen, or at least lagged behind that in other countries. Such experiences with evaluation of tax holidays suggests that the cost of such measures (in terms of expenditure or tax revenue foregone) and other taxpayers may exceed the investment generated by the incentives. Their high cost is related to the difficulty in identifying incremental investment (that is, investment that would not be undertaken without the incentive). There are also other costs of a discriminatory tax arrangement. Since tax holidays result in a loss in tax revenues to the government, this would increase the budget deficit, which in turn put pressure on the government to cut back on expenditures. The lost tax revenues could be used for other competing economic and social priorities such as infrastructure development, education and health. Thus, where the government is under pressure to raise revenue for the budget the greater burden of taxation ultimately falls on those taxpayers subject to normal income taxes. In other words, other peoples’ taxes must pay for the tax holiday given to selected investors. Under the Law on Investment, the CDC publishes a ‘Negative Investment’ list, which specifies sectors closed to foreign and or domestic investors and open to foreign investors with special conditions (see annex D for full listing of sectors). There are four categories:
Sectors closed to all investors (12 sectors) are closed on environmental, public health or national security grounds. Two sectors (fresh water fishing, small scale mining) are closed to foreign investors on the grounds of protecting local, small scale enterprises. Sectors open with restrictions to foreign investors (11 sectors) are restricted for a variety of reasons, including local industry protection (cigarette production) or protection of small scale enterprises (food crops and livestock). New foreign cigarette producers are prohibited from producing and selling in the domestic market. Restrictions on the other sectors mainly include local equity participation and partnerships with farmers and small scale enterprises. The list leaves open the percentage of local equity participation indicating that this may be a negotiated outcome. The final category is called Manufacturing Related Services and only includes various forms of media and printing. Foreign participation is restricted to 49 per cent, and investment is subject to discussions with the Ministries of Information and Culture. 2.12 Sectors included in the negative investment list
Source: Cambodian Development Commission. With the exception of restrictions on foreign investment in cigarettes, alcoholic beverages and several agricultural sectors, the Investment List does not appear overly restrictive. Most of the sectors closed or restricted are done so on public health and security grounds and not to protect domestic producers. However there are two areas where clarity is needed and would improve transparency in the investment process. First, category three specifies 11 sectors open to foreign investment with certain conditions. This form of specification creates uncertainty for investors, as it does not classify the status of other sectors not included in the list. The investors may ask, if a sector is not included in category three, is it still open to foreign investment without restrictions and conditions? One way to reduce this uncertainty would be to replace category three with ‘sectors closed to foreign investment unless certain conditions are met’. This ‘negative list’ approach would improve transparency and predictability in the investment policy environment, as investors would know which sectors they were not permitted to invest in. A second area where improvement could be made relates to specifying the amount of required local equity participation in category three. As it is currently written category three creates uncertainty and is not transparent. To improve clarity and transparency in the negative investment list, the negative list should also specify these maximum ownership percentages. The ASEAN Free Trade Area Agreement (AFTA) Cambodia became the 10th member of ASEAN when it joined the regional grouping in April 1999 and has committed itself to a gradual reduction in almost all of its tariff rates to 0–5 per cent on imported goods from other ASEAN members by the year 2010. The Common Effective Preferential Trade Area (CEPT) process requires Cambodia to allocate all tariff lines or categories into one of three lists.
Annex E summarizes the main features of Cambodia’s reduction of tariff rates under the Agreement on the CEPT. Several pertinent features stand out. First, only 46 per cent of all tariff lines are in the Inclusion List. The bulk of goods are in the Temporary Exclusion List while the remaining 2.7 per cent of lines remain are in the restricted lists. The second feature is the very slow pace in reduction in tariff rates. Goods in the Inclusion List will not be fully liberalized to the 0–5 per cent range until 2007. Moreover, goods in the Temporary List will be phased into the Inclusion List only between 2005 and 2010 with the commitment that their tariff rates will be between 0–5 per cent by 2010. In contrast Vietnam intends to reduce all tariff rates in their Inclusion and Temporary Exclusion lists to the 0-5 per cent range by 2006 and Lao and Myanmar intend to phase in their reductions by 2008. It is important to recognize that goods on the Temporary Exclusion List would not be eligible for the lower CEPT tariff rates if exported to other ASEAN member states. A second point to note is that Cambodia can choose to accelerate its tariff reductions anytime. There are good reasons for Cambodia to transfer virtually all goods from the Temporary Exclusion List to the Inclusion List immediately and accelerate tariff reductions to 0–5 per cent before 2007. First, by accelerating tariff reductions, this will make Cambodia a viable base for exports to ASEAN. But Cambodia will only be a potential site for ASEAN oriented investment only for those goods that can be exported to member countries at the lower CEPT tariff rates. For this to happen, goods must be on the Inclusion List and the transitional CEPT rate must be 20 per cent or less. A more effective way to establish Cambodia’s place as a potential investment site would be to ensure that most tariff lines are immediately placed in the Inclusion List, and that the maximum rates are reduced to no more than 20 per cent, preferably less. A second reason is the strong competition from the other new ASEAN Member States. Vietnam joined ASEAN in 1995 and Laos and Myanmar joined in 1997. While there are some important differences between each of these countries, there are also some similarities in their economies. It is likely that of the new ASEAN members, one or two will emerge as relatively more attractive investment centers than the others. This is because as investors look to locate ASEAN oriented investment in one of the low wage, new members, there will be a tendency to choose sites where other members are starting to grow. In other words, in this type of endeavor, success breeds success. By delaying tariff reductions, Cambodia is not taking the advantage in this process. For Cambodia to emerge as one of the more attractive platforms for investment, it will need to include a rapid and comprehensive integration into AFTA/CEPT framework thereby ensuring the best possible prospects for ASEAN oriented investment relative to her neighbors. This suggests the need for accelerating tariff reductions. A third reason to accelerate the implementation of CEPT tariff rates is the need to establish predictability in its trade policies. The RGC government has foreshadowed that most goods will have preferential (CEPT) tariff rates between 0–5 per cent by the year 2010. However, nine years is a long time and the less clearly defined is this process, the less confidence investors will have. Stability and transparency are two essential characteristics of an effective industrialization strategy. However, the implementation of the CEPT system entails a large Temporary Exclusion List and this may create significant instability and uncertainty in the policy framework, especially during the next four to nine years when these goods would be phased into the Inclusion List. It is important to note that in implementing CEPT tariff rates, there would be benefits if the difference between Cambodia’s CEPT preferential tariff rates and her MFN rates for the rest of the world remain small. The reason is that the larger the difference between the two rates the greater the probability that the preferential trade area would divert Cambodia’s trade away from the rest of the world to AFTA rather than create new trade for Cambodia. Recent analysis suggests that if this occur the benefits to Cambodia of joining AFTA would be small. Indeed, an increasing proportion of Cambodia’s trade is with partners outside ASEAN and this will continue for many more years to come. Further, maintaining a big margin between CEPT rates and MFN rates encourages Cambodian firms to source more expensive materials from ASEAN producers. Thus, the Cambodian government might consider ways of reducing MFN rates in parallel with CEPT rates to keep the wedge between the two as small. This is permissible under AFTA. Indonesia, for example, has reduced its MFN rates in tandem with its CEPT rates. In 1999, Indonesia’s simple average CEPT tariff rate was 7 per cent, while its simple average applied MFN rate was 9.5 per cent. Since then, Indonesia has reduced its applied MFN rates to 7.3 per cent. WTO
accession issues The Council of Ministers has adopted a draft Legislation Action Plan which sets forth the legislative agenda for the years 2001, 2002, 2003 and 2004. Under this draft Legislation Action Plan, around 55 draft laws or regulations are planned to be adopted in order to complete the legal framework of Cambodia. In preparing, drafting, assessing and adopting these new laws and regulations, ministries are required to ensure full compliance with requirements under the WTO Agreements. Thus, various technical assistance projects are either underway or in preparation to support Government officials for the drafting and preparation of these laws and regulations and to ensure compliance with WTO requirements. The WTO specialist member of the Diagnostic Study team supported these activities. In order to cover all questions from Members of the Working Party in relation to draft laws and implementation, charts were prepared describing:
Because the Cambodian legal framework is being almost entirely rebuilt and many of the new laws being drafted, will need to notably, implement WTO requirements. For other accessing countries, the main emphasis is reforming existing legal frameworks to comply with WTO requirements. However, for Cambodia, the main emphasis will be to adopt and implement new laws and regulations to complete the current deficient legal framework and, at the same time, to implement the provisions of the various WTO Agreements. Component 1: full assessment of the existing laws and regulations That said a number of existing laws and regulations need to be examined in order to ensure compliance with WTO requirements. To carry out such an assessment, the Government will need further technical assistance from experts on WTO matters. Such a team of experts could then work closely with Cambodian officials directly implicated in implementing the WTO requirements throughout the various ministries. In many cases, for laws and regulations of a general nature (that is, commercial laws), no specific provisions of the WTO Agreements relate precisely to these issues. However, the general rules and principles of the WTO Agreements need to be respected by WTO members. The various WTO Agreements contain general rules which are likely to affect national legislation where the impact on international may not be immediately obvious. Based on the assessment of the WTO Agreements, the fields on which WTO requirements will impact on national legislation are likely to be, mainly, the following:
Another significant priority area for Cambodia will be the due process requirements under Article X of the GATT 1994. Moreover, Cambodian officials preparing the GATS schedule will have to ensure that any restrictions in the services domain is properly recorded in that schedule. This assessment activity could proceed as follows: first, identify WTO requirements; second, identify all relevant laws and regulations; third, analyze those identified laws and regulations to assess their scope and effect on WTO related matters; fourth, propose amendments or additions required in offer to be in full compliance with the WTO agreements; fifth, assess work being done to endure that the identified laws and regulations comply with WTO requirements; and sixth, propose further action required to amend existing laws and regulations under component 2 hereafter. A TA team could advise governmental entities responsible for the accession of Cambodia to the WTO. Such advisory work could cover, notably:
Moreover, as a least-developed country, the WTO agreements provide for Cambodia a number of special treatments and exemptions. These provisions raise technical issues of implementation and policy issues as to whether it is in Cambodia’s interest to take advantage of them. Component 2: detailed plan to adopt new laws and regulations and amend existing laws and regulations The fields on which WTO requirements will impact on national legislation shall be, mainly, the following:
Another significant priority area for Cambodia will be the due process requirements under Article X of the GATT 1994. In addition, to these priorities areas, the Government intends to create a sound business environment upon joining the WTO by preparing and adopting a full range of new laws in order to establish a complete Commercial Code. The National Legislation Program involves adoption of laws such as Law on Business Enterprises, Law Establishing the Commercial Court, Commercial Contracts Law, Commercial Arbitration Law and laws on intellectual property. At a later stage, the Government will need to consider detailed rules and regulations governing issues such as Rules of Origin, Anti-Dumping and Countervailing Measures and Safeguard Measures. National Legislation Program - The Cambodian Government has prepared a detailed program to adopt many laws and regulation to comply with WTO and built up a comprehensive legal framework. Around 55 legislative instruments have been identified and prepared by the National Assembly, the Council of Ministers and various ministries. Following further research and better comprehension of the WTO Agreements, the Government will add other laws or regulations to be adopted under the National Legislation Program. As part of the Diagnostic Study, that specialist team members has prepared detailed charts for each law or regulation covering:
Technical Assistance Projects - In order to implement this National Legislation Program, the Government and various ministries have proposed various technical assistance projects, financed multilaterally and bilaterally, implicating foreign experts team. Some projects have been operating for some time, notably with Japanese experts on the Civil Code and the Civil Procedure Code, with the World Bank on drafting a Commercial Code and with the Asian Development Bank on drafting a new Land Law. However, Cambodia still requires technical assistance to draft and adopt various legislative instruments required under the WTO Agreements. For example, detailed laws and regulations concerning sanitary and phytosanitary measures require a high level of expertise to be drafted and implemented. Moreover, specific agreements on issues such as safeguard measures, antidumping measures and countervailing measures raise issues of the policy desirability of such agreements as well as technical drafting requirements. Component 3: Implementation and Training The Working Party has also asked about the effective implementation of the proposed Legislation Action Plan. The ‘Legal and Judicial Reform Strategy for Cambodia’ has been adopted by the Council of Ministers and aims, notably, at improving the effective adoption of laws and regulations by the National Assembly and the Government. It is been presently implemented by the Government and is composed notably of a significant component on Law Making Process covering the following issues.
In ensuring implementation of new laws and regulations and training of Government officials, the Government will first need to do a full evaluation of the technical skills and expertise currently available in the Cambodian Government and the Cambodian society. Based on such evaluation, the technical assistance projects can be tailored to fulfil such formation needs. Moreover, various international organizations such as WTO, IMF or ITC can provide permanent training and formation in respect of fields where skills and expertise would need to be developed. Once Cambodia has accessed WTO, permanent governmental entities responsible for monitoring WTO matters will need to be established. |
