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Invest law rethink

Invest law rethink

A GOVERNMENT move to overhaul the 1994 Investment Law introduced as a generous incentive

package for foreign investors is now long overdue, say government officials.

A sub-decree to the law, giving the government greater control over foreign investment

is due for debate by the Council of Ministers in mid-February, say sources.

"We need to have it, we've been pushing for it for almost a year," says

Secretary of State Sun Chantol.

The bill cuts to the core of a debate oft heard in the corridors of power: to what

extent should Cambodia go to attract foreign capital.

According to Ith Vichit, Secretary General for the Cambodian Investment Board (CIB),

the government is caught in the middle of a difficult balancing act.

On one side of the balance sheet is the need to raise government revenue through

taxation on businesses. At the same time, Cambodia is competing with its neighbors

to attract foreign capital using favorable investment conditions. The answer is not

clear cut, says Vichit.

"At the end of the day we have to decide - what do we want? In economic development

there's always a trade off," explains Vichit, who refuses to be drawn on whether

Cambodia has struck the right balance but warns about "killing the goose that

lays the golden egg."

"Too much tax will stifle the growth of the private sector, let's not forget

that it's only the private that can create jobs," he argues.

The incentive package offered by the investment law - which includes a corporate

tax rate of nine percent, tax holidays of up to eight years, import duty exemption

on raw materials and equipment, and no barrier to repatriation of profits - is one

of the "competitive tools" Cambodia is using to woo foreign capital.

However, some observers are now describing these incentives as a "free-for-all"

and a "fire-sale" which allow too little of the golden egg to find its

way into government coffers. Hence the need to clarify the law with a sub-decree.

According to Chantol, the investment law has created "confusion" among

some investors who now believe they are exempt from all taxes bar the corporate profit

tax and "refuse to pay anything until the law is clarified."

"Some investors pay taxes right now, but some say they are not clear yet,"

explains Chantol. He adds the problem is most apparent in the rapidly growing garment

manufacturing industry which "doesn't understand [the law], or maybe tries not

to understand."

Sources at the taxation department in the Ministry of Economics and Finance confirm

some companies are not paying extra taxes, in particular a turnover tax. But they

are confident that taxation laws introduced in January, which stipulate a mandatory

one percent tax on annual turnover regardless of whether an enterprise has been given

a "tax holiday", will remedy the problem.

While tightening up the investment law is high on the govern-ment's agenda, investment

incentives are only one of a number of factors which attract investors. Analysts

say a well-defined and properly implemented legal system, including banking and commercial

law, political stability and solid infrastructure are also crucial.

"The philosophy seems to be that if you become more liberal (with incentives)

then you can attract more investment," says KP Kannan, economist at Cambodian

Development Resource Institute.

But Kannan notes that long-term foreign investment, directed into productive sectors

of the Cambodian economy, such as industry and agriculture, and into infrastructure

development, is not necessarily attracted by generous incentives. Most of the economic

growth has occurred in "speculative or service activities", he says.

"Government needs to be concerned about this, they will have to find out whether

the country is really gaining by this business or not," says Kannan, warning

that "quick money ventures" bring few lasting benefits to the country.

"You have to consciously plan your investment strategy, encourage those sectors

you think are important and discourage investment in those sectors which are not

economically or socially desirable," he says.

Sources at the Council for the Development of Cambodia, the country's one-stop shop

for potential investors, say a new sub-decree to the Investment Law will include

a "matrix" determining how long different investment projects will gain

a "tax holiday".

Making up the matrix are such factors as the size and location of the enterprise,

number of employees and how much of its product is exported. In this way the government

will be better able to manage, and benefit from, foreign investment, say observers.

"We are waiting for the sub-decree," says one level Commerce Ministry official.

"At the moment Cambodia is like a restaurant without a menu."

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