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Investment policy on fdi in hydropower sector economics essay

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Background

Generally speaking, Foreign Direct Investment (FDI) has come into sight to be broadly recognized over the past decade in many countries as it contributes growth and the development. It can bring capital, technology transferring, job creation and management knows how to the host countries. Thus it plays an essential role in economical development especially in many developing countries. Such trends of FDI will likely continue to grow especially in the developing countries, where there are rich in natural resources and labor forces. Like many countries, the Lao People’s Democratic Republic (Lao PDR) is in trend in receiving FDI mainly in hydropower sector which comparing by sector from 2000-2010 hydropower sector account more than 33% in total investment (MPI, Laos). Laos’ nature and climate provide great opportunities to develop hydropower plants to meet domestic electrification needs and the increased demand for electric power in the region of South-East Asia. Less than 2 % of the hydropower potential has been developed in Laos over the past 30 years (Lao’s National Statistic in 2007). During the last few years, however, hydropower has played a central role in the rapid economic growth the country recently has experienced. Today, more than 70 hydropower projects are under development, and the electricity sector makes up an important part of the export industry in Laos. As the government of Lao PDR set the economic outlook in the year 2020, its vision to the year 2020 is to graduate from the status of being a least developed country and become a sustainable development nation. To achieve such goal of National Development Vision to the year 2020, Lao PDR needs more capitals, technology, and capable human resource, as the Government of Lao PDR lack of these things. Thus, the FDI especially in Mega projects such as hydropower sector and mining sector are the significant contributors for increasing the government’s revenue, creating jobs, introducing new market and business system. In such circumstance, FDI especially in the hydropower sector is playing the significant role in the Lao’s economic and social development, the Investment Law in 1994 provided by government of Lao PDR, which is the benchmark of the investment incentive policy in order to attract more foreign investments. Thus in this thesis, there are questions need to be qualify, the question is that are these investment policy effectiveness and attract more foreign investment in hydropower sector into Lao PDR? Or how did the investment policy effect to foreign investment in hydropower sector in Laos? Thus, the thesis statement of this paper is to study on the effectiveness of investment policy offered by Laos’s government in order to attracting FDI mainly hydropower sector. The scope of this thesis is started from the Investment Law in 1994 with some basic information about Laos, the situation of FDI in this country and the investment policies provided by the government of Lao PDR. Thus the scope of this thesis is not going cover up all aspects of the economic development in the country; it will focus only on investment policy such as the laws and regulations applied to FDI especially in hydropower sector in Lao PDR. Many scholars explained that, market size and cost of production is the key in attracting investment. Krugman (1991a) argues that the interaction of market, transport costs, and fixed investment costs as the major decision on the location of industry. In the article of Morisset (2003, p. 253), the investment incentive policy such as tax incentive impacts on foreign direct investment is not clear that it can help out on attracting foreign investment. There are numerous studies of international investors have indicated that the incentive policies are not major factor in their investment location decision. More significant factors such as infrastructure, political stability, labor and the cost of production, however in this thesis is going to highlight and provide evidences that investment policy provided by government are the key factor in attracting foreign investment in hydropower sector in the case of Lao PDR. Most of the information and data used in this thesis are mostly from the Ministry of Planning and Investment (MPI), Lao PDR as essential. Furthermore, the objective of the paper is to study and identify the effective of Lao’s investment policy in the issues of strategic policy to attracting more FDI in hydropower sector. In order to make this thesis organizes and comfortable to read, thus this paper is developed and divided into four chapters. The chapter one is the Introduction where the objective, thesis statement and scope of this paper are offered. The second chapter is literature reviews related to the FDI policies. The third chapter will provide the overview of Lao’s economy, trend of FDI and Hydropower Sector. Showing how the investment policy offered by government of Lao PDR effected to FDI and hydropower sector by providing the information, data and figures, plus in this chapter will analyzing and comparing on the Investment Law in the year of 1994, 2004 and 2009. The fourth chapter is conclusion and last part of the paper is the references and acknowledgement

Chapter II: Literature Review

2. 1 Foreign Direct Investment Polices

Recently, many scholars tried to explain and point out the factors for foreign investment location decision in developing countries. On the other hand there are many studies and articles related the FDI and its policies in developing countries. The developing countries try to develop their investment policies and strategic plan in order to attract the foreign investmentIn the article of Shaukat Ali and Wei Guo (2005) explained the behavior of Multinational National Companies (MNCs) in China, with its huge potential market size as the most important factor for attracting FDI to China, with its large population, steady economic growth, trade integrations are the perfect combination in attracting FDI. However apart from good environment of investment, the authors’ further point out that the Chinese Government investment policies are another important factorIn the article of Ekrem Tatoglu (2002), it is was found that market size, openness of the economy, and infrastructure of the host country had positive effect, but the lack of exchange rate and economic stability had negative effect but not significant, however to some extent, it has slowed down its efforts to receive much higher volume of foreign investment. In the Morisset’s article (2003, pp. 253) point out that the relation between investment policy such as tax incentives and FDI is not the most significant whether it can help the host country in gaining the foreign investment. Over the past few decades they are numerous studies from the international investors have indicated that investment policy such as tax incentives are not the most important factor for investment locations, more important factors such as infrastructure, labor and political stability. However it doesn’t mean that the investment policy has no effect on attracting foreign investment, one of the good examples is the Ireland’s tax incentives which have been recognized as key in attracting foreign investors over the past two decades. Moreover, there has been growing support evidence that investment policy influence the location decisions of companies within regional economic groupings, such as the European Union, North American Free Trade Area, and Association of Southeast Asian Nations. No doubt that market size is important to foreign investment in deciding location but other factors such as the investment policy and institutional framework, are essential in influential a country’s attractiveness to FDI. However the investment policy can be favorable to foreign investment or unflavored to foreign investment in order to protect local industriesThe effect of FDI will depend, in part, on the form that FDI takes. FDI directed to heavily protected industries or attracted by very costly incentives may have a low, or even negative, effect on growth and productivity, Attitudinal and empirical research on the effect of tax incentives on FDI has been inconclusive. In the article of Hearnest (2007, pp. 25-30) dedicated that if the investment policy such as tax incentives may be good for a country. This is so if some conditions are contents. First, the investment policy must lead to an increased of inflow in FDI into that country by attracting FDI that would not come without the presence of the incentives. Second, these FDI should contribute to the country’s development by offering returns to the country that more than offset (the returns) the foregone tax revenue in form of tax incentives granted to the investors. When trying to find out who should qualify for the tax incentives in Tanzania therefore, the work will focus on some types of investments that would not come to Tanzania without the presence of the incentives, but have the potential of contributing positively to the development of the country. As for who should not qualify, a focus will be on those investments that would come in any circumstance (in this case the absence of tax incentives). FDI determinants that MNEs look for are the presence of economic, political and social stability; and rules regulating entry and operations of businesses. Others are standards of treatment of foreign affiliates; business facilitation (including, inter-alia, investment incentives and thereby tax incentives; market size, growth, structure and accessibility; raw materials, low cost but efficient labour force and physical infrastructure in form of ports, roads, power and telecommunication. Since specific incentives may not be main determinants of a country’s attractiveness to FDI. A country’s general economic and political conditions, domestic market, natural and other resources may be more important than some specific incentives. However various incentives have been found to influence investments. In conclusion, there are both positive and negative effected by providing the incentives policy from the host countries to the foreign investors. However, most of the articles presented above appear to favor the incentives policy (tax incentives). Thus no doubt that this form of investment policy is dominated in many developing countries with plenty of unexploited natural especially the ASEAN nations

CHAPTER III: OVERVIEW OF ECONOMY, TREND OF FDI AND HYDROPOWER SECTOR IN LAO PDR

3. 1 Current Lao’s Economic Situation

As the Lao government set their development goal which aiming to free the country from being least developed country by the Year 2020, it ultimate goal is to graduate from the status of being a least developed country and become sustainable development nation. To achieve the goal, Laos needs the capital and human resource capacity, as Laos’s lack of these things. Thus, the Foreign investment especially in hydropower and mining sector are playing an essential role in increasing the government’s revenue (capital generation), job creations and so on. Since the Lao’s government started their economic liberalization, the ” new economic mechanism” (NEM) in 1986, the Government of Laos has made the development of private sector and attraction of the foreign investment as the strategic priority, thus the implementation of investment policies are very important to investment especially in attracting FDI. With the advantages such as political stability, natural resources, low labor costs, strategic location and incentive investment policies, both domestic and foreign investment has notably evidenced its contribution to the Lao’s Social Economic Development. Generally the total (public and private) investment mobilized rose significantly from 21. 3 percent of GDP in 2001 to about 29 percent in 2005, and averaged at 27. 8 percent for the five-year period which mainly from FDI[1]. The foreign investment has provided further drive to Lao’s economic growth. The government of Lao PDR provided good climate for investment, such as infrastructures, telecommunication, political stability, stable macroeconomic condition and law and regulation related to investment. With the Lao’s National Social and Economic Development Plan (NSEDP), Lao’s government had achieved to maintain the economic prospect with an average GDP from year 2000 to 2010 approximately about 7. 73 percent (see figure 1), mainly benefiting from expanding natural resources within the country. By encouraging Foreign Direct Investment, Lao’s economy has been gradually increased in many sectors, especially industry sector and services sector, which by 2009 had reached 70 percent of GDP. (See Figure 2 and 3)Industrial sector has grown in recent year with rapid rate, accounted an average rate about 11. 3 percent per year. The mining industry increased by 33. 87 percent; tobacco 20. 75 percent; food processing 9. 17 percent; textiles 20. 11 percent; and garments 11. 15 percent. The services sector has been positively meet the requirements of production and trading, from 2001to 2005, the growth rate in total revenues from services sector accounted an averaged at 10 percent per year.[2]According to National Social and Economic Development Plan, in general Government of Lao PDR has performed well with its ambitious economic target and strong economic growth which grounding to free the country from the status of least-development country by 2020. Figure 1: Lao’s real GDP growth in percentageSource: International Monetary Fund (IMF), World Economic Outlook 2010Figure 2: Lao’s GDP – composition by sectorSource: CIA World Fact Book

Figure 3: Lao’s GDP per capita compared by continent

Source: International Monetary Fund (IMF), World Economic Outlook 2010In recent year the Government of Lao PDR continue to work hard and try to boost its foreign trade with the aim to increase more in export, the structure of their economic changed with the shares of the private sector and foreign investment in the economy have increased. In particular, FDI has facilitated the creation of new products and increasing size of the markets including the entry of new markets. The number of FDI and private domestic in the past five years stood at 9. 7 billion USD, in which FDI accounted for 8 billion USD[3]. Thus, the private sector has become more and more essential in the economy of the Laos. The Lao PDR has been headed for business in regional and global economic integration. It is vital to Lao’s economic with its potential in domestic and foreign investors to guarantee the benefits from the liberalization of trade. Being the member of ASEAN, ATFA and WTO applicant providing opportunity for the country in trade and attracting foreign direct investment increasing the market entry by reduced 98 percent of its tariffs (zero to five percent in 2008). However Laos faced the problem of trade imbalance, in the year of 2007 to 2008 the total trade was 2630. 9 million USD which number of export only 822. 7 million USD (see Table 1)

3. 2 Foreign Direct Investment and Hydropower Trends in Laos

FDI is playing crucial role in Lao’s economy, with the implementation of Investment Law in 2004, the government of Lao PDR had given huge investment incentive to foreign investors especially tax incentive, as the resulted in 2005 onward the FDI inflow has been significantly increased especially in mining sectors and hydropower sectors. In 2006 the FDI inflow raised up to 2, 699 million USD and in 2009 increased more than 4, 312 million USD (see figure 4). To some extent, the successfully implementation of investment policy in 2004 by the government of Lao PDR, the witness of increased in FDI inflow both in number of the projects and capital values in this period were mainly from the improvement of investment’s climate such as liberalization of investment, simplify laws and regulations on investment, shorten the procedure for gaining investment license, lower taxes and tariffs rate for investors, which directly benefited investors especially in hydropower sector which compared by sectors account 33 percents of total investment from 2000-2009 (see table 2)

Figure 4: Foreign Direct Investment in Laos

Source: Raw data from Ministry of Planning and Investment, Laos

Table 2: Foreign Direct Investment by Sector 2000-2009

Source: Raw Data from Ministry of Planning and Investment, LaosHydropower sector is playing major role as the significant contributor of Lao PDR’s economic growth and poverty reduction, the number of exports in this sector accounted approximately 30 percents of all of Lao PDR’s exports. Many hydropower projects are in operation and under construction in several river basins which aiming to export electricity to neighboring countries and accounted seventy six in number for the projects in operation from 2000 to 2009 (see table 3). Most of the investments in this sector appeared in the type of public-private partnerships and long-term concessions to foreign investors to finance and manage hydropower plants.

Table 3: Hydropower Project in Lao PDR – Operational

Source: Department of Energy Promotion and Development

3. 3 Analyzing Incentives and Disincentives on FDI in Hydropower Sector

3. 3. 1 The Incentives of FDI

Land-linked country:

Lao PDR is considered as landlocked country which situated in Southeast Asia region and shares border with five countries: Myanmar, Cambodia, China, Thailand and Viet Nam. However the government of Lao PDR is converting the landlocked to land-linked by connected the main roads to the every international border pointed. Thus Lao PDR geographically is going to be trade hub in this region and huge market which providing access to ASEAN market plus connecting to the southern part of China which attracting FDI in numerous sectors. Moreover there is investment incentive in hydropower sector, due to the increasing demand on electricity from countries such as Thailand, Vietnam and china, which providing great opportunity to Lao PDR for exporting electricity to those neighbors

Abundant in mineral and water resources:

Government of Lao PDR is continuing in enjoyment to receiving the request from foreign investors for the concession of the development in hydropower and mining. With the abundant in mineral and water resources, thus these two sectors are largely attracting FDI into Lao PDR. The abundant in water resources lend a hand for Lao PDR to receive more FDI in the hydropower project, which lead Lao PDR to be major electricity export-oriented in Southeast Asia region. Furthermore, unexploited mining areas, which have plenty of mines such as: gold, copper, Zink, tin and coal are attracting numerous foreign investors around the world.

Social and political stability:

Social and political stability is another major reason that encourages the foreign investors for trustworthy invest or doing business in Lao PDR. With a very near to the ground of crime rate, no noticeable ethnic conflicts, no political issues and very peaceful country Thus it comes into view to be very low risk for short term and long term investment

The incentives of investment law:

The investment incentives which provided by the government of Lao PDR under the Investment Promotion Law in the year of 2009, by offering profit tax and other incentives to foreign investment enterprises. Commonly the exemptions on profit tax and concessional tax rates are dependent to the type of investment and the geographical location of investment. Moreover the procedure for the establishment and approval process of foreign investment enterprises had been shortening by the Investment Promotion Law.

Inexpensive labor and land:

By comparing with the neighboring countries of Lao PDR, the cost of labor and land are much cheaper, which regard as one of the attractiveness for investment in Lao PDR. Especially the land leasing policy which offered low rate in rental fee and longer investment term which up to seventy-five years. On the other hand the weak point of Lao PDR is the quality of labor which mostly amateurish labor, even though the cost of labor in Lao PDR is cheaper comparing to its neighboring countries.

3. 3. 2 The Disincentives of FDI

Geographic condition and poor infrastructure:

Lao PDR has no sea route and most of the areas are mountainous plus the infrastructure is quite poor especially the condition of the roads in many rural areas. Thus Lao PDR has difficulty in the transportation, has quite expensive transport cost or possibly will take longer time for the goods in delivering to destination and lastly the mountainous land in Lao PDR makes it difficult and costly to expand the electricity network to more rural areas. In return these expenditures are cut down the profit of investment

Small size of market and multiplicity of regulatory processes:

The domestic markets in Lao PDR are too small in both size and number of consumers. Moreover long time consuming to formally establish a business in Laos, investors are required to obtain numerous licenses and too many documentary requirements, which including the submission of a feasibility study or business plan for all businesses.

3. 4 Legal Framework and Investment Policy related to FDI in Hydropower Sector

According to National Development Goal to free the country from the statue of Least Developing countries (LCDs) by the year of 2020, thus the Seventh National Socio-Economic Development Plan (2011-2015) with the main directions and targets related to the development of energy sector as below:

Direction:

Develop hydropower sources and renewable energy in order to supply energy to the production sectors and the society, and become the battery of ASEAN. Extractive industries should take into consideration the conservation of the resource and protection of the environment (including water). It is also the aim to develop systems for transmitting electricity to target areas (to raise production), and to reduce poverty, especially in remote areas, and expand power in other areas that have the potential to produce exportable goods.

Target:

Build 10 more large dams, to produce 5, 015 Mega watt powerEnsure that the number of households who access electricity increases to 80% by 2015Complete transmission lines (115 KV lines) in the north, central and south regions, to meet the power demand. Mobilize and effectively utilize resources including grants and concessional loans for effective development of power infrastructure; and invest in developing the mining sector especially in those areas having high return and economic potential. Source: The Seventh National Socio-Economic Development Plan (2011-2015)On the relating with the FDI in hydropower sector, there are two main sets of law as: foreign investment law and environment law. In order to promote FDI in Lao PDR, thus in the year of 1988 the foreign investment law was implemented and it had been revised in many occasions as in the year of 1994, 2004 and lastly in the year of 2009. Therefore in this chapter is going to preview the procedure of gaining hydropower project, comparing the investment law in 1994 and 2004, plus reviewing the recent investment law 2009

3. 4. 1 The Procedure of Approval in Hydropower Project

According to the investment law in the year of 2004, the outlines an application and approval process for FDI in hydropower sector. This process is the responsibility of the Ministry of Planning and Investment (MPI), and the decisive decision on project approval is the Prime Minister’s Office (PMO). The Environment Impact Assessment (EIA) and Strategic Impact Assessment (SIA) are to be carried out as one of the last steps in the approvals process. Implementing EIA and SIA are the responsibility of the investor, and are reviewed by the relevant Lao technical ministries such as: Ministry of Energy and Mines (MEM), Water Resource and Environment Agency (WREA, PMO), and Ministry of Agriculture and Forestry (MAF).

Plan Stage:

The Independent Power Producer (IPP) has to submit Application of Study Plan (AOSP) to MEM after the plan review successfully pass, the IPP should sign the Minutes of Understanding (MOU) with the government of Lao PDR. Submit application of Feasibility of Study (AOFS) and IEA to MPI and MEM. The Feasibility Study will be report and examination by MEM and WREADiscussion on Dealing tariff

Design Stage:

Project Development Agreement (PDA)Tariff Agreement (TA)Submit Notification of Chief Engineer (NOCE) and Application Detail Design (AODD) to MEMAgreement of IPP Stakeholder (AIOS)Establishment of IPP Company (EOIC)Concession Agreement (CA)Power Purchase Agreement (PPA)

Construction Stage:

NOCE and Commencement of Construction (COC) by MEMConstruction Inspection and ExaminationNOCE by MEM

Operating Stage:

Commission Operating Date (COD)Operating and Reporting (O&R) by MEM

3. 4. 2 The Investment Law in 1994

The foreign investment law implemented in the period of year 1994 to 2003, it mainly offered two forms of FDI which are: a joint venture with one or more domestics Lao investors and 100% foreign-owned enterprises. There was not much clear in what king of incentives providing to attract FDI, only the incentive for investment was the term of investment which gave the foreign investor up to thirty years of investment. Thus the FDI amount in number of projects and capitals in this period were not much highly concerned compare to the period of years 2004 to 2009. However the mega projects approval in this period such as hydropower and mining were given concession with negotiable tax incentives. In conclusion the investment law in 1994 was not much attracting FDI into Lao PDR; however in the hydropower sector mainly big investment projects was paying attention by foreign investors, as the consequence of tax incentives.

3. 4. 3 The Investment Law in 2004

In order to attract more foreign and domestic investors, the government of Lao PDR decided to revise the investment law in 2004, which had given huge investment incentive to foreign investors especially tax incentive, as the outcome in the year of 2005 onward the FDI inflow has been considerably greater than before which in the year of 2006 the FDI inflow rose up to 2, 699 million USD and in the year of 2009 increased more than 4, 312 million USD (see figure 4). The investment law in 2004 also decentralized power to the provincial level in FDI approval which project values up to 1 million USD (under the promoted list), except four provinces such as: Luangprabang, Vientiane, Savanakhet and Champasack which can approve the FDI project up to 5 million USD[4]. The main activity for incentives (The investment law in 2004) was divided into seven sectors as below: 1. Production for export2. Agro-processing and forestry3. Industrial processing4. Human resource development and public health5. Infrastructure Construction6. Raw materials, Component and equipment Manufacturing7. Development of the tourism industry and transit services

Table 4: Comparing investment law in 1994 and 2004

Law on the Promotion and Management of foreign Investment in the Lao PDR (1994)

Law on the Promotion of Foreign Investment In the Lao PDR (2004)

Form

of FDI

•  2 forms of FDI:

a) A joint Venture with one or more domestic Lao Investorsb)  A 100% foreign- owned enterprisesExemption from import duties for intermediate components and raw materials imported for processing and re-export; Uniform flat rate of 1% of import value of equipment, means of production, spare parts and other materials used in operation of investment projects; No export duties on finished products; Annual profit tax at a uniform flat rate of 20%Special privileges, including reduction or exemption from theprofit-tax rate, are given based on the size of investments and the significant positive impacts that such investments have on the socio- economic development of Lao PDR;

•  3 forms of FDI:

a)  Business Cooperation by contract; b) A joint venture with one or more domestic Lao investors (Foreign equity should not be less than 30% of total investment capital); orc) A 100% foreign- owned enterprise0% of import duties on production vehicles, machinery, equipment and raw materialsNo export duties on finished products; Profit tax is classified into 3 groups: 20%, 15% and 10% and profit tax exemption is offered for a certain period depending on activities, investment areas and size of investment1) Zone One (area with no economic information infrastructure)7 years profit tax exemptionthereafter a profit tax of 10%2) Zone Two: (areas with certain level of economic infrastructures)5 years profit tax exemption3 years profit tax of 7. 5%thereafter a profit tax of 15%3) Zone Three ( areas with good infrastructure)2 years profit tax exemption2 years profit tax of 10%thereafter a profit tax of 20%

Other

Incentives

Investment term is up to 30 yearsFreedom to expatriate their earnings back home or to third countriesRight to employ foreign expatriatesPersonal income tax at a flat rate of10%

Investment term is up to 75 yearsFreedom to expatriate their earnings back home or to third countriesRight to employ foreign expatriates (not exceed 10% of the enterprise’s labor)Personal income tax at a flat rate of 10%Source: Ministry of Planning and Investment, Lao PDRThe Lao government has divided investment promotions zones into specific activities and zones. According to the law on the Promotion of Foreign investment, the three promoted zones based on social-economic conditions and geographical locations in the zones are as follows: Zone 1: Mountainous, plain and plateau zones with no economic infrastructure to facilitate investmentTax exemption for seven years and thereafter will be subject to profit tax at the rate of ten percent (10%). Zone 2: Mountainous, plain and plateau zones with a moderate level of economic infrastructure suitable to accommodate investment to some extentTax exemption for five years, and thereafter will be subject to a reduced profit tax rate to 7. 5 percent for 3 years and thereafter a profit tax rate of fifteen percent (15%). Zone 3: Mountainous, plain and plateau zones with good infrastructure to support investmentTax exemption for 2 years and thereafter will be subject to a reduced profit tax rate to ten percent for 2 years and thereafter a profit tax rate of twenty percent (20%). In addition to the above incentives, foreign investors are entitled to the following incentives: 1. During the tax exemption period and during the tax reduction period, the enterprise is entitled to an exemption of minimum tax. 2. The profit used for the expansion of licensed business activities will be exempted from profit tax during the accounting year. 3. Exemption of import duties and taxes on equipment, raw materials and others. 4. Exemption of export duty on export products. Another attractive feature of this law is that raw materials and semi-finished products imported for manufacturing or assembly for import substitution will be exempted from import duties and taxes or will be subject to reduced rates of import duties and taxes.

Special Economic Zones (SEZs):

On April 13, 2003, the government of Laos brought in duty incentives to assist investors under the country’s first establishment of Special Economic Zones (SEZs) aimed at attracting FDI. It situates in south of Lao PDR and shares border China, Vietnam, Cambodia, Myanmar and Thailand. It located in the province of Savannakhet along the East-West Economic Corridor (EWEC) linking Myanmar, Thailand, Laos and Vietnam (Route No. 9). Economic sector zones promoted in the Zone are as follows:(1) Export (oriented) processing zone;(2) Free trade Zone; and(3) Free Service and logistics centre. Many incentives are available to investors who wish to invest in the SEZs. The main incentives are the exemption of taxes such as: Tax Holiday: two to ten years, starting from profit making yearCorporate Profit Tax: eight to ten percentPersonal Income Tax: 5 percent for local and foreignerDividend: Tax five percent (at least two shares holders and apply after Tax Holiday ended)Import duty exemption for raw material, construction material and equipmentOne percent for import vehiclesLand Leasing Policy up to seventy five years and can be extended

The Investment Law in 2009

The new investment law was introduced by the government of Lao PDR in the year of 2009; with add more policies on income tax to investors who investing in three zones and the zones were divided each zone into three different layers, which was highlighting some new features as below: Harmonized the domestic investment law and foreign investment law; Shorten procedures to open a new businessNo terms of investment; Foreign investors have rights to exercise the lands and properties; Investment incentives: Education and Health care sectors are top priorities; Pro-active Investment promotion agency (IPA): investment calling lists; Providing better facilitation from IPA : One Stop Shop servicesIn conclusion, the investment incentives which provided by the government of Lao PDR under the Investment Promotion Law in the year of 2009, by offering profit tax and other incentives to foreign investment enterprises. Commonly the exemptions on profit tax and concessional tax rates are dependent to the type of investment and the geographical location of investment. Moreover the procedure for the establishment and approval process of foreign investment enterprises had been shortening by the Investment Promotion Law.

Chapter IV: Conclusion

As the government of Lao PDR set the economic outlook in the year 2020, its vision to the year 2020 is to graduate from the status of being a least developed country and become a sustainable development nation. To achieve such goal of National Development Vision to the year 2020, Lao PDR needs more capitals, technology, and capable human resource, as the Government of Lao PDR lack of these things. Thus, the FDI especially in Mega projects such as hydropower sector and mining sector are the significant contributors for increasing the government’s revenue, creating jobs, introducing new market and business system. The abundant in water resources lend a hand for Lao PDR to receive more FDI in the hydropower project, which in the near future could lead Lao PDR to be major electricity export-oriented in Southeast Asia region. In addition by comparing with the neighboring countries of Lao PDR, the cost of labor and land are much cheaper, which regard as one of the attractiveness for investment in Lao PDR. Especially the land leasing policy which offered low rate in rental fee and longer investment term which up to seventy-five years. The implementation of Investment Law in 2004, the government of Lao PDR had given huge investment incentive to foreign investors especially tax incentive, as the resulted in 2005 onward the FDI inflow has been significantly increased especially hydropower sectors accounted in number from the year 2004 to 2010 was forty one projects (approved projects)[5]To some extent, the successfully implementation of investment policy in 2004 by the government of Lao PDR, the witness of increased in FDI inflow both in number of the projects and capital values in this period were mainly from the improvement of investment’s climate such as liberalization of investment, simplify laws and regulations on investment, shorten the procedure for gaining investment license, lower taxes and tariffs rate for investors, which directly benefited investors. It given the investors wishes for to doing business or invests in Lao PDR.

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