Implementation of International Legal Standards in The Investment Legislation of Uzbekistan - Assignment Example

 Strengths and Opportunities of Uzbekistan Strengths Uzbekistan is a market that is emerging and has the following strength; the country quite a number of natural resource that is attractive to many investors for example minerals and hydrocarbon. In addition, there are great potentials of exploration and discoveries of more natural resources. Large regional and domestic market Uzbekistan has a population that is over 20 million and this provides a medium market for consumer goods and services oriented investments. In addition, regional market of Uzbekistan has a high potential of providing market for the goods and services produced by Uzbek investors. Educated workforce High level of academic achievement, workforce skills and motivation of the Uzbek people has impressed existing investors. Political and Social stability Uzbekistan is stable both politically and socially with ethnic homogeneity. Rate of organized crimes are minimal and this has provided a favourable environment for foreign investment. Opportunities Uzbekistan is has freedom and independence in development of industry in line with national goals. In addition there is also an opportunity for Uzbekistan becomes the main investment location preferred by both regional and foreign investors. There is also an opportunity for Uzbekistan to become a base for production in regional market. Its central location provides a large market especially the home market. The country has freedom in utilization of new resources as a result of development of new export markets and advanced technological progress. Present competitiveness and foreign investment trends Uzbekistan has large quantity of natural resources and skilled labour with comparably large population that act as an attraction to foreign direct investment than what the country has received. POLICIES FOR DIRECT FOREIGN INVESTMENT Permissive framework Law for in foreign investment Uzbekistan allows investors (foreign) to engage in wide range business opportunities that are not legislatively prohibited. Foreign investors investment in Uzbekistan through legal means that include branch establishment, real property acquisition and buying of shares. There are no legal preconditions stipulating nationals to have interests of ownership in foreign investments except in banking sector. Government encourages joint ventures of local partners and foreign investors .Foreign investors have to registrer with Justice Ministry to get legal rights as persons. These imply that foreign investment laws in Uzbek have opened the door to all forms of business investors in the available business opportunities. Entry requirements for foreign investors are therefore straight with minimal performance requirements. In Uzbekistan, the right for investors to exit and repatriation of funds are guaranteed .However, in practice, entry requirements for investors especially individual investors are controlled by the government. The investors will have to negotiate with Uzbek government on key issues that relate to joint agreements of joint venture, acquisition of government controlled assets, application for tax incentives and raw material importation rights. This gives a clear indication of how the government is reluctant to speed economic privatisation. In addition, foreign investment negotiations deals with asset valuation of national partners based on GKI formula that fails to take into account the depreciation of assets or principles of market. This is a contentious problematic issue affecting foreign investors and points out at how control of profile and direction of foreign investment is carried out by Uzbek government. Therefore, policies for foreign investment are not controlled by principles of market economy. Many strategic government enterprises have not been privatized including utilities and production of hydrocarbon and major minerals. The government is therefore interested in joint-venture promotion where state enterprises partner with foreign investors who provide technology and the required capital. Specific standards of treatment Law for foreign investment provides impartial treatment rights assurances, and guaranteed protections on issues which include repatriation of profit and expropriation which are important to any foreign investor. Protections assure investors that legislation which negatively affects the status of foreign are not implemented for a period of ten years from the time investment is set. In addition foreign investors are given a chance to select favourable terms in the future subsequent legislations .Law for foreign investment have provisions that are exclusive for foreign investment enterprises in regard to export and import rights and arrangements for foreign currencies. There is only one instance where the law for foreign investment is unfavourable. This is where it stipulates that in instances where chartered fund is not constituted within a year, the company in question will be deemed insolvent. In addition, provisions in the previous legislation which allowed national shareholders to acquire shares of foreign investors at the current market price in situation where they are disposed have been removed. General standards of treatment These are applied standards that are of interest to foreign investors. a) Foreign exchange arrangements Conversion of Som to hard currency is not easily and is rationed by authorities at rate of exchange that are high to mitigate the problem of balance-of-payments. In most emerging markets, conversion of local currencies to hard currency is not easy for the purpose of paying current account for example imports. Transaction involving capital accounts with regard to foreign exchange have to be approved prior the transaction. Markets that are progressively emerging are slowly reducing the approval needs and decentralising exchange rate setting for foreign investment. In contrast, Uzbekistan has a different foreign exchange approach where exchange rate are officially set to overvalue the currency, foreign currency availability for business operational is not guaranteed and accessibility is uncertain and limited and also government has prioritised foreign exchange allocation purposes for example low priority for imports. Taxation incentives The main feature of Uzbekistan fiscal regime as follows; Tax on profit As from 1998, Uzbek profit tax rate is 35% except for agricultural investments where the rate ranges from 3 to 20%.This is meant to ensure that tax rates are within the range of the countries where investors originate. There is 15% tax for royalties, dividends and interest income. In addition, the provisions for consolidation are not provided for. Taxable income calculations for new investment are unfavourable to many investors. Rates of depreciation are low with losses carried forward common characteristic of CIS members. This hikes payback which produces loss especially in new investment during start-up duration. Furthermore, there are restrictions on the costs of loan interest, labour, advertising and entertaining deductions for foreign investors. Taxation of the gains in Foreign exchange especially in time of som depreciation and inflation causes problems to exporters. Investment concessions a) Foreign investment production enterprises There are concessions for profit tax for industrial investment with over 60%output production. In cases where 50% of the enterprise is foreign owned, 16 to 20% tax is imposed. In addition there also tax relief in cases where the profit of an enterprise is reinvested. There is also seven years profit tax exemption for industrial enterprises with over 30% foreign ownership. The incentives are geared towards either export or import substitution at the first operational stages of foreign investment. There is no tax for the first two years of operation for new foreign enterprises (industrial) with over 50 % ownership that venture in exports-import substitutes. Other concessions These are concessions provided to investors of any nationality who owns an enterprise in Uzbekistan .This include;25 and 50% reduction in the tax standard rates in first two years of operation as long as the investment is not intermediary, commerce or procurement oriented. There is also 50% reduction in the tax standard rates if the investment generates more than 30% of its revenue from exports. In addition there is also no tax on profits connected with rise in export revenues with exception of Uzbek exports (traditional) which include minerals, hydrocarbons and cotton. Development costs are sometimes debited to ensure that taxable profits are equal to or less than 50 %. Tax withholding Taxes in Uzbekistan are withholded at rates that are in line with international standards. There is 15 % standards rates for dividends, 20% for management fee, royalties, lease income, rent and other income. For foreign investors who own more than 10% of any investment in Uzbekistan, there is a reduction in the rate of withholding by 10%. Customs duties Imports from countries in the CIS treaty are duty free while those from other countries have a 30% custom duty. There are instance where excise duties are imposed on imports from CIS countries. This goes against the terms of business operation in the free trade zone.30% duty rates application on capital goods impact negatively on the export and import of industries or investment in competition. This runs parallel to fiscal incentives that are meant to encourage industrial investments. This is mitigated by the import duty impact on the cost of capital expenditure to partly relief the import duty by the contribution of the charter capital In addition, operating items impact duties are mitigated by imports tax exemption in the reprocessed items for export and own production. Lastly, imports of over US$50 are allowed entry without imposition of duty.30% import duties is imposed on a variety of consumer goods to provide a protective cover which indirectly contribute to the sum cost of engaging in business activity in Uzbekistan. Excise duty and VAT VAT is imposed on locally produced goods or goods that have been imported. Exports are zero rated except those exported to FSU countries. There is a standard VAT rate of 20% Many investors are unable to get input for excess VAT or tax liabilities. Paid VAT for asset acquisition cannot be refunded but have to be summed up with assets capital cost and then devalued. Taxes related to Employment There is a 15% minimum tax rate for personal income and 45% marginal tax on income that is over fifteen times of the minimal wage. This is meant to ensure that the wage cost of employees in Uzbekistan is within the international range. Expatriates have to stay in Uzbekistan for over 183 days to be regarded as residents. In cases where expatriate do not have arrangements for special tax; there is imposition of 45% on their personal income. Employers are therefore forced to increase the remuneration of the expatriate to compensate for the added Uzbekistan tax load. In addition, there are no concessions for house provisions, car, and tax exemption. There is also pension fund and other contributions that amount to over 40% which the employer has paid. Tax on Property There is 4% property tax for fixed assets and other entities that are legal and intangible. In other CIS countries however, taxation of property is subtracted from profit tax. Properties owned by new enterprises that have decided to venture in fresh investments are not taxed for a period of two years. In addition any entities in Uzbekistan that attract investments of foreign origin of over US$ 0.5 million to the charter capital are not taxed. Tax for Road users Road tax is applied to all CIS member states. There is over 12% rate of turnover in Uzbekistan Other taxes Include water use and land taxes and environmental tax. There is no tax on land use during in the first two years after start up. In addition local authorities have the power to enforce other minor tax. Policies on Sectoral tax Fiscal treatment of various sectors vary for example, investors in tourism who set up their enterprises in certain key cities are entitled to low profit tax in the first three years of after start up. There is concessional profit tax range of agricultural enterprises of between 3 to 20% based on profitability. The standard tax rate for banks is 35% with no available concessional benefit. Royalty taxes are imposed on mineral producers for using and replenishing the natural resource. Combination of road usage and environmental tax increases the royalties by international standards. However the rates of royalties can be negotiated. Industries with high priority that have been included in the Programme forForeign Investment have a high chance getting seven years exemption. Overall impact of Fiscal regime Can be assessed as follows; 1) Profits tax rate are within the international standards range but tax base doesn’t fully support new investment because of uncareful handling carry forwards loss and an unappealing depreciation rates. There is an irrational labour and other cost deduction restriction that is a similar practice in the CIS countries. 2) Business taxation structure is cumbersome because of the application of considerable assets, production costs and turnover taxation instead of profit taxation. Because there is no excess VAT refund, the problem is aggravated further more so to new investors. 3) There is application of fewer investors in the major concessions in the standard monetary regime especially in prospect for additional available concessions on application 4) Fiscal regime is biased against small and to some extent medium enterprises especially with regard business distribution, trade and services. Trade policy Import regime in Uzbekistan is extremely bureaucratic and restrictive. It’s very difficult for investors to comply with broad Import contracts registration process. This reduces goods import especially those regarded as unnecessary. In addition quota system is applied to particular to important goods in Uzbekistan for example refined and crude oil. Foreign Enterprises are allowed to export what they produce and at the same time import materials and products which they require in their operation as long as the government approves them. Competition policy The country is in the process of developing competition policies. However, there is no clause in the current laws that limit competition between national business and foreign investors. In practice, there are exclusive market rights for foreign investors. Uzbek ministries that still have significant business function are favoured. There are a lot of restrictions in insurance and commercial banking industries to allow state institutions have a greater business advantage. Company and commercial law Company law adopted in Uzbekistan provides closed and open limited liability investments or companies with guaranteed rights for stakeholders .there is also limited and general partnership legal provisions. Uzbekistan is a head of other CIS member states in embracing accounting law and associated rules that exemplify internationally established accounting principles. The country has separated and distinguished tax accounting and financial accounting by reviewing regulation of production cost implementing international standards of account. Financial statements similar to western investors have been adopted Employment of Expatriate There is liberal employment approach of foreigners such that no straight measures are available to reduce the ability of hiring expatriates to work for foreign investors. Intellectual property and trademarks Protection Laws have been enacted to address patents, trademarks and copyright protection. Foreign investment is perceived as an opportunity to bring in new ideas and technology and therefore protection of intellectual property and trademarks will encourage foreign investors with advanced technology to invest in the country. . ADMINISTRATIVE PROCEDURES Process of Entry Procedures for entry in Uzbekistan as a foreign investor are deceivingly easy. Foreign investors are only required to register on condition that the investment will be an enterprise. It entails submission of official lawful documentation which is accepted in case they are in order. However, in practice, registration is the result of negotiation for investment with the relevant ministries. The registration has to undergo many burecratic processes if the investment is great importance. This makes the approval process broad and protracted and requires more effort before the investment is finally approved Promotion of Investment It’s spearheaded by the government where senior government officials travel oversee to meet potential investors and also avails themselves to meet visiting business delegation. This exposes potential investor to variety of business opportunities. Administrative regulations Regulations that have an impact on business operation are repeatedly and suddenly changed with no consultation with representatives of foreign investors. Administrative needs are used to pursue unconnected policy objectives. COHERENCE POLICY It’s evident that Uzbekistan has a great desire to attract more foreign direct investments. This is absence of legal restrictions related to foreign investment and the commitment of government officials in promoting the country abroad. The government has also prioritised private investments and industries that replace imports to introduce new technologies that are advanced and also to open up new industries. Work cited. United Nation. United nation conference on trade and development: investment policicy review of uzbekistan.Newyork and Geneva, 1999:2-65. Read More