Economy & Trade

Singapore and India to Include Limitation of Benefits in DTAA Amendment: Implications for Foreign Investors

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By Mike Vinkenborg 

On December 30, 2016 Singapore and India agreed on amending their Double Taxation Avoidance Agreement (DTAA) for capital gain income. With the new agreement, which will implemented on April 1, 2017, India aims to tackle investments coming into the country through shell companies and prevent tax avoidance. This follows the agreements reached by India and Mauritius in May 2016 and India and Cyprus in November that year, when they similarly amended their respective DTAAs by implementing a Limitation of Benefits (LOB) clause. The India-Singapore DTAA, last amended in 2005, had the provision that any changes in the Mauritius treaty would automatically apply to the Singapore DTAA. All three DTAA amendments will come into effect on April 1, 2017.

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ASEAN Market Watch: Indonesia Seeks Engineers, ASEAN ICT Masterplan, and Singapore-Malaysia High Speed Rail

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Indonesia faces shortage of engineers

Indonesia’s annual shortage of around 30,000 engineers is becoming a key obstacle to its infrastructure development plans. Currently, Indonesia has 57 million skilled workers but it would need 113 million by 2030 to meet the country’s requirements. Around 20 percent of Indonesia’s six million university and postgraduate students pursue Islamic studies, with most students ending up with unrelated jobs.

According to a 2015 national labor force survey, less than ten percent of Indonesia’s 250 million citizens have a university-level education. Of those, only eight percent choose an engineering study and more than half of these graduates work in different fields, such as banking. The government believes that the country needs a more skilled workforce if they are to keep up with other ASEAN countries and meet the Master Plan for Acceleration and Expansion of Indonesia’s Economic Development’s (MP3EI 2025) ambitious targets, which will be difficult to achieve with substantial infrastructure gaps.

Achieving Indonesia’s infrastructure development goals, which range from sea projects, airports, highways, and power plants, necessitates a technical workforce. The government is taking steps to establish more industry-oriented engineering colleges, technical institutes, and state-funded scholarships. The last few years have seen improvements, with 57 percent of Indonesians completing education after primary school in 2015, compared to 40 percent in 2002. Furthermore, the share of college-age Indonesians attending universities has risen from 20 percent to 25 percent over the last decade. However, economists believe that Indonesia still needs to do more to meet its infrastructure development goals by 2025.

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Investing in Myanmar: Recent Developments and Future Outlook

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By Alexander Chipman Koty

MyanmarFollowing a series of bold political reforms beginning in 2011, Myanmar has sprung onto the radar of foreign investors as one of Asia’s last frontier markets. For decades, Myanmar was an isolated and overlooked pariah state dominated by a repressive military government that crushed dissent and participated in illegal drug and jewels trades. However, the military government’s unexpected democratic reforms, which culminated in the rise of Nobel Peace Prize winner Aung San Suu Kyi to power in 2015 and the removal of American economic sanctions in 2016, quickly changed the narrative surrounding the Southeast Asian nation.

Historically one of the region’s wealthiest countries but presently among its poorest, Myanmar has long been underperforming its vast economic potential, as the military regime’s ineffective political and economic policies hamstrung the country’s development. Favorable demographics, an advantageous location, and rich natural resources – along with the introduction of substantial economic reforms – make Myanmar an intriguing destination for adventurous investors who were previously blocked from entering the market.

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ASEAN Market Watch: Indonesia Foreign Ownership Rules, Philippines Internet Speeds, and Thailand Manufacturing

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Indonesia: Foreign ownership in digital payment companies reduced

Indonesia’s central bank, Bank Indonesia, has reduced foreign ownership in local companies that offer electronic payment services. As per Regulation No. 18/40/PBI/2016, effective on November 9, foreign ownership in such companies has been reduced to a 20 percent stake on the Operation of Payment Transaction Processing. This applies to companies that operate as card providers or offer switching, clearing, or settlement services for electronic payments.

The regulation does not retroactively apply to existing companies. Rather, companies in the digital payments sector, existing companies that expand into the sector, and existing companies in the sector that change ownership will have to abide by the new rules. Apart from this, other rules apply, such as e-wallet service providers that have 300,000 users will need to obtain a Service Provider license from Bank Indonesia.

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ASEAN Market Watch: Malaysia Hiring, Indonesia Retail, and Philippines VAT Waiver

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Malaysia: Hiring in manufacturing sector improves

Malaysia’s manufacturing sector continued to register growth despite a 47.2 Purchasing Managers’ Index (PMI) reading in November, which is a little lower than September’s reading of 48.6. A score of 50 indicates improvement in the sector. The Department of Statistics (DoS) in mid-November issued an Industrial Production Index (IPI) showing industrial growth of 3.2 percent year-on-year, mainly from manufacturing and electrical sectors. Sub-sectors such as petroleum, chemical, rubber, plastic products, electrical and electronic products, non-metallic mineral products, and basic metal and fabricated metal products drove growth.

Manufacturing sales also improved to US$13 billion, a 1.1 percent year-on-year expansion. The Monster Employment Index (MEI), which records online hiring, stated that manufacturing was the top growth industry, with online recruitment in that sector expanding by 1 percent year-on-year in August. Local recruits also expect hiring to pick up in the short to medium term, with manufacturing a key sector to benefit the most. In addition to manufacturing, robust growth is also expected in IT and retail industries.

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Daily Minimum Wage Rates in Thailand to Increase from January 1, 2017

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By Zolzaya Erdenebileg

The Thai cabinet on November 22, 2016 approved the recommendations of the Central Wage Committee to increase the daily minimum wage rates by an additional five to 10 Thai Baht (THB) for 69 provinces with effect from January 1, 2017.

This will be the first adjustment in the country’s minimum wage rates since January 1, 2013. Currently, the minimum wage is THB 300 (US$8.39) per day across the country. The current minimum wage rate will be maintained in the eight provinces of Sing Buri, Chumphon, Nakhon Si Thammarat, Trang, Ranong, Narathiwat, Pattani and Yala.

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ASEAN Market Watch: Philippines FTA with EFTA States, Myanmar Retail Sector, and Google-Indonesia Tax Settlement

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Philippines: Free Trade Agreement with European Free Trade Association Expected in August 2017

The Philippines’ government is expected to complete ratification of its Free Trade Agreement (FTA) with the four-nation European Free Trade Association (EFTA) by August 2017. The four countries include Switzerland, Iceland, Liechtenstein and Norway. The agreement is currently with the Department of Foreign Affairs and will later be sent to the Senate for ratification. This is part of the Philippines’ three-pillar strategy of widening and strengthening its access to Europe – one of the country’s biggest market.

Trade between EFTA states and the Philippines remained stable worth around US$ 850 million in 2015. As per the FTA, EFTA states will abolish all custom duties on industrial products, including fish and other marine products from the Philippines. In turn, Philippines will gradually eliminate custom duties on industrial products, fish and other marine products from EFTA states over a 10-year period. The Philippines is also currently negotiating a FTA with the European Union (EU), which will be in effect once internal procedures are completed.

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ASEAN Market Watch: Philippines Manufacturing, Cambodia Agriculture, and Indonesia’s Textile Industry

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Philippines: Manufacturing Continues in Upward Trajectory

Philippines registered a Purchasing Managers’ Index (PMI) of 56.5 in October, suggesting a continued expansion in the manufacturing sector. PMI measures the health of the manufacturing sector, and a reading of 50 and above indicates improvement in business conditions, while a score below that indicates deterioration. Manufacturing activity showed strong growth due to strong domestic demand for new orders. In addition, export sales also contributed to strong operating conditions. Further improvement in purchasing and employment, with continued stock building is likely to continue to help the sector.

The Philippines lead the region by a wide margin, followed by Vietnam. Nevertheless, analysts have stated that the continued depreciation of the Philippine Peso is likely to increase the average cost for manufacturing companies and reduce profits. Expensive raw materials used in production and the rise in prices of imported crude oil will also contribute to increased costs. Still, strong demand has allowed manufacturers to raise prices to keep up with costs. Proposed increases in public spending is also expected to give an additional boost to the manufacturing sector in the near term.

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Donald Trump in the White House: Implications for the Future of the TPP and Free Trade in ASEAN

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By Dezan Shira & Associates

US president-elect Donald Trump’s opposition to the Trans-Pacific Partnership (TPP) is well-known and the future of the trade deal is now on tenterhooks. For the supporters of the TPP, Trump’s victory has meant that their worst fears are now going to unfold. Opponents of the trade deal are rejoicing at their expectation that Trump will now move quickly to fulfill one of his most controversial campaign promises – to abandon the TPP. Any prospects of the US renegotiating the TPP are not only bleak but also impractical – the trade deal was seven years in the making, meticulously negotiated and involved compromises from several countries on both sides of the Pacific.

Professional Service_CB icons_2015RELATED: Pre Investment and Market Entry Advisory from Dezan Shira & Associates

Implications for ASEAN

So now if the US does ultimately withdraw from the TPP, what implications will this have for free trade in the ASEAN region? Before analyzing this, it should be kept in mind that TPP’s potential failure is unlikely to have any significant immediate economic impact on the region. It was not a trade deal in force, but only offered prospects of newer free trade rules coming into effect in the near future. Instead of being a step backwards, it is more a lack of further progress as far as development of free trade in the region is concerned.

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ASEAN Market Watch: Malaysia CIT Reduction, Indonesia Ease of Doing Business, and Cambodia Rice Exports

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Malaysia: Corporate Income Tax to be Reduced for Profit-making Companies

In the forthcoming Assessment Year (AY) 2017, beginning January 1, 2017, as well as AY 2018, companies registering an increase in revenue, compared to the previous AY, will be eligible to pay a reduced rate of corporate income tax (CIT) on the increased amount.

As per the new measure, companies increasing their annual revenue by at least five percent over the previous year will get a one percent reduction in the 24 percent CIT rate on the incremental portion of taxable income. The tax cut will rise on a sliding scale to four percent in line with revenue increases of 20 percent or more. For example, if a company increases its chargeable income from RM 10 million in AY 2016 to RM 12 million in AY 2017, the income tax rate for the first RM 10 million will be 24 percent, and the income tax rate for the additional RM 2 million will be 20 percent.

In addition, a tax incentive has been introduced for small and medium enterprises (SMEs) whereby the income tax rate on the first RM 500,000 (US$120,222) will be reduced from the current 19 percent to 18 percent with effect from AY 2017. The changes are part of the Budget 2017, which will also include incentives for other sectors like hotels and insurance. Despite these incentives, analysts have stated that the tax reduction is still not attractive as compared to other ASEAN countries.

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