Incentives

The American Chamber of Commerce (AmCham) issued a rather lengthy position paper on the second package of reform measures. The group represents the interests of American businesses in the country.

AmCham understandably supports the phased reduction in the corporate income tax rate to 25% to match the prevailing rates in the region. However, the group expressed its preference for a much lower rate of 20% and a faster tempo of reduction.

AmCham likewise discretely expressed opposition to the withdrawal of some fiscal incentives contained in TRAIN-2. The group did this by quoting their own survey of American businesses here. In that survey, 83% of respondents said the fiscal incentives compensate for the higher cost of doing business here and might move elsewhere if these incentives are withdrawn.

Many of the American companies here enjoy tax incentives that are not time-and performance-bound. They have enjoyed these incentives for over two generations and have ceased creating new jobs in the countryside many decades ago. The incentives they enjoy distort the playing field and discourage the entry of new competitors who might be more prepared to deal with the costs of doing business simply by becoming more efficient.

The concerns of the majority of AmCham members do not seem to cohere with the findings of a World Economic Forum study done a couple of years ago. In that study, tax incentives were not top of mind among those making investment decisions.

 TRAIN-2 is mainly about improving competitiveness of our business environment. Reducing corporate income tax rates is one measure toward this goal. Ensuring a level playing field is another.

American businesses that were in the country ahead of the others, enjoyed tax incentives that gave them an edge over new entrants. They won those incentives in another time, when investors needed some encouragement to overcome infrastructure challenges of going out to bring their businesses to the countryside. At that time, it was understood that the economy benefited from granting those incentives because of the social benefit of dispersing economic activity. That no longer applies.

The rationalization of the incentive system is necessary for several reasons. Most obvious, it will help compensate for revenue lost from lowering the corporate income tax rate. It is necessary to clear up a chaotic situation where numerous separate laws grant too many incentives, depriving government of hundreds of billions in potential revenue. It will help attract new investments by offering a level playing field where old investors do not enjoy advantages over new ones.

Vietnam’s experience is illustrative for us. In its eagerness to attract foreign direct investments, the country offered too many incentives. This resulted in weak revenues and uncompetitive domestic enterprises.

Vietnam, like us, must soon unwind their over-generous incentives system both to improve revenue and improve domestic competitiveness. Their advantage, if they do this, is that they do not have to deal with a powerful lobby of “traditional” investors like the AmCham is here.

It is true that we do not get as much foreign direct investments as most of our neighbors in the region do. But things are looking up. Last year, about $10 billion in new investments came in. We expect to attract much more this year and into the medium term.

With the Build, Build, Build infrastructure program, we are looking to vastly improve the efficiency of moving people and goods through the length of the archipelago. There will be much less reason to demand incentives to compensate for the poor logistics backbone. 

Over the medium term, we expect a new breed of investments: more efficient, more innovative and better capable at opening quality jobs for our young. Not coming from the country of a former colonizer, they are not disposed to demanding tax exemptions to bring their businesses in – especially tax exemptions that are neither time-bound nor performance-based.

Summit

Today, Donald Trump and Kim Jong-un will meet in Singapore. It is an unlikely summit, and certainly one we could not have expected at the start of this year.

At the very least, we hope Trump does not pull the sort of stunt he pulled a few days ago in Canada. His view of the world rejected by America’s closest allies during the G7 summit, Trump hit back by withdrawing the US from the communiqué issued after the meeting. As soon as he boarded his plane to fly to Singapore, Trump unloaded a stream of personal attacks against the Canadian Prime Minister Justin Trudeau.

Trump is coming to this summit without much preparation and certainly without a strategy in place. He expects to wing it through and had said he was prepared to walk out of the meeting if he senses it will not be productive.

North Korea, by contrast, has been preparing years for this event. They forced their own people to starvation to fund an ambitious nuclear program. Nuclear arms, they think, will win the hermit kingdom some international respect. The summit, even if it is fruitless, will be sold at home as proof of international respect nuclear weapons won for the nation.

Trump’s expectation is high: he expects Kim to unconditionally commit to some undefined process of “de-nuclearization.”

Kim’s expectation is low: all he needs is a photo-op showing him on equal terms with the leader of the superpower.

Even before the first handshake, the shrewd and brutal North Korean dictator shall have scored all the points he needs. Whatever else he reaps will be gravy.