WEST BANK/GAZA INVESTMENT CLIMATE STATEMENT 2008

UNCLAS SECTION 01 OF 06 JERUSALEM 000299 SIPDIS SIPDIS STATE FOR EB/IFD/OIA, NEA/IPA FOR GOLDBERGER/SHAMPAINE/BELGRADE PLEASE PASS TO USTR, TREASURY FOR NUGENT/HIRSON, COMMERCE FOR LOUSTANAU E.O. 12958: N/A TAGS: EINV EFIN ETRD ELAB KPAL KTDB PGOV USTR OPIC KWBG, IS SUBJECT: WEST BANK/GAZA INVESTMENT CLIMATE STATEMENT 2008 REF: 2007 SECSTATE 158802 Post submits the following 2008 Investment Climate Statement for the West Bank and Gaza Strip. BEGIN TEXT INVESTMENT CLIMATE STATEMENT - 2008 WEST BANK AND GAZA STRIP -------------- INTRODUCTION Internal Palestinian political issues and the Israeli-Palestinian conflict continue to impact negatively the development of the Palestinian economy in the West Bank and Gaza Strip (WB/G). Following the establishment of a Palestinian Authority (PA) Government under the leadership of Prime Minister Salam Fayyad in June 2007, the PA has demonstrated a renewed determination to improve the investment climate in the WB/G and to attract foreign investment. The PA has undertaken a number of significant reforms and prepared a three year reform and development plan that was endorsed by the international community in December ¶2007. The PA's development plan emphasizes the importance of private sector investment and growth as a vital source of new jobs and a sustainable economy. At the time this report was drafted, Hamas, a designated Foreign Terrorist Organization (FTO),remained in control of the Gaza Strip, having violently seized power in June 2007. Where applicable, this report addresses issues related to investment in the Gaza Strip, although there are currently no opportunities for meaningful private investment in Gaza due to Hamas' control. This report focuses on investment issues related to areas under the administrative jurisdiction of the Palestinian Authority, except where explicitly stated. Given the changing circumstances on the ground, potential investors are encouraged to contact the U.S. Consulate General in Jerusalem and the Foreign Commercial Service for the latest information. OPENNESS TO FOREIGN INVESTMENT PA laws have established a legal structure that aims to promote foreign investment. The 1998 Investment Law guarantees the repatriation of foreign capital and prohibits expropriation and nationalization of approved foreign investments. PA law states that no restrictions govern foreign currency accounts. FOREIGN TAXES All new foreign investment in WB/G must be registered with the PA and approved by the relevant ministry/ministries. The income tax law is intended to incorporate both West Bank and Gaza. Ministry of Finance officials stated to USG officials in January 2008 that the PA's corporate tax rate is 15 percent, while personal income tax is specified according to the following: - 5 percent for income between NIS 1 - 10,000; - 10 percent for income between NIS 10,001 - 25,000; and - 15 percent for all incomes above NIS 25,001. A 20 percent tax is withheld at source from dividends distributed in WB/G to shareholders of a foreign company. There are no taxes due on dividends distributed to shareholders of Palestinian companies regardless of where they live or their nationality, and regardless of whether they are an individual or a company. An automatic deduction at the source of 25 percent is withheld from companies, unless they obtain a "Deduction at the Source Certificate," which grants a reduced rate that ranges between zero and five percent. Applications for these certificates are available from district tax offices. Exemptions The 1998 Investment Law provides a number of incentives, including exemption from taxes, for PA-approved domestic and foreign investment. To benefit from these incentives, JERUSALEM 00000299 002 OF 006 investors must apply to the Palestinian Investment Promotion Agency (PIPA),a department of the PA Ministry of National Economy, and present it with a completed investment application and feasibility study. PIPA is composed of both public and private sector members. Pre-approval Certain investment categories require PA Council of Ministers' pre-approval. These include investments involving (1) weapons and ammunition, (2) aviation products and airport construction, (3) electrical power generation/distribution, (4) reprocessing of petroleum and its derivatives, (5) waste and solid waste reprocessing, (6) wired and wireless telecommunication, and (7) radio and television. CONVERSION AND TRANSFER POLICIES The 1998 Investment Law guarantees investors the repatriation of all financial resources, including capital, profits, dividends, wages, and salaries. There are no other PA restrictions governing foreign currency accounts and currency transfer policies. EXPROPRIATION AND COMPENSATION The 1998 Investment Law prohibits expropriation and nationalization of approved foreign investments, except for the pursuit of the public good, which shall be in return for fair compensation based on market prices and for losses suffered because of such expropriation. PA sources and independent lawyers say that any Palestinian citizen can file a petition or a lawsuit against the PA. There are on-going court cases involving illegal confiscation of property by PA senior government officials; however, there has been no ruling on most of these cases. A general lack of confidence in the judicial system has prompted citizens to look for alternative means of arbitration to resolve such disputes. DISPUTE SETTLEMENT The 1998 Investment Law provides for dispute resolution between the investor and official agencies by binding independent arbitration or in Palestinian courts. It has been reported that some contracts contain clauses referring dispute resolutions to the London Court of Arbitration. PERFORMANCE REQUIREMENT AND INCENTIVES Certain incentives apply to Palestinian Investment Promotion Agency-approved investments: - Investments whose value is between USD 100,000 and USD 1 million will be exempt from income tax for five years and be subject to income tax on their net profit at 10 percent for an additional eight years; - Investments whose value is between USD 1 million and USD 5 million will be exempt from income tax for five years and be subject to income tax on their net profit at 10 percent for an additional 12 years; - Investments whose value is USD 5 million and above will be exempt from income tax for five years and be subject to income tax on their net profit at 10 percent for an additional 16 years; - Special projects recommended by PIPA and approved by the Council of Ministers will be exempted from income tax for five years and be subject to income tax on their net profit at 10 percent for an additional 20 years; and - Investments in information technology (IT) training may be capitalized and depreciated for tax purposes. The United States continues to support private sector development in the WB/G. In 2007, the Overseas Private Investment Corporation (OPIC),working with Palestinian and U.S. partners, helped establish a program that will generate at least USD 228 million in lending to Palestinian small and JERUSALEM 00000299 003 OF 006 medium enterprises over the next 10 years. OPIC is also seeking to establish a new mortgage finance company which will offer long-term mortgage loans to potential home-buyers. By dramatically expanding access to long-term credit, the mortgage facility will support several new affordable housing development projects, thus stimulating the construction sector. OPIC is also investigating the possibility of providing political risk/trade disruption insurance to businesses operating in the West Bank. In addition, in December 2007, the Secretary of State launched the U.S.-Palestinian Public-Private Partnership to support the development of economic and educational opportunities for Palestinian youth and to foster business opportunities in the West Bank. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT The right to private ownership in Gaza is guaranteed by British Mandate law, as amended by regulations issued by the PA. Jordanian law in the West Bank, as amended by PA regulations, similarly guarantees the right to private ownership. Foreigners must obtain permission from the PA before purchasing property in areas under PA civil authority and from the appropriate Israeli authorities before purchasing property in West Bank areas under Israeli control. PIPA outlines the following concerning foreign ownership of property: The Acquisition Law in the West Bank, which regulates foreign acquisition and the rental or lease of immovable properties, classifies foreigners into three categories: - Foreigners who formerly possessed Palestinian or Jordanian passports shall have the right to own certain properties sufficient to erect buildings and/or for their agricultural projects. - Foreigners who hold other Arab nationality passports have the right to own certain property that suffices for their living and business needs only. - Other foreigners must receive permission from the PA Cabinet to own buildings or purchase land. It is critical that potential purchasers of land or buildings perform a title search to be assured that no outstanding violations or unpaid penalties exist on the property. Under current law, violations and penalties are transferred to the new owner. Accurate title search can only be obtained from the PA Land Authority (al-Taboh). Land registration is done through the Land Registries in Hebron, Ramallah, Qalquilya, Tulkarem, Nablus, Bethlehem, Jericho, Jenin, and Gaza City. In order to purchase land in WB/G, an application that includes supporting documents, such as deeds to the property and powers of attorney, should be submitted to the land registry office having jurisdiction over the land. PROTECTION OF PROPERTY RIGHTS The West Bank and Gaza do not have a modern intellectual property rights (IPR) regime in place. The PA was indirectly committed to the GATT-TRIPS agreement when it signed the Interim Agreement on WB/Gaza according to Annex III (Protocol Concerning Civil Affairs),Appendix 1, Article 23. All IPR legislation pertaining to WB/G originates from British Mandate Law regardless of the change in control over the years. Pre-1967 era Jordanian laws concerning trademarks, patents, and designs are applicable in the West Bank. In Gaza, the Palestinian Trademark and Patent Laws of 1938, adopted during the British Mandate, are applicable. Registration under the two laws is very similar, and, despite different authorizing legislation, there are few substantive differences between IPR laws in the West Bank and Gaza Strip. According to PA contacts, the PA is working on a modern law that will encompass areas of Copyright, Patents and Designs, Trademarks, and Merchandise Branding. Patent protection in WB/G is provided for a period of 16 years from the date of filing the patent application. JERUSALEM 00000299 004.2 OF 006 Furthermore, both systems require licensing of anything already patented if the reasonable requirements have not been met. Trademark protection is available for registered trademarks for a period of seven years, which may be extended for additional periods of 14 years. The proprietor of a trademark in WB/G owns the sole right to the use of the trademark in association with the goods with which the trademark is registered. The trademark is open for opposition after being published in the Gazette for a period of three months. The holder of a trademark retains the right to bring civil action against any perpetrator in addition to criminal proceedings. There is minimal enforcement of IPR laws in WB/G. TRANSPARENCY OF REGULATORY SYSTEM The PA has worked to erect a sound legislative framework for business and other economic activity in the areas under its jurisdiction since its creation in 1994; however, much work remains to be done. Al Mustakbal, a Palestinian non-governmental organization (NGO),in its September 2006 report on legislative reform in the business sector, stated that a number of institutional and procedural dysfunctions have impeded efforts to establish a transparent regulatory system, including a lack of clear goals in policy formation; an unsystematic process for passing laws; dysfunctions within the Palestinian Legislative Council (PLC),and a lack of sustained and coordinated donor support. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT Major progress was achieved in 2004 with the passage by the PLC of the Capital Markets Authority Law, the Securities Commission Law, and the establishment of the Capital Market Authority, the regulator of the stock exchange and insurance industries, among others. Several foreign banks, mostly Jordanian, have established WB/G branches, but financial services remain limited. Credit is limited by concerns over uncertain political and economic conditions in WB/G and limited availability of real estate collateral due to non-registration of most West Bank land. Correspondence and other international banking relationships are evolving. No Palestinian currency exists, and, as a result, the PA places no restrictions on foreign currency accounts, leading some observers to believe that WB/G will show strong growth in offshore banking services. The Palestinian Monetary Authority (PMA) is responsible for bank regulation. Palestinian Securities Exchange In early 1997, the Palestinian Securities Exchange (PSE) started operations on a limited scale in the West Bank city of Nablus. Twenty-eight share holding companies have been approved for listing so far with additional companies authorized for future listing. The current list of companies spans a wide range of sectors including pharmaceuticals, utilities, telecommunications, and financial services. There are currently an estimated forty Palestinian companies eligible to be listed on the Exchange with a market capitalization of over 1 billion USD. PSE operations have been disrupted several times in 2007-2008 as a result of Israeli military operations in Nablus. POLITICAL VIOLENCE In June 2007, Hamas forces violently seized control of Gaza, removing PA forces from government facilities. Since that time, crossings between Israel and Gaza have been closed to most shipments, with only limited humanitarian shipments and certain commercial shipments allowed to enter Gaza. Exports from Gaza have been severely restricted. As a result of these restrictions, economic activity in Gaza has slowed dramatically. According to 2007 World Bank reports, as many as 80 percent of private sector businesses have closed as a result of the current economic situation. Economic and political instability resulting from the continued Israeli-Palestinian conflict, inter-factional fighting within Palestinian areas, and ongoing Israeli military operations have had a significant impact on the JERUSALEM 00000299 005 OF 006 operations of the private sector in the WB/G. In recent years, the GOI has increased the number of obstacles to movement of goods and people within the West Bank and between Israel and the WB/G. These measures have restricted economic activity in WB/G. The World Bank and the UN Trade and Development Conference estimated that these obstacles had cost the Palestinian economy USD 8.4 billion from 2000-2006. The State Department, at the time of this writing, has in place a travel warning that urges American citizens to defer travel to the West Bank and to avoid all travel in the Gaza Strip. CORRUPTION The U.S. Consulate General in Jerusalem has received reports of potential foreign and domestic investors being asked to provide inducement fees or to include well-connected persons in their business arrangements to help secure a contract. There are no reliable means of determining where or to what extent this kind of activity occurs. When crossing points between Gaza and Israel were open - prior to June 2007 - many Palestinian businesses reported corrupt practices by guards stationed at the crossings. According to those reports, border guards would allow certain shipments access to the crossings in exchange for large amounts of cash. TRADE AGREEMENTS AND TARIFF STRUCTURES The PLO, on behalf of the PA, has signed international trade agreements, which on more than one occasion implicitly or explicitly refer to WTO rules. These include: 1) Interim Association Agreement with the EU (1997) 2) Free Trade Agreement with EFTA states (1998) 3) Duty Free Arrangements with the United States (1996) 4) Free Trade Framework with Canada (1999) 5) Preferential trade agreements with Jordan and Egypt (1996 and 1998) 6) Unilateral acts by other Arab trade partners extending preferential treatment to trade with Palestine 7) Greater Arab Free Trade Area, to which PA is a party (2003) 8) Free Trade Agreement with Turkey (2004) Since 1996, duty-free treatment has been available to all goods exported from the WB/G to the U.S. provided they meet qualifying criteria as spelled out in the U.S.-Israel Free Trade Area (FTA) Implementation Act of 1985, as amended. The duty-free benefits accorded under the FTA exceed those benefits which would be provided under the Generalized System of Preferences (GSP). OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS OPIC provides a variety of services to qualified U.S. investors in emerging economies and developing nations. During the early stages of investment planning, U.S. investors may contact OPIC for insurance against political violence, inconvertibility of currency, and expropriation in the form of an insurance registration letter. OPIC insurance is not available after the investment has been irrevocably committed. As stated above, OPIC has initiated a number of programs in the WB/G to support private sector development. The World Bank, via a USD 20 million fund administered by its Multilateral Investment Guarantee Agency (MIGA),provides guarantees in the form of insurance against political risk for private investments in the WB/G. Under the terms of the Fund, investors who are nationals of or companies incorporated in a MIGA member country, or who are Palestinian residents of the WB/G, are eligible to obtain guarantees provided that investment is brought in from outside the WB/G. The Fund currently has the capacity to issue guarantees for up to USD 5 million per project. LABOR The working age population (over the age of 15) reached 2,375,000 (54.2 percent of the total population) by 2007. According to the Palestinian Central Bureau of Statistics (PCBS),as of September 2007, 92 percent of WB/G workers were JERUSALEM 00000299 006 OF 006 employed in the WB/G, while eight percent were employed in Israel and the Israeli settlements in the West Bank). In 2007, nearly 40 percent of those working in Israel, including the settlements, worked in construction. Women account for some 15 percent of the formal labor force (16.4 percent in the West Bank, 10 percent in Gaza) and are concentrated in the services and agricultural sectors. According to PCBS, roughly 24 and 36 percent of the West Bank and Gaza Strip's eligible workers, respectively, are unemployed. Labor force distribution (percentage) by sector is as follows: (Source: PCBS website) West Bank (2007) - 15.7 percent - Agriculture, Forestry, Fishing, Hunting - 14.8 percent - Mining, Quarrying, Manufacturing - 14.4 percent - Construction - 20.6 percent - Commerce, Hotels, Restaurants - 6.0 percent - Transportation, Storage, Communication - 28.5 percent - Services and other Gaza (2007) - 11.7 percent - Agriculture, Forestry, Fishing, Hunting - 8.3 percent - Mining, Quarrying, Manufacturing - 9.3 percent - Construction - 16.2 percent - Commerce, Hotels, Restaurants - 5.1 percent - Transportation, Storage, Communication - 49.7 percent - Services and other FOREIGN TRADE ZONES/FREE PORTS There are no foreign-trade zones or free ports in WB/G. FOREIGN DIRECT INVESTMENT STATISTICS The PA has not yet compiled a complete listing of foreign direct investment statistics. Limited foreign investment flows began in 1994-95, with the majority of funds coming from Palestinian investors. The largest foreign company in WB/G is the Palestine Development and Investment Company (PADICO),which has invested over USD 500 million in WB/G. Key PADICO investors include Diaspora Palestinians from Jordan, Great Britain, and the Arabian Gulf. PADICO has made significant investments in telecommunications, housing, the Gaza Industrial Estate, and the establishment of the Palestinian Securities Exchange in Nablus. Another large foreign investment group active in WB/G with authorized capital of over USD 100 million is the Arab Palestinian Investment Company (APIC),which is headquartered in the West Bank city of Ramallah. END TEXT. WALLES