Tonga's Investment Climate Statement 2008

UNCLAS SUVA 000035

SIPDIS

STATE FOR EB/IFD/OIA AND EAP/ANP
PLEASE PASS TO USTR

SIPDIS

E.O. 12958: N/A
TAGS: EINV KTBD OPIC USTR TN
SUBJECT: Tonga's Investment Climate Statement 2008

REF: SECSTATE 158802


1. Paragraph 2 contains the text of the 2008 Investment Climate
Statement for Tonga, per reftel.


2. Begin text:

Openness to Foreign Investment

The Government of Tonga seeks to be welcoming to business and
investors. Many Tongans have lived in or visited the United States,
and American products are readily recognized.

Legislation simplifying foreign investment and streamlining business
registration procedures came into effect April 1, 2007. Tonga became
the 151st member of the WTO in June 2007. The primary tax
collection method shifted from import duties to a broad-based
consumption tax in 2005.

In November 2006, a pro-democracy demonstration degenerated into a
large-scale riot. Rioters destroyed or damaged some 80% of the
capital's central business district. Reconstruction has begun,
aided in part by government secured funds providing low interest
reconstruction loans.

Tonga's Industrial Incentives Development Scheme, which granted
incentives and concessions for new projects in the industrial
sector, was repealed in October 2007. The replacement Customs and
Excise Regulations 2007, under which all industrial sector inputs
will be except from customs duties, has yet to enter into force

The Ministry of Labour, Commerce and Industries (MLCI) administers
policy on foreign investment. Every foreign investment business must
obtain and hold a valid foreign investment registration certificate.
The foreign investment certificate application fee is about US$50
and can be obtained upon application to the Secretary of the MLCI.
The certificate must be renewed annually.

The MLCI also processes company registrations. A company
incorporated outside the Kingdom of Tonga that wishes to do business
within the Kingdom must apply for incorporation under Part XVIII of
the Companies Act 1995. When applying to register as an overseas
company, a complete application must include the following:

1. Name of the overseas company, which must be reserved on
prescribed Form 5. The name reservation fee is about US$37.

2. Full names and residential addresses of company directors &
company secretary at the time of application

3. The physical address of the place of business in Tonga

4. The full name and residential address of persons in Tonga being
authorized to accept documents /communications on behalf of the
overseas company

5. Evidence of incorporation in the country of registration

6. Copy of instrument constituting or defining the constitution of
the company

7. Copy of notice of reservation of name

8. Application fee of about US$373

Partnerships and sole proprietors do not need to be registered but
must have a business license. The cost of a business license varies
according to the type of business activity. Current charges can be
obtained from MLCI.

Every business or person carrying out a business in Tonga must have
a valid business license. Business license applications by foreign
investors must be accompanied by a valid foreign investment
registration certificate. Applications for business licenses can be
made to the Business Licensing Officer at the MLCI. Licenses are
issued annually and expire on December 31 each year. An application
for a new license costs about US$38 and the annual renewal about
US$33.

Land cannot be bought or sold in Tonga, but may be leased through
formal lease arrangements. Leases are usually 50 years in duration,
although the law permits terms up to 99 years. The government has
designated areas for small industry development ,known as Small
Industry Centers (SIC),on the two main islands in the Kingdom.
Foreign investors are restricted by law from doing business in
certain sectors. An updated list of restricted sectors can be
obtained from the MLCI.

Conversion and Transfer Policies

In order to conserve foreign exchange, the National Reserve Bank of
Tonga exercises some control on foreign receipts and payments.
Repatriation of funds, including dividends, profits, capital gains,
interest on capital and loan repayment and salaries, is permitted,
with the following exceptions:
--when an industrial enterprise is partly financed by locally raised
capital (including working capital),in which case the repatriation
of funds will be related to the extent of foreign financing; that
is, repatriation will be regulated on a pro-rata basis;

--in respect of capital gains, the amount eligible for repatriation
will be restricted to the amount transferred inward through the
banking system or by other approved methods; and

--expatriate employees will be allowed to remit overseas wages and
salaries received in Tonga up to the amount on which income tax has
been paid.

Obtaining foreign exchange is not difficult.

Expropriation and Compensation

Expropriation has not recently been an issue in Tonga.

Dispute Settlement

Tonga has a robust judicial system, staffed at the highest level by
expatriate judges. The country's legal system is generally capable
of enforcing contractual rights. Tonga
does not have a formal bankruptcy law, and there have been no
high-profile investment disputes over the last five years. Section
16(1) of the Business Licenses Act states that the provisions of the
Arbitration Act 1996 of the United Kingdom shall apply to any
arbitration under the Foreign Investment Act. The Business Licenses
Act also states that the Convention on the Settlement of Investment
Disputes shall have the force of law in Tonga, the country having
ratified the convention on March 21, 1990.

Performance Requirements and Incentives

Investment incentives include:

-- Guaranteed long-term space and land leasing in the Small
Industries Center, a 12-acre industrial estate, located about one
kilometer from the center of Nuku'alofa;

-- Residential and work visas for foreign investors and their
families for as long as the enterprise is in operation;

-- Priority for electricity, telephone, and water connections.

Technical and promotional assistance from the MLCI is available to
help prospective investors identify, evaluate and set up industries.
Companies and foreign investors can
apply for the aforementioned business incentives as soon as they are
granted business licenses. Once a business license/permit is
obtained, the business can operate.

The government allows full ownership by a foreign investor in cases
where manufacturing activities are using imported raw materials for
export, or where the investments are too large for local investors.
Each project is considered individually, however, the government
generally encourages joint ventures.

Right to Private Ownership and Establishment

Both foreigners and domestic investors have equal rights for
incorporating/establishing entities. The "Foreign Investment Act
2002," which was implemented on 1 April 2007, categorizes business
activities for investment purposes into two categories. The Act
identifies a Reserved List of 13 business activities reserved solely
for Tongans and a Restricted List of business activities that
foreigners may invest in under certain conditions. The Business
Licenses Act 2002, which will also take effect on 1 April 2007, also
has a Prohibited List.


I. Reserved List

1. Taxis

2. Passenger vehicles for hire

3. Used motor vehicle dealers

4. Retailing activity i.e distribution of groceries (food and
household provisions) for final consumption

5. Wholesaling activity

6. Baking of white loaf bread

7. Tongan cultural activities, including:
i. folktales, folk poetry, and folk riddles
ii. folk songs and instrumental folk music
iii. folk dances and folk plays
iv. production of folk arts in particular, drawings, paintings
carvings, sculptures, woodwork, jewelry, handicrafts, costumes and
indigenous textile

8. Raising of chicken for the production of eggs

9. Security business

10. Export of green and mature coconuts

11. Wiring and installation of residential and commercial buildings
with capital investment of less than $500,000.

12. Production/farming of:
i. root crops (yams, sweet yam, taro, sweet potato, cassava);
ii. squash;
iii. paper mulberry;
iv. pandanus; and
v. kava

13. Fishing activities comprising:
i. reef fishing
ii. inshore fishing within 12 nm(Zone C) in water less than 1000
meters
iii. bottom fishing in water depth less than 500m

II. Restricted List
The Restricted List specifies the business activities that a foreign
investment business may carry out in Tonga subject to the conditions
specified by the Regulations.


1. Commercial fishing comprising tuna fishing, bottom
fishing in water deeper than 500m, other deep water fishing, and
aquaculture.

2. Agricultural supply stores distributing seeds, fertilizers,
chemicals.

3. Educational facilities

4. Medical or health facilities

III. Prohibited Activities (under the Business Licences Act)

1. Storage, disposal or transport of nuclear or toxic waste.

2. Pornography.

3. Export, import or production of any products that are prohibitied
under the laws of Tonga.

4. Prostitution.

5. Processing or export of endangered species.

6. Production of weapons of warfare.

Corporatization/Privatization of State-Owned Enterprises

A key aim of the government's economic reform program is to
corporatize and eventually privatize the agencies that perform
non-core government functions.

Protection of Property Rights

Tonga has legislation protecting patents, utility models, designs
and trade marks., A bill on enforcement and border measures has been
endorsed by the cabinet and is currently under consideration. This
legislation aligns Tonga's laws with its WTO obligations and
contains stricter border controls for counterfeit products.
Currently, counterfeit products are widely available on the local
market.

Transparency of Regulatory System

Although there are some difficulties with setting up a business, the
Government has instituted reforms to make the procedures and
processes much easier and quicker for investors. The World Bank
lists Tonga as the 47th easiest country to do business in
worldwide.

Publishing of draft bills for public comments is not practiced in
Tonga.

Efficient Capital Markets and Portfolio Investment

Foreign investors are generally able to obtain credit on the local
market. The Tonga Development Bank (TDB),with assets totaling
T$58,688,399 (2006),finances development projects that meet the
TDB's criteria. In December, 2006 the TDB had a private sector loan
portfolio of T$39 million. There are also three international
commercial banks, which together had T$189.9 million in domestic
private sector loans outstanding in June 2005.

Political Violence

In November 2006, political protests degenerated into a large-scale
riot. Numerous buildings were attacked, looted and burned. Rioters
particularly targeted businesses associated with the royal family
and businesses owned by ethnic Chinese and Indians. Approximately
80% of Nuku'alofa's central business district was destroyed or
significantly damaged. Violence on this scale is unprecedented,
previous incidents being limited to isolated cases of vandalism and
arson directed typically at symbols of government.

Subsequent to the November disturbances, the government declared a
state of emergency, empowering the Tonga Defence Services to restore
law and order within 24 hours of the events. Trials of the
perpetrators and those accused of incitement are under way. The
state of emergency has been repeatedly extended, most recently in
December 2007 for another 30-day period. Total damages are estimated
to be about US$62 million. Businesses have begun reconstruction,
aided in part by funds obtained by Tonga's government and used to
provide low interest loans for reconstruction.

Corruption

Corruption has not been specifically identified as an obstacle to
foreign investment. Corruption and bribery are criminalized and
prosecuted. In a high-profile case in 2006, the Speaker of the
Tongan Parliament was convicted and fined for bribery relating to
the import of alcohol. Such measures appear to be impartially
applied.

In July, the parliament passed legislation establishing an
anti-corruption commissioner charged with investigating official
corruption. There are no international non-governmental "watchdog"
organizations represented locally, and the country is not included
on Transparency International's Corruption Perceptions Index.

Bilateral Investment Agreements

Tonga is party to a bilateral investment treaty with the United
Kingdom. It is not party to any other bilateral investment
treaties.

OPIC and Other Investment Insurance Programs

Overseas Private Investment Corporation (OPIC) insurance is
available to investors in Tonga, and OPIC provides political risk
insurance, finance, direct loans and loan
Guarantees.,

Labor

Although unemployment was officially placed at 5.2 percent in 2003,
this does not account for the significant number of people
underemployed. More than half of the men, and 38 percent of all
people employed, work in the agricultural, forestry and fishing
sectors. Only 59 percent of households include one or more wage
earner. Women are playing an increasing role in the formal wage
sector and make up more than one-third of the workforce.

Wages and salaries are comparatively low. Wages, salaries and other
conditions of work in the private sector are a matter of direct
negotiation between employers and workers.
There are currently no trade unions in Tonga, although there is
legislation permitting unions to form. The Public Servants
Association operates as a de facto trade union for civil servants.

Local skilled labor is available in sufficient quantities to
undertake most types of building work, except for some specialized
skills and supervisory-level manpower, which is
generally recruited from abroad.

Foreign-Trade Zones/Free Ports

Tonga does not operate any foreign trade zones or free port
facilities.

Foreign Direct Investment Statistics

In its 2007 World Investment Report, the UN Conference on Trade and
Development (UNCTAD) estimated 2006, foreign direct investment in
Tonga sourced from transnational corporations to be US$51 million,
equal to 22.6 per cent of GDP. The inward flow of foreign direct
investment for 2005 was approximately US$17 million, up from
approximately US$5 million in 2004.

The U.S. Commerce Department's Bureau of Economic Analysis records
no U.S.- sourced FDI stocks for Tonga.

According to the MLCI, over 150 foreign companies are currently
registered in Tonga. Foreign businesses are largely in the retail
sector, and many are owned by ethnic Chinese and Indians.

Web Resources

Regulatory authorities

Ministry of Labour, Commerce and Industries, P.O. Box 110,
Nuku'alofa, Tonga. Tel: (676) 23 688; www.mlci.gov.to;

Ministry of Finance and Economic Development, Nuku'alofa, Tonga.
Tel: (676) 23 066; www.revenue.gov.to
Banks

National Reserve Bank of Tonga, Private Bag #25, Nuku'alofa, Tonga.
Tel (676) 24-057; www.reservebank.gov.to

Tonga Development Bank, Hala Fatafehi, Nuku'alofa, Tonga. Tel:
(676) 23 333; Email: tdevbank@tdb.to; www.tdb.to

DINGER