Tonga Investment Climate Statement 2009

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SUBJECT: Tonga Investment Climate Statement 2009

REF: SECSTATE 123907


1. Paragraph 2 contains the text of the 2009 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.

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
loans for reconstruction projects.

New customs and excise regulations that came into effect on July 1,
2008 grant exemptions from import duty on capital goods.

The Ministry of Labour, Commerce and Industries (MLCI) administers
Tonga's foreign investment policy and regulations. Foreign invested
businesses must obtain and hold valid foreign investment
registration certificates. The application fee is about US $50 and
can be obtained by applying to the Secretary of the MLCI.
Certificates are valid until the business terminates activity. If a
business does not commence activity within a year after a
certificate is issuance, the certificate becomes invalid.

After obtaining a foreign investment certificate, an investor must
apply for a business license. The application, which must be
accompanied by a valid foreign investment registration certificate,
can be made to the Business Licensing Officer at the MLCI. Licenses
cost about US $38, renewals about US $33, and expire on December 31
each year.

The MLCI also processes company registrations. A foreign company
that wishes to do business in Tonga must apply for incorporation
under Part XVIII of the Companies Act 1995. The applicant must
first reserve the company name at a cost of about US $37. The fee
to register is about US $373. For a company to qualify as a "Tongan
company," the majority share-holder must be Tongan. Partnerships and
sole proprietors need not register but must have a valid business
license.

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, on the two main islands. Foreign investors are
prohibited from doing business in certain sectors. An updated list
of these sectors can be obtained from the MLCI.


Conversion and Transfer Policies

The National Reserve Bank of Tonga exercises 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 has no formal bankruptcy
law. There have been no high-profile investment disputes over the
last five years. Legislation states that the provisions of the
United Kingdom's Arbitration Act 1996 governs arbitration under
Tonga's Foreign Investment Act. Tonga ratified the Convention on
the Settlement of Investment Disputes in 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.
Once a business license is obtained, the business can operate.

Although the Foreign Investment Act specifies activities reserved
for local businesses and included a list of these activities, the
government allows full ownership by a foreign investor in cases
where manufacturing activities use imported raw materials for
export, or where the investments are too large for local investors.
Projects are considered on an individual basis. The government
generally encourages joint ventures.

Right to Private Ownership and Establishment

Both foreigners and domestic investors have equal rights for
incorporating/establishing entities. Foreign investment legislation
that came into effect in 2007 contains a list of thirteen business
activities reserved solely for Tongans and separate list of business
activities open to foreign investors. Tonga's Business Licenses Act
has a separate list of activities reserved for Tongans.

CORPORATIZATION/PRIVATIZATION OF STATE-OWNED ENTERPRISES

A key aim of the government's on-going economic reform program is to
corporatize and eventually privatize 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.
Counterfeit products are widely available on the local market.

Transparency of Regulatory System

While it remains somewhat challenging to establish a business, the
government has instituted reforms to make the procedures and
processes easier and quicker for investors. The World Bank lists
Tonga as the 43rd easiest country in which to do business.

It is not a practice in Tonga for parliament or government agencies
to publish draft bills or regulations for public comment.

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
around US $30 million, finances development projects that meet the
TDB's criteria. In December, 2007 the TDB had a loan portfolio of
around US $25 million. There are also three international
commercial banks, which together had approximately US $160 million
in domestic private sector loans outstanding in December 2007.

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.

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. The state of emergency
has been repeatedly extended, most recently in November 2008 for
another 30-day period. Total damages were 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. Both corruption and bribery are criminalized
and prosecuted and the laws appear to be impartially applied.

In July 2008, the Office of the Anti-corruption Commissioner was
established, charged with investigating official corruption. There
are no international non-governmental "watchdog" organizations
represented locally, and the country was ranked 138 out of 177 on
Transparency International's Corruption Perceptions Index 2008.

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

The 2006 Census placed the unemployment rate at 4.9%. This rate
does not reflect the significant number of people who are
underemployed. Just over 60% of people in paid employment are male.
Over two-thirds of all employed people held paying jobs in the rural
areas while the rest are in urban areas. About half of those
employed in the rural areas work in the agriculture industry.

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 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

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

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

Westpac Bank, Hala Taufa'ahau, Nuku'alofa, Tonga
Tel:

ANZ Bank

CSMCGANN