Why not abolish corporate tax?

Second in a series

ABOLISHING corporate tax will help Brunei Darussalam rise above the competition and avoid simply becoming the same as other economies that have succeeded in attracting foreign direct investment, said an economic analysis expert.

Creating a favourable tax regime, according to Manu Bhaskaran, director and chief executive officer of Centennial Asia Advisors, is among a basket of reforms that could create "the right enabling environment" for Brunei's goal of expanding its economy beyond oil and gas.

In an interview with The Brunei Times, Bhaskaran said: "The reasons why Brunei currently ranks relatively low on the Ease of Doing Business rank (put together by the World Bank), is more due to legacy issues and policies which can be changes.

"So I think the Brunei Economic Development Board can achieve this target and I commend them for their excellent work," Bhaskaran said, referring to the board's plan to work with government agencies concerned to raise Brunei ranking in the said report.

In a paper published in the first volume of the Centre for Strategic and Policy Studies (CSPS) Strategy and Policy Journal, Bhaskaran highlighted six different issues on which the Sultanate's "weak enabling environment" directly curbs any capacity to expand beyond the oil and gas sector.

This environment has also indirectly curbed the economic potential of Brunei through two key means: bureaucratic delays and restrictive land ownership rules, and unfavourable cost structures that have led to a host of unexploited resources.

Bhaskaran provided three suggestions to create the right enabling environment.

"First, reforms are needed in the government arena. The leadership has to send clear and strong signals of its determination to make the bureaucracy more effective," he said.

This involves changing the incentive structure in the civil service, especially agencies dealing with the business sector. There has to be clearer demarcation of responsibilities for the achievement of policy goals such as those articulated in National Development Plans.

Brunei also needs a streamlined single agency for economic development that must cover all sectors. Other suggestions are: an investigation into major areas of policy divisions and a comparison between how countries have been successful in bureaucratic reforms.

"Secondly, the political leadership must set out clear goals and define a little more clearly what the trade-offs are. It has to accept that some things have to give, in terms of long cherished taboo subjects," he said.

"Inevitably, given Brunei's small scale, higher and more dynamic growth must entail a larger foreign involvement in the economy. Creating more diverse recreational activities for tourism to flourish will also prove beneficial," he wrote.

A "right enabling environment" will come about after acknowledging that Brunei does not have the luxury of being the same as others, said Bhaskaran. It has to be "much, much better than other jurisdictions if it is to attract foreign direct investment by creating a more business-friendly regime."

A most critical reform would be to improve Brunei's ranking in the World Bank's Ease of Doing Business.

"One aim could be to reach the top 10 in Asia within a short span of maybe five years," he said, adding that "an aggressive transformation of the tax regime into a low tax one would help".

Some suggestions he gave include: abolishing the corporate tax entirely and shifting to value added tax or indirect tax; continuing with a special tax on oil and gas and other natural resources; cutting the corporate tax to say a flat rate of 10 per cent; and, imposing a flat fee of say $1,000 per incorporated business oil/ gas and natural resources.

There is a vital need to reform land legislation and the implementation of land-related policies, said Bhaskaran.

Brunei can make more strategic use of foreign investors, Bhaskaran said, adding that a target should be set to attract four to five multi-national corporations (MNCs) in different sectors to establish a substantial presence here.

"This, however, will not be easy given the competition and Brunei's characteristics because MNCs choose to invest abroad for a number of reasons. They want to gain access to resources that they cannot elsewhere, gain access to a domestic market that is large enough to require investment in local production facilities and to achieve high profitability because the destination offers low unit costs or other competitive advantages," he said.

Hence, he suggests that Brunei adopt innovative strategies that differ in some ways from the traditional models used in other successful East Asian countries.

"Strategic relationships could be forged with selected MNCs by offering them lucrative concessions on conditional terms. This could be relatively unexploited areas such as forestry, tourism or silica sand," he said, adding that such a strategic relationship could be strengthened through the offer of partnership with the MNC in areas outside Brunei, this could include participating with the MNC in a consortium to make acquisitions.

"In order to allay fears of excess foreign ownership, a regime of quotas for foreigners could be considered to augment the policies such as the Strata Title Legislation," Bhaskaran added.

Tomorrow: Conclusion

The Brunei Times