Corporate tax cut adds icing to cake

WE CANNOT expect foreign investors to come rushing in to locate their projects in the Sultanate as soon as they learn of Brunei Darussalam's latest corporate tax cut. Tax reductions and tax holidays, after all, are no panacea to any economy that craves foreign direct investments. But the reduction of the corporate tax to 22 per cent in 2011 will help our economic managers encourage investors to take a second look at the mix of ingredients we have in our basket.

It is easier to appreciate the value of this latest development if we look at it as part of the bigger picture. The Ministry of Finance's move jibes with the overarching goal of economic diversification the government's desire to see an increase in economic activity other than the extraction of oil and gas.

While we do not need to rely 100 per cent on foreign business to get the wheels of economic diversification spinning, we need not downplay their potential contribution in developing industries outside oil and gas either. Partnerships between foreign and local companies have always been considered one best option to cultivate new fields of economic activity previously untapped in the Sultanate. However, among initial challenges that need to be overcome is convincing foreign investors of the advantages that Brunei has over its neighbours.

Some examine the ease of doing business in a country and while in recent years we have ranked relatively better than economies with a bigger population, we should not be satisfied. Our market size puts us at a disadvantage in competing with other countries in the region that are also intent on attracting foreign businesses that are particular about the domestic market being capable of providing the needed economies of scale. It is thus imperative that we continue to beat our own record.

On corporate tax, Brunei which imposes 23.5 per cent this year already has among the lowest rates in Southeast Asia, next to Singapore at 17 per cent. The Ministry of Finance says this move is in recognition of the continued support that the business community has extended to the government's goals. With the tax cut, it hopes to see businesses finding extra room to hire more Bruneian workers and devote a bigger chunk of their working capital to help train and upgrade their skills.

There are many other ingredients to attracting foreign investors and to encouraging more local entrepreneurs to set up shop. For one, there remains the nagging concern about the time it takes for businesses to open a shop, a category which has been a drag to Brunei's standing in score charts that measure ease of doing business as well as its competitiveness as a business destination.

Economists often argue against giving too much focus on lowering taxes and offering fiscal incentives in the race for foreign direct investments (FDI). But it does not make the tax regime less important in the scheme of things. Studies have pointed out the positive relationship between low corporate tax and increases in FDI going to economies in Southeast Asia.

It is definitely a move that the business community views positively and it supports Brunei's aim to increase its ranking in the World Bank's Ease of Doing Business by 30 points.

We tip our hats off to government executives for this latest move. Tax cuts can mean lower projections for collections and the announcement came at a time when government's finance executives are confronted with a huge projected budget deficit arising from fluctuations in world oil prices.