Timor Leste and ASEAN: Understanding the Relationship and Preparing for Investment

By: Eugenia Lotova

Having established foreign missions in the 10 other Southeast Asian countries, it seems increasingly likely that the small nation of Timor Leste will become the eleventh member of the 625 million, $2.8 trillion economy of the Association of Southeast Asian Nations (ASEAN). Timor Leste submitted its application for membership in 2006, but a lack of support amongst member nations made the alliance improbable. Today it remains the only country in Southeast Asia not taking part in the association, but it has taken several steps towards meeting the membership requirements. It gained the support of several Southeast Asian nations, particularly Indonesia—its former colonizer. If Timor Leste does in fact join ASEAN, it is likely to see rapid development and will undoubtably present exciting opportunities for investment.

Currently the country relies heavily on its oil and gas exports, but it is quickly running out of reserves and needs to diversify the economy. Timor Leste’s GDP is largely made up of the industrial sector (77 percent), with agriculture only composing 5.9 percent. The industrial production growth rate was 6 percent in 2015 and saw a 4.1 percent GDP growth in 2015, a drop from earlier years due to a decrease in oil and gas prices.

While the country shows potential outside of the oil and gas industry, a lack of basic infrastructure and shortage of skilled labor presents a major problem for growth. According to the World Economic Forum Global Competitiveness Report, Timor Leste ranks 133rd out of 143 countries in infrastructure and 117^th in primary education. Nonetheless, Timor Leste has been stable politically and joining ASEAN would allow it to tap into the collective experience and capital pools of its more advanced neighbors. 

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Companies can either set up operations in Timor Leste in the near future, expecting to largely benefit when the country joins ASEAN or invest once Timor Leste’s growth potential is realized. FDI is US$ 34 million , but this amount is expected to drastically increase with ASEAN membership. The main focus with regard to attracting investment is currently on basic infrastructure and creating a special economic zone. In addition to this there are few restrictions on the industries where companies can invest. However, it should be noted that particular industries such as postal services and weapons production currently do not allow foreign investment. Since the oil and gas reserves may run out earlier than expected, other sectors are a better option for investment. 

In order to attract foreign investment, Timor Leste’s government is creating an environment with a generous tax code and a simple procedure for company establishment. The entire process takes only 4 steps and 9 days, in comparison to East Asia and Pacific averages, which  currently stand at 7 steps over the course of 27 days. Foreign investments that are above $1.5 million USD benefit from a five-year exemption on income, sales, and service taxes, and customs duties on goods used for constructing or managing the investment. This tax break increases to 8 years in rural zones and 10 in peripheral zones. Companies are also subject to the following taxes:

-Sales tax- 2.5% and 6% for imports related to petroleum operations

-Company tax- 10%

-Withholding tax- none on dividends and interests

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Taxes are paid 18 times a year, which is fewer than in East Asia and Pacific, but the hours involved in administrative work is slightly larger in Timor Leste than in East Asia and Pacific—276 and 208, respectively.

While this article gives a general overview of investing in Timor Leste, the process of establishment can become complex and it is important for companies to establish themselves at the appropriate time, while taking advantage of the country’s tax laws. With over 20 years of experience, Dezan Shira has the expertise to advise your company on the best method of corporate establishment in Timor Leste.

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