Tax Exemption Key to FDI Absorption

Based on the experience of countries that succeeded in absorbing foreign direct investment, incentives such as tax exemption, investment guarantees and customs facilitations play an important role in encouraging foreign investors.  

According to the sixth five-year development plan (2017-22), to achieve an 8% economic growth, Iran needs 1.3 quadrillion rials ($34.6 billion) of foreign investment, which account for 22.2% of the entire resources needed to finance different economic sectors.

A recent report by the Institute for Trade Studies and Research (affiliated with the Ministry of Industries, Mining and Trade) reveals that Turkey, India, China, Brazil, Egypt, Qatar and Malaysia have been considerably successful in attracting foreign investments.

These countries have set their goals on attracting investments, thereby facilitating technology transfer and regional expansion.

In line with this, the institute proposed a number of measures to support and encourage foreign investors.

First, it recommends extending tax exemption for foreign investments targeting petrochemical, chemical and plastic projects. It also prescribes the same facility for mining and fishery projects, for boosting the production of export goods and supporting startups and research projects.

Foreign investments that create new export potentials and produce a commodity more than 50% of which are exported should benefit from a 50% tax cut.

Foreign startup companies that invest in Iran should also benefit from tax and customs waivers, as well as export concessions in line with executive regulations for supporting startup companies.

Based on the report's recommendations, the limit for foreign investment in each economic sector should increase from 25% to 50% and in the sectors' subsidiaries from 35% to 60%.

Gradual Inflow of Investment

Absorbing foreign investment is a time-consuming process, but according to the head of Foreign Investment Department in the Organization for Investment, Economic and Technical Assistance of Iran, after the implementation of the nuclear accord in January 2016, the volume of foreign investments has been increasing consistently.

"As the official source of foreign investment information, our data show that more than $13 billion of foreign investments have been approved in the past four months and we managed to absorb more than $3 billion during the year to March 20, 2017," Ahmad Jamali also said in a talk with Ayandeh Negar–a monthly economic journal published by the Tehran Chamber of Commerce, Industries, Mines and Agriculture.

According to a report published by OIETAI in early April, after the implementation of the nuclear accord with world powers, Iran has negotiated to receive $50 billion worth of foreign finance that are expected to flow into the country in the foreseeable future.

Jamali noted that in less than a year and a half since the nuclear deal has been signed, a significant amount of foreign investment has flowed into the country, which can be considered a good head start.

"Foreign investors spent the first months after the nuclear accord to find suitable business partners and acquire licenses to invest in Iran. They then started to transfer money through banks and imported their machineries and raw materials," he said.

The official with OIETAI, which is affiliated to the Ministry of Economic Affairs and Finance, noted that almost all economic sectors have absorbed foreign investments but the lion's share went to renewable energy projects while pharmaceuticals and automakers also received a decent amount.

"A majority of investors were Europeans mostly from Germany, France, Italy and Switzerland, but Asian countries like China, South Korea and the UAE have also invested in Iran's market," he added.

Hopes of attracting foreign finance have been strengthened since the implementation of the nuclear accord in January 2016, but a series of factors, namely a high risk rating for Iran and the fear of international banks running afoul of US sanctions, have largely contributed to foreign investors remaining wary of making inroads.

Jamali noted that after the nuclear accord, foreign investors did not move the profit from their investments out of the country but instead, they asked to add it to their previous investments, which is a great thing since the capital remains in Iran's economic cycle.

"In order to encourage and support foreign investors, Iran has signed a number of agreements with Japan, Russia, Singapore, Slovakia, Czech Republic and Luxemburg with the goal of attracting more foreign investments, providing risk coverage and lowering the risk of investment in the country," he said.