Turkmenistan Preparing Legislation For Establishment Of Free Economic Zones
Turkmenistan Ministers have begun to develop a state program for the creation of Free Economic Zones (FEZ), with Deputy Chairman of the Cabinet of Ministers Hojamyrat Geldimyradov discussing the concept with President Serdar Berdimuhamedov during a Turkmen government meeting this week.
According to Geldimyradov, the project is being prepared taking into account the priorities outlined in the conceptual state documents – the National Program of Socio-Economic Development of Turkmenistan in 2022-2052 and the Presidential Program of socio-economic development of the country in 2022-2028.
Berdimuhamedov noted that Free Economic Zones are an integral part of the world economic relations between different countries, and also added that for the speedy implementation of the project it is necessary to intensify cooperation with foreign partners, conduct a constant exchange of information and technologies, which, in turn, will integrate economic processes and increase international trade.
Turkmenistan’s Free Economic Zones, known elsewhere as Free Trade Zones, are an integral part of incentivising foreign investment and boosting manufacturing skills. China used them extensively from the early 1990’s, and they became – and remain – a key pillar of China’s manufacturing and export capabilities.
There are typically several different financial components to operating Free Economic Zones, although these do differ from country to country. However the essential parts tend to remain the same, as follows:
Cheaper Land Use Costs
Often FEZ offer discounted land use and utilities costs, including cheaper land and energy bills – something Turkmenistan will not have an issue with as it is an energy-rich nation. This in turn attracts foreign investors. An issue Ashgabat needs to coordinate with this is construction – many investors have specific needs and construction crews will need to be ready along with architects familiar with factory construction. Issues such as energy, water and other supplies should be arranged by the zone and be on hand for connection, as should waste treatment facilities. Nearby housing blocks and communal restaurants and activity centres should be provided near by for employees to be bussed into the FEZ each day. (You don’t want employees living in bonded areas). Rent can of course be charged to the investor but at reasonable rates. If this complete package can be provided, investors will arrive.
There are several taxes that are typically reduced to attract investment, as follows:
Corporate Income Tax (CIT): China was very successful in offering five year CIT tax exemptions, typically 2 years at 0 percent (to allow investors time to pay off the establishment costs) and 3 years at 50% CIT, after which normal tax rates would apply. This model is standard for most manufacturing enterprises, however can be extended for production facilities that the Turkmen Government specifically wish to attract.
VAT: VAT is typically exempt for components being shipped in from overseas, however only if an FEZ also has a customs bonded area – which can include the entire FEZ. That does mean ring-fencing the FEZ off from the surrounding area so goods cannot leave without customs permission. The benefit to investors in providing this service is that it allows investors to work on imported components and integrate them into a finished product without being liable for VAT until the finished product is ready. At the finished product stage, the product can either be imported onto the Turkmenistan mainland (when VAT on the imported component parts then become due) or can be re-exported to other overseas markets (when VAT rebates can be claimed back by the investor on any Turkmenistan components used in the final product). VAT rebates vary but are typically reckoned at 50-70% of the total VAT reclaimable amount. Applying this tax structure requires a well-managed customs service in control of imports into the FEZ from both Turkmenistan and overseas, and the accurate record keeping and financial services to track and both impose VAT and refund it as appropriate.
Other Tax Incentives: These can include reductions on minor taxes such as land use, property, and individual income tax (for employees) and reducing overheads for employees such as certain welfare costs. These are minor but can be used perhaps in areas where attracting labour can be problematic.
Potential Turkmenistan FEZ Locations
Typically in countries with a long coastline, such as China, such zones are based near Sea Ports, which allows for the easy import and export of component parts and finished products.
Caspian Sea Access
An FEZ is extremely likely to be based close to the Turkmenbashi Port on the Caspian Sea, which would attract other Caspian investors such as Azerbaijan, (with whom trade is up 620% this year) Russia, Kazakhstan and Iran in addition to INSTC linked nations such as Turkiye, Pakistan and India.
Inland FEZ – Uzbekistan, Iran, and Afghanistan
Given that Turkmenistan’s bilateral trade with neighboring Uzbekistan is also growing, an FEZ close to the Uzbek border would also make sense, with bilateral freight rail also significantly up this year. An FEZ near to the border freight rail hub between the two would further incentivize bilateral trade.
An FEZ close to the border with Iran, at a similar freight connectivity hub would also work. The two countries are planning increasing trade ties, with bilateral trade volumes growing 84% in 2021.
Perhaps later, such a facility could also be placed close to the border with Afghanistan. Turkmenistan has been developing an industrial cluster at Mary close to Afghanistan’s major trading city of Herat. Security would be an issue, but such a venture would be a part of the overall strategic desire to get Afghani men to put down weapons and return to the workplace.
With Turkmenistan now officially part of the INSTC transport network, the time is ripe for the country to begin offering manufacturing facilities of the type typically provided by FEZ’s. Structuring the tax and incentive assets is key. Spin off benefits include increasing employment, raising domestic production skill sets, and enhancing Turkmenistan’s export potential.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates and has 30 years experience in structuring foreign investment plans for both businesses and governments. He may be contacted at email@example.com