Review of Free Zone and Industrial Estate Policy


 Full Report - PDF File  النسخة العربية
 

Executive Summary

·   Jordan has a large number of commercial zones in the form of industrial estates, free zones and a special economic zone in Aqaba

·   Duty-free free zones have demonstrated their effectiveness as a useful vehicle for enterprises engaged in international transit, trade and storage

·   Relying on zone enclaves as the primary instrument to streamline the investment environment risks slowing improvements in public service delivery throughout the country

Key Findings

Estates and Zones in Jordan

·   Jordan has two entities responsible for industrial estate and free zone development and management: Jordan Industrial Estates Corporation (JIEC) and Free Zone Corporation (FZC) 

·   The government has been slow to regulate private estate and zone developers

·   Public estates and zones compete with private estates and zones. JIEC and FZC enjoy greater benefits in terms of access to public funds and public land, exemptions from income and sales taxes, and exercising municipal powers to classify land and license enterprises, all of which private developers do not benefit from

·   Although economic theory suggests that free zones are a ‘second best solution’ to compensate for the anti-export bias of trade policies and other policy distortions typical of many developing countries, “Jordan need not continue relying on zones to test and demonstrate the effectiveness of new economic policies for eventual application to the whole country”

·   At least three arguments point to a smaller role for zones in Jordan:

o   There are fewer potential policy advantages that can be provided to investors by a special economic zone today in Jordan that are not currently available nation wide

o   Maintaining unique policies within special economic zones in Jordan has the danger of distracting central and local government from the essential work of reforming national policy

o   Jordan is too small geographically and economically to be distracting investors by offering a range of incentive packages tied to different zones and regions

 

Performance of Estates and Zones in Jordan

·   Activity at public industrial estates has generally stagnated over the past seven years

o   The total number of enterprises and total capital has remained relatively constant

o   Out of the five public estates in the country, 64% of available space is occupied

o   However, both garment and non-garment exports have continued to increase from all public estates

·   Out of the nine private estates in the country, over the past five years only five have attracted many tenants and only two are near full occupancy; only 17% of developed land at operational private estates is occupied

·   JIEC is experiencing a lack of demand in its southern industrial estates with Karak estate being half occupied since opening and Ma’an and Aqaba Industrial Estates virtually empty.Opening new estates without accompanying growth in the number of new enterprises has limited JIEC’s profitability over the past six years

·   There are six public free zones in Jordan with 85% occupancy while there are 26 operational private free zones, most of which are single-factory free zones, with an additional ten private free zones under construction

·   Three free zone trends emerging in Jordan include:

o   Multi-purpose free zones are becoming the preferred format for new multi-purpose commercial zone developments, likely for the assured long-term tax and duty-free status they bestow on tenants, and easier customs arrangements

o   There appears to be a willingness of FZC and government to permit large-scale manufacturing at free zones, blurring the distinction between industrial estates and free zones 

o   The need for a public free zone developer is called into question when three private developers are ready to develop free zones at the border with Iraq. The government can still benefit from private free zone development through an appropriate tax regime

·   Employment and investment levels in both public and private free zones are more modest than those in industrial estates and have been steadily increasing over the past decade

·   The number of lessees has doubled and employment tripled across all public zones over the past eight years, including in manufacturing

·   Private free zone activity has been even greater with capital investment and employment increasing significantly

·   Traders increasingly perceive freezones to be an efficient place to keep inventory due to simpler customs procedures and an ability todelay sales tax and remaining customs duties payments until time of consumption in Jordan

 

Policy Environment

·   The Jordanian government is undertaking efforts to reduce and eliminate customs duties:

o   Customs duty on imports from Jordan’s free-trade partners has been reduced

o   Remaining customs duties on imports from other countries, particularly on capital goods and goods used in production, are being eliminated steadily

·   Producers in Jordan face the issue of either carrying forward excess input tax credits for some time or waiting for a refund of General Sales Tax

·   A new income law is awaiting approval and intends to eliminate the current investment incentives offered under the Investment Promotion Law (16) for the Year 1995, and the current exemption on export earnings under the Income Tax Law which has enabled industrial estates and QIZs to attract export investment without offering special export tax incentives of their own

·   Raising and enforcing income taxes throughout the country but allowing domestic firms to relocate or register as free zones will lead to significant tax-induced investment distortions and revenue loss for the country

Investment Incentives

·   Income tax incentives are currently ineffective while duty-exemptions for manufacturers have the potential to crease disputes with trading partners

Recommended Actions/Initiatives

The report outlines a number of activities the government should undertake.

·   Establish an industrial estate and free zone regulatory body to ensure equal rights andobligations between private sector developers and operators and the JEIC and FZC

·   Replace the current selective fiscal incentives with a universal flat rate of income tax applicable to most, if not all, manufacturing and service sectors

·   Investigate the potential for double taxation agreements with countries that do not tax their residentson foreign investment income

·   Continue to eliminate customs duties on inputs used in production by all economic sectors in Jordan, including capital goods, intermediate goods and raw materials

·   Streamline customs procedures, business licensing procedures and ensure the prompt refund of excess sales tax input credits

·   Develop a national industrial land-use plan to guide the use of private and public land among competing uses, set out a methodology for allocating public land, set out an appropriate property taxation system to promote productive use of land

·   Create institutional mechanisms to facilitate local economic development by empowering local representatives to coordinate with counterparts to plan and achieve development goals

 
 

Report Name

Date

Timeline

Review of Free Zone and Industrial Estate Policy

2007

Not Relevant

Author

Supporting Donor

BearingPoint International

USAID

Sector

Lead Ministry

Enabling environment

Not Relevant

Key Topics

Customs Duties – Free Zone – General Sales Tax – Incentives – Income Tax – Industrial Estate –Private Sector – Public Sector

 

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