Tonga - Foreign investment

Although some non-Tongans have leased large plantations and residential and business sites, there is little private foreign investment. In 1997, foreign direct investment (FDI) was reported as $3 million, and then for the next four years, 1998 to 2001, $2 million a year. Government policy is that foreign investment is welcome. The statutory framework was laid out in the Industrial Development Incentives Act (IDI Act) of 1978 that provides for a tax holiday of five year extendable to 15 yeas, with additional tax holidays for expansions of an enterprise. Raw materials and semi-processed goods imported to manufacture an exported finished product are exempt from customs duties for two years, and all imports of capital goods, machineries and construction materials are assessed at 50% of port and service taxes. With a view to husbanding the country's foreign currency resources, there are restrictions, mostly on a pro rata basis, on the ability to move hard currency out of the country. Under current IMF-guided efforts at fiscal reform, this regime has been criticized for overbroad tax exemptions and is scheduled to be replaced with a new investment incentives law. Aside for the obvious problems of remoteness and lack of development, the main impediment to foreign investment is not the legal framework but its administration, which is reported to lack transparency and predictability. There are no free trade zones in Tonga, but in 1980 the government established the Small Business Centre near Nuku'alofa that serves as an improved industrial park for small enterprises.

The bulk of Tonga's foreign reserves are invested in Australia. In 2002, in an extraordinary financial scandal it was revealed that all by about $2.2 million of the Tonga Trust Fund (TTF)— $26.5 in all—had been lost.

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