Free Economic Zones in Macedonia

By: Dr. Sam Vaknin
 

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Dr. Sam Vaknin on THE LAW ON FREE ECONOMIC ZONES in "Nova Makedonoija".

Question:
Dr. Vaknin – is it true that you are the father of the Law of Free Economic Zones?

Answer:
I participated in the dedicated and professional team, from many ministries and state organs, which prepared the law. The initiative – in collaboration with the delegation of the government of the Republic of China (Taiwan) – belongs to Dr. Milijana Danevska, the Minister of Development. Most of the work was done by her advisor, Ms. Zorica Doncevska long before I arrived on the scene. I did suggest a few amendments, some of which were accepted.

Question:
What is a free zone?

Answer:
There is an important distinction which the media is not aware of between FREE ZONES and FREE ZONE SITES.
To quote from the law:
“A free zone site represents a detached, enclosed and marked area of the territory of the Republic of Macedonia on which commercial activities are conducted under conditions prescribed by this and other laws and on which custom and other tax incentives determined by this law shall be applicable.”
“A Free Zone shall be established as trade associations conducting economic, technical, administrative, expert and other activities supporting the operations in the free zone sites.”

Question:
Do other countries have free zones?

Answer:
Dozens of other countries have free trade zones, free industrial zones, free industrial or technology parks, customs free zones, free transhipment zones and many other types of free economic zones. Our law allows for all these types of activities to exist. It is very broad and flexible and one of the best and most complete laws I have seen. As opposed to popular opinion, free zones exist even in rich countries such as the United Kingdom or the USA (although they are not called “free zones” there). It is true, though, that to poor and middle income countries, such as Macedonia, a free zone can be an important tool for economic development.

Question:
Why do you use such cautious language, “can be”?

Answer:
Because it is never enough to have a law. What matters is how it is implemented. There are free zones in countries as diverse as the Philippines, Tunisia, Costa Rica and Taiwan. In some places they are the engine of the economic locomotive, in other they are a drag on the local economy.

Question:
So, the critics are right, free zones can be a bad thing?

Answer:
The critics are wrong. Anything that has the potential of generating investments, encouraging entrepreneurship, creating new working places, enhancing exports and improving the balance of payments – should be implemented without delay. Free zones are potentially powerful economic engines of exports and growth and employment. Would it have been wise of us to ignore their potential?

Question:
Can’t free zones be used as tax havens, for smuggling or other criminal activities?

Answer:
If the free zones are run by criminals AND (this is a cumulative condition) the authorities are inefficient or corrupt – of course it can. But our law is very strict on WHO will own and run the free zones. It is also very explicit about the precise functions and procedures to be performed by the authorities intended to ensure that the free zones are not abused. Free zones will be established only where and when they can increase employment, bring new technology and know how to the country and increase exports. An average of 65% of the goods and services produced in the zones MUST be exported or the developer might lose its licence. Additionally the law says that the businesses operating in the zone must use local manpower and prefer domestic suppliers where economically feasible.

Question:
What is the Free Zones Directorate?

Answer:
This is my favourite part of the law, the one I am most proud of. We introduced, for the first time in Macedonia, not only in theory, but in practice, the concept of “One Stop Shop”. All the business entities in the free zone will have one address to go to. They will no longer have to run for weeks between ministries, authorities, agencies and state organs. They will get everything they need from one central authority, from one address. All the relevant ministries and state organs will be represented there, with full authority to render all the services required by the free zones users. This is unprecedented. The ministers are worthy of the highest praise for being willing to participate in such an innovative approach. The law says:
“The Free Zone Directorate shall be responsible for… granting approvals of requests of developers for the establishment of free zones; provision of supervision and management of free zone sites through its branches; coordination of the activities of state organs and authorities and public enterprises within the free zone sites; planning and developing free zone sites and making sites available to developers; public relations, advertising and promotion of free zone sites; attracting developers and users to the free zone sites; registration of businesses and structures within the free zone sites; coordination of issuance of licenses, permits and approvals where and as needed, of product quality control and the issuance of certificates of origin by the members of the Directorate; Inspection of installations and working conditions within the free zone sites; convening a labour relations committee in which all labour disputes between employees and employers in the free zone sites are to be settled; the coordination of the issuance of export and import licenses; coordination of the prevention of smuggling; coordination of the safety and security of people and property in the free zones sites; Provision and maintenance of all public goods and utilities … conducting other activities associated with the functioning of free zone sites and especially the implementation of the “one stop shop” concept of management of the free zone sites; raising the required start-up capital.”

Question:
So, from now on, any trade association can open a free zone?

Answer:
Absolutely not. The developer must satisfy very strict and rigorous criteria to qualify. The law demands that it “…provide written proof of their financial ability matching their financial obligations under this Law either in the form of a performance bond or a bank document substantiating the availability of unencumbered funds in their account or audited financial statements” and “demonstrate previous experience and track record in trading or in the operating of free zone sites”.
The developers, in their application, must provide an environmental impact assessment, a marketing plan and a business plan or a feasibility study.
And the developer loses his approval if it enters bankruptcy procedures, if it is proven that he provided false material information in his request, If he failed to build and operate the free zone site in accordance with the stipulations of this Law or failed to submit one annual report.
Additionally, the developer pays 0.3% of the total turnover of the business entities in his zones.
I think these are relatively reasonable terms.
It will also not be that easy for the developer to do in the zone something other than what he undertook to do. Almost every substantial change requires a new approval. The law states: “Each change of a free zone shall be subject to the procedure for the establishment  of a free zone … “Change” in this law shall mean: enlargement of the approved free zone site area; change in location of the free zone site; new activities are to be conducted in the approved free zone; each change in the composition of the developers (addition of new developer, change of corporate structure, take over, merger, acquisition, etc.) of the free zone; change of the period for existence of the free zone.

Question:
Still, inside the zone – the developer is king. Actually, it is a kind of ex-territorial area, like an embassy?

Answer:
I want to say it once and for all (because I heard this argument before):
A free zone is NOT an ex-territorial area. It is an integral and inseparable part of Macedonia. All the domestic laws of Macedonia apply there. It simply has different rates of customs and taxes. The over-riding status of the Macedonian domestic law is stated numerous times throughout the law. One example:
Article 20 says: “Free zone developers shall enact rules or pose conditions (hereunder referred to as “developer rules”) under which their free zone site will be operated and activities conducted, regulate internal order and prescribe separate measures for protection of the working and living conditions and the environment. BUT…
The developer rules shall not contradict all the applicable laws of the Republic of Macedonia, including their by-laws and regulations and all the international obligations of the Republic of Macedonia…. AND The developer rules shall be announced in the Official Gazette of the Republic of Macedonia after the approval given by the Free zone Directorate.”

Question:
Aren’t we offering too much by way of tax incentives? Aren’t the revenues lost by the state worth more than the free zone will ever generate?

Answer:
It is a very narrow point of view. Tax revenues are not the only thing we should consider. What about unemployment, technology transfers, export enhancement? These are invaluable in that they can revive the economy.
Compared to other free zones in other countries, we are offering mid-way concessions. We are by no means too generous. Additionally, to qualify to receive the tax incentives, the user must satisfy certain annual export quotas. It must prove that it generated NEW activities, not merely transferred activities from “mainland” Macedonia to the free zone “island”. It must show that it is not involved in criminal activities or bankruptcy procedures and so on. Only then is it eligible to enjoy the tax incentives.

Question:
Which are?

Answer:
The law says it best:
“Free zone users meeting the terms as in article 21 of this law shall be exempted from:
(1) sales tax on products within the free zone site except for those products sold for final consumption within the free zone
(2) sales tax and VAT on goods imported into the free zone site for production purposes and for performing other approved activities in the free zone;
(3) sales tax on services provided in the free zone immediately linked with export of goods and services;
(4) profit tax for a period of ten (10) years from the day of commencement of activities in the free zone;
(5) property tax for a period of ten (10) years from the day of commencement of activities in the free zone;
(6) all taxes otherwise applicable to any transfer of property or rights thereof between developers and users within the free zone
Free zone users reinvesting in the capital assets of the free zone site shall be entitled to a reduced profit tax base for the amounts invested after the expiration of the 10-year period.
Free zone users shall be exempted from paying participations (contributions), taxes and other duties pertaining to use of land for construction, connection to the water supply, sewerage, heating, gas and power supply networks.
Free zone land may be leased to foreign investors for a period of fifty (50) years, with a possibility to extend the term to another twenty-five (25) years, pursuant to the law.
The developers of the free zone shall have the full right to sublet or rent parts of the free zones or structures thereon or rights thereof to the users.”

Question:
Are the economic activities within the free zone restricted?

Answer:
Every type of economic activity is allowed EXCEPT the activities explicitly forbidden by the law. These include: the trading of decayed, rotten, expired or infected goods or waste material detrimental to the environment or not fit for human or animal consumption; radioactive materials except those which are needed for industrial, medical and scientific research purposes under a valid license from the competent authorities; drugs, chemicals and biological materials and chemical and biochemical derivatives with the exception of those used in industrial, manufacturing, medicinal and pharmaceutical preparations, according to certificates issued by the Ministry of Health; arms, munitions, weapons and military explosives; goods or services which originate from countries or firms subject to boycotts, embargoes or blockades imposed by the competent national and international organs and authorities; goods or services that violate public morals, public defence, public safety and the security of the state; goods or services that violate the domestic laws and international treaties pertaining to intellectual and commercial property; practices, services and activities in contravention or violation of treaties, laws, regulations and directives regarding the protection of the environment in Macedonia.
Free zone users may apply standards, technical and quality norms of the destination country when manufacturing goods in the free zone intended for export.
Free zone users may set prices for their goods and services and will not be subject to laws and regulations pertaining to prices in the Republic of Macedonia.

Question:
Will workers’ rights be protected in such an environment?

Answer:
Workers’ rights are protected only by a good economy. In Macedonia, we have a lot of theoretical workers’ rights. But the right to work is violated by mass unemployment and by gigantic wage and pension arrears. All the employers in the free zone shall sign a collective agreement with their employees. The collective agreement will oblige the employers and the employees to settle labour dispute through arbitration or mediation. The Directorate shall set up a labour relations committee to provide the employers and the employees with an arbitration and mediation mechanism.

Question:
Thank you very much. Let’s hope that free zones will fulfil all the expectations …

Answer:
I will settle for half the expectations …

Thank you.