19 Aug 2019
Section 4: Regulations & Tax Incentives in Djibouti
Fitch Solutions Trade & Investment Risk Index
- Djibouti is enacting various reforms to improve the country’s attractiveness to foreign investment, particularly from China. Reforms introduced in April 2018 focussed on reducing red tape for foreign businesses. In 2018, the country rose 55 positions in the World Bank’s ‘Ease of Doing Business’ global rankings, rising to 99th position globally.
- The primary risk for foreign firms is the uncertain legal environment. Djibouti’s ongoing dispute with UAE-based ports operator DP World concerning the cancellation of the company’s Doraleh Container Terminal concession in 2018 is a high-profile example. Chinese firms are not exempt from risks, with the Djibouti government announcing in October 2017 that it was re-tendering the contracts for two airport concessions initially awarded to China Civil Engineering Construction Corporation (CCECC) in 2015.
- The country ranks third out of 11 states in East Africa in Fitch Solutions’ Trade and Investment Risk Index, behind Rwanda and Kenya. This is despite being placed a low 162nd out of 201 countries globally, with a score of 42.8 out of 100.
Trade and Investment Risk Index: Methodology and Components
- Trade and Investment Risk Index quantitatively compares the challenges of operating in 201 countries worldwide. The index scores each country on a scale of 0-100, with 100 being the lowest risk. Each country has a headline Trade and Investment Risk Index score, which is made up of three categories, further broken down into sub-categories. The individual categories and sub-categories are also scored out of 100, with 100 the best. The overall Trade and Investment Risk Index score is calculated using the average of the Economic Openness, Government Intervention and Legal sub-component scores.
- Economic Openness: Analyses a country's openness to foreign investment and international trade. This is generated from indicators such as import, export and foreign direct investment (FDI) values as a percentage of GDP, which are used as a barometer of openness. A country that is more open to private and foreign businesses will score more highly on this indicator.
- Government Intervention: This score is composed of information on taxation and the availability of financing. The scoring system favours countries which offer lower taxation and open, sophisticated financial markets with easy access to loans.
- Legal: This score reviews the strength, transparency and efficiency of the legal system and bureaucracy in a given country. It measures the extent to which the rule of law is upheld, the prevalence of corruption, and the delays and costs involved with the bureaucratic procedures required to set up a business.
Foreign Investment Climate Overview
The Djibouti government is actively courting foreign investment and the legal system does not discriminate against foreign firms. In fact, foreign companies making large investments frequently secure extended tax breaks and other incentives.
Incentives for Manufacturing Relocation
In addition to bespoke concessions provided for large foreign investments on a case-by-case basis, there is a default set of tax incentives in the Investment Code. The Investment Code contains three preferential regimes: Regime A, Regime B and the Free Zone Code.
Foreign Trade Zones/Free Ports/Trade Facilitation
Free Trade Agreements
Djibouti is a member of the Common Market for Eastern and Southern Africa (COMESA) and the World Trade Organisation (WTO). COMESA maintains a common external tariff for non-COMESA imports, ranging between 0% and 25%. Djibouti is a member of COMESA’s free trade area, although not all the member states subscribe to it. Djibouti has signed bilateral investment treaties (BITs) with France, Malaysia, India, Egypt and Switzerland. The BITs with France and Switzerland entered into force in 2010 and 2001 respectively. Djibouti has not yet concluded any tax treaties with other countries.
The Djibouti franc has been pegged to the US dollar since 1949 and the peg has been almost unchanged for two decades.
There are no foreign exchange restrictions and foreign firms are entitled to repatriate profits. There are no indications that investment remittance policy will change in the near future. Direct currency transfers are the only practical method of remitting profits. Converting or transferring funds and the international flow of cash are not constrained by any official limits. Credit is available from the local market with no structural restrictions on foreign entities.