COOK ISLANDS : COUNTRY AND FOREIGN INVESTMENT REGIME

Cook Islands Geography

Cook Islands Population, Lanuage and Culture

In 1595 the Spanish navigator Alvaro de Mendala became the first European to sight the Cook Islands; the Portuguese landed on them in 1606. The Russians named the Islands the Cook Islands after Captain James Cook who made 3 trips there between 1773-7. The Islands became a British Protectorate in 1888 and were annexed to New Zealand in 1901. In 1965 they became self governing in a free association with New Zealand from which they require support only in external affairs, defence and finances.

The Cook Islanders are Polynesians who are closely related in tradition, language, culture and customs to the Maoris of New Zealand. Although English is the official language Maori is also spoken. British missionaries ended cannibalism and made Christianity the predominant religion.

However Western occupation was accompanied by Western diseases which so devastated the indigenous population that by 1850 there were less than 2,000 inhabitants. The population of the Islands was estimated at approximately 21,000 people in the first quarter of 2009, but the total resident population was estimated at 12,000 at this time. Annual population growth is low.

In the 20th century it is economic difficulties and not disease which has kept the population low, with large numbers of Cook Islanders emigrating to New Zealand in search of employment.

Cook Islands Government

The Cook Islands are a self governing parliamentary democracy. The Islands have a prime minister, a cabinet, and a legislative assembly whose 25 members are elected every 5 years, most recently in September, 2006. Additionally the traditional tribal chiefs( the "Ariki") have their own house of representatives where they consider matters submitted by the legislative assembly.

The seat of Government is at Avarua, the capital town located on the Island of Raratonga. The Queen of England is the head of state in her capacity as Queen of New Zealand and New Zealand has a High Commissioner on the Islands. The Prime Minister is Jim Marurai (since 14 December 2004); The Deputy Prime Minister is Terepai Maoate (since 9 August 2005).

The legal system is based on English common law and equity. Since 1965 the Islands parliament is sovereign, meaning that it must approve and pass all new laws. The superior court of record is the High Court of the Cook Islands. From there appeal lies to the Court of Appeal and thereafter to the Privy Council in England. Legal services are provided by local and New Zealand lawyers.

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Cook Islands Economy and Currency

Both the New Zealand dollar and the local Cook Islands currency are legal tender on the Islands, with an exchange rate of around US$1 = NZ1.66 (August 2009).

The Cook Islands geographic isolation and their lack of natural resources have hindered the Islands' economic development. Most goods have to be imported and there is little to export in return: in 2005 exports stood at around $5.2mn against imports of approximately $81mn. Remittances from emigrants bridge only some of the gap and there is substantial external debt. The balance of trade for March 2009 quarter showed a deficit of $62.3mn. This had deteriorated by $4.2mn over the previous quarter.

Government profligacy led to a declaration of 'bankruptcy' in 1996. The impact of this default has been substantial and has created a negative international perception. Under pressure, the Government cut its workforce and costs by more than 50%, and sold assets. It tried to expand the mining and fishing industries, and to encourage tourism, but the drain of economic migrants to New Zealand fleeing the dire local situation added a further difficulty.

Agriculture provides exports of copra and citrus fruit. Manufacturing activities are limited to fruit processing plants and some clothing factories. Other exports include fish, jewellery, handicraft and mother of pearl shell. Trade is dominated by New Zealand with regular shipping connections from the port at Avarua.

By 2003, the government's efforts had borne fruit and the Islands' Finance Secretary at the time, Kevin Carr was able to announce that taxation revenue had almost doubled in the jurisdiction over the previous five years. The budget for 2004/2005 maintained a fiscally responsible strategy.

Citing tourism, the pearl industry and the fishing sector as the driving forces behind the economy of the Cooks, Mr Carr also reported a 1.5% increase in economic growth, and predicted that the Islands could achieve growth levels of 3.2% per year in the long-term. Tourist arrivals in 2003 at 78,000 were up from 72,000 in 2002. However, total visitor arrivals for March quarter 2009 (19,045) decreased by 22.0% when compared to the previous quarter (24,421) but slightly increased by 1.2% when compared to the same quarter in 2008.

After growing by 6.2% in 2006, GDP dipped by 1.1% in 2007, although preliminary data suggests that the economy rebounded well in 2008, growing by 5.4%.

Inflation was low at 0.3% in 2004. The solid economic conditions helped further improve the fiscal position over the year. Revenues from the four main taxes (VAT, income tax, import duties, and company taxes) were 9% higher than in the previous year. GDP ran at about US$5,000 per head. In 2005, it was estimated at around $9,100.

The Consumer Price Index (CPI) for June quarter 2009 was 118.1, up by 11.2% over June quarter 2008 and it continued to show an upward trend of 2.2% over March quarter this year.

The overall improvement in the fiscal position was recognized in October 2004 by Standard & Poor’s, which raised the long-term rating to BB- from B+. This is the fourth upward revision to the rating since an initial B-/C rating was assigned in 1998. However, the Cook Islands was put on credit watch in early 2005 because of the threat to the economy from cyclone activity.

The 2005/2006 budget recognized difficulties caused by cyclones early in the year. "There is evidence that the economy contracted in the March quarter of this year. There are some signs that the economy was slowing even before the cyclones. Moreover, the five cyclones that hit the country in February-March had a major short-term effect on the economy," said the Minister of Finance.

The minister continued: "Economic growth in 2005-06 will be lower than it would have been without the cyclones. The budget is premised on real growth of 2.4% in 2005-06, slightly below the long-term trend growth rate of around 3%."

The budget foresaw an operating surplus of $3.4m. GDP growth was estimated at 0.1% (2005).

The March quarter 2009 shows that gross turnover was $117.3 million for all industries in the Cook Islands. This is a decrease of 15.5% when compared to the previous quarter and a decrease of 6.4% when compared to March quarter 2008. Total Value Added Tax (VAT) collected on Sales and Income was $11.8 million for the Cook Islands in this quarter. The Wholesale & Retail Trade industry continued to contribute the highest VAT collected on Sales and Income with 37.9%, followed by Hotels & Motels with 16.5% and Transport & Communication with 14.5%. Net value added tax (VAT) for all industries was $5.6 million for March quarter 2009. This is a decrease of 12.5% when compared to the previous quarter and a further decrease of 12.0% when compared to the same quarter of last year.

The offshore sector started early with various pieces of legislation in 1981/82, and despite its small absolute size is the second biggest contributor after tourism to Government finances, although concerns have been expressed in recent years with regard to shrinkage of the finance industry. See Offshore Business Review for further details.

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Cook Islands Entry and Residence

The Entry, Residence and Departure Act 1977 states that anyone other than a Cook Islands citizen or permanent resident who wishes to live and work on the Islands must first obtain a work and residence permit. An application for a work and residence permit can now be made online.

Formal unemployment is low and there is a shortage of skilled and qualified workers in both the public and business/private sectors. Where qualified local persons are not available to fill a position, the foreign investor may recruit from overseas.

For short-term entry, passport, proof of sufficient funds, and onward/return ticket are required. For many nationals, a visa not needed for visit up to 31 days.

In August 2007, Foreign Affairs and Immigration Minister, Wilkie Rassmussen, announced that permanent residence permit holders who had lived outside the country for more than three years would be liable to lose their permanent residency rights.

In February 2008, Parliament passed the Entry, Residence and Departure Amendment Bill 2008, which amended the 1971-72 Act with respect to Permanent Residence (PR) and now allows the granting of up to 650 PR certificates, 150 more than the previous 500.

The amendment also required applicants not only to be of "good character" but to have a proven record of having made a "significant positive contribution to or investment in the Cook Islands in terms of skills, expertise, community work or financial investment."

There was also a new seperate category added, allowing unlimited number of PR certificates to be granted to those married to Cook Islanders or PRs, as long as they have been married for no less than five years.

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Cook Islands Business Environment

Business licenses are required to operate domestically, but not by offshore companies. Certain domestic activities are reserved to Cook Islanders.

Unless the entity falls within one of the stated exceptions the general rule is that all foreign companies or organizations that wish to set up a commercial operation in the Islands must first obtain approval from the Government and register their planned activities. A foreign enterprise is a business of which more than one third of the equity is owned by foreigners.

The investment code strongly encouraged joint venture participation with Cook Islanders but this requirement will be waived where such participation is not a practical proposition.

The full text of the Investment Code 2003 can be found here.

Under the Leases Restrictions Act 1976 a foreigner may lease land for up to 5 years without obtaining special permission. A foreigner wishing to lease land for more than 5 years needs to obtain the approval of a Government committee set up under the Act. A foreigner cannot lease land for more than 60 years and is forbidden from owing a freehold. A foreigner is defined as anyone who is not a permanent resident or a citizen of the Cook Islands.

Confidentiality is tight in the Cook Islands. The offshore registries are not open to a search by the general public and may be searched only by persons showing to the registrar a good and cogent reason for doing so. Fraud constitutes one such reason. Although under the International Trusts Act 1984 an International Trust must be registered annually for the first 5 years after its creation the registration requirements do not include disclosure to the registry of the names or details of the beneficiaries or settlor or the provision of a copy of the trust deed setting out the terms under which property was settled. Likewise under the International Companies Act 1981 a company is not required to file details of the beneficial owners either at the date of incorporation or in any subsequent annual returns.

Government officials and the employees of banks, insurance companies, trust & corporate entities are compelled to observe secrecy and failure to do so leading to an unauthorized disclosure will result in penal sanctions. There are some exceptions where criminal activity is involved, but this does not include fiscal crime.

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Cook Islands Import of Foreign Capital

There are no exchange controls in the Cook Islands.

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Cook Islands Investments by Foreigners

The Development Investment Act of 1977, administered by the Cook Islands Monetary Board, has traditionally been regarded as the basis for all incentives and concessions. Under the Act, any foreign enterprise (i.e, one with less than 66% local shareholding) must apply to the Monetary Board (in effect the Cook Islands Cabinet) to establish a new business. An Investment Code issued in 2003 (see above) listed the areas in which investment is restricted as well as those in which it is encouraged.

Foreign inward investment is generally encouraged. Incentives and concessions are available where the Government believes the investment will contribute significantly to the development of the Cook Islands and include such measures as:

• the imposition of tariffs on competing imports;
• tax relief by way of an accelerated depreciation allowance on capital goods;
• exemptions from customs duty and import levy;
• permission to lease land;
• work permits;
• tax concessions;
• training incentives, including allowances for the training and recruitment of Cook Islanders who are living abroad.

In addition to these incentives, the Government heavily encourages joint ventures with the indigenous population, and the Development Investment Code identifies desired investment sectors where the Government has deemed that development by potential overseas investors is desirable for the economic development of the Cook Islands. These areas do not necessarily attract incentives, however they are encouraged and welcomed by the Government.

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