Revamping tax incentives to fight for FDI
Malaysia making strategic move in bid to step up its game
AT a time when the battle for foreign direct investments (FDI) in the region has intensified and reached new heights, Malaysia is making a strategic move to step up its game.
As widely speculated ahead of Budget 2020, the country will be implementing the much-needed revamp of its tax incentives as seeks to capture the strong flow of FDI entering the region as a result of the Us-china trade war.
The Finance Minister, in tabling the Budget, acknowledged this, saying that the country intends to capitalise on the opportunities arising from the trade war.
The government said it is reviewing the tax incentives it currently offers to foreign investors, and will offer new, more attractive - and even customised - incentive packages to attract more FDI into the country.
FDIS have been rapidly flowing into the region as companies scramble to relocate their production facilities out of China to avoid paying steep tariffs imposed by the US.
While Malaysia has been among the beneficiaries of this move, the country is faced with stiff competition in the region, and of late, appears to be losing out to some of its neighbours.
For one, there is the rise of Vietnam as a highly attractive investment destination, with the country touted as the region’s biggest beneficiary of the trade war, partly due to the lower cost of doing business and better market access to the US.
Investments flowing into the region due to the widespread protests in Hong Kong on the other hand appear to be benefiting Singapore more than Malaysia.
A recent report by The Economist cited Singapore as the country set to benefit from the mayhem in Hong Kong, due to the striking similarities between the two nations with their self-governing, Chinese majority, efficient and uncorrupt bureaucracies, and their positions as financial, commercial and shipping hubs.
Another strong competitor for FDI in the region is Indonesia, with the sheer size of its market as among its key strengths.
The call for a revamp of Malaysia’s tax incentives is not new.
While the country already has in place a comprehensive set of tax incentives, observers have noted that some of these incentives have become obsolete and need to be repackaged to keep up with the times. Economist Jomo Kwame Sundaram is among these voices, recently calling on the government to abolish tax incentives that are no longer relevant, in order to improve the nation’s taxation system.
This, he was quoted as saying, was as business conditions had changed significantly over the years and some of the incentives offered were no longer relevant.
Also calling for further tax incentives to be introduced is OCBC Ltd chief economist Selena Ling.
“While Malaysia may not be able to compete well with the likes of populous Indonesia and Vietnam, it has carved out a niche in medium-to-high-end manufacturing sector that is more technologically-focused, such as chipmakers.
“That should be safeguarded and enhanced further with potential tax breaks, among other initiatives,” Ling said recently.
Finance Minister Lim Guan Eng during the Budget announcement yesterday said a ‘Special Channel’ would be set up to attract investments from China.
For the first half of this year, he said approved FDI into Malaysia rose by 97% to Rm49.5bil.
Approved manufacturing FDI from the US was the highest at Rm11.7bil, followed by China at Rm4.8bil
“The protracted trade war creates a unique opportunity for Malaysia to again be the preferred destination for high value-added FDI,” Lim said in his speech.
Malaysia is also looking to speed up the approval of foreign and domestic investments, with the setting up the National Committee on Investment (NCI).
The review and revamp of the country’s existing incentive framework had actually started earlier this year, with the government relooking the Promotion of Investments Act 1986, Special Incentive Package and incentives under the Income Tax Act 1967. The new framework is expected to be ready by January 1,2021.
Among the major announcements by Lim were an up to Rm1bil worth of customised packaged investment incentives to be offered annually over five years, as part of the push to attract targeted Fortune 500 companies and global unicorns in high technology, manufacturing, creative and new economic sectors.
To qualify, Lim said the companies must invest at least Rm5bil each in Malaysia.
At the moment, Malaysia’s incentives for foreign investors wanting to set up operations here include a tax rate of as low as 17% for companies with a turnover of RM500,000 or less.
Special incentives such as tax exemptions, pioneer status and re-investment tax allowance are also already present in the country’s policies.
Malaysia has one-stop agency called the Incentive Coordination and Collaboration (ICCO) which functions to fulfil the needs of foreign investors looking to invest in the country. There are 121 incentives available at the moment, involving 12 ministries and 28 agencies. Moving forward, the fight for FDI is expected to only get more intense as countries in the region grapple with weakening global economic conditions.
It is hoped that the improved set of tax incentives, along with other measures announced, will increase Malaysia’s attractiveness in the eyes of foreign investors and ultimately help to strengthen the economy for the tough times ahead.