Attracting FDI and maintaining top ranking in Islamic financing

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The 2010 Budget announced on Oct 23 was by no means reflective of the lacklustre economic scenario in Malaysia during the year brought on by the global economic meltdown.

While Malaysia may have escaped the full brunt of the effects of the global economic recession, it has been recognised that continuous efforts must be made to stimulate the Malaysian economy to speed up the recovery process.

The budget also proposes to transform the Malaysian economy from that of a middle income economy into a high income economy via a comprehensive innovation process.

This article highlights the efforts proposed in the area of foreign direct investment (FDI) and the Malaysian capital markets.

FDIIn recognition of the role to be played by FDI and the capital markets sectors in the recovery and transformation process, Minister of Finance Datuk Seri Najib Razak proposed a number of measures to encourage and stimulate these sectors.

It should be noted that the measures proposed are in addition to those already put in place by the government in the last two years.

The government has already liberalised 27 services subsectors as well as the financial sector. These include the abolition of the local shareholding requirement for the 27 services subsectors.

In addition, the Foreign Investment Committee (FIC) guidelines have been liberalised.

In this respect, foreign investors may now set up wholly owned companies in Malaysia to undertake all economic activities. However, the requirement for local equity participation is still applicable where there is a dilution of bumiputera interest.

The government’s commitment to encourage and secure FDI can be seen by its commitment and measures adopted to relax conditions and simplify procedures for foreign companies to operate in Malaysia.

In relation to the manufacturing and services sectors, it has appointed the Malaysian Industrial Development Authority (Mida) as its principal agency for the promotion of these sectors in the country.

Mida is committed to assisting companies proposing to invest in these sectors by being a one -stop centre for inquiries, dissemination of information and assistance to implement projects. 

The government has also taken aggressive steps to attract FDI from the Middle East, China and India.

This has yielded some impressive results. For instance, Malaysia has secured an investment from a Saudi Arabian company amounting to US$1.5 billion (RM5.07 billion) for a high-impact project to be undertaken in collaboration with 1Malaysia Development Bhd (1MDB), a sovereign wealth fund. 1MDB has also committed to invest US$1 billion into the project.

The government’s commitment in this area is further fortified by the announcement that Khazanah Nasional Bhd and Permodalan Nasional Bhd (PNB) — both being agencies for the government’s investments — will enhance their collaboration with foreign investors in the areas of education, tourism and infrastructure.

As part of the government’s efforts to encourage FDI, it appears that foreign investors will be allowed equity ownership in companies and to participate in joint ventures in local

projects in conjunction with Khazanah and PNB.

Capital markets

The sustainability of any high income economy will depend on, among other things, a strong and sound financial system. The role of this sector and its impact on the strongest and largest economies in the world cannot be more obvious, as evidenced by recent global economic events. It is thus imperative that this sector not only be stimulated but also be resilient and have sustainable growth. 

In an effort to invigorate the activities on Bursa Malaysia and simultaneously attract investments by foreigners and locals, the stock market will be further liberalised and measures adopted to increase efficiency. In this respect, the government commits to undertake the following measures:

•    The commission sharing arrangements between stockbrokers and remisiers will be liberalised in two stages with a view to encourage retail participation in the stock market.  With immediate effect, flexible brokerage sharing (with a minimum of 40% for remisiers) will be allowed. The commission sharing arrangements will be fully liberalised from Jan 1, 2011.

•    Foreigners will be allowed to set up wholly owned companies which undertake corporate finance and financial planning activities in Malaysia. This represents a liberalisation from the present requirement of at least 30% local shareholding in such companies.

•    All public listed companies will be required to offer e-dividends to their shareholders. Stock broking companies are to provide e-payment options to clients to receive and make payments. These are expected to increase efficiency.

Malaysia is not resting on its laurels of being the world’s largest issuer of sukuks with approximately 62% or US$94.7 billion of outstanding global sukuks in 2008, but rather further measures are proposed to consolidate this position. To ensure the rapid development of financial services relating to Islamic finance, the following tax measures are proposed:

•    With effect from Sept 2, 2006, until Dec 31, 2009, the stamp duty payable on the principal or primary instrument of financing made according to the principles of syariah which is chargeable to stamp duty, is remitted by 20%.

This is provided that the instrument is approved by Bank Negara Malaysia’s Syariah Advisory Council or the Securities Commission (SC). It is now proposed that the above stamp duty remission be extended until Dec 31, 2015.

•    From the Year of Assessment (YA) 2008 to YA 2010 and subject to the relevant conditions being met, certain expenses incurred to promote Malaysia as an International Islamic Financial Centre are given a double deduction. It is proposed that the above incentive be extended until YA 2015.

•    The costs incurred to establish companies are generally not allowed a tax deduction save in limited circumstances. However, in respect of the costs incurred to establish companies undertaking licensed Islamic stock broking businesses incorporated under the Companies Act 1965, such costs will be tax deductible.

This is provided that the application to undertake the Islamic stock broking business is made to Bursa Malaysia from Sept 2, 2006, to Dec 31, 2009, and the company commences that business within two years from the date of Bursa Malaysia’s approval.

It is proposed that the above incentive be extended to applications received by the SC to establish Islamic stock broking companies until Dec 31, 2015.

•    Expenses incurred in the issuance of securities are generally viewed as capital costs for which no tax relief is available. As an exception, the costs incurred to issue Islamic securities under specified syariah principles are tax deductible provided that the same are approved by the SC.

This incentive is applicable until YA 2010.

It is proposed that the above incentive period be extended until YA 2015. In addition, it is also proposed that the above incentive is to be extended to the cost of issuing Islamic securities approved by the Labuan Offshore Financial Services Authority (Lofsa) with effect from YA 2010 to YA 2015.

•    With effect from YA 2007, where a company establishes a special purpose company (SPC) solely for the purpose of issuing Islamic securities, the income and expenses of the SPC will be deemed to be the income and expenses of the first mentioned company.

In addition, the SPC is exempted from complying with the Income Tax Act 1967 (ITA).

Among other factors, in order to qualify for the above, the SPC must be established under the Companies Act 1965.

It is proposed that the above treatment be adopted for SPC’s established under the Labuan Offshore Companies Act 1990 (OCA) which elect to be subject to tax under the ITA.

In this respect, it should be noted that companies established under the OCA and which carry on an “offshore business activity” (as defined) are normally subject to tax pursuant to the Labuan Offshore Business Activity Tax Act 1990.

However, with effect from YA 2009, such companies may elect to be taxed under the ITA.

•    With effect from YA 2008, profits paid or credited to any person in respect of Islamic securities (except convertible loan stock) originating from Malaysia issued in any other currency than ringgit and approved by the SC are exempt from Malaysian income tax.

It is proposed that the above exemption be extended to profits paid or credited in respect of Islamic securities approved by Lofsa.

In summary, it is noted that with respect to encouraging FDI, the steps already taken and proposed to be undertaken to convince foreigners to invest in Malaysia and undertake business activities in Malaysia are encouraging.

It is noted that one of the barriers to FDI in Malaysia has been the requirement for local shareholding although this has been progressively liberalised over the years.

In relation to the Malaysian capital markets, it appears that the Malaysian government’s aim is to make Malaysia an Islamic financial hub and consolidate its position as the leading issuer of sukuk.

Nicholas Crist is executive director and Nicolas Chen, director of KPMG Tax Services Sdn Bhd.

The views expressed in this article are the personal views of the writers, and do not necessarily represent the views of KPGM Tax Services.