This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 31, 2017 - August 6, 2017

In the last two decades, Labuan International Business and Financial Centre (IBFC) has evolved from an offshore to a midshore financial centre with a unique proposition. Labuan IBFC Inc CEO Danial Mah Abdullah talks about how it has remained relevant to the needs of individuals and companies beyond wealth management.

Personal Wealth: Could you tell us about Labuan IBFC’s growth and development?

Danial Mah Abdullah: Labuan IBFC has gone from strength to strength in its 27 years of existence. This has been demonstrated by the robustness of the financial centre, notwithstanding the current downturn in global trade and investments. We believe this is due to the fact that we have always adhered to international standards and practices while continuously improving our business environment, especially the facilitation of cross-border trade and investments as well as wealth management.

By offering a regional home to businesses across Asia, Labuan IBFC seeks to play an important role as a facilitator of trade and investment. The midshore centre’s unique qualities offer comprehensive options to global companies and businesses that are planning for expansion and looking to penetrate Asean’s burgeoning markets. We are very much Asia-focused as almost 70% of the incorporated entities are based in this region.

Thus, the constant and projected growth prospects in Asia have stood Labuan IBFC in good stead. In 2016, we recorded a growth rate of 6.3% in company incorporation. Currently, there are more than 13,400 companies registered with us. As at 1Q2017, the midshore centre is home to 55 banks, more than 200 insurance-related entities, 198 foundations and 384 leasing companies — establishing a strong and sound financial infrastructure.

Strategic initiatives were undertaken to transform Labuan IBFC’s financial system, which was previously dominated by banking and insurance players, to expand its offerings to include a wider array of financial solutions and services to meet the increasing demands of global investors. The increasingly liberalised marketplace combined with forces of globalisation and international regulatory reforms have altered the business and financial landscape in which we operate today.

An important strategic shift was undertaken in 2008 with the repositioning of Labuan IBFC — a bold step for the traditional offshore financial centre to become a vibrant international business and financial centre. The repositioning was a significant development and strategy to enhance its competitive edge. To complement this, a holistic review of the legislation and tax framework was undertaken to ensure that we could remain facilitative and flexible for business to be carried out at the midshore centre. New business services and solutions were identified, with a focus on wealth management and financial solutions.

In the spirit of constant change and improvement, in 2017, Labuan IBFC is embarking on a new journey to further refine the midshore concept by focusing on niche areas in which it has experienced tremendous growth over the years, such as leasing, commodity trading and captive insurance.

Labuan IBFC began repositioning itself as a midshore centre in 2013. What was the rationale for it and has the repositioning translated into a higher take-up of products and services?

We embarked on a journey to reposition ourselves from an offshore to a midshore centre as it offers both ease of doing business typically found at offshore centres and the high international standards of regulation and supervision found onshore a few years ago. Essentially, the exercise involved a lot more than a change in name or naming convention, as most people think it is. Midshore brings with it a change in the entire ethos that encapsulates Labuan IBFC. Our principles and philosophy in managing and running the financial centre have been built on strong standards of supervision, regulatory adherence and prudential requirements as we realised early on that we needed to ensure we are defined as such.

As you know, many typical offshore centres are island nations and are not part of a larger nation — like Labuan is to Malaysia. Thus, we have always been part of all the protocols the country adheres to, such as the anti-money laundering and anti-terrorism financing regulatory requirements. This is what sets Labuan IBFC distinctly apart from other offshore centres.

Hence, our move to midshore is simply a clear statement of where we stand in the onshore versus offshore landscape. Our advantage has always been that we are a proactive business-friendly regulator, and this is a trait we are happy to share with other offshore centres. In a way, we believe that we are “walking the talk” as a centre that offers ease of doing business found at typical offshore centres, but with international requirements on transparency and prudence.

Last November, Labuan IBFC said a tax review was in the works to harmonise the tax regime of Labuan IBFC with the national tax system. Did this exercise come as a result of the Panama Papers leak? Could you name some areas of the tax regime that will be harmonised?

The tax review was not in any way a result of the Panama Papers leak. Instead, it was the result of the general landscape — the requirement for transparency and the need to conform to initiatives such as the Common Reporting Standard (CRS) and Base Erosion and Profit Shifting (BEPS), which will soon be the new normal for all financial activities.

For Labuan IBFC, the need to conform to international regulatory requirements has always been key to our principles and the aim of ensuring the sanctity of the jurisdiction itself. Thus, the changes in the international tax landscape, which disfavours pure pass-through structures for those that are able to pass the test of ‘economic substance’, actually work in our favour. In fact, the unrelenting demand for transparency provides us an edge as we have always maintained a high regulatory and supervisory standard, along with our commitment to transparency.

Without a doubt, some international financial centres will have to alter the way they have been doing business, and this is not necessarily a bad thing for the industry. In a way, the current environment makes Labuan IBFC stand out as one of the well-regulated centres and we welcome the greater need for transparency.

It is worth noting that we are not a tax haven. We have put in place relevant legislation to allow the exchange of information with the tax authorities of Malaysia’s double-tax treaty partners as well as the tax information exchange agreements (TIEAs) signed by Malaysia. At this point, it is worth noting that the competent authority for all things tax at Labuan IBFC is, in fact, the Inland Revenue Board of Malaysia.

We are not a secretive jurisdiction and we have put in place a compliance requirement to ensure a well-regulated jurisdiction — stringent in regulatory compliance, yet provides an environment for business stability with legal and tax certainty. Guidelines and directives are regularly issued to assist our investors in matters of compliance.

There are three initiatives being undertaken this year. The first is the review of the legal framework. Could you elaborate on the aspects that are being reviewed? What changes can we expect?

Ensuring that our legislations are kept abreast with current developments has been an ongoing exercise since our inception. For example, several new Acts were introduced during the repositioning exercise — the Labuan Financial Services and Securities Act 2010, Labuan Foundations Act 2010 and Labuan Limited Partnerships and Limited Liability Partnerships Act 2010. There were also extensive amendments to the Labuan Financial Services Authority Act 1996, Labuan Companies Act 1990 (LCA 1990), Labuan Trusts Act 1996 and Labuan Business Activity Tax Act 1990 (LBATA 1990).

More recently, two legal provisions were inserted into the Labuan Business Activity Tax Act 1990 and were gazetted on Dec 30, 2015. These were in line with Malaysia’s efforts to continuously conform to the global tax transparency initiatives and international standards.

For 2017, the main focus of the review is enhancing compliance with the relevant international standards and best practices; facilitating the supervisory, regulatory and enforcement functions of the Labuan Financial Services Authority; facilitating business development and streamlining them with the relevant domestic laws.

Labuan IBFC respects and protects the right to confidentiality for each business and person. The Labuan legislations have put in place relevant legal measures to protect the confidentiality of businesses and individuals that allow them the protection and security of their businesses, family and wealth. This is not equivalent to tax secrecy as Labuan’s Exchange of Information mechanism has addressed this issue.

Not resting on our laurels, we believe that there is a need to better our offering. And the only way to do this is to review legislations which, as you can imagine, is an extensive exercise. It is not something that can be done overnight. The process will require a wide-ranging engagement with numerous parties to build a stronger Labuan IBFC. It is necessary that this engagement process takes place and is not conducted in haste.

What are Labuan IBFC’s plans for the future? What can investors expect?

We expect to intensify our efforts in growing niche growth sectors while keeping investors updated on the developments in international standards and best practices promoted by international standard-setting bodies. We will also continuously engage with the industry’s representatives to keep pace with the markets’ development.

As we are very much Asia-focused, Labuan IBFC continues to play an important role as a facilitator of trade and investment within the region. For example, we encourage investors and business owners to use us as an entry point to access larger marketplaces such as Asean and tap the opportunities created by the burgeoning markets. We are confident that as Asean and Asia grow, so will Labuan IBFC, which we hope will be the region’s intermediating jurisdiction of choice.

Additionally, Malaysia’s established Islamic finance ecosystem, coupled with our conducive legal and regulatory environment for shariah-compliant businesses, will pave the way for the centre to expand its range of solutions and services. We aim to become an innovative Islamic finance hub by offering our unique Islamic wealth management structures, which complement onshore Malaysia’s initiatives.

We are also keen to penetrate further into the Chinese market. We believe the country’s continued growth, even against a slower global economic backdrop, will benefit the region. We look forward to working closely with intermediaries and advisers in China towards creating a better understanding and appreciation of how Labuan IBFC can benefit Chinese enterprises and high-net-worth individuals.

Nevertheless, the challenge to conform to international regulatory requirements is a top priority. After all, a financial centre is only as good as its reputation. Rest assured, we will continue to implement initiatives that ensure effective tax transparency and curtail tax evasion while offering a business-friendly environment to investors and business owners.

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