ON June 16, as the agreement that formally sees IWH CREC Sdn Bhd become a 60% shareholder in the Bandar Malaysia development as well as its master developer was signed, Prime Minister Datuk Seri Najib Razak announced a slew of incentives for the massive project.
However, the carrot being dangled for both Bandar Malaysia and its sister development, Tun Razak Exchange (TRX), located just 3km away, has not gone down well with some quarters, particularly the developers.
At the core of the issue is whether the incentives are necessary as the projects are in a strategic location in Kuala Lumpur. Apart from that, the projects will boast strong connectivity via the upcoming mass rapid transit lines and the planned high-speed rail linking KL with Singapore.
In other words, both developments already have strong advantages as far as investor attraction is concerned, according to market players. Piling on tax incentives may seem excessive.
A market insider tells The Edge that by dishing out the incentives, the projects will have such a strong pull that it will disrupt the KL office market further as the playing field is no longer level. This amounts to the government crowding out the private sector for the benefit of government-linked endeavours.
The government wholly owns TRX and has a 40% stake in Bandar Malaysia.
Both projects are the legacy of controversial 1Malaysia Development Bhd (1MDB), a strategic development fund wholly owned by the Ministry of Finance.
The cost of the incentives is significant, mainly in terms of forgone revenue through tax exemptions, remissions and tax deductions (see table). While this signals Putrajaya’s determination to see the success of both projects, the gains for the government for doing so is less clear.
Several economic and taxation experts The Edge spoke to note that some of the incentives appear unusual at various levels.
One economist thinks that the packages are “overly generous” while another feels that the projects “should not exactly be high priority” for the country at this time.
A notable example is that for TRX — qualified companies will be able to claim a 150% tax deduction for rental of TRX premises for a decade. This means a company occupying TRX premises would see 150% of the amount it pays as rent be deducted from its taxable income for 10 years, resulting in lower taxes paid.
While this is similar to the double deduction incentive that is commonly afforded for expenses such as interest costs, R&D or export-related expenses like freight charges, such deductions for rental of premises is not common, says one tax practitioner.
Another economist also questions the fairness of allowing such distortion in the market. “How can one development get such benefits while the others don’t?”
In addition, the way the incentives are tailored for a specific entity in Bandar Malaysia — master developer IWH CREC and its wholly-owned subsidiaries — seems to defeat the purpose of tax stimulants in the first place, says a senior tax consultant, who explains that in theory, the primary goal is to spur rapid development or activity in a particular area.
Luring investments
The primary justification for the incentives appears to be to woo investors. That is the reasoning in the case of Bandar Malaysia, according to Iskandar Waterfront Holdings Sdn Bhd (IWH) executive vice-chairman Tan Sri Lim Kang Hoo, whose vehicle Credence Resources Sdn Bhd controls an effective 22% of the development.
In an interview with The Edge, Lim says the incentives for this project should be viewed in the context of the big picture concerning investments in the region.
He adds that they are offered to the world’s top 500 multinational corporations (MNCs) and top 100 financial institutions.
“There is so much competition around us … our neighbouring countries and the region at large are offering all kinds of incentives to attract investors,” he says, adding that the “reward” for the nation will be job creation.
“Imagine if one such financial institution sets up a regional office in Bandar Malaysia ... we’re talking about thousands of jobs to be filled.
“If you look at China Railway Group Ltd’s (CREC) decision to have a regional office in Bandar Malaysia, this alone would mean a few thousand employees. And there are many more [global players] expressing interest to come in.”
Credence Resources is the 60% shareholder in IWH. The remaining 40% is owned by the Johor government via its investment arm Kumpulan Prasarana Rakyat Johor. IWH, in turn, owns a 60% stake in IWH CREC while Chinese construction firm CREC, which is dual-listed on the Shanghai and Hong Kong stock exchanges, holds the remaining 40%.
At press time, the Ministry of Finance had yet to reply to The Edge’s queries.
Its wholly-owned unit TRX City Sdn Bhd, which is the master developer of TRX, says the incentives for the project are aimed at attracting long-term investors and tenants. However, it stresses that the core attraction remains its fundamental value propositions.
TRX City CEO Datuk Azmar Talib says the incentives are merely sweeteners and not meant to get companies to relocate to the development on that basis alone. He adds that early investors in TRX were already thinking of relocating or expanding operations when they were approached.
“The incentives are designed to offer short-term relief for the costs of relocating to TRX, to kick-start the district as a fully operational financial services hub,” says Azmar in an email reply.
He adds that the limited period for the incentives will protect the country’s tax base and reduce arbitrage.
Bandar Malaysia incentives may widen
The incentives for TRX were gazetted in 2013 when the project was still being undertaken by 1MDB. Those for Bandar Malaysia, however, have yet to be passed into law.
According to IWH’s Lim, the master developer of Bandar Malaysia had received a formal letter from the government in August, stipulating the promised incentives to IWH CREC as well as companies ranking among the world’s top 500 MNCs and the top 100 financial institutions.
And the developer’s incentives for Bandar Malaysia may not necessarily be limited to IWH CREC, says Lim, who states that the master developer is currently seeking strategic partners to jointly develop the Bandar Malaysia land, which measures 486 acres.
He says the company is looking for pre-qualify developers, consultants and other players this month, after which it will invite proposals to be considered for the final master plan. The master developer also intends to help its future strategic partners request tax incentives from the government.
“People are approaching us every day. But we will choose our partners carefully, especially for Phase 1, because this phase is very important. It is going to be our showcase to the world,” says Lim, whose flagship Ekovest Bhd recently clinched a deal to sell a 40% stake in the Duta-Ulu Kelang Expressway concession for RM1.13 billion cash.
“It’s a national project. And it’s a very big project for the country.
“Once we have identified them, we will know what [kinds of] incentives these investors need. Then, we will write to the government to apply for them on their behalf.” He says ultimately, the decision would be the government’s.
“If not, these investors will not come in and instead will go elsewhere. So, it’s just like what Mida (Malaysian Investment Development Authority) is doing — customising incentives to suit individual investors.”
However, if the primary objective is to draw investors, would it not be more prudent to offer the incentives for a broader area?
One example would be to declare tax benefits for MNCs coming into anywhere within the federal capital, where fears are growing of an oversupply situation vis-à-vis the office space market.
On the face of it, this may make more sense than introducing incentives for specific projects or companies in what seems to be a challenging period in the market, which, in turn, may heighten the pain for other players.
Drawing more investors to the overall market may help alleviate the oversupply pressure. One economist says that in general, tax incentives cannot be discriminatory if they are to be effective.
“If it is only given to certain companies to the disadvantage of others, then it becomes detrimental and distorts the playing field. You can’t give preferential treatment to foreign investors to the detriment of local players too,” the economist adds.
But that will not work, claims IWH’s Lim. He says any such initiatives must be planned around a specific location to be effective, citing the example of Dubai and Abu Dhabi where similar incentives were given for special economic zones.
Instead, Bandar Malaysia will lift the present market situation, says Lim. He explains that while the project will go on for roughly 10 years through various phases, the players involved will bring in a lot of professionals, including engineers, architects and other specialists.
“So, for this period, all these people will take up the existing offices, apartments and hotels around KL,” he says. “This will boost hotel [occupancy] rates, apartment prices and office rental rates [in the city].”
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