This article first appeared in The Edge Malaysia Weekly on January 23, 2023 - January 29, 2023

With the grim outlook for the global economy in 2023, the ability to draw quality investments is essential to providing a buffer against the economic downturn. As the government reviews its tax incentives for investments, The Edge speaks to several companies and trade associations on the incentives or allowances they are hoping for to help them grow.

Managing director and president of Shah Alam-based automated test equipment (ATE) manufacturer QES Group Bhd

The government should increase FDI (foreign direct investment) and DDI (domestic direct investment) in semiconductor wafer fabrication and related activities as there is already a large presence of test assembly plants in Malaysia. We need incentives — such as lower company income tax or tax free, training grants and matching research and development (R&D) grants — for technology companies to attract both local and overseas talents to ensure Malaysia remains competitive in the semiconductor, medical technology and E&E (electrical and electronics) sectors. Continuous incentives are needed for reinvestments and building up a sustainable and world-class ecosystem to support FDI in high-technology segments.

Malaysian Investment Development Authority (Mida) has provided clear and transparent criteria for incentives thus far. In terms of lateness, as a country, Malaysia should act much faster than other Asean countries such as Vietnam, Indonesia, the Philippines and Thailand, which have been coming up strongly to attract FDI in the light of US-China trade issues.

Singapore has been the only Asean country to have multiple wafer fab FDI in the past few years as its government acted with speed and agility to ensure expansion related to wafer fab remains in the republic. Besides the usual tax incentives and allocation of low-cost industrial land for these FDI, the Singapore government is also setting up R&D institutions such as the Agency for Science, Technology and Research (A*STAR) to drive and focus on both medical tech and semiconductor research.

The Malaysian government should learn from South Korea, Taiwan and Singapore where the respective governments had set up R&D institutions, where collaborations between government and private industry players have yielded excellent results for the long term towards the targeted segment.

The world is definitely heading towards greater trade protectionism initiated by the US-China geopolitical tension. More domestic investments certainly will help Malaysia in the long run to be self-reliant but it will take many years. As we are a small country, businesses are definitely concerned and we need to work closely, [be] Asean-centric and be neutral to mitigate the rising trade protectionism.

Skilled talents, especially in mechanical, E&E and software engineering, are in demand everywhere. The situation is more severe in Penang due to the sheer increase in the number of new factories setting up there in the past two years or so.

The Malaysian government should allow skilled foreign engineers to come in to ease the severe shortages as our university and college graduate talent pool is restricted, and the courses they have studied are generally not tailored towards supporting industry players’ needs.

Larger companies in Penang have resorted to training their own people as a mitigating measure. However, this is not a long-term solution as the SMEs (small and medium enterprises) may not have a big budget and when the market is down, it could impact their priorities [when it comes to] training.

Executive director of Penang-based glove maker and property developer Iconic Worldwide Bhd

In Malaysia, there are no tax allowances specifically for the glove manufacturing sector. Therefore, it is essential for the government to introduce a dedicated tax incentive scheme to encourage expansion and growth in this sector. Malaysia is one of the world’s main exporters of rubber gloves, taking up 65% of the market share. It is essential for the government to understand the significance of this industry and cultivate it, so that Malaysia continues to be the industry leader.

In terms of R&D and skilled talents, the government could play a part by getting more involved in promoting greater partnerships between local educational institutions and industry players for the benefit of exchanging skilled talents and knowledge. Industry players will be able to cultivate the best talent pool while interns and fresh graduates will receive the best exposure to the industry workplace. The government could also play an active role in promoting local products internationally.

Greater trade protectionism moves in the US will definitely affect the industry as the country is one of the largest glove consumers. Malaysia exports 80% of the end-product of manufactured gloves to the US and Europe. It is definitely a concern for export businesses as it will have a strong impact on the industry, the overall export market and Malaysia’s GDP (gross domestic product). Therefore, it is essential for us to explore ways to improve the quality and efficiency of our products and stay competitive through new improvements and innovations. This would require support from the government as a domestic investment for R&D is essential for us to survive and grow the business in this challenging environment.

The issue of labour shortages is one that is nationwide. Policymakers have to address this issue and need to bring back low-skilled and skilled foreign labour to fill the industry gap. However, we are not severely impacted by this as our current workforce is 100% local. Since the pandemic, we have been experiencing shortages in the local workforce and have had to resort to providing transport and sourcing employees from other states to solve this issue. We have also integrated an automation system into our production lines to reduce the dependence on manual labour.

Executive director and group CEO of clean energy specialist Solarvest Holdings Bhd

Energy efficiency has been a barrier in expediting the adoption of clean energy as intermittency or the sporadic availability of natural resources such as wind and solar has been the bane of the matter. A battery energy storage system (BESS) is effective in addressing this issue, but it also comes with its own set of limitations. Depending on usage, it can be costly and may require a sizeable storage area. Though we may have reached a certain degree of advancement in harnessing green energy, we have yet to attain the same for storage. Hence, we have to make do with what is currently available until there is a better solution.

With that, the introduction of financial subsidies such as exemptions on Sales and Service Tax (SST), (exemptions on) import and excise duties, as well as other tax incentives such as the extension of the Green Investment Tax Allowance (GITA) could be useful in improving the financial feasibility of employing BESS in operating facilities.

The development of green mobility in Malaysia is still in its nascent stage. Market acceptance of electric vehicles (EVs) is lower than that in developed countries such as the US and China due to high initial purchase prices, subsequent maintenance costs, as well as the lack of charging infrastructures. Lower import duty that inevitably lowers consumers’ purchase cost is an important step in encouraging the use of EVs in the first place.

As ESG (environmental, social and governance) becomes an increasingly important corporate sustainability agenda, it encourages the wide application of green tax incentives in businesses, which, in turn, boosts Malaysia’s competitiveness in attracting foreign investments.

Formulating a clear and transparent tax incentive calls for simplicity and accountability of the tax administration. The easier a tax is to understand, the higher the voluntary compliance by taxpayers. High public acceptance would also lead to lower enforcement costs for the Malaysian government.

GITA and the Green Income Tax Exemption (GITE) were introduced to incentivise sustainable development efforts. This helped to accelerate the use of ESG-focused technology and projects, which attracted investments to further develop the clean energy ecosystem.

Nonetheless, the government should consider providing timely information on the effectiveness of such a tax system. The report should detail the aspects of definition and measurement of tax expenditures, coverage, presentation, as well as usage of tax expenditure accounts.

To strengthen the bridge between academics and clean energy industry players, the government can consider providing subsidies and resources for universities to develop hands-on training and programmes that attract interest and talents into the industry.

There are many areas within the ecosystem that need improvement, but the aforementioned issues, if fully addressed by the government, are enough to encourage industry players such as Solarvest to invest and nurture the necessary technology and infrastructure.

Head of corporate communications of the International Air Transport Association (IATA)

From the perspective of the aviation industry, we urge the Malaysian government to provide financial and regulatory support in the form of incentives in two areas. The first is on allowing and promoting the use of technology in aviation for both passenger and cargo processing. The second is to boost the production of sustainable aviation fuel (SAF).

The aviation industry has committed to achieve net zero carbon emissions by 2050. This will be done through an energy transition focused on SAF, new aircraft propulsion technologies like hydrogen and electricity, continued improvement in infrastructure and operational efficiency, use of approved offsets, [and] eventually including carbon capture and storage technology.

SAF is expected to account for 65% of carbon mitigation in 2050. It will be the largest contributor to the aviation industry’s sustainability. However, the supply of SAF currently is unable to meet the ever-growing demand across the industry. In 2022, every drop of SAF was used and more would have been purchased if the supply were available.

We need governments to incentivise the production capacity of SAF. It is the most effective policy tool that reduces risk and accelerates the energy transition. Positive incentive-based policies would enable the transfer of publicly sourced revenues towards defined programmes or direct financial project support, without attached obligations or regulations other than the use of SAF. These could include (but are not limited to) well-supported R&D programmes, capital support and loan guarantees for production facilities.

Incentive-based policies also provide the benefit of being able to support local jobs and communities, driving the development of environmentally-friendly supply chains and local sectors, which in turn supports the creation of domestic energy security.

President of the Malaysian Rubber Glove Manufacturers Association (Margma)

As an industry that undergoes continuous advancement and expansion to keep its pole position of being the largest producer of rubber gloves in the world, it is only fair that the industry be accorded reinvestment allowance. This could benefit the country [manifold] as it would mean that our local producers will continue to expand their operations here in Malaysia.

The way forward to remain a world leader is through intensive R&D on process, engineering and polymer chemistry. R&D costs can be offset via a tax rebate mechanism.

There is a need to foster more domestic investment as trade protectionism is getting more rampant, especially after many countries [faced a shortage of] personal protective equipment (PPE) during the Covid-19 pandemic. For example, countries are promoting the exercise of PPE manufacturing within [their borders] and guaranteeing that government hospitals will buy such products made within, even if there is a need to buy at higher prices. This is already happening in the US and certain countries in Europe.

Margma has been suggesting a visible centralised data system for all R&D that is completed or ongoing in the country. A lot of R&D is currently done in silos by universities and research organisations, without much visibility to the industry, hence its pickup for commercialisation is minimal. Furthermore, the lack of knowledge on what R&D has been completed may result in duplicity on some R&D, which is a sheer waste of time and resources. There should be more concerted effort in place to match industry needs and the industry would certainly welcome and take the best to commercialise it.

There should also be room to ensure the application process for R&D grants is made much easier for industry players with proven track records and expertise. Proven industry players with track records will have certainty about the outcome for the R&D.

Talent is currently still lacking for the industry and there is an urgent need for higher [educational] institutions to churn out better talents, especially in TVET (technical and vocational education and training) to reduce industry dependency on foreign workers. Currently, our pool of local graduates may not have the “perfect fit” to fulfil the industry’s needs, but via an apprenticeship or journeyman type of training, there will be a match between personnel education and skills, with manufacturers’ requirements.

The next frontier will be the incorporation of AI (artificial intelligence) technology in rubber glove production processes and more local talents will be needed in this field.

The rubber glove industry is currently working on its last mile of automation in the rubber glove production process. This is most significant as the industry will be focusing on two key areas, namely packaging and defects detection. Upon completion of these two key processes, the industry would be complete in its automation process and heading towards the fourth industrial revolution (IR4.0).

The industry is also looking into improved raw materials like natural rubber and synthetic, specifically in elastomer chemistry, that can be greener with bio-based additives.

President of the Federation of Malaysian Manufacturers (FMM)

Most companies have exhausted their reinvestment allowance (RA) incentive period of 15 years. While the special RA, introduced under the National Economic Recovery Plan, has been extended until the year of assessment 2024, the industry calls on the government to consider further extending the special RA period or removing the time bar for real benefits to accrue since companies reinvest continuously at different times. The government could introduce a graduated scale of support to expedite upgrading and/or diversification.

There has also been a lack of assistance to support trade initiatives for industries to expand their market access, as many have faced severe impact on their existing markets due to the pandemic and supply chain disruptions. [Support can come in the form of] tax incentives, such as lower corporate taxes, or assurance of market access through government and government-linked companies (GLCs) procurement and multinational corporations (MNCs), by encouraging large companies to participate as anchors in vendor development programmes. Such assistance will help SMEs build and upgrade their capacity and capabilities to meet their anchors’ (customers’) requirements, expand export activities and better integrate with the local and global supply chain.

In the case of R&D investment, FMM has been calling for the liberalisation of the double deduction incentive for R&D expenses to allow for the automatic double deduction for all companies, including mid-tier and larger companies, given their potential in spurring innovation and creativity, with no cap on the threshold of expenses and no time bar.

FMM has also called for a more liberal interpretation of R&D, especially for SMEs. The government should support adaptive technology as acquisition of established technology could lead to upgrading of indigenous capacity in creating new technologies or applications. Acquisition of established technology helps a company to move up the value chain faster rather than reinvent the wheel. This is a phenomenon seen in emerging nations, which do not have to undergo the same stages of development as developed or developing countries like Malaysia — they could jump-start to a higher level of technology usage and expertise.

Building a bigger pool of highly trained TVET graduates will attract high value-added investment, drive productivity and enhance innovation, which could indirectly help minimise the B40 group. In the long term, it would also result in a reduction in dependence on foreign workers.

For the purpose of reducing the reliance on foreign workers and training the local labour force, FMM proposes to set up a dedicated TVET Apprenticeship Fund to fund apprentice programmes by employers to close the skills gaps among locals as the industries move up the value chain.

As such, FMM suggests 60% of the levy collected from foreign workers be channelled towards a National TVET Apprenticeship Fund. FMM has, in its 2023 budget wish list, proposed that the government provide a seed fund of RM100 million to kick-start this fund.

The remaining 40% of the levy should be channelled towards automation and IR4.0 technology implementation to support high-technology and high value-added manufacturing activities. In this regard, FMM has proposed that to kick-start this National Automation Fund, the government put in a seed fund of RM500 million, which will then be further topped up with the foreign worker levy contributions.

Last but not least, given the increasing need for industries to comply with ESG requirements, especially when it comes to trade, investment and financing, there is a need for more incentives to support SMEs that have invested or are going to invest in ESG initiatives in their operations.

President of the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM)

Malaysian businesses are interested to invest in agriculture (smart farming technology in sustainable food production and processing, and halal food), green manufacturing (renewable energy, electric vehicles, solar, and reuse and recycle materials) and green buildings (green building system, green township and green data centre).

Investment in these industries requires support and facilitation via development programmes, facilitation fund, incentives, grants and soft interest rate loan for automation. More importantly, [it requires] the easing of cumbersome regulatory and compliance costs as well as the ease of application and approval process.

Many times, industry players need to go through a very long and tedious process to apply for investment incentives. Moreover, incentives are often without a proper standard timeline (deadline) to process the investment incentives, [so much so that] the offer period might be over before the approval of the incentives is attained.

In addition, there is a lack of advice on which incentives are suitable for businesses, and the rejection of application comes without reason(s) given or no follow-up. At times, it was found that different agencies were kicking the can down the road. As a result, the delay or a long waiting time frustrates businesses [that want] to apply for the incentives.

The Socio-Economic Research Centre (SERC), the think tank for ACCCIM, suggests reforming policies for tax incentives that can give immediate relief to investors without providing overly generous tax incentives. Such policies include:

setting time limits on incentives, sending a signal to potential investors that there is a limited window for benefits;

fostering investment in plants and machineries by reducing the cost of capital. Although this effort has a revenue cost, it goes a long way in encouraging investment;

making incentives available automatically, signalling to investors that the government is making the investment process friendlier;

publicly announcing investors who have benefited from incentives, helping to increase transparency and minimise undue rent-seeking activities; and

pursuing a time-bound plan to reduce barriers to investment.

Malaysia has been lagging behind some regional peers in attracting FDI, though some industries such as E&E products have benefited from the US-China trade tension.

It must be noted that the days of competing on offering lower tax rates to attract FDI will come to an end following the implementation of a global minimum tax rate of 15% under the Organisation for Economic Co-operation and Development/Group of 20 (OECD/G20) nations’ inclusive framework on base erosion and profit shifting (BEPS), which brings together over 135 countries and jurisdictions.

From the competitive tax perspective, Malaysia could lose its competitive edge in attracting FDI but this can be compensated by other non-tax factors — good investment climate and better investment facilitation, good governance as well as predictable regulatory environment, backed by credible economic and financial policies and stable political conditions. In addition, the supply of productive and skilled manpower as well as the provision of excellent software and hardware infrastructure to enhance our nation’s competitiveness.

The review and consolidation of existing incentives based on the cost-benefit analysis, and the introduction of new incentives are crucial to make them relevant in a business environment and investment landscape that are constantly changing.

Businesses and investors want policy certainty and clarity in terms of cost and tax and non-tax competitiveness for making informed investment decisions.

The investment climate is especially crucial for determining the effectiveness of incentives in attracting investment. Although lowering effective tax rates helps to boost investment, the effect is stronger if augmented with a good investment climate and better investment facilitation.

Legal guarantees for investors and simplified incentive regimes also have positive effects on investment. Some investors had spent considerable time qualifying for incentives, implying that these special benefits also impose costs.

Meanwhile, it is imperative that the nation is equipped with a highly skilled workforce that can meet the industry’s demand. Malaysia needs to have more students enrolling in the fields of science, technology, engineering and mathematics (STEM) to catch up with the regional tech race.

Skilled workers currently make up about 28% of the workforce. Malaysia had aimed to achieve a target of 35% skilled workers by 2020. The country needs at least 45% of the workforce to be skilled workers by 2030 to realise the goal of becoming a developed nation.

More support [is needed] for employer-led/demand-driven training models such as “Place and Train”, teaching factories and co-ownership models in meeting industry skills needs and addressing the current manpower shortages and skills mismatch.

The government should allow an open varsity or platform where higher learning institutions can offer their online courses. Students can pick and choose whichever subjects they can afford. Degrees, diplomas or certificates are then offered by these higher learning institutions based on a combination of credits to make up the requisite passing score.

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