Investing in ASEAN: Malaysia
“Saya suka berada di sini – or ‘I like it here’ – is a phrase that investors are using more often when referring to Malaysia,” says Justin Kuepper, who writes for a number of popular financial portals. “The country’s robust economy, supportive government, educated workforce and developed infrastructure has quietly transformed it into an attractive investment destination for international investors”.
Benefits & Risks
“Malaysia has an open state-centric and newly industrialized market economy. Between 1957 and 2005, the country reported gross domestic product (GDP) growth of 6.5% on average, which has made it one of the best performing economies in the region. And the government has been reducing its role in the economy, while implementing many business-friendly reforms’” says Kuepper.
“But as with most emerging or frontier markets, there is an element of geopolitical risk and monetary policy risk. The country’s political tensions in 2008 weighed on the country, while the country has run ballooning deficits in the past that have drawn investor scrutiny. And finally, corruption has started to become a problem after years of reliability and stability,” he concludes.
A former British colony, Malaysia gained its independence in 1957. The country is separated by the South China Sea into Peninsular Malaysia region bordering Thailand (West Malaysia) and the Malaysia-Borneo region bordering Indonesia and Brunei (East Malaysia).
Malaysia is a federal constitutional monarchy, consisting of 13 states and 3 federal territories. The head of state is the Yang di-Pertuan Agong and the head of government is the Prime Minister. The Malaysian monarchy is unique, insofar as it is an elective monarchy where the Yang di-Pertuan Agong is elected to a five-year term by the 9 Rulers of the Malay states, who form the Conference of Rulers.
A report from PwC Thailand entitled South East Asia – Investment Opportunities, Tax & Other Incentives says that “Malaysia is an open, industrialised market economy. The state plays a significant but declining role in guiding economic activity through macroeconomic plans, and the government has set out a number of reforms with the aim of continuing the liberalisation of the economy, especially in the services sector. Malaysia was one of the founding members of the WTO and is actively involved in both multilateral liberalisation and regional and bilateral cooperation”.
“The country has one of the most developed infrastructures in South East Asia,” it continues. “Within the region, Malaysia’s telecommunications system is second only to Singapore, with 4.7 million fixed-line subscribers and more than 30 million cellular subscribers. The country has seven international ports and 200 industrial parks, including specialised parks such as Technology Park Malaysia (more on that below) and Kulim Hi-Tech Park. Development has traditionally been concentrated in economically powerful cities. Hence, while rural areas have recently been the focus of development, they still lag behind the major cities.
With its vast natural resources, Malaysia had long been dependent on agriculture and primary commodities. Over the last 20 years, however, the country has progressed from being a commodities exporter to a multi-sector and manufacturing-based export-driven economy anchored in high-tech, knowledge-based and capital-intensive industries. As an oil and gas exporter, Malaysia has profited from higher world energy prices, but the government recognises the need to reduce the country’s dependence on petroleum as the main source of revenue.
“In the last decade, Malaysia has moved up the industrial value chain,” says PwC, “by attracting investments in high-tech, biotechnology and services. The country has emerged as an attractive regional hub for services, including financial services, information and communications technology and logistics sectors. Thanks to its highly educated workforce and widespread proficiency in English, Malaysia has become a significant player in the outsourcing and ‘back-office’ sector”.
The country is also getting increasing recognition as an innovative international Islamic financial centre, and is emerging as a springboard for regional expansion into South East Asia in view of its strategic central location and multilingual ‘Truly Asia’ mix of its Malay, Chinese, and Indian populace.
Malaysia is considered a high middle-income economy with a significant middle class of consumers. As with other economies in the region, these consumers are spending on higher-end products and services and domestic consumption is becoming an ever-increasing driver of the economy.
“Companies in the manufacturing, agricultural, hotel, and tourism sectors, or any other industrial or commercial sector that participate in a promoted activity or produce a promoted product may be eligible for Pioneer Status (PS) and Investment Tax Allowance (ITA),” PwC explains.
“PS is given by way of exemption from corporate income tax on 70% of the statutory income for five years and the remaining 30% is taxed at the prevailing CIT rate. ITA is granted on 60% of qualifying capital expenditure incurred for a period of five years to be utilized against 70% of the statutory income, while the balance 30% is taxed at the prevailing CIT rate”.
A resident company in operation for not less than 36 months that incurs capital expenditure to expand, modernise, automate or diversify its existing manufacturing business or approved agricultural project is entitled to a reinvestment allowance of 60% of qualifying capital expenditure incurred to be utilised against 70% of statutory income; the remaining 30% is taxed as the prevailing corporate income tax rate.
The 70% restriction does not apply to projects located in the eastern corridor states of Peninsular Malaysia, Sabah, Sarawak, Labuan, the state of Perlis, Mersing district in Johor or projects that achieved the level of productivity prescribed by the Minister of Finance. The allowance is given for 15 years from the first year of claim and will be withdrawn if the asset for which the allowance is granted is disposed of within 5 years.
A resident company undertaking a project approved by the Minister of Finance in the transportation, communications, utilities, and services subsectors may receive an investment allowance of 60% of the qualifying capital expenditure incurred within 5 years to be utilised against 70% statutory income or an income tax exemption of 70% of statutory income for a period of 5 years. Buildings used solely for the purpose of such projects qualify for an industrial building allowance.
A resident company engaged in manufacturing or agriculture that exports manufactured products, agricultural produce, or services is entitled to allowances of between 10% and 100% of increased exports (subject to satisfying the prescribed conditions), which is deductible up to 70% of statutory income.
A Malaysian incorporated company that provides qualifying services to its offices and related companies, within or outside Malaysia, may enjoy corporate income tax exemption for a period of 10 years. Income exempted includes business income, interest, royalties, and income from services (not exceeding 20% of the total income of qualifying services) provided to related companies in Malaysia.
Expats working in an operational headquarters (OHQs) are taxed only on the portion of chargeable income attributable to the number of days they are in Malaysia. An OHQ is also granted special facilities (subject to minimal conditions) including approvals for expatriate posts, the ability to obtain credit facilities in foreign currency from licensed banks in Malaysia without the approval of the Central Bank, invest freely in foreign securities, lend to related companies outside Malaysia, and open foreign currency accounts with licensed banks in Malaysia or Labuan.
“MSC Malaysia is Malaysia’s initiative for the global information technology (IT) industry and is designed to be the research and development (R&D) centre for industries based on IT,” says the PwC report. It is an information communication technology hub equipped with high-capacity global telecommunications and logistics networks. MSC Malaysia is also supported by secure cyber laws, strategic policies, and a range of financial and non-financial incentives for investors. It is managed by the Multimedia Development Corporation (MDeC), a ‘one-stop shop’ that acts as the approving authority for companies applying for MSC Malaysia status”.
MSC Malaysia status is awarded to both local and foreign companies that develop or use multimedia technologies to produce or enhance their products and services as well as for process development and offers incentives like exemption from indirect taxes on multimedia equipment, unrestricted employment of local and foreign knowledge workers, the freedom to source funds globally for investments, protection of intellectual property and cyber laws, and no internet censorship, among others.
There are also green incentives. A resident in Malaysia awarded Green Building Index certificate by the Board of Architects Malaysia from 24 October 2009 through 31 December 2014 is granted 100% allowance on qualifying expenditures incurred for the purpose of obtaining the certificate, to be utilised against 100% of statutory income.
Companies engaged in generating energy from renewable sources, such as biomass, hydropower or solar power, can receive full income tax exemption on statutory income for 10 years, or ITA of 100% QCE against 100% statutory income for 5 years, for applications received before 31 December 2015
Companies undertaking contracting service activities to conserve energy usage that apply before 31 December 2015 can receive full income tax exemption on statutory income for 10 years, or ITA of 100% QCE against 100% statutory income for 5 years.
Companies undertaking biotechnology initiatives with approved bionexus status from Malaysian Biotechnology Corporation can receive full income tax exemption for 10 years from the first year in which the company derives statutory income of ITA of 100% on QCE incurred for a period of 5 years, a concessionary tax rate of 20% on statutory income from qualifying activities for 10 years upon expiry of the tax exempt period, and an accelerated industrial building allowance (over 10 years) for buildings used solely for the purpose of its new business or expansion project.
“After refocusing its efforts many years ago, Malaysia has made tourism its third largest revenue contributor,” says investment expert Justin Kuepper. “This has made real estate investment a very popular alternative form of investment for many international investors. According to the Global Property Guide, average home prices rose nearly 50% between 2002 and 2012, while the market remains highly competitive”
“Despite these favorable outcomes, he adds, “there are several risks that investors should carefully consider. Government attempts to make housing more affordable has led to an oversupply at times, while there were new restrictions on foreign buying put in place during the economic crisis that began in 2008. And finally, the rental market remains very small relative to the US. Malaysian real estate may also be an investment option to consider, but be wary of the drawbacks before committing any capital.”
Indeed, “many small and medium-sized Chinese enterprises have forayed into the Malaysian housing market this year despite concerns about government policy and lack of transparency in the Southeast Asian country,” said a story in Guangzhou’s 21st Century Business last month” Several Chinese housing business giants based in southern China have invested sizeable funds in Malaysia over the past two years.
In August, representatives of business groups from southern China gathered in Malaysia for the signing of a cooperative investment project with a local real estate developer to build villas in Nilai, a town that is home to several popular colleges and universities, including Nilai University and INTI International University – a joint venture valued at about USD 310 million.
The paper said that “over the past three years, housing prices in Malaysia have grown by 8%-15% each year, but the return rate for rental housing has reached 5%-8%, higher than that on the mainland, Hong Kong and Singapore. For Chinese real estate companies, the risks of investing in Malaysia are governmental policy and economic planning in terms of currency exchange rate system reforms and data transparency”.
US dollars are not commonly used in most South East Asian countries, and investors normally have to exchange them for local currencies while making investments in these countries, thereby putting them at risk of loss. Malaysian vice finance minister Chua Tee Yong has said that the issue of currency exchange has had a long-term impact on trade and investment between China and Malaysia, adding that “it will take the next 10 to 15 years to resolve the problem”.
Talk to the Experts
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