(Pre-Budget 2004 Commentary) Malaysia... do we still have the potential to attract foreign direct investment?

2 September 2003. Malaysia was once among the front-runners together with Hong Kong and Singapore in receiving FDIs. The country is now working very hard indeed just to maintain the pace. China as the economic giant is definitely absorbing most of the FDIs inflow. It has opened up its market and has relaxed many rulings like loosening its corporate controls to make doing business easier.

Malaysia cannot afford to be complacent with past success. It now has to contend with ASEAN, AFTA, WTO. The Budget 2003 commented that Malaysia cannot afford to only rely on FDIs. But after one year, it cannot be said that we could do so without FDIs either.

The GDP forecasts for the East Asian countries indicate that China and Vietnam would achieve growth in excess of 7% with Laos and Cambodia following closely at about 6% and 5% respectively. Malaysia is placed seventh in the forecast.

If Malaysia is to succeed in securing foreign investments, it must now review its policies and strategies. In today's global competition balancing act, Malaysia should consider opening up corporate ownership to foreigners who take the risk to invest in this country. If China can allow a foreign company 51% equity participation, it is time Malaysia follow suit and focus more on the accelerator and multiplier dynamics of the investments.

The recent announcement by the Minister of International Trade & Industry on the intended changing of equity requirement, i.e. 30% Bumi-owned stakeholding condition is to apply only upon listing and not thereafter, is an enlightened one.

In view of the stiff global competition, tax laws should also be looked at broader areas as potential assistance.

Group Tax Relief

A good start will be to expand on the Schedule 4C group relief for losses and capital allowances to multinationals operating as a group catering for the regional and global market. In addition, it would be ideal to set up one-stop center where all government related approvals and licenses are processed and provided to the investors. This would attract investments with entire upstream and downstream infrastructure potentials rather than the piecemeal investments that are dripping in currently.

As business competition stiffens, companies have to restructure their operations and realign their supply chain management. Specialized manufacturing and operations require separate business entities with built in production and marketing links, both onshore and offshore. It is time to understand business reality, and to look at these group operations as a whole rather than at each company as one entity with the resultant individualized treatment for tax purposes. After more than 50 years of tax administration and operations, the Government should now look into the group relief aspects of the tax law.

Withholding Tax on Technical Fees and Out of Pocket Expenses

Most offshore transactions for technical assistance will spell out clearly what constitutes technical fees. Out of pocket expenses incurred for traveling of expatriate staff do not form part of the arrangement. Yet under our current Revenue's practice, out of pocket expenses are contented to be income subject to withholding tax.

Apparently there are some confusions in this area and the earlier this is settled the better for the Government's effort to enhance the environment for FDIs inflow into Malaysia. The example of Sony, the Japanese electronic giant transplanting its manufacturing facility from Indonesia to Singapore because of the inflexibility of the Indonesian Revenue Authorities, should be a hard lesson for proponents of FDIs and the implementers of withholding tax.

Targeting at Export-Oriented FDIs

Malaysia should scale up its efforts to attract and benefit from export-oriented FDIs. It should consider an approach involving taxation analysis that can well integrated into a country's overall development strategy. Memberships to FDIs in free trade zones, preferential tax treatments, updated version of tax schemes, etc. are the Budget wishes for 2004.