AS a developing nation, foreign direct investment (FDI) is expected to continue being an important growth contributor. Annual headline figures from the Statistics Department indicate a rebound since the pandemic.
However, Malaysia must not be complacent, given the macroeconomic headwinds from the prolonged Russia-Ukraine conflict, rising interest rates and the likelihood of a recession, among other factors.
Potential investors still regard Malaysia as an attractive investment destination, mainly due to our lower cost base relative to Singapore.
However, they are now spoilt for choice as our neighbours like Indonesia, Vietnam and the Philippines are fast becoming forces to be reckoned with.
The rising affluence of their middle-class population, which fuels greater demand, is among the factors forming their investment thesis.
In the re-tabled Budget 2023, the Prime Minister acknowledged Malaysia’s decline in the World Competitiveness Ranking by the International Institute for Management Development to 32 (2021: 25). Singapore, however, ascended from five to three.
Encouragingly, one of the 12 main thrusts of the re-tabled Budget 2023 is to achieve high-impact investments.
Several new initiatives were proposed to boost the domestic ecosystem and attract more meaningful investments to catalyse economic growth and job opportunities.
This includes the New Industrial Master Plan 2030 slated for release in the third quarter of 2023 to chart the path forward for the industrial sector.
Malaysia is already acknowledged as having an edge over other economies in the region in sectors like electrical and electronics (E&E) and we should continue capitalising on it.
The billions of high-quality E&E investments by reputable multinational companies in Bayan Lepas and Batu Kawan Industrial Park is testament to our strength.
We are also seeing a growing interest in the data centre and telecommunications spaces among foreign investors.
It is timely that the government plans to extend the tax incentives for manufacturing companies relocating their operations to Malaysia, initially announced under the National Economic Recovery Plan or Penjana.
The plan to reduce bureaucracy and expedite approvals from government agencies complements this, potentially shortening the lead time in operationalising new FDI.
Tax incentives moving forward
The Prime Minister mentioned FDI benefits have been narrowing following higher incentives against low value-added investments.
Tax incentives are not necessarily a bane since they could be the “sweetener” to sway investors in our direction.
It is good that there are plans to restructure Malaysia’s incentives, including the many investment promotion agencies existing presently, towards tiered tax rates based on outcomes which will spur a multiplier economic effect, for instance.
Hopefully, this can attract the right investments which align with our development goals.
Proposals around CGT and QDMTT
Malaysia is expected to implement a qualified domestic minimum top-up tax (QDMTT) in line with new international tax standards.
This should not materially erode Malaysia’s competitiveness, as other countries are also expected to follow suit to “end the race to the bottom” on corporate tax rates.
However, there is an immediate need to have some clarity on certain key policy decisions, especially how these would impact companies currently enjoying tax incentives.
Many are concerned about the potential introduction of a capital gains tax (CGT) for the disposal of unlisted shares by companies from 2024.
This was not surprising to tax professionals, however, as there were already whispers of a CGT a few years back.
No doubt, it may dampen our investment allure to a certain extent, but Thailand, Indonesia and Vietnam also have some form of a CGT and that did not deter investors going there.
However, clarity on the CGT mechanism is crucial to minimise ambiguity.
Ideally, internal group restructurings for commercial reasons such as corporate structure streamlining, in which any gains are merely on paper, should not be subject to a CGT.
The intention to start with a low rate is certainly welcomed and sufficient heads up should be given before any future increase to avoid surprises.
Additional revenue from CGT
The question remains as to the amount of additional revenue expected from the CGT, if implemented, which is worth a thorough assessment by the government.
While tax will always be important for any foreign investor, it is often not, and should not be, the deciding factor.
This is because other commercial reasons like access to new markets and closer proximity to customers generally take precedence.
Tax is just another cost of doing business which investors will try to manage within the confines of the law.
Hence, stability and predictability of the tax landscape is crucial for our investment competitiveness.
That said, maintaining pro-business policies, containing our fiscal debts and addressing the brain drain are among the other equally, if not more important, factors to instill greater investor confidence in Malaysia’s fundamentals.
Lee Boon Siew is senior manager of PwC Taxation Services Malaysia. The views expressed here are the writer’s own.