Enhancing Malaysia’s investment-friendly name

Foreign direct investment (FDI) remains a key growth driver for Malaysia as a developing economy, and headline figures from the Statistics Department show a rebound since the pandemic. But there's little room for complacency, given macroeconomic headwinds from the prolonged Russia-Ukraine conflict, rising interest rates, and recession risk elsewhere.

Malaysia's lower cost base relative to Singapore still makes it an attractive destination for investors — but neighbours like Indonesia, Vietnam and the Philippines are increasingly competitive, helped by rising middle-class affluence driving domestic demand. In the re-tabled Budget 2023, the Prime Minister acknowledged Malaysia had slipped to 32nd (from 25th in 2021) in the International Institute for Management Development's World Competitiveness Ranking, while Singapore climbed from fifth to third.

High-impact investment push

One of the 12 main thrusts of the re-tabled Budget 2023 is achieving high-impact investments, with several new initiatives proposed to strengthen the domestic ecosystem and attract more meaningful investment — including the New Industrial Master Plan 2030, due for release in Q3 2023, which will chart the industrial sector's path forward.

Malaysia already holds an edge in sectors like electrical and electronics (E&E), reflected in billions of dollars of high-quality E&E investment from major multinationals in Bayan Lepas and Batu Kawan Industrial Park, and is seeing growing foreign interest in data centres and telecommunications. Plans to extend tax incentives for manufacturers relocating to Malaysia — first introduced under the Penjana national recovery plan — along with efforts to cut bureaucracy and speed up agency approvals, should help shorten the runway for new FDI to get up and running.

Reworking tax incentives

The Prime Minister has noted that FDI benefits have narrowed as incentives were increasingly directed at lower value-added investment. Tax incentives aren't necessarily a downside — they can still be an effective sweetener — and plans to restructure Malaysia's incentive system, including its various investment promotion agencies, toward tiered tax rates based on outcomes could help drive a stronger multiplier effect through the economy, provided they're designed to attract investment aligned with the country's development goals.

Capital gains tax and QDMTT

Malaysia is expected to introduce a qualified domestic minimum top-up tax (QDMTT) in line with new international tax standards — a move unlikely to materially dent competitiveness, since other countries are expected to follow suit as part of a broader push to "end the race to the bottom" on corporate tax rates. What does need clarifying urgently is how this affects companies currently benefiting from existing tax incentives.

More attention has gone to the planned capital gains tax (CGT) on disposals of unlisted shares by companies, from 2024 — not entirely unexpected, given tax professionals had anticipated a CGT for some time. It may dent Malaysia's investment appeal somewhat, though Thailand, Indonesia and Vietnam all have some form of CGT without it deterring investors. Clarity on the mechanism will be crucial to avoid ambiguity — ideally, purely paper gains from internal group restructurings done for commercial reasons (like streamlining corporate structures) should fall outside its scope. Starting at a low rate, with adequate notice ahead of any future increase, would help ease the transition.

How much additional revenue a CGT would actually generate is worth a thorough government assessment. Tax matters to every foreign investor, but it's rarely — and shouldn't be — the deciding factor; access to new markets and proximity to customers typically weigh more heavily, with tax treated as simply another cost of doing business to be managed within the law. That makes a stable, predictable tax landscape essential to investment competitiveness — alongside maintaining pro-business policies, managing fiscal debt, and addressing brain drain, all of which matter just as much to investor confidence in Malaysia's fundamentals.

Source: The Star