Malaysia 2016: Challenges and Bright Spots for Foreign Investment

Op/Ed by Christopher Heng
Dezan Shira Asia Alliance, Kuala Lumpur

Malaysia is in a strange position at present concerning foreign investment. This is mainly brought about by political issues, particularly the scandal involving the 1MDB Bhd, an investment arm of our Malaysian government. Allegations of corruption at the highest level are having a negative impact on sentiment towards our country. 

While these allegations have yet to be legally substantiated, they are to a certain degree already affecting our economy across all sectors. As reported by BMI Research, “Malaysia’s Q3 2015 real GDP grew by 4.7 percent year-on-year, reflecting the economy’s slowest growth rate in nine quarters.” The trends for 2016 for both the domestic and external sectors may have a “crossover effect” that will continue over the coming quarters. This is in tandem with external global issues, such as the still-falling oil price and our weakening ringgit, which have cast a pall over the global economy for 2016.

The New Malaysian Budget

The Malaysian government, for its part, has taken an immediate realignment through a revised Budget 2016 to recalibrate certain issues, expounded by our Prime Minister Datuk Seri Najib Tun Razak as “taking pre-emptive measures following the changes in the external global economic landscape which is beyond our control” and in part to enhance our attractiveness for foreign investment.

We expect our Budget 2016 realignment – together with our healthy business environment towards foreign direct investment, established policies to mitigate burden of bureaucracy, utilization of ICT and intellectual property rights (IPR) protection – to drive trade flows and increase the attractiveness of our country as an investment location.

We also expect more cross-ASEAN activities, especially from Cambodia and Myanmar (Burma), but less from Vietnam. Singapore will remain our close business partner.

Malaysia and TPP

Malaysia is a member country of the TPP agreement signed with the United States. However, given the current political climate in Malaysia and the presidential election taking place in the U.S., it is not clear what benefits this will bring. The Malaysian business community is not excited about this initiative. Nevertheless, our government is providing information on the potential benefits generated for the business community through the TPP agreement.

Incentives for Foreign Investment

The Malaysian government encourages FDI through a number of incentive measures, including tax exemption for “pioneer” companies and “priority” companies, particularly those geared towards industries exporting “high-tech” products and back office operation services.

Tax Incentives for 2016 are mostly carry-forward (or extension) incentives from previous incentives, such as the reinvestment allowance (RA) with expanded qualifying projects; tax incentives for food production projects; tax incentives for tour operating companies; and automatic double deduction for R&D projects.

We encourage and hope more new tax or trade incentives will be proposed by our government in the near future to attract investment into Malaysia. This will mitigate the detrimental effects that falling oil prices will have on our government’s revenue.

Malaysia’s pressing need today is to fix allegations of impropriety and come up with answers for a business community still reeling from the introduction of last year’s Goods & Services Tax. We will continue to develop slowly, but 2016 will not be a banner year for the country until more positive moves are made to calm our political environment and implement more pro-FDI policies.

Christopher Heng is a Partner of the Dezan Shira Asian Alliance in Kuala Lumpur, Malaysia.  The firm is a full service practice, offering corporate establishment, tax planning, tax treaty advisory, bookkeeping, accounting, tax filing and full audit services. The firm can also advise on legal matters in Malaysia, especially those related to investment laws and applicable regulations.  It is an Approved Company Auditor, Liquidator, Tax Agent, GST Tax Agent, and is a Registered Financial Planner.

To contact the practice, please email Malaysia@dezshira.com or visit www.dezshira.com


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