Watch Out, Singapore and Hong Kong. KL Is Coming

It could be an emblematic moment. Flying into Kuala Lumpur in early October, this reporter was pleasantly surprised to discover that Malaysia no longer requires travelers to fill in immigration and customs forms. At the counters, passports were scanned electronically and stamped, a process that took less than a minute.
 
But when traveling to Singapore the next week, this reporter was required as usual to complete the immigration form to be presented to the immigration officer – who took some time scrutinizing the passport pages and, for some reason, the binding as well. Foreigners entering Hong Kong still have to fill up paper forms too. 
 
Is Malaysia beginning to leapfrog Singapore, Hong Kong and other places in Asia? Possibly. Since the government of Prime Minister Najib Razak launched the Economic Transformation Programme (ETM) in 2010, more than RM218 billion (US$69 billion) in investments have been poured mostly into the service sector, notes Rajiv Biswas, Asia-Pacific Chief Economist at country and industry forecaster IHS Global Insight.
 
That’s only 15% of the targeted US$444 billion by 2020, seven years from now, but the hard and soft infrastructures being built is evidently bearing some fruit, if the automation and digitization of the immigration process is any guide.
 
The ETM aims to turn Malaysia into a service economy, not just strong in manufacturing. One objective is to attract 100 multinationals to make the country their global hub by 2020. To date, 23 MNCs have established headquarter presence in Malaysia, among them America’s Schlumberger and IBM, Japan’s Toshiba and Hitachi Systems, and Europe’s Alstom and Philips Healthcare.
 
Treasury Hub Initiatives
The latest ETM initiative should be of special interest to Asia’s CFOs and treasurers, who tend to automatically look at Singapore, Hong Kong and potentially Shanghai when thinking of where to locate treasury centers.
 
“We do believe that Malaysia . . . will be able to move towards becoming the perfect choice as a corporate treasury hub,” says Norzila Abdul Aziz, Assistant Governor at Bank Negara, the central bank. “With a strong banking system [that has a] presence in all ASEAN countries, plus Hong Kong as well as China, we will be able to support the regional expansion of our corporations. “
 
The proposals made in Malaysia’s 2012 budget to grant tax and other incentives for MNCs setting up their Treasury Management Center in the country are now being implemented. The incentives have been spelled out:  
 
Income tax exemption. The TMC will not be asked to pay income tax for five years on 70% of statutory income arising from treasury services rendered to related companies. The income categories are:
 
  • All fees/management income from providing qualifying services to related companies in Malaysia and overseas
 
  • Interest income/finance income received from lending/financing to related companies in Malaysia and overseas
 
  • Interest income/finance income/gains received from placement of funds with onshore banks or short term investment (onshore and offshore) as part of managing surplus funds within the group
 
  • Realized foreign exchange revenue/gains/profits from managing risks for the group i.e. exchange rate risk, interest rate risk, benchmark rate risk, market risk, credit/counterparty risk, liquidity risk and commodity price risk
 
  • Premium/income discount/gains pursuant to subscription of bonds/sukuk [Islamic bonds] issued by related companies and financial institutions
 
  • Guarantee fees
 
Withholding tax exemption. The TMC will not pay withholding tax on interest payments and profits on borrowings by the TMC from financial institutions and related companies, provided the funds raised are used for the conduct of qualifying TMC activities.
 
Full stamp duty exemption. The TMC will be 100% exempted from stamp duty on all loan/financing agreements and service agreements executed by the TMC for the conduct of qualifying TMC activities.
 
Partial tax exemptions for expatriates. Foreigners working in a TMC will be taxed only on the portion of their chargeable income attributable to the number of days that they are in Malaysia.
 
Flexibility in Foreign Exchange Administration. Most of the selective capital controls imposed during the 1997 Asian financial crisis have been removed, but the use of the ringgit outside Malaysia for settlement is still controlled. The central bank promises flexibility and exemptions for TMCs. 
 
No requirement to have local equity. Foreign participation in TMCs are allowed to go to 100%.
 
Going Head-to-Head
How do these incentives compare with those in Singapore? On the face of it, the Malaysian incentives are on par and some even better than those in Singapore. The global tax advisory Taxand has made a comparison of the incentives in the two places (see table below).  
 
Click image to enlarge 
Comparing Perks and Incentives
Source: Taxand
 
Hong Kong does not offer special incentives to treasury centers, but all companies there enjoy a top corporate rate of 16.5%, waiver of tax on interest income, no withholding tax on interest payments and no foreign exchange controls. And like Singapore, Hong Kong boasts a mature financial and banking system, triple-A sovereign credit rating, the status of an international financial center and an extensive network of banking, tax, legal and other professional talent.
 
For its part, China has just launched the Shanghai Free Trade Zone, which among other things aims to promote a trial program of RMB convertibility in the capital account, gradual liberalization of interest rates, cross-border RMB usage and a foreign exchange management system – all attractive features for a treasury center. However, these are available only to companies within the 28-square-kilometer zone and there are no plans for tax breaks (the top corporate rate in China is 25%) and other incentives for treasury centers.
 
Qualification Hurdles
At least one Malaysian multinational, telecom company Axiata Group, has announced plans to build its regional TMC in Kuala Lumpur to serve operating entities at home and those in Bangladesh, Cambodia and Sri Lanka. The Malaysian Investment Development Authority (MIDA) and Bank Negara are working to attract both local and foreign corporations.
 
The approval process will take only between six to eight weeks, pledges Phang Ah Tong, a Deputy CEO at MIDA who was speaking at the relaunch of the Malaysian Association of Corporate Treasurers (MACT) in Kuala Lumpur on 9 October. “We work very closely with Bank Negara in processing applications of companies that apply for the status of TMC . . . And we are very liberal, allowing 100% foreign-equity participation in the TMCs.”
 
It’s not too difficult to establish a TMC in Malaysia, said Phang. “You only need paid-up capital of at least 500,000 ringgit [US$157,000], be incorporated locally, spend upwards [in investment] of 1.5 million ringgit [US$472,000], provide at least one TMC-qualified service, serve at least three related companies outside Malaysia to indicate you have regional activities, and employ at least three senior professional management personnel.”
 
The three main qualified services, at least one of which the TMC must engage in, are cash, financing and debt management, investment services and financial risk management. Specifically:
 
Cash, Financing and Debt Management, including the following:
  • Cash pooling arrangement through a centralized account with a licensed onshore bank
 
  • Providing financing sourced from surplus funds within the group or financial institutions in Malaysia to a related company in Malaysia or to a related company overseas (in foreign currency for any purpose but for use only in Malaysia if in ringgit).
 
  • Arranging for competitive financing sourced from surplus funds from within the group, financial institutions in Malaysia or the issuance of bonds/sukuk (Islamic bonds) in ringgit or foreign currency
 
  • Providing or arranging for financial and non-financial guarantee for its group of companies
 
  • Current account management such as managing account payables and receivables and maintaining inter-company offsetting arrangements
 
Investment Services. Investing funds within the group in domestic money market and in foreign currency assets onshore and offshore
 
Financial risk management, including hedging of exchange rate risk, interest rate risk/benchmark rate risk, market risk, credit/counterparty risk, liquidity risk and commodity price risk.
 
Will They Come?
Will other companies follow Axiata’s lead? It’s probably too much to expect that those already in Singapore and Hong Kong will pull up stakes and transfer to Malaysia, at least not in the short term. But some organizations yet to establish a regional treasury center may find the Malaysian option especially attractive, among them regional and global companies that utilize Islamic banks and financial products.
 
Twenty one international and domestic Islamic banks, including CIMB Islamic Bank, HSBC Amanah Malaysia, OCBC Al-Amin Bank and Standard Chartered Saadiq, are licensed in Malaysia. Islamic banking assets currently stand at US$132.3 billion, 20% of the entire banking system’s total assets of US$642.8 billion (the total assets of Singapore’s banking system come to US$935.9 billion, but very few of the city’s 164 commercial and merchant banks are Islamic banks).
 
While the Malaysia incentives are certainly attractive, companies will also be looking at other factors, including the depth and stability of the financial and legal systems, maturity of the payment infrastructure, availability of hedging and other risk management products, and ready supply of finance, tax, legal and other professional talent.
 
To their credit, MIDA and the central bank recognize that much more needs to be done and they say Malaysia is moving to do just that. “We will build a settlement infrastructure to be highly developed, highly interlinked with the international payment and clearing system,” says Bank Negara’s Norzila, who oversees the central bank’s Investment Operations and Financial Market Department, Foreign Exchange Administration Department, Currency Management and Operations Department, and Legal Department.
 
Speaking at the MACT event in Kuala Lumpur, she noted that RENTAS, the Real-time Electronic Transfer of Funds and Securities system, is already interlinked with EuroClear and the Hong Kong Monetary Authority, allowing the clearing of US dollar and renminbi transactions on payment basis.
 
Norzila says the central bank will also “facilitate active management of FX exposure that has allowed anticipatory hedging, and settlement of international trade in local currency, including in the ringgit.” It would also grant further flexibility in “managing cross-border capital flows, cash pooling within the group, and managing foreign exchange and interest rates.”
 
“But, of course, this flexibility and exemptions come with accountability,” she stressed. “The central bank being the central bank . . . we want to make sure that the robust risk management we would like is in place. If we are not satisfied with that condition, the flexibility may not be given. I think that is only fair.”
 
Pulling Out the Stops
Still, Norzila maintains, “I’m very sure that many corporates have already experienced the flexibility that has been granted by the central bank,” particularly on issues around Foreign Exchange Administration. “We’ve always have this philosophy that, whenever real-sector activity is concerned, the central bank will be very facilitative with regard to giving exemption, giving permission on the Foreign Exchange Administration. The engagement with the central bank with regard to flexibility of FAI rules is very much encouraged.”
 
For his part, MIDA’s Phua says immigration and taxation procedures for expatriates in TMCs have been streamlined. Expats will be taxed only the days they stay in Malaysia and they don’t even need to go to the Immigration Department. “We have an immigration section in MIDA that houses 12 immigration officers to help expatriates, those that come here to apply for key posts as well as term posts in the manufacturing and services sector,” he says.
 
Malaysia, in other words, is pulling out all the stops. Time will tell whether its corporate treasury initiative will bear fruit, but Singapore and Hong Kong, and even Shanghai, are now on notice that there’s a new – and determined – kid on the block.
 
About the Author

Cesar Bacani is Editor-in-Chief of CFO Innovation. 

 

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