As Malaysia is located in South East Asia, we think that it will be more relevant if we place focus more on this area due to location and environment contrast. Our study also includes countries from different parts and continents in the world to make our study more complete.
South East Asia
Malaysia
Vietnam
Singapore
Thailand
Philippines
Asia
Israel
Taiwan
Africa
Kenya
Europe
North America
United States (US)
South America
Australia
Country
Tax Rate
Malaysia
26%
Singapore
17%
Thailand
30%
Philippines
Israel
25%
Taiwan
17%
Vietnam
Vietnam has made a shift from a centrally planned economy to a Socialist-oriented market economy. Over that period, the economy has experienced rapid growth. Nowadays, Vietnam is in the period of integrating into world’s economy, as a part of globalization and is in transition from a planned economy to a market-oriented mixed economy under one-party rule. This statement is taken from the Wikipedia and it proves the growth of Vietnam economic on international stage. Previously, Vietnam’s FDI confident index ranks under Malaysia. But in 2008 Vietnam was able to overcome Malaysia and now Vietnam is rank number 12 in top 25 FDI confident indexes. The rapid growth of FDI inflow into Vietnam is affected by many factors. The most important factors will be the politic stability condition and sufficient cheap labour supplies. At the same time, investment incentives being given by Vietnam government also play an important role in encouraging FDI.
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Tax incentives scheme in Vietnam has very similar characteristics with Malaysia. Vietnam offers investor tax holidays up to 8 years, lower corporate tax rate, investment allowance, and special exemption from import duty. These incentives are focused on foreign investors, exporters and investment in poor regions. Vietnam has a higher reduced corporate tax rate (25%) given to foreign investor compare to Malaysia (10%). The higher corporate tax rate can reduce the possibility of tax avoidance by company through transfer pricing transfer profit to low-tax subsidiary country. So the largest benefit will still go to Vietnam government.
Vietnam offer a very attractive tax holidays offer up to 8 years, welcoming foreign investor as they can enjoy tax relief for a long period while their business start to stabilize in Vietnam. But there are some risks for implementation of tax holiday. Firstly, tax holiday will encourage short-run project and fast profit generation project to invest in Vietnam. During the short period of investment duration, the business can generate maximum profit without paying high tax. When the project is completed and matured, the foreign company will plan to move to other place to enjoy tax holidays for its “new business” again. Furthermore, some company will take advantage on tax holiday offer through indefinite extension of holidays to avoid tax. That is done by creative redesign the existing investment become new investment which qualified for tax holidays again. Tax holiday also create competitive advantage to new investment company and threatening old company. These problems might also threaten Malaysia incentives scheme, because we are given pioneer status tax holiday plus reinvestment allowance up to 15 years. So Malaysia tax authority must set strict rule and regulation to strengthen the implementation of tax relief type incentives.
Malaysia offered investment tax allowance of 60-100% of qualifying capital expenditure to foreign investor. This offer able to attracts those industries with heavy capital investment for example technology industry and electronic industry. But there are some weaknesses, first, the qualified company might abuse the system by selling and repurchase the same assets to claim multiple allowances. Moreover, the qualified company might purposely purchase asset estimated of short-lived, since a further allowance can be claimed each time an asset is replaced. On the other hand, Vietnam has a more narrow investment allowance law. The allowance is given in the way of refund back a portion or all corporate tax paid, if the profits are reinvested for 3 consecutive years. So Vietnam able to avoid some of the problem of directly offering investment allowances incentives on qualified expenditures.
Both Vietnam and Malaysia gives special exemption from import duty in certain sector for example exporters. This incentive can effectively encourage the manufacturing of export goods by allows taxpayer avoid from contact with the complex tax administration system. But this incentive tends to bring little benefit the investor. Even though the import of inputs is exempted from duty but the final export products will still get taxed at later stage. So this special incentive is not so effective in encouraging foreign direct investment, it only can be considered as a supplementary factor.
The investment incentives scheme of Malaysia and Vietnam has many similarities and basically some are the same. But in year 2008, Vietnam successfully overtakes Malaysia and ranked higher in FDI confidential index. The main reason to the rapid growth of FDI inflow into Vietnam is the cheaper labour and material supplies. Meanwhile, Malaysia unstable politic condition also form a “push” effect, which chase the foreign investors’ interest away from our country and turn to our neighbour who offering similar investment condition for them.
Singapore
In Singapore, the government uses the 1967 Economic Expansion Incentives Act to encourage the foreign investment into Singapore. This is the law of the Principally Consolidates Investment incentives. There are various types of tax incentives available to companies and that are provided by the Singapore Income Tax Act (ITA) and Economic Expansion Incentives Act (EEIA).
Under the Singapore 2010 budget, the government has made a lot of changes where company is taxed at a flat rate on its chargeable income regardless of whether it is a local or foreign company. During 2010 onwards, the tax rate has reduced to 17% compare with 2008 and 2009 which was 18%. This budget can encourage the local company and foreign companies establish their business in Singapore which will enjoy the tax exemption or rebate. The company that establishes their company in YA 2008 and YA 2009 will continue to enjoy the partial tax exemption scheme and tax exemption scheme. It will attract attention for the foreign investment company to invest into Singapore. Besides that, it can also attract the local company to expand their company in the Singapore. The tax rate refers to the percentage of chargeable income the company pays to the Inland Revenue Department. The good news to investors is that Singapore reduced the percentage tax rate to 17%. In addition, in order to encourage companies to start-up during YA 2010, the tax exemption scheme is extended and companies limited by guarantee will subject to the same condition.
This emphasized that the tax incentive system in Singapore is drastically different in nature as compared to Malaysia. Malaysia definitely does not allow a flat rate on the chargeable income regardless of local or foreign company. Local and foreign companies in Malaysia are subjected to different schemes which are totally different in treatment. This difference is due to the different standards of development between both countries. Singapore is a more developed country compared to Malaysia which is a developing country. Malaysia should look forward in adopting this incentive system in the future when Malaysia achieves that level of development and economic condition. At the current situation, Malaysian government cannot afford to place equal treatment to both foreign and local companies as this may perish the local industry. Majority of our local industries still require protection from the government. Therefore, once the local industries are strong enough, Malaysia may opt to adopt the equal treatment of flat rate among local and foreign industries.
The incentive and promotion of investment in Singapore is more attractive than Malaysia since the tax rate in Singapore is lower than Malaysia. The tax rate in Malaysia is 26% compare with Singapore 17%. It will attract attention for the foreign investors or local company start-up their business in Singapore compares with Malaysia. Investor will only focus on the benefits or advantages that will generate them higher return. Singapore is the best place for them to set-up their business. Therefore, Malaysia must consider reducing their tax rates to stay competitive.
Besides that, the partial tax exemption is given to the companies on the normal chargeable income excluding the Singapore franked dividend and the amount is up to $300,000. For example:-
Exempt amount
First $ 10,000
@ 75%
= $ 7,500
Next $290,000
@ 50%
= $145,000
Total $300,000
$152,500
The partial tax exemption is means that the companies can enjoy only the partial tax exemption for the tax deduction. While the fully tax exemption scheme is for the qualifying company on the first $100,000 of the normal chargeable income is exempt and the further 50% is given to the next $200,000. The qualifying company is means that the company must be incorporate in Singapore, be a tax resident in Singapore and the company no more than 20 shareholders during the basis period for that YA. The calculation for the tax exemption is:-
Exempt amount
First $100,000
@ 100%
= $100,000
Next $200,000
@ 50%
= $100,000
Total $300,000
$200,000
This attracts the attention for the foreign investors who want to invest into Singapore. The tax exemption can help the company obtain benefits or allowances upon the tax return. While in Malaysia, the partial tax exemption is only for the pioneer status and restricted to 70% of the statutory income for 5 years and only allows extension for the further 5 years if it is a specific promoted activity or project that is significant to the country. Pioneer status of a company in promoted areas will enjoy the tax exemption restricted to 85% of the statutory income for the 5 years. This is the tax exemption difference between Singapore and Malaysia. Singapore tax exemption is better than Malaysia because Singapore uses these benefits to attract the attention of foreign or local investors. This can increase Singapore’s economy.
This is the example for the Malaysia tax exemption as below:-
Y/A 1995 (1.10.1994 – 31.12.1994)
Statutory pioneer income
(Restricted to 85% of statutory income RM58,500)
RM49,725
Less : Non Pioneer Loss
(RM22,000)
Exempted Pioneer Income
RM27,725
In Malaysia, the government is use the Promotion of Investment Act 1986 to attract the foreign investor or local company. The disadvantage of the PIA is that it only grants incentives to companies that are involved in promoted activities such as manufacturing, agricultural, hotel, tourism, R&D and technical or vocational training. This benefit is only for the investors who are interested to invest into these specific industries. Besides that, the government offers pioneer status that allows total or partial exemption of tax for a period of five year.
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Philippines
In Philippines, incentives and promotions of investments are placed under the Foreign Investments Act of 1991 R.A. 7042 as amended by RA 8179. The Omnibus Investments Code of 1987 regulates the incentive tax and non-incentive tax. Similar to other developing countries, incentives and promotion of investments are done to increase inflows of Foreign Direct Investment (FDI) and this effort cannot be untangled from the effect of tax incentives. Like Malaysia, Philippines apply the use of pioneer status in their tax structure for promotion of investment. But Philippines adopt a tax exemption policy that is unique from the others. Tax exemptions in Philippines are termed as Income Tax Holiday (ITH) which is different from other countries. Besides that, different exemption periods are given based on different situations and cases with the maximum of eight years exemption to tax.
In addition, Philippines do allow exemption on tax and duties on imports, exemption from wharf age dues and export tax, duty, impost and fees. To extend the incentive programs, tax credits, additional deductions from Taxable Income and non-fiscal incentives are also widely introduced.
Apart from that, Philippines provide incentives to Ecozone export and free trade enterprises. Bringing in the history, Philippines is one of the first countries in Asia to introduce the export processing zones (EPZ) to allow total automatic access to imports by firms located in zones on the condition that they will export their entire production. The introduction of the Ecozone is featured with incentives relating to export and free trade enterprises and also domestic market enterprises. This proves that Philippines have high intentions to promote investment to encourage international trade in their country to ensure inflow of currencies into the country. To a certain extend, Philippines offers a much attractive package of incentives to investment. In terms of tax exemption period, Malaysia offers 5 years although extendable, but Philippines offer an 8 year exemption period. The only disadvantage of the Philippines tax structure is that it applies a high corporate tax rate of 30% or more throughout the years. If Philippines were to lower their tax rate to a more attractive rate, approximately between 16-25%, Philippines will stand tall attracting more FDI than other competing countries as Philippines is well known for their low cost labour employment and strategic location in the South East Asia. Therefore, with all resources available, Philippines should place Hong Kong and Singapore as their benchmark to create more attractive tax incentives. Currently, Singapore is applying a 17% while Malaysia their nearest neighbour is applying a 26% tax bracket. Therefore, to compete, it is advisable for Philippines to reduce their tax rates.
In terms of exemption portions and deductions, Philippines are not less attractive as in Malaysia. Practically, the activities qualifying for deductions and exemptions are quite similar between the countries. The only main difference relates to restricted sectors where in Malaysia restriction is only implied on parts and components industry, while in Philippines, retail trade, mass media, engineering, rice and corn production, defence related activities, small and medium-size domestic market enterprises, import and wholesale activities are all restricted sectors. This makes Malaysia’s incentive much widely covered as restriction is only placed in the parts and components industry under the ICA 1975 due the popularity and high quantity of the sector.
As known, Malaysia is popular in attracting foreign investment companies especially in the field of electronic components and parts which is located in many free trade zones receiving overwhelming responses. Therefore, the restriction in this sector is to secure income to the country and also prevent avoidance of tax. Yet, Philippines placing restriction in the import sector is viewed as a prudent move in our opinion. As this will somehow impact the import performance due to reduced profits and this, in other words encourages the local productions. Philippines move in restricting the import sector in the foreign investment act in our opinion is more efficient than allocating resources to advertising for promotion of local made items. Therefore, Malaysia should take careful considerations in applying this provision in order to reduce imported goods that signify outflow of our local currency. Philippines move to place rice and corn productions as a restricted sector shows their effort in protecting the income of the local citizens. By doing so, foreign investor will be less interested in competing with local rice and corn producers due to the tax disadvantage. Therefore, this showed that Philippines are brilliant in using the tax law to protect the local industries.
However, Philippines having many restricted sectors explain the low FDI of the country. Placing the engineering sector as a restricted sector is somehow not appropriate as we are living in an era of technology which requires tons of engineering capabilities in the country. Therefore, this discourages investment and also the development of the country. This concludes that by using the tax law to protect the local industries though reduction of competition impacts the promotion and incentives of investment the other way around. Therefore, the country must strike a balance in making sure the local industries are protected and at the mean time foreign investors are attracted. In this, we felt that the Malaysia tax system is more balanced compared to the Philippines tax incentive system. This maybe because of the weak local industries in Philippines compared to Malaysia.
In addition, we found that the Philippines tax structure is systematic and has a very structured base which is very efficient in our opinion. Perhaps it is better to be rigid in taxation compared to be flexible. Therefore, Philippines system is strong and reliable.
All in all, after reviewing and studying in depth the incentive and promotion of investment system in Philippines and Malaysia, we realise how much the tax provisions can impact and affect the whole countries growth and development. As the world is always changing in trends, it is important to make reviews every now and then to stay attractive among foreign investment and most importantly strike a balance.
Israel
After reviewing several countries’ tax policies, we found Israel adopting a rather interesting set of tax policies relating to incentives and promotions of investment. It is rather common that countries all around the world are implementing attractive sets of tax incentives to attract foreign direct investment (FDI) into the country. Israel is doing the same as well. Israel places special emphasis in R&D activities and hi-tech companies apart from tourism, real estate and industries. Under the Law for the Encouragement of Capital Investment, tax incentives are divided into Grants program and Automatic Tax Benefits program. The grant program is administered by the Israel Investment Center (IIC), a department of the Ministry of Industry, Trade and Labor and the Automatic Tax Benefits program administered by the Tax Authorities. This system is quite similar to what is adopted in Malaysia where the PIA 1986 states the activities which qualifies for incentives.
Israel’s incentives are given based on locations in the country. The country placed a priority listing of states given with different rates. Projects in promoted locations are given higher exemption rates. Therefore, this in our opinion is very useful as the government can use this as a tool to control and ensure systematic development in various locations. This is practiced in Malaysia as the Minister of Finance may grant pioneer status to companies located in promoted areas for the same purpose as in Israel.
To contrast between both the countries, Israel does not adopt the pioneer status incentives or investment tax allowance. Therefore, exemptions are made fairly based on activities while in Malaysia, it is performed depending which incentive system it qualifies. For instance, pioneer status, investment tax allowance, reinvestment allowance or industrial adjustment allowance. But there is a special relation between Malaysia and Israel which is payments within Malaysia must be made in Ringgit but payments outside Malaysia may be made in any foreign currency except in the currency of Israel.
To extend incentives and promotion to the next level, Israel establishes special incentive programs with specific countries like the United States. US investors enjoy special grants and tax breaks investing in Israel based on the legal framework listed below.
i. Israeli Income Tax Ordinance – Tax reform 2003
ii. USA-Israel Taxation Treaty of 1975 – Avoid double taxation
iii. Encouragement of Capital Investments Law,1959
-R&D Grants for Approved Enterprises
-Reform of 2004: Streamline Alternative Track/Ireland Track/Strategic Track
iv. Encouragement of Industrial Research and Development Law, 1984
-R&D Grants for Industrial R&D
v. Encouragement of Industry (Taxes) Law, 1969
-Industrial Enterprise
Like Malaysia, Israel does establish comprehensive Double Tax Agreements (DTA) with countries such as Austria, Ireland and many more. These DTAs serve as to attract more FDIs into the country.
Focusing in the detail legalisation of Israel relating to incentives and promotion of investment, there is a tax law allowing approved investment to accelerate the depreciation on its property and equipment. Its works where in the first five-year operation of the assets, they are allowed to depreciate the assets for tax purposes at 200% to the ordinary rate for equipments and at 400% to the ordinary rate for buildings. This is a special law in Israel which is very foreign and different with the Malaysian income tax law. Malaysia does not allow such incentives. This accelerated depreciation may sound attractive but will impose many complications in our opinion if implemented in Malaysia. This is because it affects the capital allowance structure computation. As the investment incentives system in Malaysia is generally consisting of pioneer status and investment tax allowance which is much affected by the capital allowance figure before arriving to the statutory income, the accelerated depreciation concept complicates the computation and affects the choice of either using pioneer status or investment tax allowance. Therefore, we strongly stand that Malaysia should not adopt this accelerated depreciation method as adopted in Israel as the computation of chargeable income is different in structure.
Relating to the R&D, Israel performs its R&D incentives rather differently compared to other countries. Israel forms bi-national funds which encourages joint R&D programs with foreign investing companies. These funds are formed to provide grants as incentives to foreign investors. This is a very attractive and creative form of incentives to promote investments.
Following our review we found that Malaysia provides a more attractive incentive package compared to Israel in terms of figures and also exemption periods. Besides that, Malaysia also adopts a more structured and systematic incentive promotion techniques. For example, Malaysia uses the pioneer status while Israel does not adopt anything like this although it does provide exemptions to foreign investment. Therefore, the incentive system in Israel is vaguer and it makes it hard to draw conclusions especially for new cases. In long term, not just a good system provides simpler application but it also saves cost. Israel should take the Malaysia tax incentive and promotion investment provisions as reference to enhance and improve their incentive system and attractiveness to boost their FDI.
Through thorough studying in the Israel income tax act, we found that Israel adopts a rather flexible tax application compared to the ITA1967 which is much stringent. This is proven where investors who opt for automatic programs as explained above can apply for advance ruling to determine the scope of benefits if conditions are met. In Malaysia, rules are rather rigid where there are few cases where application is allowed for special benefits given. Therefore, the ITA1967 is considered much stricter if compared to the Israel Tax Act. Applying a stricter and more stringent law does help in maintaining authority and also it saves cost in application and also prevents incurrence of disputes among investors who are not satisfied with the different rulings. All in all, the tax incentives structures in Malaysia and Israel is quite similar except the fact that Israel’s provisions are more flexible and less rigid structurally. In our opinion, it is more efficient to adopt a more rigid application of income tax provisions to ensure systematic applications and prevent any unwanted disputes.
Taiwan
Under 2010 budget, Taiwan government uses the tax treatments of foreign investment to attract global companies invest in the Taiwan market. This tax treatment of foreign investment is for domestic source of income that subject to all foreign source income, personal tax is exempted and an enterprise is taxes on its worldwide income. The objective of developing these tax laws is because the government intends to show respect to the non-resident and foreign enterprise. These parties only pay the income tax according to the domestic source income.
The enterprises which are incorporate under the Corporate Law in the ROC will be entitled the benefit from the tax incentives that provided by the Statue for Upgrading Industries. Under the Statue for Upgrading Industries, the tax incentives are include tax holiday, investment tax credit, accelerated depreciation, encouragement of investment by overseas Chinese or Foreign Nationals, encouragement of enterprise outward investment, and other tax benefit to encourage the foreign investment.
The Taiwan government offer the tax holiday to the foreign investors who operate their business enterprise or an individual invest in a company in the Taiwan. The organization is designated as a newly emerging, important and strategic industry. This organization is allowed to apply tax credit for the shareholders who making the investment against profit-seeking enterprise income tax or personal income tax. Besides that, shareholders can choose the tax holiday whether holding the registered stocks exceeding three years, or select a five-year exemption. This tax holiday is similar with the Malaysia pioneer status that government offers the tax incentives under the promotion of investment. The pioneer status is offered to companies that operates their business under the promoted products or areas. The incentives are given in the form of exemption for the period is five years from the day the company commence production.
Taiwan government offers the encouragement of Investment by Overseas Chinese or Foreign Nationals to the non-resident individual or non-resident enterprise which registered in ROC under the Statute for Investment. Benefit of this scheme is that enterprise profit or dividends received from an ROC partnership will reduced to 20% and withheld at the time of payment. The Taiwan government offers this scheme to the foreign investors because the government wants to encourage the overseas Chinese and foreign nationals to invest in Taiwan. Most of the Taiwan residents are Chinese; this encouragement is to encourage the oversea Chinese such as China, Hong Kong, Malaysia and Singapore to invest into the Taiwan market. Besides that, these people can easily adapt to the Chinese cultural and the government can seize this opportunity to promote the Taiwan cultural to the global market. We do not suggest Malaysia to adopt such a provision because Malaysia is a multi-religion country where Malay, Chinese, Indians and others live peacefully and prosperously together. Such provisions which only concentrate on one race may bring racism and critics which will affect the peacefulness of our country. Malaysia’s current incentive system which does not consider skin color is a perfect match to attracting FDIs into the country. This is because most of the large investors are from the west or the Middle East which is different in races.
In addition, the government offers investment tax credit to the investors. The purpose in the investment tax credit is to encourage upgrading industries. For investment into equipment or technology such as automation, reclamation of resources, pollution control will receive investment tax credit of 5% to 20% against profit-seeking enterprise. Besides that, the other investment credit allowance such as 35% for R&D and personnel training expenses. For the industries, the government has divide into various geographical areas, the corporations will get the 20% for the investment tax credit. In Malaysia, the government provides tax incentives for machinery and equipment industry, and it is similar with the Taiwan investment tax credit. On the other hand, tax incentives in Malaysia are better than in Taiwan because the companies who have pioneer status will enjoy the tax exemption of 100% of the statutory income for a period 10 years. Besides that, the Malaysia government will give investment tax allowance of 100% on the qualifying capital expenditure within five years with the allowance deducted for each year of assessment.
Each country have their own promotion scheme to attract the foreign investors attention to make the investment in their country. The data and information findings show that the Malaysia government provide better tax incentives to the foreign investors compare to Taiwan.
Kenya
The government of Kenya promotes foreign direct investment, as most of Kenya’s business and industry activities are encouraging foreigner to invest. At the same time, Kenya’s government has introduced few investment incentives to attract foreign direct investment. Investment incentives being offered are investment allowance, tax holidays, depreciation liberal rates, duty remission scheme and also reduction of corporate tax rates.
Previously, Kenya has implemented a higher rate of 85% investment allowance on investment outside Nairobi and Mombasa. While 35% rate for investment inside both cities. But currently, it has changed to flat investment allowance rate of 60%. This investment allowance is similar to the Investment Tax Allowance (ITA) of Malaysia. Both of the investment allowances are encouraging foreign investment by giving attracting allowance to foreign company on their capital machinery spending and cost of building for business activities. This allowance is more attractive to foreign investment company which need intensive or heavy capital spending and long gestation period (slow profit generation).
The pioneer status of Malaysia investment incentive is not found in Kenya. The pioneer status generally gives tax relief period for 5 years and it is granted for promoted activities or products. This tax relief allows the small and medium industry invested by foreigner to exempted from tax for a period of time to let their business growth and stabilize. Thus, it reliefs the foreign investor’s tax burden while concentrating in expanding their business during commencement. In other words, pioneer status directly encourages the foreign direct investment and boosting the development of promoted activity or product. Kenya only has tax holiday for investment in Export Processing Zones, not applicable for other investment outside the zones. Without the tax holidays, it will cause Kenya to loss some foreign investor who is intend to invest at Non Export Processing Zone and cause the investor turn to other country like Malaysia with pioneer status incentives.
Corporate tax rate is another important issue concern by foreign investor as it is the mandatory tax being charged on them. The corporate tax rate in Kenya is 32.5% and branch tax rate is 40%. Both of the tax rates are consider high for foreign company and will “push” the investor to other country with lower corporate
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