Malaysia Uncut

A Repository of Malaysian Stuff and More

2005 INVESTMENT CLIMATE STATEMENT — Malaysia

2005 INVESTMENT CLIMATE STATEMENT — Malaysia
Openness to Foreign Investment
The Malaysian government encourages foreign direct investment, particularly in export-oriented manufacturing and high-tech industries, and in “back office” service operations, but retains considerable discretionary authority in approving individual investment projects. The government does permit 100% foreign ownership in the manufacturing sector. However, in keeping with long-standing public policies designed to increase “bumiputera” (i.e. ethnic Malay and other indigenous peoples) participation in the economy, the Malaysian government encourages or requires joint ventures between Malaysian and foreign companies and in many areas limits foreign equity and employment. 
Malaysia actively woos foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), an ambitious project to transform a 15-by-40 kilometer area stretching south from Kuala Lumpur into Asia’s version of Silicon Valley. Foreign investors in the MSC receive a host of tax and regulatory exemptions (see Appendix A) in exchange for a commitment of substantial technology transfer. In September 2004, Prime Minister Abdullah Badawi pledged that MSC status would soon be available to new investors locating in Bayan Lepas Industrial Area in Penang and Kulim High Technology Park in Kedah, in addition to the MSC’s original location of Cyberjaya. This had not, however, been implemented by the end of 2004. Many corporations are now using the MSC to outsource call center and back office operations, including HSBC and BMW, among others. In the services sector, the government promotes foreign investment in information technology, hotels and tourism, research and development (R&D), and training. Malaysia also welcomes foreign investment in biotechnology. Prime Minister Abdullah repeatedly has expressed strong interest in using biotechnology to help invigorate the agricultural sector in Malaysia. Malaysia does not actively seek foreign investment in financial or professional services (other than “back office” operations that support foreign business activities) or foreign participation in agriculture (unless it is an agro-tourism linked project) or construction. Foreign investment also is restricted in the oil and gas industries. All foreign energy investment is conducted through production sharing contracts between foreign operators (including ExxonMobil, ConocoPhillips, Amerada Hess, Baker Hughes, and Murphy Oil from the U.S., as well as Royal Dutch Shell) and Malaysia’s national petroleum company, Petronas.
The Malaysian Industrial Development Authority (MIDA) screens all proposals for manufacturing projects in Malaysia, both foreign and domestic. MIDA determines whether a project is consistent with the Second Industrial Master Plan (1996-2005) and with other government strategic and social policies. Applications for investment in other sectors are handled by the relevant regulatory agency.
Investment regulations are specified in the Promotion of Investments Act of 1986 (PIA) and the Industrial Coordination Act of 1975. (The government pledged in 2004 to replace the PIA with a more concise law covering investments in both manufacturing and services, but had not repealed the PIA by the end of 2004. The PIA does not address services investment.) The Securities Commission and the Foreign Investment Committee implement the regulations specified in the Malaysian Code on Takeovers and Mergers. The Foreign Investment Committee also formulates policy guidelines for foreign participation in non-manufacturing sectors. In an effort to streamline the investment approval process and to stimulate foreign investment, the Government reduced the oversight and approval authority of the Foreign Investment Committee (FIC) in 2003.
In 1998, the Malaysian government relaxed existing restrictions on foreign equity in new manufacturing projects. Foreigners may now hold 100% equity in any new manufacturing project, whether export-oriented or not, for which MIDA approves a license. This relaxed policy applies only to new projects (both green-field and expansion). The policy originally was set to expire on December 31, 2000, but was extended until December 31, 2003. In June 2003, MIDA announced that the policy permitting 100% foreign ownership in manufacturing had been extended indefinitely.
Manufacturing investments approved under the liberalized measures are not subject to a divestment or dilution requirement. Prior to 1998, foreign ownership in manufacturing firms generally was limited to a 30% share, though up to 100% ownership was permitted depending on export orientation. (See Appendix B for elaboration on present and previous Malaysian government policies on equity ownership in new manufacturing projects.)
Foreign-owned manufacturing firms with licenses issued prior to June 17, 2003 are required to export a certain percentage of their production. However, they may apply to the Ministry of International Trade and Industry (MITI) for permission to sell locally 100% of products not subject to import duty or not produced domestically, or 80% of products if domestic production does not meet the demand. The government lifted these restrictions for foreign-owned manufacturing firms with licenses issued after June 17, 2003. These guidelines, designed to encourage new investment, allow new-to-market or expanding foreign-owned manufacturing firms to export any portion of production.
The Malaysian government has also loosened foreign-held equity restrictions in several other industries. The GOM increased the level of foreign ownership allowed in telecommunications firms from 30% to 61% in 1998. The government stated at that time that foreign equity must be reduced to 49% after five years, but to date it has not mandated foreign divestment from telecommunications holdings. Foreigners are permitted to hold a 70% stake in shipping companies, 49% in forwarding agencies, and 51% in insurance companies.

The Malaysian government promotes the acquisition of economic assets by bumiputera to encourage a more even distribution of wealth among races. The government often requires foreign and domestic non-manufacturing firms to take on bumiputera partners (usually 30% of share capital) and to maintain a workforce that proportionately reflects Malaysia’s ethnic composition. If a company issues publicly-traded stock on the Bursa Malaysia (formerly the Kuala Lumpur Stock Exchange), it is required to issue at least 30% of its initial offering to bumiputera shareholders. The government relaxed requirements for subsequent issuances and share trading in August 2003.
Malaysia offers a number of incentives to foreign manufacturing investors (See Appendix C). Historically these incentives have been linked to performance criteria such as export-percentage requirements, as specified in individual manufacturing licenses. As mentioned above, however, export requirements have been relaxed for firms issued licenses after June 17, 2003.
Project approval depends on many factors. MIDA may consider the size of an investment, the export-orientation of production, the type of financing (both local and offshore) required, capital/labor ratio, the potential for technological diffusion into the local economy, the ability of existing and planned infrastructure to support the effort, and the existence of a local or foreign market for the output. The criteria are applied in a non-discriminatory manner, except in instances where both local and foreign firms propose identical projects. All requests are handled on a case-by-case basis.
In an effort to insulate the Malaysian economy from risks posed by volatile short-term capital flows, and to eliminate offshore trading of the ringgit, the government imposed selective capital controls on September 1, 1998, and fixed the exchange rate of the Malaysian ringgit at RM3.8=U.S. $1.0. Foreign direct investment flows, wages, dividends, interest, and rental income earned in Malaysia were exempted from controls. Following a series of relaxations, in May 2001 the government eliminated one of the most controversial measures when it abolished a 10% tax on foreign investors’ portfolio investment profits taken out of the country. Further information on remaining capital controls, and economic and monetary policy developments in Malaysia, is available on Bank Negara Malaysia’s website: www.bnm.gov.my.
Thirteen wholly foreign-owned commercial banks operate in Malaysia, and enjoy considerable market share in a number of sectors. The government has expressed a desire to reduce the number of banks, yet Bank Negara has indicated its intent to issue 3 new licenses to foreign participants in Islamic banking in 2004 and an additional 3 commercial licenses are expected in 2005. Foreign participation in new commercial banking operations otherwise remains restricted, with foreign equity limited to an aggregate 30% in any single institution including Islamic banks. For virtually all publicly listed companies, only a minority portion of stock is available for trading. The principal shareholders (who are often government-linked agencies) often hold the majority portions of stock. Malaysia’s privatization program slowed as a result of the 1997-1999 economic downturn. Since then the government has re-acquired a number of privatized entities, including the national air carrier, MAS, and Kuala Lumpur’s light rail transit system. The government has made little movement towards restarting its privatization efforts. Foreign participation in the last round of privatization was generally welcome. Foreign firms are able to participate in government-financed research and development programs.

Major Taxation Issues Affecting U.S. Business
A company is resident in Malaysia for tax purposes if its management and control is exercised in Malaysia, that is, if directors’ meetings are held in Malaysia. Resident companies pay an income tax of 28% on all income, 38% in the petroleum industry. Payments made to non-residents for technical or management services and rental of movable properties are subject to withholding tax at the rate of 10%. The United States and Malaysia have not concluded a bilateral tax agreement and no negotiations are anticipated at this time.
Tax authorities normally collect taxes within 30 days after the issuance of a notice of assessment. However, companies are required under the compulsory tax payment scheme to pay tax in bimonthly installments for each assessment year, commencing from the month of January or February based on an estimate of tax payable. Taxes on royalties, rental of movable properties, technical or management service fees and interest received by non-resident companies are collected by means of a withholding tax. The withholding tax is payable within one month of crediting the non-resident company. Starting in 2000, the tax collection system changed to a present-year assessment.
Conversion and Transfer Policies
Despite the imposition of selective capital controls, Malaysia’s currency remains fully convertible. Importers and exporters have sufficient access to foreign exchange. Ringgit earned by foreigners in the form of salaries, interest payments, and dividends may be converted into foreign currency for repatriation abroad.
All payments to other countries must be made through authorized foreign exchange dealers in foreign currency. Dealers are prohibited from supplying payments in the currencies of Israel, Serbia and Montenegro.
Effective April 1, 2004, the government increased the allowable maximum of retained foreign currency export proceeds held in foreign currency accounts by resident exporters and approved operational headquarters to U.S. $100 million from the previous U.S. $70 million. Resident and non-resident travelers may carry no more than RM 1,000 into or out of Malaysia. Residents may not carry out foreign currency more than the equivalent of RM 10,000 (U.S. $ 2,632). Non-residents may carry in any amount of foreign currency, but are required to declare currency amounts in excess of USD $2500. Non-residents may carry out any amount of foreign currency up to the amount they carried in.
Expropriation and Compensation
The Embassy is not aware of any cases of uncompensated expropriation of foreign-held assets by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system, which has proved capable of enforcing property and contractual rights.
Dispute Settlement
Malaysia is a signatory to the UN-sponsored Convention on the Settlement of Investment Disputes and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The domestic legal system is open and accessible. Past cases of foreign investment disputes, which have been rare, have generally been handled satisfactorily by existing dispute settlement mechanisms. Many firms choose to include mandatory arbitration clauses in their contracts. The U.S. Embassy is aware of one contractual dispute with a U.S. company where the Malaysian firm chose not to honor mandatory arbitration clauses as stated in their contract. Resolution of that case is pending.
Should local administrative and judicial facilities fail to satisfy claimants, the dispute is submitted to the International Center for Settlement of Investment Disputes (ICSID) under the aegis of the United Nations. The government has set up the Kuala Lumpur Regional Center for Arbitration under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes.
Performance Requirements/Incentives
Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer. Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.
In the May 2003 Economic Stimulus Package, the Malaysian government extended the full tax exemption incentive to firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority) to fifteen years from ten years and those with “Investment Tax Allowance” status (companies promoting products or activities in industries or parts of Malaysia to which the government places a priority, but not as high as Pioneer Status) to ten years from five years. In general, however, if a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded. In extreme cases, a firm could lose its manufacturing license. The government has stated that in the long term, it intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors.
Appendix A lists benefits for companies with MSC status, which extends to three separate zones in Malaysia: its original location in Cyberjaya, the Bayan Lepas Industrial Area in Penang and the Kulim High Technology Park in Kedah. Appendix B describes the conditions of foreign equity structure. Appendix C lists investment incentives in the manufacturing sector. Appendix D lists guidelines for expatriate employment.
Right to Ownership and Establishment
Foreign-held equity limits have been lifted for new manufacturing projects and the expansion of existing projects received between January 1, 1998, and December 31, 2003. The government has not made announcements clarifying the status of new projects begun after December 2003. However, projects approved before 1998 are still bound by the equity structure specified in their individual manufacturing licenses. Seventy percent foreign ownership is permitted in local fund management companies working with both local and foreign clients and dealing with both institutional and unit trust funds. Forty-nine percent foreign ownership is permitted in brokerage companies. The government announced in September 2004 that it would issue up to five licenses each for foreign brokerage and global fund management companies to operate in Malaysia.
Malaysia has also temporarily eased equity restrictions on licensed telecommunications companies. Under measures announced in May 1998, foreign ownership in telecommunications companies may reach as high as 61%, but the government has stated that foreign ownership in the sector must be reduced through divestiture or dilution to no more than 49% after five years from the initial investment. As of end 2004, we have not seen government efforts to enforce any such divestitures or dilution.
Under the Insurance Act of 1996, foreign insurance subsidiaries were required to incorporate their operations locally by June 30, 1998. However, the government has granted individual extensions to this deadline and has yet to move against companies not in compliance. Foreign shareholding exceeding 49% is not permitted unless the Malaysian government approves higher shareholding levels. As part of the 1997 WTO Financial Services Agreement, Malaysia committed itself to allowing existing foreign shareholders of locally incorporated insurance companies to increase their shareholding to 51%. New entry by foreign insurance companies is limited to equity participation in locally incorporated insurance companies. The aggregate foreign share in such companies may not exceed 30%.
Certain financial sectors have additional barriers to entry. For example, the government severely restricts establishment in the financial service industry. No new banking or insurance licenses are being issued, other than those for re-insurance firms. (In December 2000, the government reissued a banking license to the Bank of China. That license had been surrendered in 1959.) Foreign banks wishing to enter this market may purchase equity in existing financial institutions. In February 2000, the government approved substantial consolidation of the banking industry into 10 “anchor” banks in an effort to create stronger, more competitive domestic institutions that might better withstand future fluctuations in the global financial market. All financial institutions completed their merger plans into 10 anchor banks by March 2002. Analysts believe that in the years ahead there will be further consolidation among domestic banks, bringing the number of anchor banks down to approximately six. Even so, the government hinted in December 2004 that it would make up to 3 commercial licenses available in 2005. Malaysia has a substantial Islamic banking sector, accounting for 9.6% of assets in the banking system. Almost all banks, both local and foreign, offer Islamic products. In 2004, the government announced plans to issue three new Islamic banking licenses to foreign banks active in the Islamic banking sector. The Central Bank awarded one license in May 2004 to Kuwait Finance House, which expects to begin operations in June 2005. Bank Negara awarded an additional license to a consortium composed of Qatar Islamic Bank, RUSD Investment Bank, and Global Investment House. The Central Bank awarded the third foreign license for Islamic banking to Al Rajhi Banking and Investment Corporation.
The Malaysian government maintains broadcast content quotas on both radio and television programming. Eighty percent of television programming must originate from local companies owned by ethnic Malays. However, in practice, local stations have been granted substantial latitude in programming because of a lack of suitable local programming. Radio programming must also consist of 60% locally originated content. The Communications and Multimedia Act of 1998 transferred responsibility for regulating broadcasting from the Ministry of Information to the Ministry of Energy, Telecommunications, and Multimedia, now renamed the Ministry of Energy, Water and Communications. It calls on industry groups to establish content standards and could serve as the basis for modification of existing local content restrictions. Foreign ownership of radio and television stations is not expressly forbidden but not likely to be approved.
Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by the parastatal, Petroleum Nasional Berhad (Petronas), the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign investment takes the form of production sharing contracts (PSCs). Non-Malaysian firms are permitted to participate in oil services either in partnership with local firms or as contractors. They are restricted to a 30% equity stake if they are incorporated locally. Ownership of agricultural land is restricted to Malaysian citizens.
Historically, non-export-oriented foreign firms that had negotiated temporary exemptions from general equity limits were required to restructure within a definite timeframe. A restructuring program could involve taking on new local partners, giving existing local partners a greater equity share, or floating shares on Bursa Malaysia, formerly the Kuala Lumpur Stock Exchange (KLSE). The government’s goal at that time was to reduce foreign ownership of most firms producing for the domestic market to 30%. However, as mentioned previously, all new manufacturing license applications received through December 31, 2003 are exempt from equity and export conditions, and equity restructuring will not be required in the future. In June 2003, the government extended indefinitely the policy permitting 100% foreign ownership in new investment and expansion of existing investments in manufacturing.
Private entities, both foreign and domestic, have the right to acquire, merge with, and take over business enterprises according to the Foreign Investment Committee (FIC) guidelines of 1974. However, the acquisition or disposal of five percent or more of interests in any local financial institution requires the prior approval of the Minister of Finance.
Patents registered in Malaysia generally have a 20-year duration from date of filing, which can be extended under certain circumstances. The length of time required for patent registration averages five years, due to a shortage of qualified personnel in the Patents and Trademarks Department of the Ministry of Domestic Trade and Consumer Affairs. The Malaysian government recently has hired a number of patent examiners, with a goal of reducing average registration time to three years. While no current figures are available, as of June 2003, a backlog of 16,355 patent applications was awaiting processing. Although the processing time for trademark registration may be as long as 2 years, industry groups have not complained widely about infringement. Copyright protection extends to computer software and lasts for 50 years. The Copyright Act includes enforcement provisions allowing government officials to enter and search premises suspected of infringement and to seize infringing copies and reproduction equipment.
Intellectual Property Rights
Malaysia is a member of the World Intellectual Property Organization (WIPO), the Berne Convention, and the Paris Convention for the Protection of Industrial Property. In 2003 Malaysia amended its laws to allow it to join the Patent Cooperation Treaty (PCT) but as of January 2004 implementing regulations had not been gazetted. Malaysian law provides copyright protection to all works published in Berne Convention member countries regardless of when the works were first published in Malaysia. Malaysia is also a member of the WTO and a party to the Trade Related Intellectual Property (TRIPS) agreement.
The Optical Disc Act of 2000 established a licensing and regulatory framework for manufacturing copyrighted work and controlling piracy. Manufacturers of optical discs are required to obtain licenses from both the Ministry of International Trade and Industry and the Ministry of Domestic Trade and Consumer Affairs. Malaysia’s production capacity for optical discs far exceeds local demand plus legitimate exports, and pirated products believed to have originated in Malaysia have been identified throughout the Asia-Pacific region, North America, South America, Africa, and Europe. As of January 2004, Malaysia remained on the USTR Special 301 Watch List.
A special task force, chaired by the Minister of Domestic Trade and Consumer Affairs and including representatives from all ministries and agencies with responsibility for IPR, has overseen the expansion of enforcement staff and a more vigorous program of raids on sellers of pirated products. Government and industry cooperation has expanded. The results have been measurable; retail piracy in the domestic market, though still high, has dropped in both value and percentage terms over the last few years. The International Intellectual Property Association (IIPA) estimates 2003 industry losses in Malaysia due to piracy at $178 million, with piracy rates at 63 percent for business software, 45 percent for music, and 50 percent for movies. The government also made some headway in tackling the judicial backlog for infringement cases. Malaysian courts have imposed deterrent sentences, fines and or penalties for the offenders.

A number of U.S. consumer product companies also have suffered significant losses due to the manufacture and sale of counterfeit products in Malaysia. The volume is difficult to determine because of the broad range of products affected, which includes printer cartridges, motor oil, household cleaning agents, shampoo and skin care items, herbicides, and batteries. Counterfeiters have improved the quality of packaging and marketing so that consumers are misled into purchasing the products. The products have caused harm to individuals, and damage to automobiles and household goods. Some of the pirated goods are produced in Malaysia, while many are brought into the country from China, Thailand and India.
The Malaysian government has mandated the use of hologram stickers as a primary tool in helping its enforcement agents identify counterfeit goods. The Ministry of Domestic Trade and Consumer Affairs began requiring their placement on optical disc products in 2003, and the Ministry of Health announced its intention to require all medicines and health care products to be affixed with a hologram label beginning in mid-2005. U.S. industry groups oppose the mandatory requirement schemes because of concerns about cost and efficacy of this “one-size-fits-all” approach.
Transparency of the Regulatory System
Malaysia has an open system of government, economic, and business regulation. For tax purposes, local and foreign enterprises are treated essentially the same.

The Malaysian government restricts the number of expatriate personnel employed by foreign and domestic firms. As described in Appendix D, a new foreign-invested project is allotted a certain number of “key posts,” determined by the size of the investment, which may be occupied by foreigners in perpetuity. Beyond these automatic allowances, a firm wishing to employ expatriate personnel generally must demonstrate that there is a shortage of qualified Malaysian candidates and that a Malaysian citizen is being trained. In practice this is a difficult showing for firms to make. In June 2003, the government released new guidelines liberalizing the policy on employment of expatriates in the manufacturing sector. Under the new policy manufacturing companies with foreign paid-up capital of at least U.S. $2 million will receive automatic approval for up to 10 expatriate posts. Manufacturing companies with paid-up capital of U.S. $200,000 to $2.0 million will receive automatic approval for up to five expatriate posts.
Foreign firms have complained that the procedures for obtaining work permits are time-consuming and burdensome. Due to the acute shortage of highly-qualified professionals, scientists and academics, Malaysia has made some progress in simplifying permit approval for these categories of foreign personnel. With the present procedure, the foreign investor submits permit applications simultaneously with the project proposal to the relevant ministry. The ministry approves the applications with the project then forwards them directly to the Immigration Department for immediate issuance of the required documents. Permit-approval bodies now convene more often and have successfully computerized their operations, reducing the processing time. Nevertheless, anecdotal evidence suggests that significant problems remain.
The government monitors hiring practices to ensure that all employers strive to meet guidelines designed to ensure a racial balance in employment. Malaysia’s manufacturing and construction industries have relied heavily on unskilled guest workers from Indonesia and, to a lesser extent, other Southeast Asian countries. In February 2002, however, the government instituted new regulations governing the employment of foreign workers in certain industries, including construction, manufacturing, and plantations, as part of an effort to reduce employment of illegal aliens. In 2004, the government decided to repatriate up to 1 million workers illegally present in Malaysia.
Efficiency of Capital Markets and Portfolio Investment
The government is committed to broadening and deepening domestic capital markets. With that in mind the government released in 2001 the 10-year Financial Sector Master Plan and Capital Markets Master Plan. (Please see the following website links for more information: www.bnm.gov.my and www.sc.gov.my). The Financial Sector Master Plan, produced by the central bank, Bank Negara, aims to develop a more competitive and resilient financial system by building competitive domestic banks. The Plan defers the introduction of new foreign competition in conventional banking until after 2007. (As of end 2004, approximately a quarter of banking assets were placed with established foreign companies). The Plan provides for some liberalization in the insurance industry, including lifting existing restrictions on employment of expatriate specialists, raising caps on foreign equity, and opening the reinsurance industry to foreign competition.
In February 2001, the Securities Commission released its Capital Markets Master Plan, which stipulated that foreign participation limits would be liberalized by 2003, at which time foreigners would be permitted to purchase a limited number of existing stock-broking licenses and take a majority stake in unit trust management companies. As of June 2004 the equity restrictions had not been relaxed. The maximum foreign equity stakes remains fixed at 49% in stock-broking firms and 30% in unit trust management companies. Foreigners may hold up to 70% in fund management companies managing both local and foreign funds. In September 2004, the government announced that it would make licenses available for 5 foreign global fund management and five foreign stock brokerage firms.
Since 1998, the Central Bank has progressively lowered deposit and lending rates. Daily average interbank deposit rates have fallen from 10.74% in January 1998 to 2.70% in December 2004. The average lending rate likewise has dropped from 11.51% in January 1998 to 5.97% at the end of 2004. In April 2004, Bank Negara implemented a new interest rate framework, reflecting a move towards a more market-based approach in determining interest rate. The overnight policy rate replaced the three-month intervention rate as the indicator of the Central Bank’s stance on monetary policy, and as the target rate for the day-to-day liquidity operations of the Bank. Bank Negara also relaxed certain rules on how banks compute their lending rates, namely removing the cap on lending rates for most lending products. The new framework is expected to give banks more flexibility to create structured and customized products. Bank Negara still prescribes certain limits on interest rates used by banks, specifying a minimum rate for fixed deposits, and maximum rates for credit cards and certain home loans.
Foreign investors have access to credit on the local capital market, and may source up to RM 50 million (U.S. $13.2 million) in funding from local financial institutions. In March 2003, the government abolished the previous requirement that foreign companies source at least 50% of local borrowing from domestic banks. Foreign companies are permitted an aggregate a maximum of RM 50 million (U.S. $13.2 million) in ringgit credit facilities from Malaysian banking institutions.
Though the government has significantly relaxed capital controls since their imposition in September 1998, the government continues to control the flow of currency. Local currency may not be sent abroad to purchase imports, nor may it be received from abroad in compensation for exports. Unless prior permission is sought, no one may carry more than one thousand ringgit into or out of the country with the exception of border traders, who may carry up to RM 10,000 (U.S. $2,631) or the equivalent in foreign currency. A resident of Malaysia may carry no more than U.S. $2,500 or the equivalent in any foreign currency out of the country, although a non-resident may carry out any amount of foreign currency up to the amount he or she brought in.
Non-resident companies operating in Malaysia may borrow in Malaysia. However, ringgit credit above RM 50 million (U.S. $13.2 million) requires prior approval from Bank Negara. Foreigners may trade in securities and derivatives. The Malaysian government has an adequate regulatory system to facilitate portfolio investment. In the wake of the 1997-1999 regional financial crisis, Malaysia took steps to improve accounting transparency and corporate governance. Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end. Companies must submit audited annual accounts for public scrutiny within four months of each year’s end. To promote professionalism, the number of corporate directorships any individual may hold has been limited to 25. All public and private company directors are required to attend classes on corporate rules and regulations.
Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified. A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia (formerly the Kuala Lumpur Stock Exchange or KLSE) must now be deposited in the CDS. Short-selling of stocks is not permitted.
The domestic banking system came under acute stress as a result of the regional economic crisis of 1997-98. In 1998, the government undertook measures to re-capitalize distressed banks, to remove non-performing loans from banks’ books, and to restructure loan agreements. The government established a national asset management company, Danaharta, in June 1998 to purchase, manage, and dispose of non-performing loans (NPLs) in the banking sector. By March 2001, Danaharta had acquired some RM 48 billion (U.S. $12.6 billion) in non-performing loans, equal to approximately 44% of NPLs in the banking system. In March 2004, Danaharta indicated it plans to recover some RM 30.94 billion (U.S. $ 8.1 billion) from restructured NPLs. Danharta ceased purchasing NPLs in 2001 and has since been focusing its efforts on implementing debt recovery plans. Danaharta representatives have stated that the organization aims to cease operations in 2005.
Danamodal, a special purpose vehicle established in August 1998 to re-capitalize ailing financial institutions, injected a total of RM 7.1 billion (U.S. $1.9 billion) into 10 banking institutions. By January 2003, the amount of injected capital fell to RM 1 billion (U.S. $263 million) after most banks made partial or full repayments. System-wide, the risk-weighted capital adequacy ratio of banks was 12.7% as of March 2004, down from 13.1% the previous year. The third entity created by the Government to speed the recovery of ailing Malaysian businesses, the Corporate Debt Restructuring Committee (CDRC) officially ceased operations on August 15, 2002.
Political Violence
Malaysia has experienced little political violence since the serious ethnic rioting in 1969, which led to the establishment of the National Economic Policy, an aggressive program designed to give the bumiputera majority a larger stake in the economy. For a brief period in 1998, supporters of former Deputy Prime Minister Anwar Ibrahim staged a number of largely peaceful demonstrations to protest his trials and imprisonment. Anwar was released on appeal in September 2004.
Corruption
The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from taxes. Nevertheless, corruption remains a serious concern. The Anti-Corruption Agency (ACA) began operations in 1967, but does not play a significant role. Since June 1997, senior state-level officials have been required to declare their assets to the ACA upon taking office. Foreign businessmen are asked to report any individuals who ask for payment in return for government services. ACA investigations are sometimes reported in the newspapers, but are rarely targeted at high-ranking officials or business representatives with well-connected companies. In conjunction with new Prime Minister Abdullah’s anti-corruption drive in early 2004, former Land Minister Kasitah Gaddam was charged with two counts of corruption relating to transactions by the Sabah Land Development Board, of which Kasitah was former chairman. The government also charged Eric Chia former CEO of Perwaja, a government-linked steel company, for charges loosely affiliated with the over RM 10 billion (USD 2.63 billion) in unaccounted for debts incurred by the company under Chia’s watch. The anti-corruption drive seemed to have lost momentum by the end of 2004.
Transparency International, a nonprofit organization, ranked Malaysia the 39th most corrupt nation in its 2004 survey of 146 countries. Malaysia’s score of 5.0 on a scale of 0 (corrupt) to 10 (clean) was a regression from the 5.2 in 2003. Even slipping from 2003, Malaysia placed ahead of countries such as South Korea, China, Thailand, the Philippines, Vietnam and Indonesia, though well behind others such as Singapore, Hong Kong, Taiwan and most of Western Europe. The Malaysian chapter of Transparency International is the Kuala Lumpur Society for Transparency and Integrity.
Bilateral Investment Agreements
Malaysia has bilateral investment guarantee agreements with 70 economies:
Date Economy
1959 United States
1960 Germany
1971 Canada
1972 Netherlands
1975 France
1978 Switzerland
1979 Sweden, Belgium, Luxembourg
1981 United Kingdom
1982 Sri Lanka, Romania
1984 Norway
1985 Austria, Finland
1987 Organization of Islamic Conference, Kuwait, ASEAN
1988 Italy, South Korea, People’s Republic of China
1991 United Arab Emirates
1992 Denmark, Vietnam, Papua New Guinea, Chile, Laos
1993 Taiwan, Hungary, Poland
1994 Indonesia, Albania, Zimbabwe, Turkmenistan, Cambodia, Namibia, Argentina, Jordan, Bangladesh, Croatia, Bosnia-Herzegovina
1995 Spain, Pakistan, Kyrgistan, Mongolia, Uruguay, India
1996 Peru, Kazhakstan, Malawi, the Czech Republi, Guinea, Ghana
1997 Kuwait, Egypt, Botswana, Cuba, Uzbekistan, Macedonia
1998 Yemen, Turkey, Lebanon, Burkina Faso, Sudan, Djibouti, Ethiopia
1999 Senegal, State of Bahrain
2000 Algeria, Saudi Arabia
2002 Morocco
Malaysia has a limited investment guarantee agreement with the United States under the U.S. Overseas Private Investment Corporation (OPIC) program. Efforts to negotiate a more comprehensive bilateral investment treaty still require resolution of several issues, the most important of which is differing interpretations of national treatment.
Malaysia has double taxation treaties with 56 countries:
Date Country
1968 Singapore (supplementary in 1973)
1970 Japan (new agreement 1999), Sweden (new agreement 2002), Denmark, Norway
1972 Sri Lanka
1973 United Kingdom (new agreement 1996), Belgium (additional protocol 1995)
1974 Switzerland
1975 France (additional protocol 1991)
1976 New Zealand, Canada, India (new agreement 2001)
1977 Germany, Poland
1980 Australia (additional protocol 1982)
1982 Thailand (additional protocol 1995), South Korea, Philippines, Pakistan, Romania
1983 Bangladesh
1984 Italy, Finland
1985 People’s Republic of China
1987 Russia
1988 Netherlands (additional protocol 1996)
1989 United States* (limited agreement), Hungary, Austria
1991 Indonesia
1992 Mauritius, Iran (additional protocol 2002)
1993 Papua New Guinea, Saudi Arabia* (limited agreement), Sudan
1994 Albania, Zimbabwe, Turkey, Jordan
1995 Mongolia, Vietnam, Malta, United Arab Emirates, Fiji
1996 Czech Republic
1997 Kuwait, Egypt, Uzbekistan, Sri Lanka, Namibia, Argentina (limited agreement)
1998 Myanmar, Ireland
1999 Bahrain
2000 Kyrgyz Republic
2001 Morocco
2002 Croatia, Luxembourg
2003 Lebanon
*Malaysia’s double taxation agreements with the United States and Argentina are currently limited to air and sea transportation. The agreement with Saudi Arabia is limited to air transportation.
SOURCE: Ministry of International Trade and Industry, Index of Bilateral Agreements, found at http://www.miti.gov.my/trd-bilateral.html
OPIC and Malaysia
Since 1959, Malaysia has qualified for the U.S. Overseas Private Investment Corporation (OPIC) insurance programs. However, given Malaysia’s political stability, attitude toward foreign investors, and available dispute settlement mechanisms, few investors have sought OPIC insurance in Malaysia.
Labor
Labor market conditions improved marginally in 2004, as total employment increased to 10.5 million workers and the number of retrenched workers declined. The Malaysian unemployment rate dropped slightly to 3.4%, from 3.5% at the end of 2003. The regional economic downturn in 1997-1998 led to retrenchments which mostly affected Malaysia’s substantial foreign workforce. At that time, the government put a freeze on hiring new foreign workers. In February 2000, the government lifted the freeze on foreign workers except for some specific jobs. During the slowdown of 2001, the government again announced it would reduce hiring of foreign workers. In 2004, the government announced it would forcibly repatriate all illegal workers in Malaysia. Analysts estimate that up to 1 million workers illegally present may be repatriated, primarily to Indonesia. The government imposes a monthly per capita levy on employers of foreign workers: RM 100 (U.S. $26.30) on foreign construction and manufacturing workers and RM 30 (U.S. $8) on domestic and agricultural workers. Source: Department of Statistics, Malaysia, at http://www.statistics.gov.my/English/frameset_keystats.php
Labor productivity rose to 2% in 2003 from .9% in 2002. The real rate of wage increases in the manufacturing sector was 2.6% in 2003 as compared to 3.2% in 2002. Malaysia no longer seeks to entice labor-intensive companies to establish operations, and reserves its fiscal incentives for higher value-added projects.
Malaysia is a member of the International Labor Organization (ILO). Labor relations in Malaysia are generally non-confrontational. A system of government controls strongly discourages strikes. Some labor disputes are settled through negotiation or arbitration by an industrial court, though cases can be backlogged for years. Once a case is referred to the industrial court, the union and management are barred from further industrial action.
While national unions are proscribed, there are a number of national confederations of unions. The government has prevented some trade unions, such as port workers’ unions, from forming national federations. There are no labor unions in the electronics sector. Employers and employees share the costs of the Social Security Organization (SOSCO), which covered 8.1 million workers as of December 2003. No welfare programs or government unemployment benefits exist; however the Employee Provident Fund (EPF), which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector. Civil servants receive pensions.
Foreign Trade Zones/Free Ports
Malaysia has Free Zones (FZ’s) in which export-oriented manufacturing and warehousing facilities may be established. Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. The zones are divided into Free Industrial Zones (FIZ), where manufacturing and assembly takes place, and Free Commercial Zones (FCZ), generally for warehousing commercial stock. Companies that export not less than 80% of their output and depend on imported goods, raw materials, and components may be located in these FZ’s.
Goods sold into the Malaysian economy by companies within the FZ’s must pay import duties. If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN sourced. In addition to the FZ’s, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in a FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from 2-8 weeks.
Ports, shipping and maritime-related services play an important role in Malaysia since 90% of its international trade is sea borne. The government is promoting Port Tanjung Pelepas and Port Klang (Westport and Northport) as regional load and transshipment centers. The government has designated Port Klang, Port Tanjung Pelepas, Penang Port and Johor Port and ten other locations as Free Commercial Zones. There are 13 Free Industrial Zones in Malaysia
Foreign Direct Investment
The U.S. has consistently been the largest foreign investor in Malaysia, with significant presence in the oil and gas sector, manufacturing, and financial services. An American Chamber of Commerce 2003 survey puts cumulative U.S. interest in Malaysia at more than US $28.6 billion. According to the Malaysian Industrial Development Authority, the U.S. accounted for the second greatest number of new manufacturing foreign investment project applications in terms of value by September 2004, with approved projects valued at U.S. $245 million. (Note: Manufacturing investment statistics do not capture investments in services or upstream oil and gas production.)
U.S. firms with significant investment in Malaysia’s petroleum sector include: Exxon/Mobil (which participates in upstream and downstream activities), Caltex, ConocoPhillips, Dow Chemical and Eastman Chemicals (all of which have investments in downstream activities). Major semiconductor manufacturers, including Freescale, Texas Instruments, Intel, Western Digital, ChipPac, National Semiconductor, and others have substantial operations in Malaysia, as does Dell Computers. Virtually all major Japanese consumer electronics firms (Sony, Fuji, Panasonic, Matsushita, Hitachi, etc.) have facilities in Malaysia.
Investment Statistics
Table One: Sources of Approved Manufacturing Investment in Malaysia (New Projects and Expansions)
(Value in U.S. Dollars Millions)
Total Investment 2000 2001 2002 2003
Foreign 5,211 4,827 3,047 4,116
Domestic 3,632 1,684 1,658 3,554
Foreign Investment Sources
(Value in U.S. Dollars Millions; Share in Percent)
Country 2000 2001 2002 2003
Germany 438 127 1,330 45
United States 1,972 870 702 574
Singapore 468 574 268 322
Netherlands 572 572 160 83
Japan 758 865 155 341
China incl. HK 100 781 32 92
U.K. 197 27 44 1,019
Switzerland 24 22 7 4
Australia 34 16 29 28
Korea 190 446 97 118
India 1 2 5 12
France 1 17 18 11
Others 220 506 200 1,467
Total Foreign US$ 5,211 4,287 3,047 4,116
US Share of Total
Foreign 37.8% 18.0% 14.9% 13.9%

Foreign Shr. Total 58.9% 74.1% 64.8% 53.7%
-Source: Malaysian Industrial Development Authority; values represent approved, not actual investment.
-Exchange Rates: U.S. $1.0=RM 3.80
-Note: Manufacturing investment only, does not include the upstream oil and gas industry or services.
Table Two: Foreign Manufacturing Investment by Sector
(U.S. Dollars Millions)
Sector 2000 2001 2002 2003
Chemicals 154 163 130 94
Petroleum Prod. 464 8 1,261 115
Electronics 2,687 2,479 1,054 955
Basic Metal 113 110 42 1,112
Textiles 193 12 8 20
Food Mfg. 141 134 113 116
Paper, Print 56 811 47 27
Rubber Products 170 59 58 28
Non-metal 402 420 26 86
Fabricated Metal 43 91 56 157
Transport 72 129 37 1050
Other 721 400 — 356
Total 5,216 4,816 3,047 4,116
Source: Malaysian Industrial Development Authority
Table Three: Malaysian Investment Abroad
(U.S. Dollars Millions)
Country 2000 2001 2002 2003
Singapore 753 548 278 94
United States 1,034 1,056 1,504 115
United Kingdom 142 71 105 955
France 197 20 — 1,112
Indonesia 140 443 237 20
Hong Kong 41 26 108 116
Australia 19 80 45 27
Philippines 29 14 16 28
China 40 82 81 86
Netherlands 1 140 244 157
Chad — — 289 36
Others 1,267 969 1,415 1,759
Total 3,633 3,449 4,322 2,787
-Sources: Cash BOP Reporting System, Bank Negara Malaysia.
-Investment data include equity investment, purchase of real estate abroad and extension of loans to non-residents.
Table Four: Net Foreign Direct Investment Flows to Malaysia
(U.S. Dollars Millions)
Year 2000 2001 2002 2003
FDI 1,970 553 3,158 2,470
Percentage of GNP 2.4% 0.7% 3.6% 2.5%

-Source: Bank Negara Annual Report 2000-2003

APPENDIX A
MULTIMEDIA SUPER CORRIDOR (MSC) INCENTIVES
Companies with MSC status are eligible for the following incentives:

  • Pioneer status for 10 years or 100% investment tax allowance. (See Appendix C)
  • No duty on computer and capital equipment.
  • Special guidelines to regulate foreign currency transactions and loans.
  • Special incentives for companies whose presence will attract others to establish their operations in the multimedia super corridor.
  • Small- and medium-scale firms can apply for government funding for R&D in designated areas.
  • No restriction on recruitment of expatriates.
  • Exemption from all capital controls measures.

Note: see www.mida.gov.my/invest.html
APPENDIX B
FOREIGN EQUITY GUIDELINES
General policy for manufacturing investment
Effective June 17, 2003:

  • 100% foreign equity allowed for all investment in new projects and existing companies’ expansion or diversification projects with no restrictions on export levels and product orientation.
  • No equity restructuring will be required later.
  • Policy on equity for non-renewable resources:
  • For projects that involve the extraction or mining and processing of mineral ores, majority foreign equity participation of up to 100 percent is permitted. In determining the percentage, the following criteria will be taken into consideration:
  • The level of investment, technology and risks involved in the project
  • The availability of Malaysian expertise in the areas of exploration, mining and processing of the minerals concerned
  • The degree of integration and level of value-added involved in the project.

Note: see www.mida.gov.my/invest.html
APPENDIX C

EXPORT INCENTIVES
Principal incentives for the manufacturing sector are contained in the Promotion of Investments Act of 1986 and the Income Tax Act of 1967. These incentives apply to companies subject to Malaysia’s 28% corporate income tax, 38% for the petroleum sector. Some are also available for investments in agriculture, tourism, R&D and technical training.
Incentives for manufacturers:

  • Pioneer status. Initial entrant(s) in designated new industries can receive full or partial tax exemption for five to fifteen years depending on the type of products. Dividends to shareholders will also be tax-exempt.
  • Investment tax allowance (ITA). A write-off of up to 60% of capital expenditures incurred during the first five years of project commencement against 70% of income. Any unused balance can be carried forward. Not available to firms with pioneer status.
  • Reinvestment allowance. An allowance of 60% of capital expenditures to expand, modernize or diversify an existing facility.
  • Export credit refinancing (ECR). Provides qualified exporters with below-market, short-term commercial credit for pre- and post-shipment.
  • Export allowance. Five percent of the fob value of export sales can be deducted from the pre-tax income of trading companies exporting Malaysian manufactures.
  • The Ministry of Finance approves double deduction of export credit insurance, provided the insurance company.
  • Double deduction for export promotion, granted for certain qualifying expenditures (e.g., overseas advertising and export market research).
  • Infrastructure allowance: In Sabah, Sarawak, and the Eastern Corridor of the Malaysian peninsula, an allowance of 100% is granted for capital expenditure on infrastructure such as reconstruction, extension or improvement of any permanent structure to set off against 85% of income.
  • Incentives for research and development. These inducements include a five-year tax holiday and permission to carry tax-relief period losses forward to the taxable period.
  • Incentives for training. These benefits consist of an investment allowance for buildings used for training and a double deduction for approved training expenses.
  • Customs exemption for raw materials, machinery. Granted for export-oriented manufacturers that use raw materials or components that are not made locally of acceptable quality. It also applies to machinery directly used in production. Under certain circumstances, it may be granted for firms producing for the domestic market.

Note: see www.mida.gov.my/invest.html
APPENDIX D
EXPATRIATE EMPLOYMENT
Applications for expatriate posts in manufacturing projects are submitted to the Malaysian Industrial Development Authority (MIDA) at the same time as the manufacturing license application. The following are the government guidelines on the employment and retention of expatriate personnel in the manufacturing sector in Malaysia effective June 17, 2003:

  • A company with a paid-up capital of at least U.S. $2 million is automatically allowed ten expatriate posts, including five key posts. Expatriates can be employed for up to ten years for executive posts, and up to five years for non-executive posts.
  • A company with paid-up capital of less than U.S. $2 million but over U.S. $200,000, is automatically allowed five expatriate positions including one key post. Expatriate executive posts may be retained for up to ten years and non-executive posts can be retained for five years.
  • A company with paid-up capital of less than U.S. $200,000 but over U.S. $131,579, can ask MIDA to consider permitting both expatriate executive and non-executive posts. Expatriate executive posts may be considered for up to ten years, and non-executive posts for up to five years.

 • For Malaysian-owned companies, approval for the employment of expatriates for technical posts, including R&D posts, will be automatic.
See www.mida.gov.my/enews/203/june/WEBSITEequityexpat2.doc
Source: http://www.state.gov/e/eb/ifd/2005/42086.htm

Thursday, August 17, 2006 - Posted by | General Info

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