Labuan's current tax framework must be reviewed

Bank Negara Malaysia (BNM) Governor Tan Sri Muhammad Ibrahim says the time has come for a review of Labuan's current tax framework, reports theSundaily.

He said the review is not only to ensure alignment with international best practices but also confirm the continued relevance of such incentives in catalysing new growth areas.

"Since the creation of offshore Labuan in the 1990s, the world has drastically changed.What was relevant then is no longer the case now. We have no choice but to change with it.

"It is an opportune time for us to review the current tax framework for Labuan," he said at the Labuan Industry Dinner here on Friday night.

He said tax incentives for businesses which have become irrelevant should be rationalised, while the allocation of any preferential tax treatment, must be supported by clear value propositions that are systematically measured across the qualifying period.

He said businesses that enjoyed tax incentives would be benchmarked against the performance indicators that quantify economics and financial benefits.

"This is not meant to be onerous. It is a necessary tool to ensure that the economy grows in an inclusive and sustainable way and the public policies implemented bear the intended benefits.

"Specific to financial industry players, such preferential treatment must be coupled with a clear business strategy that integrates the desired expected outcome of contributing positively to the national and the local economy," he added.

Muhammad said the intended outcome of the revised tax structure would enhance the economy of Labuan with balanced development.

"The revised tax regime should also improve regulation, compliance and prevent tax leakages.

He believed there would be closer cooperation between the authorities to address any regulatory arbitrage.

"The enhancement is also consistent with our continued commitment in advocating strong transparency and promoting greater fiscal sustainability.

Muhammad said the review of tax incentives is also to preserve the Labuan International Business and Financial Centre's (Labuan IBFC) reputation and competitiveness.

"The outcome that we seek is for an inclusive, sustainable and prosperous Labuan.

"All must benefit from the financial activities in Labuan … how we will get there is by design, by determination and the courage to institute reform," he added.

Meanwhile, he said offshore financial centres which remained mired in the old model and thinking, are set to become a sunset industry.

"As there have also been significant advancements with respect to international taxation practices, authorities are now more proactive in seeking to mitigate the distortionary effects of harmful tax competition on the allocation of resources and its negative implications on national tax bases," he said.

He said Malaysia, until early this year, has been an observer of the Organisation for Economic Cooperation and Development's (OECD) Inclusive Framework (on Base Erosion Profit Shifting (BEPS).

"Since January 2017, we have agreed to become a participating member in the Inclusive Framework and this will allow Malaysia to participate in the BEPS related work on equal footing with other OECD and G20 countries.

"We will also be able to provide direct inputs to shape the content of the BEPS related standards and in addition to that, work has commenced on reviewing respective jurisdictions' preferential tax regimes against the standards outlined, to combat harmful tax practices," Muhammad added.

One of the four BEPS minimum standards requires authorities to step up transparency and substance rules for geographically-mobile activities, such as financial services.

"It seeks, for one, to prohibit the shifting away of income into preferential tax regimes where businesses have little or no economic activity. Such international developments will directly influence IBFC's business model going forward.

"On the global regulatory front, as we had witnessed, the unfolding of the global financial crisis revealed the significant vulnerability of international financial markets to market dislocations.

"Calls for greater regulatory harmonisation and the adoption of international best practices have gathered speed, blurring the distinction between onshore and offshore regulatory requirements," Muhammad said.




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