Malaysia has shown inner strength to overcome multiple recent trials, emerging as a contender for global investment and learning to prosper despite troubles in regional and global theatres. Putro Harnowo reports.
T
he year of the tiger, 2022, proved to be a monumental one for Malaysia as the country dealt with challenges on geopolitical and public health fronts.
Three different prime ministers took office in the past three years while navigating an economic roller coaster. After the onset of the pandemic caused the economy to contract by 5.5% in 2020, Malaysia’s gross domestic product bounced back 3.1% in 2021 before roaring ahead by 8.7% last year – the fastest pace in more than two decades.
After the world reopened from the covid pandemic, increasing tensions have emerged between the two biggest economies, but Malaysia has stood out by finding the middle ground and accommodating both China and the US.
According to the Malaysian Investment Development Authority (MIDA), China was the top investor in 2022, accounting for MYR55.4 billion (USD12.5 billion) approved investment, almost twice as much as the runner-up, the US, with MYR29.2 billion approved investment. In 2021, China was the third-most approved investor, while the US was not even among the top five.
This trend arguably took off in mid-2021, with Risen Solar Technology of China’s USD10 billion investment pledge, followed by US-based Intel’s USD7 billion investment plan in late 2021. In March, Amazon said it would allocate USD6 billion to build data centres in Malaysia, while China is committed to investing MYR170 billion, as announced by Malaysia’s Prime Minister Anwar Ibrahim following his visit to Beijing in the same month.
In April, the World Bank’s chief economist for East Asia and the Pacific, Aaditya Mattoo, said that the Regional Comprehensive Economic Partnership trade agreement had helped deepen China’s integration with much of the region. Trade restrictions between the US and China also led to increased exports to certain economies, including Malaysia.
The country’s strategic location, commitment to economic development and attractive market potential make it an appealing destination for foreign investors.
Asia Business Law Journal discussed the country’s upward trajectory with legal experts in Kuala Lumpur, with several acknowledging the crucial role of the government’s proactive policies on liberalisation, tax and investor protection. Nonetheless, some also highlighted domestic regulatory changes and rising concern about environmental, social and governance (ESG) factors as challenges.
“The domestic political crisis did leave a mark for Malaysia as far as the influx of foreign investments are concerned,” says Norhisham Abd Bahrin, a partner at Azmi & Associates. “The resulting political instability gave rise to market uncertainty, which led to risk-averse investors reconsidering their investment interests.”
Despite such political uncertainty, Bahrin says the Malaysian economy has remained resilient due to its strong fundamentals and diversified economic structure, supported by a robust regulatory infrastructure and sound financial system.
“Now that the nation has moved forward from these uncertain times and re-emerged stronger in the global economic market, its resilience to persevere and grow can be seen as a good investment indicator,” says Bahrin.
Diplomatic dance
In February, the Economist reported 14 Asian economies were ready to replace China at the centre of the global supply chain amid the widening rift with the US. The links in this alternative Asian supply chain are collectively called “Altasia”. Although no single country can match China’s vast manufacturing base, Grace Yeoh, a partner at Shearn Delamore & Co, points to Malaysia’s inclusion in Altasia.
“The trade war between China and the US has accelerated the trend of trade diversion and supply chain relocation out of China, causing a shift in investment destinations by global manufacturers under the ‘China plus one’ strategy,” says Yeoh. “Malaysia, strategically geographically located, is well placed as an investment destination for US and non-Altasian corporations.”
Yeoh says the trade war has contributed to the continued growth of the Malaysian electronics and electrical sectors, including the semiconductor industry. Other industries have also benefited from high US tariffs on Chinese products, creating export opportunities for Malaysian producers.
“Malaysia has been positioning itself as an attractive investment destination, particularly for high-tech industries and manufacturing,” says Saravana Kumar, a partner at Rosli Dahlan Saravana Partnership. “The country’s competitive costs, skilled workforce, infrastructure and geographic location have made it an appealing alternative for businesses affected by the trade war.”
Malaysia External Trade Development, a trade promotion agency, had also expanded its market development grant to include virtual trade promotion activities, adds Kumar.
However, Gilbert Gan, managing partner at Zaid Ibrahim & Co, says the trade tensions present challenges, too. Malaysia needs to compete for foreign direct investment, manage commodity price volatility, and enhance its competitiveness to navigate the complexities brought about by the trade conflict while maintaining a strong position in the global economy.
“[Trade tensions] have led to increased competition from other countries such as Vietnam and Thailand as they, too, target the US and Chinese markets,” says Gan.
“Malaysian businesses have had to compete on price and quality to win contracts.”
Trade diversion, resulting from tariffs and trade restrictions, has also created competition in the Malaysian market as Chinese and American companies target Malaysia to maintain their global market share. This, according to Gan, requires local companies to enhance their competitiveness.
Trending fields
In 2022, the services sector accounted for the largest share of total approved investment in Malaysia, amounting to MYR154 billion, followed by MYR84.3 billion for the manufacturing sector. The country’s liberalisation and policy towards equity requirements for investment, supported by its strategic location, have been significant draws.
“At present, investors in the manufacturing sector are required to duly register a Malaysian business entity serving as the investing party, and secure a manufacturing licence in accordance with the stipulations outlined within the Industrial Co-ordination Act, 1975,” says Bahrin, of Azmi & Associates.
“Pertaining to equity holdings, foreign investors can now hold 100% of the equity in all investments in new projects [in the manufacturing sector], as well as investments linked to the expansion or diversification endeavours undertaken by existing companies, regardless of the export volume involved.”
Since 2009, Malaysia has liberalised the services sector, with no equity condition imposed to attract more foreign investment and bring more professionals and technology, as well as to strengthen the competitiveness of the sector.
Service sector investors are also required to register a business entity in Malaysia to conduct investment activities. Depending on the sub-sector and activities undertaken, specific equity conditions may be imposed to obtain the required approvals, licences, permits or registrations by the regulating authority.
Although there are no specific legal threats that may impact business sentiment in Malaysia, Dhanya Sivanantham, an associate at Azmi & Associates, warns industry players and potential investors should take note of the proposed introduction of a merger control regime by the Malaysian Competition Commission (MyCC) through amendments to the Competition Act.
“Malaysia is the only nation in Asean that has not adopted any merger control regime. The Competition Act only regulates anti-competitive agreements and the abuse of dominant position without the powers to regulate mergers,” says Sivanantham.
“Through the introduction of the proposed merger control regime, the MyCC intends to prohibit any merger or anticipated merger that may result in a substantial lessening of competition within any market for goods or services.”
If the proposed amendments to the Competition Act are approved by parliament, businesses would have to consider the possibility of the proposed merger being approved by the MyCC, the review period, and the potential commitments likely to be imposed by the MyCC to address the substantial lessening of competition, among other issues.
As Malaysia encourages foreign investment and businesses to set up in the country, Gan, of Zaid Ibrahim, sees two key aspects that require the attention of foreign businesses entering the Malaysian market, namely sector-based regulatory approvals and foreign equity ownership limits.
“Rather than a centralised regulatory authority, Malaysia implements sectoral regulation, set out in legislation and guidelines issued by the relevant sector regulatory authority,” says Gan. “These regulations and guidelines govern acquisitions and investment, regardless of whether they are made by local or foreign entities. The level of applicable restrictions varies according to the sector.”
More importantly, adds Gan, foreign businesses entering the Malaysian market should know upfront whether foreign ownership restrictions apply to their proposed business in Malaysia.
Cassandra Nicole Thomazios, a partner at MahWengKwai & Associates in Kuala Lumpur, notes that several industries have limited scope for foreign investment due to local participation requirements and restrictions.
“Foreign investment, or foreigners, are not allowed to purchase Malay reserved land and properties allocated for Bumiputera,” says Thomazios.
Bumiputera is commonly used to refer to persons of Malay race, or from aboriginal or indigenous tribes, who receive special rights under the constitution, although the term is not explicitly mentioned in the constitution.
Other industries that have limited scope are freight forwarding and shipping, financial services, oil and gas, and communications and multimedia.
Fiscal incentives
As countries in the region compete to attract global capital flows, Foong Pui Chi, a partner at Shearn Delamore & Co in Kuala Lumpur, says Malaysia offers tax incentives to promote investment in sectors such as manufacturing, agriculture, tourism, research and development, digital economy and the bioeconomy, in addition to relatively low corporate and personal tax rates.
“Key tax incentives available in Malaysia are pioneer status, which grants partial or full income tax exemption for a specified period, and investment tax allowances, which grant a partial or full allowance of qualifying capital expenditure incurred within a specified period,” says Foong. “Indirect tax incentives available are exemptions from customs and excise duties and sales tax.”
Furthermore, Foong says special pre-packaged incentives that cover several areas of direct and indirect taxes, and reinvestment allowances for the Labuan International Business and Financial Centre, Principal Hub and BioNexus are also available.
“Malaysia is a party to double taxation treaties with numerous jurisdictions dealing with double taxation of income and fiscal evasion,” says Foong.
Kumar, of Rosli Dahlan Saravana Partnership, adds that direct tax incentives grant partial or total relief from income tax payment for a specified period, while indirect tax incentives take the form of exemptions from import and excise duties.
“A company granted pioneer status would be entitled to a five-year partial income tax exemption on 70% of its statutory income,” says Kumar. “Unabsorbed capital allowances during the pioneer period can be carried forward and deducted from the post-pioneer status income. In addition, accumulated losses incurred during the pioneer status period can be carried forward and deducted from the post-pioneer status income for seven consecutive years.”
To be granted pioneer status, a company must be producing or aiming to produce promoted products, the details of which are stipulated in the Promotion of Investments Act.
Investment tax allowance is an alternative to pioneer status, which grants a company a 60% allowance on qualifying capital expenditure incurred within five years. It can offset investment tax allowance against 70% of its statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate.
“While companies investing in the manufacturing sector are entitled to the pioneer status and investment tax allowance, it is pertinent to note that both incentives are mutually exclusive,” says Kumar. “Companies in the manufacturing sector are not allowed to apply for both incentives at the same time.”
Amid global efforts to stamp out tax avoidance by multinationals, Malaysia has committed to combating base erosion and profit shifting (BEPS). In balancing between such commitments and attracting foreign investment, Kumar says that Malaysia has issued the Income Tax (Country-by-Country Reporting) Rules 2016.
Under the rules, Kumar says the director general of inland revenue shall preserve the confidentiality of a country-by-country report’s information, such as the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which an entity operates, ensuring the information submitted by foreign investors remains confidential.
Malaysia has also signed the multilateral convention to implement tax treaty-related measures to prevent BEPS in light of item six of the BEPS action plan, in addition to double-taxation agreements specifying the rules for taxing income or profits from trade or cross-border transactions.
“By doing so, it is believed that it may reduce the possibility of inadequate taxation and prevent the breach of the principle of reciprocity, thereby boosting the confidence of foreign investors to invest in Malaysia,” says Kumar.
Conflict crushing
Having a reliable and effective dispute resolution mechanism ensures foreign investor confidence against unforeseen complications, and Malaysia’s dispute resolution system has been designed to ensure fairness and transparency in resolving conflicts.
Yee Mei Ken, a partner at Shearn Delamore & Co in Kuala Lumpur, says that Malaysia’s court rules provide certain procedural safeguards for foreign litigants.
“For example, affidavits of foreign deponents can be filed in English and taken outside of Malaysia,” says Yee. “Affidavits are admissible if they are affirmed before a court, judge, notary public or person having authority to administer oaths in a commonwealth country, whereas affidavits originating from non-commonwealth countries may be affirmed before a consular officer of any commonwealth country.”
Malaysian rules of court also allow foreign deponents 21 days for the service of affidavits in reply, instead of the 14 days allowed to local deponents, he says. Foreign litigants can rest assured over costs as Malaysian courts adopt a reasonable approach. For instance, in a recent high court claim of MYR10 million, the court only ordered the foreign plaintiff to deposit MYR250,000 on the basis that the security sum must be reasonable and not oppressive.
“Conduct of court cases nowadays are also facilitated by the e-filing system and the e-review system,” says Yee. “Case management and cases themselves can be conducted both physically and online via video-conferencing. Foreign witnesses unable to attend court physically can testify remotely, resulting in more cost-effective and speedier resolution of commercial disputes.”
Thomazios, of MahWengKwai & Associates, adds that the Asian International Arbitration Centre in Kuala Lumpur provides an effective mechanism for settling disputes for the benefit of parties engaged in trade, investment and commerce.
“Malaysia has entered into an investment guarantee agreement with more than 60 countries, which ensures the settlement of disputes under the Convention on the Settlement of Investment Disputes, to which Malaysia has been a member since 1966,” says Thomazios. “It protects against expropriation and ensures compensation against nationalisation or expropriation.”
Although arbitration in Malaysia is potentially more costly, as parties must incur legal, tribunal and expert costs, as well as the expense of lengthy proceedings, arbitration remains popular due to its confidentiality and the availability of specialists in hearing disputes.
The Arbitration Act, based on the UN Commission on International Trade Law’s Model Law, ensures that foreign arbitral awards are enforceable in Malaysia, and provides a framework for the efficient resolution of international commercial disputes.
Quest for sustainability
With a growing focus on ESG globally, the Securities Commission Malaysia issued guidelines on sustainability for listed companies, including reporting on environmental impact, social and community involvement, and governance practices.
Companies listed in Malaysia must provide a sustainability statement in their annual reports, which is a narrative statement of their management of material economic and environmental social risks and opportunities, says Lai Zhen Pik, a partner at Shearn Delamore & Co.
“Sustainability statements cover, among others, the governance structures to manage sustainability matters, the scope and basis for the scope, material sustainability matters, their identification, importance, and how they are managed.”
In September 2022, the exchange announced the enhanced sustainability disclosure requirements to be implemented on a staggered basis (depending on the category of listed issuers), commencing from annual reports issued for the financial year ending on or after 31 December 2023.
Under the enhanced sustainability disclosures framework, listed issuers are required to include a statement of assurance on whether the sustainability statement has been reviewed by an internal auditor or independently assured. Additionally, the companies must provide at least three financial years of data for each reported indicator, corresponding targets and a summary of the data and performance targets disclosed in a prescribed format.
“Requirements on climate change-related disclosures, as well as basic plans for transitioning towards a low-carbon economy, will be required,” says Lai. “For relevant indicators, in addition to sustainability indicators outlined in the exchange’s sustainability reporting guide, listed issuers can refer to indicators prescribed by international sustainability reporting frameworks and sector-specific indicators.”
Yeoh, of Shearn Delamore & Co, adds: “ESG now is very much part of the agenda in listed company board meetings. It is also necessary to provide constant monitoring with stated goals.”
Thomazios, of MahWengKwai & Associates, agrees that ESG compliance with companies and businesses in Malaysia has been welcomed as the main agenda for most organisations.
“Our current regulatory framework for ESG standards is predominantly targeted at large companies and publicly listed companies, rather than small and medium-sized enterprises at the moment,” she says.
In April, the government announced plans to launch an ESG framework by the year’s end to help local companies transition into renewable energy, and Thomazios expects the standards to focus on non-listed companies.
“I believe some large companies would be ready for it, and some would struggle [to meet the ESG standard] depending on their industry,” she says. “We would have to wait until the end of the year to see what those standards are when announced.”
Gan, of Zaid Ibrahim & Co, believes that the upcoming ESG framework will focus on small and medium-sized enterprises in terms of funding and capacity building, as many export markets require exporters to be ESG-compliant.
“We expect businesses particularly in the small and medium-sized enterprises category to struggle to grasp the meaning and scope of ESG, and the specific requirements associated with the anticipated standards,” says Gan.
Aligning existing business strategies and operations with ESG principles can be challenging for organisations, as it is a new dimension for many boardrooms, senior management and other stakeholders, and will require significant changes and realignment of resources.
Meeting ESG standards will require financial investment such as adopting eco-friendly technologies or hiring sustainability experts.
“Businesses, particularly smaller enterprises, may face resource constraints that hinder their ability to allocate adequate funds and personnel to ESG initiatives,” says Gan. “The government’s ESG initiative is expected to help SMEs deal with this constraint.”
Complying with ESG standards also necessitates the collection and reporting of relevant environmental, social and governance data. Businesses are likely to face difficulties in establishing and administering systems and processes to implement these.
It will take time to build awareness of the standards. “Businesses will likely face challenges in understanding and complying with the new ESG laws or regulations,” says Gan.
PROTECTING INTANGIBLE ASSETS
Intellectual property is a valuable currency in a globalised economy. Countries seeking to attract foreign investors must offer strong IP protection laws, and Malaysia understands IP’s power to drive innovation, trade, investment, research and development.
Loo Wai Hoong, a partner at Wong Jin Nee & Teo in Kuala Lumpur, says Malaysia has implemented extensive frameworks and policies. “Malaysia’s IP framework and systems are in accordance with international standards,” says Loo.
He adds that Malaysia is a member of various international organisations and party to treaties including the World Intellectual Property Organisation, the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Agreement on Trade-Related Aspects of Intellectual Property Rights under the auspices of the World Trade Organisation, the Patent Co-operation Treaty, the Madrid Protocol, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the Regional Comprehensive Economic Partnership.
“Malaysia has also recently amended or introduced new legislation in relation to its Trademarks Act, Copyright Act and Patents Act to be in accordance with such international standards and treaties,” says Loo.
IP rights can also be enforced by commencing civil proceedings, including in the specialised IP High Court in Kuala Lumpur. Alternatively, the Ministry of Domestic Trade and Cost of Living enforces the law in relation to criminal IP offences.
Teo Bong Kwang, a partner at Wong Jin Nee & Teo in Kuala Lumpur, adds that within the Malaysian court system there are civil and criminal proceedings for enforcing IP rights or preventing the abuse or infringement of IP rights.
Civil proceedings for restraining IP infringements commence at the high courts, which have the jurisdiction to grant injunctions, discovery, orders for delivery-up, declarations, and awarding monetary damages.
However, Teo notes some challenges in enforcing IP rights in Malaysia. A backlog due to pandemic lockdowns has delayed some cases, while lack of manpower has hampered raids or administrative actions, he says.
Due to a lack of express legislative provisions, Teo says customs authorities have been passive when it comes to enforcing IP rights at the borders. Regarding the existing provisions on stopping suspected counterfeit goods from being imported, the initiative is placed on the trademark or IP owners.
“Some of the requirements include mandating IP or brand owners to provide specific dates, times and locations of infringing shipments of goods to law enforcement authorities,” says Teo. “Malaysian laws and policies lack strict enforcement and may still be rather inadequate in some areas to fully empower the law enforcement authorities.
