Malaysia is among the many Asia-Pacific countries that will begin exchanging tax information under the Organisation for Economic Cooperation and Development’s common reporting standard (CRS) next year.
In addition, the US’s Financial Account Tax Compliance Act (Fatca) – which requires financial institutions in cooperating jurisdictions to file reports on their American clients to Washington – is due to hit the country in June 2018.
Both have implications for Labuan, Malaysia’s low-tax jurisdiction off the coast of Sabah province on the island of Borneo. The director-general of Labuan Financial Services Authority, Ahmad Hizzad Baharuddin, spoke to AsianInvestor about the changing environment.
Q Has the global wave of tax transparency been a challenge for Labuan?
The magnitude and scale of the trend today is quite large. The cost of compliance is also sizeable. But we have to exchange this information. We don’t subscribe to protecting those who are not obeying the laws and regulations of their home country.
Q Have demands for greater transparency influenced strategy?
Demands for transparency through Fatca [the US’s Financial Account Tax Compliance Act] and CRS are not something new to us. For years, we have received and facilitated requests for [the] exchange of tax-related or money-laundering information.
Q Why has Labuan decided to focus on niche areas such as leasing, captive insurance, commodity trading, and wealth management?
We are evolving to cater for growing demands in other areas. For instance, the number of high-net-worth individuals is increasing in the region, so we decided to go down the route of wealth management. It’s about diversifying and providing solutions for a more demanding, more complex set of consumers.
Today, bank customers can have access to any market they want in the region. In the earlier days of the Labuan Financial Services Authority, it was not readily available. Banks are also consolidating globally, and their stability requires a lot of tools and systems to manage risk.
Labuan cannot rely on traditional banking for its future growth. We need to be able to look at other high-end, complex financial services.
Q How does your offering differ from financial services in Singapore and Hong Kong?
We are not here to compete against Singapore and Hong Kong, but to complement them. There are things they cannot cover as well as we do here in Labuan; for instance, Islamic finance. We are proud of our independent capabilities in that sector, which has the potential to grow exponentially.
Q Why has the number of Labuan private foundations grown so rapidly?
We see foundations as part and parcel of our wealth management solutions. People in the region are looking for a place where they can have legally sound and safe structures.
Q How are private foundations treated under the CRS?
They are conceived as a reportable entity under the CRS. We have an obligation. The assets endowed with the foundation vehicle in Labuan can be somewhere else, but the whole issue of access lies with the foundation, whom we know in terms of who is the owner, who is the ultimate owner and who are expected to be the ultimate beneficiaries.
Q Will China joining the CRS regime significantly reduce the outflow of mainland Chinese money?
It all depends on how CRS exchanges will be effected with other counterparties. It could be a multilateral arrangement, where everybody would be able to share information, but I am not sure China will go down that route. They would probably prefer more bilateral discussions.
I think a reduction in the flow of funds abroad will be the outcome sought by authorities around the world. Even in Indonesia’s tax amnesty [last year]*, a lot of money did come back to the country.
At the end of the day, all these so-called tax evaders will need to find comfort in what they have garnered all these years, and make sure that they are abiding with legal requirements. We have to understand these are not necessarily tax evaders. [They could be] merely wishing to run away from predatory regimes [that] may be abusive.
Q Of the niches you want to develop, which are most promising?
The captive insurance market, as well as wealth management and transaction-planning solutions. Our multinationals are now growing and trying to figure out how to manage their risks, while at the same time saving costs. Oil companies, in particular, want to know how best to risk-manage their portfolios.
*The Indonesian tax amnesty resulted in IDR1.03 quadrillion ($77.5 billion) in overseas assets being declared by wealthy Indonesians, of which three-quarters was in neighbouring Singapore. Out of the declared total, IDR146 trillion ($11 billion) was repatriated, of which IDR84.52 trillion came from Singapore.