INVESTMENT INCENTIVES

Transcription

1 Workshop on Improving the Investment Climate in Indonesia November 16-17, 2005 INVESTMENT INCENTIVES Malaysia s Perspective Kaziah Abdul Kadir Deputy Director General I Malaysian Industrial Development Authority (MIDA) 1

2 FUNCTIONS of MIDA 2

3 RESEARCH & PLANNING Planning for Industrial Development PROMOTION Foreign Direct Investment Domestic Investment Cross Border Investment Services Recommend policies and strategies on industrial promotion and development FOLLOW-UP/MONITORING Assist companies in the implementation and operation of their projects Facilitate exchange & co-ordination among institutions engaged in or connected with industrial development Advisory Services EVALUATION Manufacturing licences Tax incentives for manufacturing and services activities Expatriate posts Duty exemption RDC, IPC and R&D status 3

4 Government Representatives Based in MIDA Immigration Department Royal Malaysian Customs Department of Occupational, Safety and Health Department of Environment Ministry of Finance Ministry of Human Resources Telekom Malaysia Berhad Tenaga Nasional Berhad 4

5 INDUSTRIAL Development Framework 5

6 Development Philosophy System of free enterprise but with active government support and direction. Government provides the broad thrusts and sets direction for the whole economy, and ensures the achievements of socioeconomic goals. Private sector is free to operate and given appropriate policy, institutional and infrastructural support. 6

7 Vision 2020 Second Outline Perspective Plan Third Outline Perspective Plan Fifth Malaysia Plan Sixth Malaysia Plan Seventh Malaysia Plan Eighth Malaysia Plan Development Plans IMP ( ) IMP2 ( ) Completion of first half of Vision 2020 IMP3 ( ) - Being Formulated 7

8 Why Malaysia 10 Check List Political and Economic Stability Pro-business Government Liberal Investment Policies Transparency of Policies and Efficient Delivery System Policy of Welcome Well Developed Infrastructure Harmonious Industrial Relations Trainable and Educated Labour Force Quality of Life The Nation s Track Record 8

9 ROLE OF INCENTIVES in Malaysia s Industrial Development 9

10 Investment incentives are being used as an important tool, not only to attract investments into the manufacturing and services sectors, but more importantly, to achieve the industrial development policies of the nation over the last 40 years. Incentives are provided to promote growth and development of selected products/activities which contribute significantly in terms of: Investment Value added Local sourcing Technology and R&D Employment of knowledge workers Socio economic development such as regional balance 10

11 cont d Incentives are constantly being reviewed with a view to remove, reduce or improve them due to the following factors: Served its purpose, i.e. targeted industries have reached maturity level Ineffective in attracting investments To promote further development of the targeted industries To promote new growth areas 11

12 PHASES of Industrial Development and the Role of Incentives 12

13 Late 1950s and in 1960s Developmental Issues Unemployment rose to more than 8% Dependency on export commodities i.e. rubber and tin Narrow economic base 13

14 Strategies Promotion of Import Substitution and Labour Intensive Industries, and Location of Projects in Less Developed Areas Introduction of Pioneer Industries (Relief from Income Tax) Ordinance, 1958 Pioneer Status/tax relief period from 2 to 5 years based on the amount of capital investment. Introduction of Investment Incentives Act, 1968 Extension of Pioneer Status up to 3 years Investment Tax Credit (ITC) based on capital expenditure incurred on fixed assets Labour Utilisation Relief (LUR) up to 5 years based on employment created Locational incentive up to 8 years based on capital investment or employment created 14

15 Impact/Result Growth of import substitution industries Food, beverages and tobacco industries Printing and publishing industries Building materials industries Chemicals and plastic industries Consumer products 15

16 The 1970s Developmental Issues Unemployment still high Development of industries constrained by small domestic market Lack of domestic capital Export of manufactured products limited Export market outlets/expertise limited Lack of managerial expertise Lack of technology Uneven distribution of wealth Identification of race with economic functions 16

17 Strategies Promotion of Export-Oriented and Labour Intensive Industries Emphasis on job-creation Promotion of electronics, textiles and other labour intensive industries Push for Foreign Direct Investments (FDI) Continue to provide tax incentives under the Investment Incentives Act, 1968 Establishment of FTZs in 1972 Establishment of LMWs in % foreign equity ownership allowed for projects exporting 80% or more Introduction of: Reinvestment Allowance (RA) to encourage reinvestments Import duty exemption on raw materials and components/machinery and equipment 17

18 Impact/Result Major MNCs established electronic assembly operations in Malaysia FDI inflow in textile industry Major exporter of semiconductors and textile products Large number of jobs created 18

19 The 1980s Developmental Issues Global recession ( ) Increase in unemployment Lack of processing of local resources for export i.e. rubber, palm oil, timber and cocoa Deepening of industrial sector 19

20 Strategies Promotion of Heavy and Capital Intensive Industries and Resource-based Industries Introduction of Promotion of Investments Act, 1986 to replace Investment Incentives Act, 1968 Encouraging the development of selected priority areas in the manufacturing sector Promotion of manufactured exports 20

21 Incentives Provided Pioneer Status (PS) with full tax exemption Investment Tax Allowance (ITA) with full tax exemption Abatement of Adjusted Income for Manufactured Exports Abatement of Adjusted Income for Location in a Promoted Industrial Area Abatement of Adjusted Income for Small-Scale Companies Abatement of Adjusted Income for the use of domestically produced materials which are incorporated in the manufacture of exports 21

22 cont d Abatement of Adjusted Income for purchases from small scale companies Export Allowance Double Deduction of Expenses for promotion of Exports Industrial Adjustment Allowance Enhancement of the Reinvestment Allowance (RA) rate from 25% to 40% Other Measures Launching of First Industrial Master Plan, Further liberalisation of equity policy to promote export-oriented and labour intensive projects. 22

23 Impact/Result Establishment of Heavy Industries Corporation of Malaysia (HICOM) Production of PROTON cars Establishment of steel mills, cement plants, motorcycle engine projects by HICOM Growth of rubber based products (gloves, catheters, latex thread, tyres); cocoa processing; and oleochemical projects based on palm oil Malaysia becomes leading world exporter of rubber latex products and oleo-chemicals Large number of jobs created Increased inflow of FDI 23

24 The 1990s Developmental Issues Industrial transition in increasingly complex global trade and investment environment No longer low labour cost country. Labour shortages, both skilled and unskilled (unemployment rate in % & %) Low level of R&D activity Bottlenecks in support infrastructure Lack of inter-intra industry linkages Lack of indigenous technology and marketing capability 24

25 Strategies Promotion of: High technology industries Capital intensive industries Skill intensive industries Services based industries R&D activities Accelerate the development of indigenous technology Development of supporting industries 25

26 Review of Incentive Scheme under PIA, 1986 In 1991, overall review of the investment incentives were undertaken to: encourage investments more selectively provide greater emphasis on achieving higher levels of local content, value added, technology and industrial linkages 26

27 Major Changes PS and ITA with partial tax exemption Phased-out the following incentives: Abatement of Adjusted Income Locational Incentive Labour Utalisation Relief Industrial Adjustment Allowance Export Allowance 27

28 Introduction of New Incentives Incentives for high technology projects Incentives for strategic projects Incentives for R&D activities (Contract R&D company, R&D company and Inhouse R&D) Incentives for industrial training (Technical & Vocational) 28

29 Other Measures Launching of Second Industrial Master Plan (IMP2), Manufacturing Plus Plus Orientation Cluster Based Industrial Development Liberalisation of equity policy (100% foreign equity ownership allowed irrespective of the level of exports) Human resource development Development of SMIs - Establishment of Small and Medium Industries Development Corporation (SMIDEC) Establishment of technology parks 29

30 2000 onwards Continue to promote: Manufacturing Activities High Value Added Projects (General promoted products) High Technology Projects Strategic Projects Resource-based Industries Small Scale Industries Industrial Linkages Encourage dispersal of industries New growth areas (biotechnology, optoelectronics, wireless technology, advanced materials etc.) 30

31 cont d Promotion of Services Sector Regional and International Establishments (OHQs, IPCs, RDCs, REs & ROs) Integrated Logistics Services (ILS) Integrated Market Support Services (IMS) Integrated Central Utility Facilities(CUF) Knowledge-based companies Acquisition of high technology and marketing companies abroad 31

32 Major Incentives Provided Incentives for services sector (Full tax exemption for 10 years for OHQs,IPCs & RDCs and partial tax exemption for 5 years for ILS, IMS & CUF) Special incentives for investments in selected industries (Full tax exemption for 10 years for specialised machinery and equipment and oil palm biomass; and 5 years for automotive industry) Second round incentives for reinvestments in selected industries (resource-based industries, food processing, machinery and equipment, oil palm biomass) Enhancing tax incentives for promoted areas Incentives for production of halal food Incentives for outsourcing of manufacturing activities Incentives for acquisition of foreign-owned companies or marketing companies abroad Extension of the RA period from 5 years to 15 years Customised incentives 32

33 Other Measures Enhancement of the Government Delivery Systems Removal of many of the conditions imposed in the Manufacturing Licence (ML) Adoption of a fast track system for the approval of ML within seven working days Adoption of a frast track approval for applications for exemption of raw materials and components within 14 working days Establishment of Project Implementation and Monitoring Unit in MIDA to coordinate and monitor the implementation of projects Appointment of special project officers at MIDA to hand-hold and assist investors in obtaining all necessary approvals until they are operational Establishment of One Stop Centres at both the local authority and state levels to expedite the processing and approval of Building Plans and Certificate of Fitness of Occupation 33

34 cont d Establishment of State Investment Centres to promote and facilitate investments in the respective states. Establishment of Business Information Centre in MIDA to provide comprehensive published information on investments in the manufacturing and services sectors, trade, financing, productivity and SMEs Review of the Industrial Coordination Act, 1875 Review of the Promotion of Investments Act, 1986 Formulation of 3 rd Industrial Master Plan 34

35 PERFORMANCE of the Manufacturing and Selected Key Services Sectors 35

36 GDP by Industrial Origin Sector Agriculture, Forestry & Fishery Mining & Quarrying GDP Contribution (%) Construction Manufacturing Services Source: Economic Reports 36

37 Contribution of Manufacturing Sector to GDP, Employment and Total Exports Year Share to GDP (%) Employment (% growth) % to Total Export Source: Economic Report 2004/

38 Major Manufactured Exports, 2004 Description Value (US$ Billion) 2004 Share of Total Exports (%) MANUFACTURED GOODS Electrical & Electronic Products Chemicals & Chemical Products Machinery, Appliances & Parts Wood Products Optical & Scientific Equipment Textiles & Clothing Manufactures of Metal Iron & Steel Products Rubber Products Processed Food Source: Department of Statistics, Malaysia 38

39 Year Investments in Approved Manufacturing Projects (2000 September 2005) No. of Projects Approved With Incentives Without Incentives No. of Employment Proposed Investment (US$ Billion) Domestic , , , , , , (Jan-Sep) No. of Projects Foreign Total , Total 5,352 1,719 3, , Source: MIDA

40 Domestic & Foreign Investments in Approved Manufacturing Projects (2000-September 2005) Domestic 42.5% (US$23.4 Billion) Foreign 57.5% (US$17.3 Billion) Source: MIDA Total Capital Investment: US$40.7 billion 40

41 Domestic & Foreign Investments In Approved Projects by Major Industries (2000-September 2005) Total Investments - US$ 40.7 Billion US$ Billion 5 Domestic Foreign E&E Basic Metal Paper Transport Petroleum Chemicals Food Source: MIDA 41

42 Foreign Investments in Approved Projects By Major Countries (2000-September 2005) Germany 15.9% Japan 13.5% Singapore 11.2% UK 5.7% Korea 4.7 USA 20.7% Others 15.3% UAE 4.3% Netherlands 4% Taiwan China 4% 4% Total Foreign Investment: US$40.7 billion Source: MIDA 42

43 Investments in Approved Services Activities (As at September 2005) Type of Establishment No. of Approvals Average Proposed Business Spending (US$ Million) Operational Headquarters 106 1,163.4 International Procurement Centres 174 4,571.7 Regional Distribution Centres Regional Offices Representatives Offices 1, TOTAL 2,068 5,903.8 Source: MIDA 43

44 Achievements Period Per Year Cumulative ( ) IMP2* Investment Target (US$ Billion) 6.6 (RM 25 Billion) 59 (RM225 Billion) Approval (US$ Billion) 7 (RM26.5 Billion) (Average) 62.8 (RM238.6 Billion) Note: IMP2 - Second Industrial Master Plan ( ) 44

45 CONCLUSION Lessons Learnt 45

46 1. Overall, investment incentives have been an effective tool to promote investments into targeted industries. Their effectiveness are measured in the context of spin offs and multiplier effects to the company, industry and the country at large. Revenue lost must result in net gains in terms of: Investment inflow Employment creation Expansion of tax revenue from individual taxes of employees Local purchases of goods and services Market penetration Technology development and R&D Creation of other support businesses 46

47 cont d 2. Tax incentives are not the most influential factor for investors in selecting investment locations. More important are the fundamental elements such as political and economic stability, pro-business government, liberal investment policies, well developed infrastructure and trainable and educated labour force. 3. Nevertheless, given all factors equal among competing countries, tax incentives can assume a decisive role in the final location decisions of foreign companies once the choices are narrowed down to handful of sites with similar characteristics. In this regard, tax incentives will enhance the competitiveness of the country to attract investments. 47

48 cont d 4. The granting of investment incentives is not a phenomena associated only with developing countries. Developed countries such as USA and UK also provide substantial incentives in the form of grants to compete for investments. 5. For the developing countries, the granting of investment incentives has to be selective as these are very costly, can create distortion to the tax system, reduce tax revenue and pose budgetary constraints to the host countries. Any measures undertaken to retain existing incentives or to grant any new incentives, will depend on the ability and the capacity of the host countries. 6. Incentives will need to be constantly reviewed to asses their effectiveness. 48

49 cont d 7. An effective monitoring and enforcement mechanism will need to be introduced. The role of promotion and regulatory bodies will need to be clearly differentiated. 8. Decision to formulate and review incentives will require consultation with the various stake holders, both government and the private sectors in order to ensure the targeted direction is in line with market demand/trends, maximise benefits and minimise bottlenecks. 9. The grant of incentives must be collectively done through a committee comprising the relevant bodies, to avoid abuse of power and to ensure all possible angles are being considered. 49

50 cont d 10. Where possible, to aim for fast delivery of decision. Delegation of authority, clear cut and transparent criteria and conditions are possible options. 11. Aim for equal treatment to FDI and private domestic investments (PDI) in the grant of incentives except in areas reserved for domestic SMEs and projects of national and security interests. 12. Any move to phase out tax incentives has to be undertaken gradually and selectively and must be followed with the reduction of income tax rates. It is also important to note that any review of incentives will need to include comparison with competing countries in order to maintain attractiveness in promoting investments. 50

51 Thank You 51