By Tho Li Ming From The Edge Markets Malaysia

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 31, 2017 – August

While Labuan is not as well known as its offshore counterparts such as Hong Kong, Singapore, the British Virgin Islands and the Cayman Islands, experts say its international business and financial centre offers a robust financial framework and unique products and structures. It is also committed to being a highly transparent and regulatory-compliant entity.

Wong Chow Yang, partner at Ernst & Young Tax Consultants Sdn Bhd, says Labuan IBFC will continue to stand out as it offers a wide range of innovative financial products and services that can be structured using a conventional or Islamic framework, thus catering for all types of investors.

“Labuan IBFC is supported by a globally recognised legal and regulatory framework, which is continuously enhanced to meet international best standards and practices in transparency and regulatory compliance. As a result of these efforts, it is labelled a white-listed jurisdiction by the Organisation for Economic Cooperation and Development (OECD) for meeting its standards on the exchange of tax information,” he says.

“The jurisdiction has robust yet progressive laws and financial products tailored for investors looking to manage their wealth based on Islamic principles. This is one key factor differentiating Labuan from its competition.”

Wong says the introduction of the Labuan Islamic Financial Services and Securities Act 2010 — which is comprehensive legislation governing all shariah-compliant businesses in the jurisdiction — provides more certainty to individual investors who are focused on shariah compliance as it covers every aspect of Islamic financial services. “A Shariah Supervisory Council was established to review and ensure that proposed financial instruments are consistent with shariah requirements. With the Labuan Islamic Financial Services and Securities Act 2010 in place, Labuan IBFC is able to offer unique Islamic products such as the Labuan International Waqf Foundation, which is not available in most financial centres.”

He adds that under the Labuan Business Activity Tax Act 1990, a Labuan entity that purely holds investments such as foreign securities, shares and properties is generally not subject to income tax in Labuan. “On the other hand, foreign trading activities carried out by the entity would, broadly speaking, generally enjoy a low effective tax rate of 3% on net profit or, upon election, a maximum payment of RM20,000 per annum. Withholding tax exemptions may also be available for payments of interest, royalties or technical fees to non-residents.

“Finally, it is worth noting that Labuan entities may be entitled to relief provided under Malaysia’s extensive list of Double Taxation Agreements (DTAs) with other countries (although we should caution that a number of DTAs specifically exclude Labuan entities from being entitled to benefits under the DTAs).”

According to a Boston Consulting Group report last year, Singapore is poised to overtake the UK as the world’s second largest offshore centre after Switzerland by 2020, due to the growing affluence in Asia. Labuan IBFC CEO Danial Mah Abdullah says Labuan plays a strong complementary role to other international financial centres such as Singapore.

“We work alongside, as opposed to competing with, other international financial centres. Complementing Singapore gives us greater opportunity to focus on facilitating business transactions and wealth management solutions across Asia-Pacific, via unique offerings and legal structures such as private trusts and foundations not available in Singapore. This rationale also applies to Hong Kong. Hence, if Singapore is on a growth path, I am confident so is Labuan IBFC,” he adds.

Labuan IBFC is regulated by the Labuan Financial Services Authority (FSA), which was established 25 years ago. Vijayan Ramanjulu, associate director of legal, compliance and Labuan services at Tricor Trustco (Labuan) Ltd, says the FSA is known as a one-stop regulator and is perhaps the only one of its kind in the region.

With the combination of onshore due diligence/supervision and offshore flexibility and creativity, Labuan has positioned itself as having the best of both worlds — hence the term midshore. “Labuan’s offshore flexibility and creativity in structuring products can compete with the likes of the British Virgin Islands, Jersey and the Cayman Islands while maintaining the same standard of compliance in places like Singapore and Hong Kong,” says Vijayan.

The Panama Papers leak in April last year at one of the top offshore legal firms, Mossack Fonseca, revealed how some global leaders, celebrities, well-known figures and their associates abused secretive offshore tax regimes. Following the leak, there were concerns that many offshore financial centres were still struggling with transparency issues such as money laundering and tax evasion. Vijayan says this is exactly the reason one should look at Labuan.

“Despite its flexibility and creativity, (unlike other jurisdictions) Labuan prides itself on being a ‘compliant jurisdiction’. It is probably the only jurisdiction in the world that insists on and enforces the need to create substance and ‘mind and management’.

“Labuan is subject to anti-money laundering legislation, so both Labuan FSA and Bank Negara Malaysia constantly come up with guidelines for compliance with anti-money laundering and anti-terrorism laws. We are bound by these guidelines. This happens very regularly, so we are highly compliant.”

He adds that there are some jurisdictions where one can do things on the quiet. This is not allowed in Labuan. “[In some jurisdictions] nothing gets held up against you, so you can route illegally sourced funds, open bank accounts and get credit cards. In contrast, Labuan was never a tax haven. There is always tax payable in Labuan. The only thing is you pay less tax compared with parking your money domestically. So, if you do a deal using a Labuan company and repatriate income back to your ‘Sdn Bhd’, you pay 24%, whereas you only pay 3% through Labuan. So, it is a huge savings.

There are also disclosure obligations to Labuan FSA, where the regulator has to be informed of the company’s affairs, says Mari-Len Ngu, director and head of Labuan business at Tricor Trustco. “That is one of the safeguards [that we have in Labuan]. So, we pride ourselves on offering you the flexibility. You can set up a company with minimum requirements. You can set up a Labuan trust or foundation for your wealth and asset protection. But there are reporting requirements.

“Some jurisdictions do not have strict laws that require them to carry out due diligence so the trust companies do not have reporting obligations whereas in Labuan, all trust companies — including ourselves — have strict reporting obligations. Trust companies are audited by Bank Negara and Labuan FSA. We have been audited in the past and came out clean.”

Labuan IBFC has continuously enhanced its legal and regulatory framework to meet international standards and practices on transparency and regulatory compliance, says Wong. “As far back as 20 years ago, Labuan IBFC was involved in initiatives against money laundering. In 2000, Malaysia became a member of the Asia-Pacific Group on Money Laundering and a year later, the jurisdiction was assessed and labelled as low-risk for money laundering.

“In 2014, Malaysia became one of the first few countries to be evaluated using the new Financial Action Task Force (FATF) methodology. Following this, the country implemented a comprehensive action plan that enabled it to be admitted as a FATF member in February 2016.

“Labuan IBFC places great emphasis on complying with the FATF’s standards for anti-money laundering (AML)/counter-terrorist financing (CFT). Labuan FSA has established AML units to promote compliance with AML/CFT requirements and to intensify the monitoring of reporting institutions. These efforts demonstrate Labuan IBFC’s commitment to combating money laundering and terrorism financing, in collaboration with other international agencies.”

Vijayan says Labuan FSA announced three key policy initiatives this year, including a review of Labuan IBFC’s legal and regulatory framework to ensure it remains relevant, more extensive use of technology for regulatory reporting and the implementation of procedures to facilitate Labuan financial institutions’ compliance with the Foreign Account Tax Compliance Act and allow the exchange of information with the US.

“Malaysia is a signatory to the Multilateral Competent Authority Agreement, which is the standard for automatic exchange of financial account information, leading to the implementation of the Common Reporting Standards in the country. These actions collectively lead to higher levels of transparency and help address tax evasion and money laundering concerns,” he says.

For more on this story go to: http://www.theedgemarkets.com/article/cover-story-robust-financial-framework

IMAGE: Labuan financial park located in Victoria Wikipedia