Labuan CEO Tackles Growing Tax Transparency | Magazine content
Malaysia is among many Asia-Pacific countries that will start exchanging tax information under the Organization for Economic Co-operation and Development’s Common Reporting Standard (CRS) next year.
Additionally, the U.S. Financial Account Tax Compliance Act (Fatca) – which requires financial institutions in cooperating jurisdictions to file reports on their U.S. clients in Washington – is expected to hit the country in June 2018.
Both have implications for Labuan, the Malaysian low-tax jurisdiction off the coast of Sabah province on the island of Borneo. The Managing Director of the Labuan Financial Services Authority, Ahmad Hizzad Baharuddin, spoke with AsianInvestor on the changing environment.
Q Has the global wave of tax transparency been a challenge for Labuan?
The scale and scale of the trend today is quite significant. The cost of compliance is also significant. But we have to exchange this information. We do not subscribe to the protection of those who do not respect the laws and regulations of their country of origin.
Q Have requests for greater transparency influenced the strategy?
Transparency requirement via Fatca [the US’s Financial Account Tax Compliance Act] and CRS are not new to us. For years we have been receiving and facilitating requests for [the] exchange of tax or money laundering information.
Q Why did Labuan decide to focus on niches such as leasing, captive insurance, commodity trading and wealth management?
We are evolving to meet growing demands in other areas. For example, the number of high net worth individuals is increasing in the region, so we have decided to engage in wealth management. It is about diversifying and providing solutions to a set of more demanding and more complex consumers.
Today, bank customers can access any market they want in the region. At the beginning of the Labuan Financial Services Authority, it was not readily available. Banks are also consolidating globally, and their stability requires many tools and systems to manage risk.
Labuan cannot rely on the traditional bank for its future growth. We need to be able to look at other complex and high-end financial services.
Q How does your offering differ from financial services in Singapore and Hong Kong?
We are not here to compete with Singapore and Hong Kong, but to complement them. There are things they cannot cover as well as we do here in Labuan; for example, Islamic finance. We pride ourselves on our independent capabilities in this industry, which has the potential to grow exponentially.
Q Why has the number of private foundations in Labuan increased so quickly?
We see foundations as an integral part of our wealth management solutions. The people of the region are looking for a place where they can have legally sound and secure structures.
Q How are private foundations treated under CRS?
They are designed as a reportable entity under the CRS. We have an obligation. The assets endowed with the foundation vehicle in Labuan may be elsewhere, but the whole question of access rests with the foundation, of which we know who owns, who is the ultimate owner, and who should be the ultimate beneficiaries.
Q Will China’s accession to the CRS regime significantly reduce the outflow of money from mainland China?
It all depends on how the CRS exchanges will be carried out with the other counterparties. It could be a multilateral deal, where everyone would be able to share information, but I’m not sure China will follow that path. They would probably prefer more bilateral discussions.
I believe that a reduction in the flow of funds abroad will be the result sought by authorities around the world. Even in Indonesia’s tax amnesty [last year]*, a lot of money came back to the country.
Ultimately, all of these so-called tax evaders will need to find solace in what they’ve racked up all these years and make sure they meet legal requirements. We have to understand that these are not necessarily tax evaders. [They could be] simply wishing to flee predatory regimes [that] can be abusive.
Q Among the niches you want to develop, which are the most promising?
The captive insurance market, as well as wealth management and transaction planning solutions. Today, our multinationals are growing and trying to figure out how to manage their risks, while reducing their costs. Oil companies, in particular, want to know how to best manage their portfolios.
* The Indonesian tax amnesty resulted in the declaration of foreign assets of IDR 1.03 quadrillion ($ 77.5 billion) by wealthy Indonesians, three-quarters of whom were in neighboring Singapore. Of the reported total, IDR 146 trillion ($ 11 billion) was repatriated, of which IDR 84.5 trillion was from Singapore.