Worldwide: Repositioning Labuan IBFC

Last Updated: 7 November 2016
Article by Labuan IBFC Inc.

Pivot to Asia continues, commitment to international standards in tax cooperation and transparency reinforced and additional key business sectors identified

Thou shalt not shy away from change. It is constant and to remain relevant, one has to adopt and adapt to the changes.

For Labuan International and Business Financial Centre (Labuan IBFC), change in a bid to remain relevant as a vibrant and progressive international financial centre is inevitable, particularly in today's challenging climate.

As Governor of Bank Negara Malaysia and Chairman of Labuan Financial Services Authority (Labuan FSA) Datuk Muhammad Ibrahim put it, "We need to find a differentiator".

His calls for a more inclusive and rigorous effort to grow Labuan IBFC does not fall short just to remain agile but it is incumbent for the midshore centre to innovate and restrategise its position in achieving the international and the Malaysian Government's aspirations, and most importantly for the betterment of the midshore centre.

Rebirth of the midshore centre

To distinguish from its competitors, Labuan IBFC embarked on a journey to reposition from an offshore centre to a midshore centre as it offers both the ease of doing business typically found in offshore centres, combined with the high international standards of regulation and supervision found onshore few years ago. Indeed, it was not an easy journey.

Nonetheless today, the time has come to further refine the midshore concept by moving away from broad-based financial services and focusing on niche areas with high growth potential. These include leasing, captives, commodity trading and wealth management, which have continued to show an upward trend in driving Labuan IBFC's growth in recent years.

This is evident in the growth that the midshore centre has experienced in these sectors, for example the demand for leasing business has grown steadily, with the total number of leasing companies increasing to 386 and the total assets leased amounting to USD52.5 billion in September 2016. This signifies the continued need for large and heavy equipment such as container ships, aircraft and oil rigs in the Asian region.

The increasing interest among corporates to establish captives as a risk management strategy also presents immense opportunities in offering risk solutions that complement onshore activities. With this in mind, a masterplan is currently in the works to position Labuan IBFC as a preferred centre for captive solutions for the ever-growing Asian corporate.

On wealth management, Labuan IBFC offers a unique proposition value as the only international financial centre in Asia to offer private foundation and special purpose trusts, including Islamic foundations or waqf.  Labuan IBFC is currently home to 181 foundations and hundreds of trusts, both in the conventional and Islamic forms.

Adherence to regulations is equally important

Compliance to international standards of regulation and supervision is equally important for Labuan IBFC. On the international level, efforts against tax avoidance and money laundering have always been an important agenda for the midshore centre.

Labuan IBFC sees the regulatory developments such as Common Reporting Standards, the Base Erosion and Profit Shifting (BEPs) as a positive note as the business activities in the midshore centre have always been conducted under a strong set of rules and regulations.

Notwithstanding that Labuan FSA is currently carrying out a tax review exercise to better align the midshore centre with international effort to further arrest tax evasion and profit shifting.

This measure is particularly more important now with the establishment of ASEAN Economic Community where global companies and investors could leverage on unique propositions of Labuan IBFC for regional business expansion.

The three key policy initiatives

Pressure has begun to continually mount for international financial centres to tighten laws and adhere to international standards on disclosure and transparency, especially with the recent Panama Paper and Bahamas Leaks.

To demonstrate Labuan IBFC's commitment to greater transparency and effective exchange of information across all international financial centres, Labuan FSA will be expected to embark on three key policy initiatives in 2017.

These include:

  1. A review of legal framework that will better reflect regulatory and supervisory policy intentions, as well as to ensure legal requirements remain relevant and current. This reflects our ongoing commitment to be a leading jurisdiction in advocating strong prudential, transparency, anti-money laundering and counter-terrorism financing standard. It is envisaged that a refreshed legal framework will allow international players to enjoy jurisdictional neutrality while operating in a stable business environment.
  2. The use of more efficient technology-based systems for regulatory reporting that will improve the timely access, accuracy and value of information to provide ease of reporting and data exchange; and
  3. Labuan IBFC will implement the Inter-Governmental Agreement of Model IB which will facilitate compliance by financial institutions in the midshore centre to the Foreign Account Tax Compliance Act (FATCA) and exchange information with the United States.

Collaboration is a must

Indeed Labuan IBFC's journey towards these changes is not a journey that should be taken alone. Collaboration with various stakeholders is important. As the future of Labuan IBFC is intricately linked with the broader Malaysian financial system, it is envisaged that Labuan FSA will be working closely with onshore Malaysian financial regulators, the Labuan economic development authority, namely Labuan Corporation and the Ministry of Finance of Malaysia to undertake a comprehensive positional review of the midshore centre and Labuan as a whole.

Not to be underestimated is the role and support from intermediaries, users and stakeholders. Their support is integral towards the success this change will bring. More importantly is the suggestions and input on the direction the jurisdiction should take towards achieving Labuan IBFC's aim of continually growing in a sustainable well-regulated manner.

Rest assured, Labuan IBFC's role as a key intermediator of Asian trade and investment will still continue, as will the midshore centre's role in facilitating wealth management solutions in a well-regulated and cost-efficient jurisdiction located in the centre of Asia. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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