Labuan has been developed primarily as an international offshore financial centre (IOFC) for investments in Asia. There are many offshore centres in the world, but most of them are located in Europe and the Caribbean. Labuan IOFC is one of the few integrated offshore financial centres well established in the vicinity of developing economies in Asia. It offers a full range of offshore financial services including offshore banking, offshore insurance, trust business, investment holding, mutual funds, investment banking and management services activities. At the same time, new activities are being developed in Labuan, which will benefit investors and other offshore players, as well as to provide them with avenues to take advantage of the widespread investment opportunities in the region and use Labuan for such purposes. For instance, Labuan is looking at establishing an offshore financial exchange to deepen the offshore capital market, and positioning itself to become an international Islamic financial centre with the setting up of an Islamic money market in Labuan.
Expected to be set up in the year 2000, the offshore financial exchange would provide facilities for the listing of mutual funds and possibly trading facilities for equity and debt instruments, including Islamic financial products, thus providing synergies to the proposed Islamic money market. Both these markets would certainly be attractive to muslim as well as non-muslim investors and financiers as more financing options would be available.
As at the end of May 1999, a total of 1,958 offshore companies and supporting companies had been established in the Labuan IOFC. There are 62 offshore banks, 43 offshore insurance and insurance-related companies and 20 trust companies in Labuan. International investors and institutions have been attracted to set up a base in Labuan because of its many efficiencies and advantages in the conduct of offshore business, including its strategic location within the region, competitive and favorable tax regime, low start-up and operating cost, as well as its flexible and conducive regulatory and business environment. The offshore businesses in Labuan are governed by a separate set of offshore legislation, mostly independent of the laws governing financial activities in the domestic market. They include the following:
- Offshore Companies Act 1990;
- Labuan Trust Companies Act 1990;
- Offshore Banking Act 1990;
- Offshore Insurance Act 1990;
- The Labuan Offshore Business Activity Tax Act 1990;
- Labuan Offshore Financial Services Authority Act 1990;
- Labuan Offshore Trusts Act 1996;
- Labuan Offshore Limited Partnerships Act 1997; and
- Labuan Offshore Securities Industry Act 1998.
The above legislation is continuously reviewed and updated to keep up with the changing times and circumstances. For example, as part of the efforts to make Labuan's business environment even more conducive, the Government has amended two Acts in 1998: the Labuan Offshore Financial Services Authority Act 1996 (LOFSA Act) and the Labuan Offshore Business Activity Tax Act 1990 (LOBATA). The LOFSA Act was amended to streamline the Labuan Offshore Financial Services Authority's (LOFSA) supervisory role so it would be in line with the practices of other offshore supervisory authorities and to reflect the policy changes of the Government. The Act was also amended to eliminate existing ambiguous provisions which have impeded the effectiveness and efficiency of LOFSA in undertaking its function as a one-stop regulatory agency.
The LOBATA was amended to broaden the scope of offshore business that can enjoy the favourable tax regime under the Act. Indeed, the tax regime in Labuan IOFC is already attractive. At 3% of net profits or RM20,000 (approximately US$5,000) a year, the tax is perhaps among the lowest in the world. Moreover, non-trading companies such as investment holding companies are exempted from tax.
Several innovative products have also been introduced to maximise tax benefits, such as the 'Malaysian Satay', a product that uses the tax treaties that exist between Malaysia and other countries to create a tax beneficial arrangement that allows for income including interest, royalties, dividends and capital gains to be received while minimising witholding and other taxes normally payable on them.
LOFSA is looking to amend the Labuan Trust Companies Act 1990 that could allow the trust companies to provide a wider range of services, including to Malaysian residents. With the introduction of various offshore business activities through amendments to legislation over the past several years, there is a corresponding need to rationalise and expand the scope of the trust companies to enable them to carry on or be involved in the new activities.
It is important to highlight that Labuan is not subject to the new selective exchange control rules and regulations of Malaysia. The exchange control rules introduced by the Central Bank of Malaysia in September 1998 were primarily to insulate the domestic economy against wild external fluctuations, ensure stability in the Ringgit exchange rate and domestic prices, and stabilise short term capital flows. Offshore business in Labuan is virtually unaffected by the new exchange control measures. This is because the nature of offshore business in Labuan is foreign currency based and not ringgit-based. Consequently, measures taken to limit the use of ringgit outside Malaysia do not affect Labuan.
The Labuan IOFC has gained further worldwide recognition and acceptance as reflected by its membership in various leading international regulatory organisations such as the Offshore Group of Banking Supervisors, the Offshore Group of Collective Investment Scheme Supervisors, Offshore Group of Insurance Supervisors and the International Association of Insurance Supervisors. In order to further enhance its supervisory role for the offshore securities industry, LOFSA has also applied to join the International Organisation of Securities Commissions.
In the area of infrastructure development, the availability of first class infrastructural facilities and other amenities, including those for recreational purposes, to support the activities of the offshore industries has been enhanced with the completion of a new and modern airport to handle increasing traffic flows in both domestic and international flights. In addition, a new university campus, providing quality education and a source for the future supply of professional manpower for the expanding offshore financial industry in Labua (as well as for the region) has been set up.
The development of Labuan as an IOFC is a long-term national agenda which has the full support and commitment of the government. In fact, a critical element of the attractiveness of Labuan is the unwavering and continued support of the Government to ensure that Labuan is able to effectively perform its role as an IOFC. Together with the pragmatic developmental approach adopted by the Government, the prospects are excellent for Labuan IOFC to flourish. Admittedly, the regional financial turbulence experienced in 1997 and 1998 has somewhat tempered the steady growth that the Labuan IOFC has had since its establishment in 1990. However, economic activity and confidence in the region has begun to pick up again as indicated by the greater stability in the interest and exchange rates as well as stronger performance in the regional stock markets. This would position the region to regain its status as one of the important engines for growth for the world economy. Labuan IOFC is ready to serve the region as it flourishes and grows in status. In the process, it will benefit participating players and investors who have the agility and foresight to come to Labuan and use it to their advantage.
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.
This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to email@example.com