EXPANDING OPPORTUNITIES FOR THE SERVICES SECTOR
Many global companies have made Malaysia their hub, catering to their operations in the region and beyond. This is in line with the rising trend of MNCs offshoring trading activities to complement the evolving global business models of today. These global supply chains are supported by well-functioning transport, logistics, finance, communications and other business and professional services. Evidently, the services sector is a new source of dynamic advantage to ensure the sustainable growth of production and trade.
The services sector in Malaysia accounts for 54.5% of the country’s Gross Domestic Product (GDP) in 2017. While the services sector is a thriving hive of activity in Malaysia, the country is a net importer of services rendered by foreign services providers, whereby money is being paid by residents for utilising services provided by non-residents. This has resulted in a services trade deficit. According to the Department of Statistics Malaysia (DOSM), the export of services amounted to RM157.8 billion and the import of services amounted to RM180.9 billion. Higher imports have led to trade deficits of RM23.1 billion in services in 2017.
As Malaysia shifts towards high value manufacturing, there is an increased need for the services sector to become more knowledge-intensive and productivity-driven. Rapid developments in technologies also translate to the emergence of new services, whereby most of them are crucial for companies to adopt towards maintaining their competitiveness. It is important to not only train and up-skill talents and improve infrastructure, but also to enhance the downstream and upstream inter-linkages through more value added services.
Transformation of the services sector is on-going with an emphasis on shifting towards high-value strategic activities, as laid out by the 11th Malaysia Plan. This includes enhancing the standards of service of our local suppliers to bring them on par with the best in the world. The internationalisation of services will be the catalyst in developing this sector as it increases competitiveness, secures new markets, and enhances investment opportunities. The anticipated outcome is to attract higher investment, boost services exports and create more high income jobs towards Malaysia becoming a developed economy.
As the principal government agency for investment promotion for the manufacturing and services sectors in Malaysia, MIDA assumes an important role in assisting companies, facilitating the implementation of projects and spearheading economic development. In this regard, various initiatives are undertaken by MIDA to accelerate the growth and participation of local service companies. These include:
Encouraging the utilisation of local services which will create linkages and spillover effects to local business communities through supply chain programmes, dialogue sessions with investors and business matching sessions, and
Enhancing the Domestic Investment Strategic Fund (DISF) to enable more local service providers to improve their capabilities and undertake modernisation.
In addition, companies operating in Malaysia can look forward to an upcoming portal by MIDA which serves as a platform for local service providers to showcase their services. This services sourcing solution, known as the ‘i-Services’ portal, connects businesses to a number of services that can be used to enhance their operations. The portal is expected to be implemented in the second half of 2018.
Digital Transformation Acceleration Programme (DTAP)
A Strategic Partnership between MIDA and MDEC
Digital transformation enhances the ecosystem which in turns increases the productivity and sustainability of Malaysia. Companies, whether they are in the manufacturing or services sector, need to future-proof their businesses to remain competitive. For starters, digitalisation has to first become a priority in the management's agenda, which translates into the willingness to make the necessary investments. Businesses across the value chain will need to assess their existing structure, skills, and methods in collecting and analysing data to steer a data-centric business model.
In the context of Malaysia, companies are still lagging behind in adopting digital technologies due to budget limitations, the perception that digitalisation is fast-paced and complex, and a shortage of digital professionals. To catalyse the shift against these challenges, MIDA has partnered with the Malaysia Digital Economy Corporation (MDEC) to initiate the Digital Transformation Acceleration Programme (DTAP).
DTAP, which was kicked off on 9 April 2018, aims to elevate Malaysian companies and enable them to penetrate the global value chain and become world class entities. The programme will provide home-grown companies in priority sectors with a structured approach towards digital transformation. Participants of DTAP will work with Digital Transformation Labs' (DTLs) partners, who consist of global experts, to provide consultancy and expertise in development and execution of digital transformation pilots. These DTLs will be the key that connects Malaysian companies to the much needed global digital exposure aligning to Industry 4.0 emphasising in IoTs, Data Analytics, Machine Learning and Artificial Intelligence, among others.
The programme is devised in 2 phases; pilot and scale up. The pilot phase will be a platform for businesses to leverage on the DTLs' expertise in identifying 'pain points' and opportunities in the digital space to discover solutions and ultimately implement proof of concept/ minimum viable product with measurable outcomes. Once the pilot phase is successfully completed, businesses can graduate to full scale implementation.
DTAP is complemented with an outcome-based matching grant, a result of the MIDA-MDEC partnership. The grant for the pilot phase will be reimbursable on the outcome achieved, which is measured through increased productivity, reduced foreign labour and creation of a new source of growth or business model. More information on the matching pilot grant can be found at the following link: https://www.mdec.my/dtap
WHAT IS BEPS & FHTP?
Taxes, direct or indirect, are essential to any economy. Regardless of the jurisdiction, it operates within a global economy. The wider the tax base, the more revenue it collects for the country. Thus, allowing more to be spent on development such as healthcare, education and infrastructure.
However, as most multinationals have inter-connected operations in multiple countries, it has enabled some to exploit the flaws in international tax rules through harmful tax practices. This has resulted in an erosion of the worldwide tax base which poses a threat to the balance and efficiency of the international tax system.
To address this, the Organisation for Economic Cooperation and Development (OECD) has prepared an action plan to address the concerns of base erosion and profit shifting (BEPS).
In Budget 2018, the Government announced that Malaysia is committed to fulfill the OECD BEPS Action Plan. Malaysia joined the Inclusive Framework on BEPS and became a BEPS Associate in January 2017. As an Associate of BEPS, Malaysia will have equal rights with other OECD countries to address BEPS issues. This is an important step in protecting the country's tax base while meeting international commitment. Other BEPS Associates within the Asia Pacific (APAC) region include Singapore, Hong Kong and Indonesia.
Meanwhile, FHTP (Forum on Harmful Tax Practices) has been the body mandated to monitor and review tax practices around the world, focusing on the features of preferential tax regimes (incentives). It counters harmful tax practices on income from geographically mobile activities such as financing and leasing, service centres, distributive centres, banking, insurance, and includes intangibles such as Intellectual Property (IP).
How does a company indulge in harmful tax practices? There are three simple examples:
A company doing their mobile activity in another country to avoid paying tax in its own country.
- A country that offers tax reliefs (incentives)that are not published/ widely available (lack of transparency).
- A company that invests in a country, without any substantial activity (no evidence of establishment of an office and permanent workers in the country that their mobile activity is carried out).
FHTP evaluates incentives within countries and classifies them into two categories, namely IP Regime and Non-IP Regime.
Incentives that give exemption on IP income such as royalty, licence fee etc. are classified under the IP Regime and will be subjected to the "Nexus Approach". It uses expenditure as a proxy for activity. From the angle of MIDA, all incentives that have elements of IP income must comply with the Nexus Approach, where only the Research and Development (R&D) expenditure incurred and engaged by the company is taken into account for incentivizing IP income.
Non IP Regimes
Incentives that have been classified under the Non-IP Regimes will be evaluated based on the following conditions:
Substantial activity – The company must have an adequate number of full time employees and incur an adequate amount of Operational Expenditure (OPEX)/ Capital Expenditure (CAPEX).
- Ring fencing – There is unequal treatment between local and foreign residents (for example, a restriction on incentives for residents) or restriction from accessing to local markets (for example, condition to export services) or restriction from using domestic currency.
- Transparency - Available legislation must be in the form of a gazette order.
In light of the current industrial landscape that is constantly changing, it is more crucial now than ever for companies to evaluate and realign their business strategies to adapt to the current challenges of doing business.
Among the BEPS areas that MIDA is currently looking into are the design and development activities for the manufacturing sector, which has IP income embedded in the sale of products.
MIDA is also focusing on the implementation of the Nexus Approach, whereby companies are required to a have a proper system to trace and track R&D expenses and income. However, there is currently a lack of clear understanding on the actual implementation of FHTP guidelines. MIDA also seeks to balance compliance to FHTP requirements in the agency's current promotion efforts to ensure investors adhere to FHTP guidelines.
The new guidelines on the Nexus Approach will soon be issued by the Ministry of Finance (MOF). MIDA will be engaging the relevant stakeholders including the industry players and potential investors to create more awareness and understanding on this matter.
"In a nutshell, 'BEPS' or Base Erosion and Profit Shifting refers to strategies used by global corporations to exploit gaps in tax rules and legally shift profits to low or no-tax regions.
* When a company increased its profits at the cost of a country losing its revenue, it threatens the financial security of the country's economy."
Emergence of Industry 4.0 in the Services Sector
Global trends have shown that companies which have utilised technology to its advantage and are not confined to the traditional way of doing things, have a higher chance of remaining relevant and successful. Every organisation needs to constantly reinvent itself, and the adoption of technologies brought forward by Industry 4.0 is considered an important part of this process. This is certainly applicable to those in the services sector as it has become a vital engine of the global economic development.
Over the years, the services sector has grown tremendously as it is fuelled by the progress of globalisation, government liberalisation, and the rapid advancement of information and communication technology. To ensure sustainability in this sector, business transformation must be focused on solving key operation issues. Much like the manufacturing sector, issues such as supply chain efficiency, Internet of Things (IoTs), digital enhancement and smart work environments are important areas for industries in the services sector to look into.
For instance, in the hospitality industry, customer expectations are increasing, and hospitality firms need to match these expectations while maintaining their level of customer satisfaction and loyalty. In this regard, the use of big data and smart analytics to obtain information on customer preferences can greatly improve service quality to sustain customer satisfaction and loyalty. Similarly, in the healthcare industry, devices can become more seamlessly interconnected through the Internet of Things (IoT) to enhance patient monitoring, potentially allowing individuals and their physicians to better manage health issues such as in the treatment of chronic diseases. Sensors connected to the IoT have the potential to engage patients in their disease management, which can help reduce the incidence of adverse events and associated costs.
In Malaysia, industry players such as those in healthcare, green technology and logistics are riding on the wave of technological changes made possible by industry 4.0 to boost productivity and increase company competitiveness. Here are a few examples:
The company has adopted cognitive computing which assists doctors to deliver cancer treatment through the Artificial Intelligence (AI) platform.
Atalian Global Services
This energy service company is able to provide energy management solutions by monitoring clients' energy usage remotely from their headquarters in Kuala Lumpur. The objective of the company is to achieve energy efficiency optimisation by modifying, analysing, coordinating and adjusting the temperature of heating, ventilations and air conditioning (HVAC) based on the weather forecast and actual climate, as well as peak and off-peak periods.
YCH Logistics, Pos Malaysia, and SnT Global Logistics
These companies have been granted approval by MIDA to undertake e-fulfillment projects. These projects are meant to cater to the diverse needs of various local and global e-merchants in the country through the utilisation of smart logistics and warehouse management systems.
Digital revolutions are impacting economic transformation. Products, services as well as support services are becoming more customisable and individualised where the focus will be to meet the needs of the user as a consumer, an employee, patient, citizen or tourist. Hence, to ensure that Malaysia remains competitive, MIDA is encouraging the adoption of the latest technologies through the use of Smart Services in Industry 4.0.
Local companies are encouraged to leverage on the facilities such as the Domestic Investment Strategic Fund (DISF) to accelerate their shift to high value-added, high technology, knowledge-intensive and innovation-based industries. Based on the request of the companies and the merits of each case, the package of assistance will be granted under the customised incentive scheme. In addition, MIDA also provides the Accelerated Capital Allowance of 200% on the first RM10 million qualifying capital expenditure incurred in the Year of Assessment (YA) 2018 to 2020 for manufacturing and manufacturing-related services.
The Growth of Malaysia's Tourism Industry : Ecotourism
When cultures meet, be it East versus West or City versus Rural, there is a chance for mutual exchanges of understanding and experience, which leads to real long-term benefits. The spill overs are particularly tangible in the ecotourism sector where increased tourism activities in the rural areas offer business and job opportunities to the communities in the area. This sector, fuelled by tourists that are willing to pay premium prices to experience the unspoiled nature, encourages the preservation of the environment in exchange for financial gain.
Tourism has traditionally been a significant sector in Malaysia, being the third largest contributor to the nation's economy. According to the Ministry of Tourism and Culture Malaysia (MOTAC), in 2016, the tourism industry contributed 14.8%, amounting to RM182.4 billion to Malaysia's GDP. As luxury travelling becomes more affordable and popular holiday destinations are increasingly overcrowded, travellers are seeking for locations which offer unique experiences and are comparatively preserved. Tapping into these preferences, the Malaysian Government has targeted ecotourism as a key segment to be developed within the tourism industry.
Malaysia is at an advantage as 75% of the country's land area is covered with greeneries. This consists of 60% virgin rainforests, unchanged for millions of years, and lush tropical rainforests which harbour 20% of the world's animal species. Malaysia is also home to 60 Ecotourism sites, including 5 UNESCO world heritage sites, namely the Kinabalu Park (2000), Gunung Mulu National Park (2000), Melaka and Georgetown historical cities (2008) and the Lenggong Valley (2012).
In 2015, MOTAC introduced the National Ecotourism Plan to spur the development of this sector. Within this initiative, several Government agencies are actively involved in promoting Malaysia's unique ecotourism features. Initiatives include engaging with stakeholders at international tradeshows and events and undertaking various nature-oriented programmes and activities such as diving, bird-watching, rock-climbing, sport-fishing and 4x4 adventures. These efforts have contributed to the growing demand in Malaysia's ecotourism sector.
Under the National Ecotourism Plan, MIDA focuses on reviewing the policies that support the development of the ecotourism sector. MIDA has been mandated to lead a technical committee to identify the infrastructure and facilitation required by industry players to implement their projects.
The Government, under Budget 2017, allocated RM400 million for ecotourism activities, extended the incentive for new 4-Star and 5-Star hotels until 31 December 2018 and increased tax deduction up to RM700,000 to encourage sponsorship by the private sector in local and foreign arts, culture and heritage shows and performances.
With these facilities, more industry players such as tourist and hotel operators will be able to upscale their business strategies to cater to the niche and ever-growing market of the ecotourism sector.