LABUAN INTERNATIONAL BANKING - TAX PERSPECTIVES

21 May 2012, Labuan

PRE-TEST QUESTIONS

1) What are the products and services offered by Labuan banks?

2) What is the tax law that impose tax on income of Labuan bank?

3) How is tax imposed on the banking industry in Labuan IBFC?

4) What are the advantages of Labuan banking industry in Labuan IBFC?

PRE-TEST QUESTIONS

1) What are the products and services offered by Labuan banks?

2) What is the tax law that impose tax on income of Labuan bank?

3) How is tax imposed on the banking industry in Labuan IBFC?

4) What are the advantages of Labuan banking industry in Labuan IBFC?

PRE-TEST QUESTIONS

1) What are the products and services offered by Labuan banks?

2) What is the tax law that impose tax on income of Labuan bank?

3) How is tax imposed on the banking industry in Labuan IBFC?

4) What are the advantages of Labuan banking industry in Labuan IBFC?

PRE-TEST QUESTIONS

1) What are the products and services offered by Labuan banks?

2) What is the tax law that impose tax on income of Labuan bank?

3) How is tax imposed on the banking industry in Labuan IBFC?

4) What are the advantages of Labuan banking industry in Labuan IBFC?

LABUAN BANKING BUSINESS – PRODUCT AND SERVICES OFFERED (CONVENTIONAL AND ISLAMIC)

a) Definition “ Labuan banking business” means –

(a) the business of receiving deposits on current account, deposit account, savings account or any other account as may be specified by the Authority;

(b) Labuan investment banking business;

(c) Labuan financial business;

(d) Labuan Islamic banking business;

(e) such other business as the Authority, with the approval of the Minister, may specify,

in any currency (including ringgit where permitted by the Exchange Control Act 1953 or such other relevant law in force)

LABUAN BANKING BUSINESS – PRODUCT AND SERVICES OFFERED (CONVENTIONAL AND ISLAMIC)

(Cont.) “Labuan financial business” means –

(a) building credit business;

(b) credit token business;

(c) development finance business;

(d) leasing business;

(e) factoring business;

(f) money-broking business;

(g) Labuan Islamic financial business; or

(h) such other business as the Authority, with the approval of the Minister, may specify,

in any currency (including ringgit where permitted by the Exchange Control Act 1953 or such other relevant law in force)

LABUAN BANKING BUSINESS – PRODUCT AND SERVICES OFFERED (CONVENTIONAL AND ISLAMIC)

(Cont.) “Labuan investment banking business” means –

(a) the business of providing credit facilities;

(b) the business of providing consultancy and advisory services relating to corporate and investment matters, including dealing in securities, or making and managing investments on behalf of any person;

(c) the business of undertaking foreign exchange transactions, interest rate swaps, dealings in derivative instruments or derivative financial instruments or any other similar risk management activities;

(d) Labuan Islamic investment banking business;

(e) Labuan financial business; or

(f) such other business as the Authority, with the approval of the Minister, may specify,

in any currency (including ringgit where permitted by the Exchange Control Act 1953 or such other relevant law in force)

LABUAN BANKING BUSINESS – PRODUCT AND SERVICES OFFERED (CONVENTIONAL AND ISLAMIC)

(Cont.)

b)Who can do Labuan Banking Business?i. Labuan company or a foreign Labuan

company; orii. Malaysian bank; and

Holds a valid license to carry on such business.

c) To whom can be provided (Who are the customers?)

i. Residentii. Non-resident

COMMON PRODUCTS AND SERVICES OFFERED IN LABUAN IBFC

Corporate Finance

Shipping Finance

Aircraft Finance

Standby Letters of Credit

Advisory/Treasury Islamic Finance

Big Ticket Leasing Private Banking

Investment Banking

Trade Facilities

Bank Guarantees

Capital Markets

Project Financing

LABUAN BANKS

COMPETITIVE ADVANTAGES OF INTERNATIONAL BANKING IN LABUAN IBFC

1) No exchange control- Free to deal in any foreign currency except M’sia

currency- M’sia currency allowed for defraying expenses and

payment of professional fees

2) Tax Incentives- Low tax- No withholding tax- Interest/Dividends received from Labuan Banks tax-

exempt- No stamp duties on instruments related to Labuan

business activities3) Can offer products and services to Malaysian residents in

Non Ringgit or in M’sian currency (where permitted)

TAXATION FRAMEWORK

a) The Labuan Business Activities Tax Act 1990 applies - income derived by a Labuan bank from Labuan business activities.

b) Definition of Labuan business activity (Section 2, LBATA) “Labuan business activity” means:

Labuan trading; or a Labuan non-trading activity.

In, from or through Labuan in a currency other than M’sian currency, by a Labuan entity with non-resident or with another Labuan entity:

Provided that –

(a) in relation to business under Parts VI and VII of the Labuan Financial Services and Securities Act 2010 & Parts VI and VII of the Labuan Islamic Financial Services and Securities Act 2010 [Act] - activity may be carried on with residents, in Non- Ringgit or in M’sian currency, where permitted..

TAXATION FRAMEWORK

• Taxation under the Labuan Business Activity Tax Act (LBATA).

• Labuan companies can elect to be taxed under Income Tax Act 1967.

• No stamp duties on:-• Instruments executed by a Labuan Entity in

connection with Labuan business activity• Constituent documents and M & A of an LC• Instruments of transfer of shares between Labuan

Companies

Labuan trading activities 3% on audited net profits, or flat rate of RM20,000

Labuan non-trading activities 0% tax

TAXATION FRAMEWORK ……Contd

• Exemptions: – Dividend paid out of exempt income or income from

Labuan business activities– Interest / profit in lieu of interest (in general) & Royalty– Distributions made to beneficiaries by a Labuan trust – Technical or management fees & Lease rental paid to

Non-residents & other Labuan Entities• 50% exemption of the gross employment income of non-

citizen in managerial capacity• 100% tax exemption on Director’s fees for non-citizen &

non-resident Director of Labuan entity• 65% exemption on Statutory Income of Service Providers• 50% exemption on Labuan allowance for Malaysian

working in Labuan entity

DOUBLE TAX AGREEMENT

To date Malaysia has signed 74 DTAs

Objectives of DTA • Enhance cross-border trade and flow of capital• Grant relief from double taxation, eg reduced

withholding tax rates• Exchange of information – tax evasion

Basic Principles of DTA• Only tax residents can seek benefits under DTA• Rights to tax• Provide various definitions eg. “Permanent

Establishment”

a)Organization for Economic Co-operation and Development (OECD)

DTA Model Standard setting body on taxation

b) Effective Exchange of Information (Article 26)

Global Forum on Transparency and Effective Exchange of Information

COMPLIANCE WITH INTERNATIONAL STANDARDS

c) Transfer Pricing

- Dealings with related parties

d) Thin Capitalization Rules

- Power to Disregard Certain Transactions eg Restriction on interest expense

e) Tax Information Exchange Agreements

- Article 26 – Exchange of Information

COMPLIANCE WITH INTERNATIONAL STANDARDS ….Contd

COMPLIANCE WITH INTERNATIONAL STANDARDS ….Contd

(f) Foreign Account Tax Compliance Act (FATCA)

i. What is FATCA?• US government introduced the FATCA provisions and

included it in the Hiring Incentives to Restore Employment (“HIRE”) Act, which was signed into law on March 18, 2010

• Impose extensive new compliance obligations eg withholding tax

ii.What is the purpose of FATCA?• To prevent a perceived tax abuse by U.S. persons

through the use of off-shore financial accounts

iii. What are the penalties for non-compliance?• Imposes a 30% withholding tax on payments made to

foreign financial institutions (“FFIs”) that do not register with the IRS

• FATCA applies to U.S. source income, bank deposit interest and gross sales proceeds

iv. To whom does the FATCA apply?• Foreign entities with investments in the U.S. and not

just those with U.S. account holders• Treaty or portfolio interest exemption relief would

normally apply

COMPLIANCE WITH INTERNATIONAL STANDARDS ….Contd

Conclusion

Strengthen Regional & International Financial Linkages Further develop role of Labuan banks to support

international trade and investment Enhancing the competitiveness of International Banking

in Labuan IBFC

Internationalization of Islamic finance Leverage on Labuan business structures and institutions

to raise funds in multi-currencies in accordance with Shariah principles

The regulatory and supervisory regime Enhance the standards for Labuan IBFC

?QUESTIONS?Is the key to

SEEKING KNOWLEDGE

POST-TEST QUESTIONS

1) What are the products and services offered by Labuan banks?

2) What is the tax law that impose tax on income of Labuan bank?

3) How is the tax impose on the banking industry in Labuan IBFC?

4) What are the advantages of Labuan banking industry in Labuan IBFC?

Thank youThank you

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