Vital to improve the ease of doing business

Challenging landscape: A couple enjoying the view of the Kuala Lumpur city skyline. While Malaysia is still the second best place to do business in South-East Asia, the drop in the ranking is somewhat of a concern, given the latest developments in global finance and policy.

OVER the past four years, Malaysia’s ranking in the World Bank’s Doing Business report has slipped.

Since 2013, Malaysia’s ranking as the sixth easiest place in the world to do business has fallen to 24th place. Many reasons have been attributed to the decline, but the overall explanation is that other countries are doing more and running faster to improve their position in the ranking.

While Malaysia is still the second best place to do business in South-East Asia, the drop in the ranking is somewhat of a concern, given the latest developments in global finance and policy.

The Republicans in the United States’ House of Representatives, backed by president Donald Trump, have unveiled sweeping changes to the tax code in the United States, which feature not only tax cuts that have put more money into the pockets of its citizens, but also slashing the corporate tax rate from 35% to 20%. The removal of certain expenses by corporates would mean that the average tax cut would not be to 20% but reportedly around 28%. Nonetheless, the net impact is that US corporations will be paying lesser taxes, going forward.

That move has seen immediate response. Semiconductor company Broadcom Ltd is moving its domicile from Singapore to the United States, which would increase revenue to the United States by a reported US$20bil.

The move by Broadcom was done to reportedly facilitate a takeover of US network provider Brocade Communications Systems, but economists are watching for further implications from the US tax cuts.

Lower taxes would not greatly help to improve the ease of doing business, but will substantially help in the cost of doing business.

With the ease and cost of doing business closely interrelated, economists do feel that improving the ease of doing business will help in lowering costs that are often unseen in the form of red tape and inefficiencies that drive up operating costs.

Lee: There is room for us to improve, as other countries are catching up.

Socio Economic Research Centre executive director Lee Heng Guie says that it is important to improve the ease of doing business in order to lower costs that will allow Malaysian companies to compete better.

“There is room for us to improve, as other countries are catching up. It is a challenge for us,” he says on the need to smoothen the ease of doing business in Malaysia.

For Malaysia, access to labour has been a perennial issue, with many manufacturers lamenting the insufficient supply or costs that are more than what they are willing to pay.

Dealing with taxes

There is anxiety over what effect the new US tax rates will have on the rest of emerging Asia. While the increase in the US budget deficit will be a hit to the dollar, the attractiveness of lower taxes will serve as an incentive for US companies and businesses when they make investment decisions.

What has helped Malaysia over the years in attracting foreign money to set up factories that create jobs for Malaysians is the overall cost of doing business in Malaysia. With many incentives and the low cost of energy and good infrastructure, Malaysia as a destination for foreign direct investment (FDI) has never been in doubt, although big money tends to flow into other countries in the region in greater numbers.

That attractiveness has been chipped away over the past few years. FDI tends to flow the most to Singapore, but other countries in South-East Asia such as Indonesia and Thailand have narrowed the gap with Malaysia in terms of being a FDI destination in this part of the world.

Tax cut: Broadcom is moving its domicile from Singapore to the United States, which would increase revenue to the United States by a reported US20bil. — Reuters

One of the reasons, apart from matching or bettering what Malaysia offers in incentives, is the lowering of corporate tax rates in many countries in South-East Asia in recent years. Singapore is the lowest with 17%, Indonesia’s corporate tax rate is 25%, Thailand (20%), Vietnam (20%), Laos (24%) and Malaysia (24%).

“It sends a signal that governments are pushing for lower taxes,” says Lee.

Even though Broadcom is moving to the United States, Lee does not expect many other US multinationals to follow suit.

“Tax is important to cost, but there are other factors that affect cost. Wages in Asia are more competitive than the United States,” he says.

There might be hesitance by Malaysia to cut taxes further, as revenue is most needed as it tries to fund the budget while lowering taxes at the same time.

In Budget 2018, the Government’s operating expenditure is projected to be RM234.25bil and revenue estimated to be RM239.86bil, leaving little room for tax cuts to match what countries in the region are doing.

While tax cuts in South-East Asia plus lower operating costs may help sway US multinationals in deciding to keep operations here, the role of the United States as a big investor is, however, being replaced by China. China’s broadening economy and reforms that push a number of businesses and investments outwards is having a big impact on investment flow, especially in South-East Asia.

Reliance on money from the developed world as a form of investment is also diminishing, given the wealth being generated in this part of the world.

Companies in South-East Asia are now big investors in countries in South-East Asia and the United Nations Conference on Trade and Development notes that recent growth of domestic productive capacity in manufacturing industries such as automotive and high-end consumer electronics is strongly related to Asean’s rapidly evolving regional production networks and intra-regional FDI flows.

“Production networks in the regional bloc have expanded their industrial and geographical coverage, and have become increasingly sophisticated. This has been linked to industrial reconfiguration in China, South Korea and Taiwan. Both national and regional policies – in particular enhanced infrastructural connectivity and more free trade and investment arrangements within Asean and beyond (Asean+3) – have contributed to these changes,” it says.

Doing better

Malaysia’s ranking, while showing improvement in the best in class in the different categories that it was judged upon in the World Bank report, is something it needs to improve on to ensure businesses continue to benefit from the better working environment.

The report is the 15th in a series of measuring regulations affecting 11 areas of the life of a business. These include starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency, as well as labour market regulations.

It was reported that the World Bank has noted that over the past 15 years, Malaysia has implemented 23 reforms improving business regulations, much higher than the per country average of 15 reforms in the East Asian and Pacific region.

 

According to the World Bank, Malaysia has an opportunity for further improvement in the area of starting a business, despite six reforms having been carried out in this area over the last 15 years. Paying taxes is another area where there is room for improvement, it adds.

An economist says the Government does recognise that more needs to be done in starting a business and is aware that policy changes are needed to cut red tape.

“Top corporates are well funded but it is the SMEs that find it difficult to raise money,” says the economist.

“The issue now is that startups and the digital economy are changing the nature of business. Starting a digital company may not be as straightforward as a traditional SME in the past.

“Furthermore, there is a need for a stronger venture capital industry and risk-taking among financial companies to make it easier for the next generation of companies to start their businesses,” says the economist.