Published May 13, 2009

Labuan to adopt new rules to become tighter tax haven

By S JAYASANKARAN
IN KUALA LUMPUR

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NEW legislation to be tabled by the Labuan Offshore Financial Services Authority (Lofsa) governing all facets of business done in Malaysia's tiny tax haven east of Sabah will essentially focus on tightening up business practices so that Malaysia will never again be targeted by entities such as the Organisation for Economic Cooperation and Development (OECD).

In April, the OECD singled out three countries, including Malaysia, as 'uncooperative tax havens'. All three countries were taken off the list after they promised to abide by OECD rules.

'They don't want that to ever happen again because it can hurt your business,' a banker told BT. 'But it's also housekeeping. They want everyone to do what they say they are going to do and not try everything under the sun.'

On Monday, Lofsa chairman Zeti Akhtar Aziz said the new legal framework will enhance the provision of a wider range of financial products and services. 'It will involve both conventional and Islamic financial products, without impinging on the status of Labuan as a well regulated centre, with strong corporate governance and high international standards,' she told reporters.

Ms Zeti, who is also Malaysia's central bank governor, said the objective is to create a more facilitative framework for a conducive business environment.

Already, the Labuan model is being liberalised in ways that had been sought by investors since the tax haven was set up in the early 1990s.

Beginning in June, holding companies in Labuan will be allowed to have a physical presence in Kuala Lumpur. Similarly, Ms Zeti said that Labuan banking institutions and insurance companies that meet 'pre-determined' criteria will also be allowed to have a physical presence in Kuala Lumpur from 2010 and 2011, respectively.

The move by the Labuan authority to tighten up business practices illustrates the rush for private capital by international tax havens in the wake of the global financial crisis and the resulting critical appraisal of tax havens by Western governments, fearful that it could be used by its citizens anxious to dodge taxes.

Bankers told BT that Labuan's secrecy rules could also be made more flexible in line with global practices, that are now beginning to frown on too much secrecy. Thus, it was likely that the tax haven's tax, trust and finance rules could be amended.

The bankers also said that the laws on Islamic finance could be made clearer in light of the increasing legal problems worldwide of defaults of Islamic debt going to court and the ensuing clash between the conventional law and Syariah.

It isn't clear, however, how exactly this will be addressed although the government has allowed three international legal firms specialising in Islamic finance to be set up in Kuala Lumpur beginning next year.