Monday, 27 April 2009

Why UK companies will not do business in Malaysia in the future

Let’s put it plain and simple…

UK corporate tax rate = 28%
Malaysia corporate tax rate = 25%
A UK-subsidiary in Malaysia will pay tax on its profits at 25%. Thereafter, when the profits are being repatriated to UK in the form of dividend, the UK holding company will have to pay an additional 3% of tax (28% - 25%) on the gross dividend.

Put simply, a $100 profit means $25 tax paid in Malaysia and $3 paid in UK. Hence, in totality, profit of a UK corporation should only suffer a maximum of 28% tax. Of course, the exact mechanism is slightly more complicated but this is the gist of it. That is how it works, or how it will work until end of June 2009.

The UK govt has just announced that dividends received by a UK company from its subsidiary around the world (i.e. foreign dividends) will be fully tax exempt effective 1 July 2009. Put simply, a UK company will not need to top up the 3% tax if it receives dividend from Malaysia.

What has that got to do with less investments coming into Malaysia? Doesn’t seems to bother us right?... WRONG!

Although a UK company no longer needs to top up the 3% of tax on dividend received from Malaysia, the profit will still suffer 25% Malaysian corporate tax. This is bad because the UK company can choose to set up its business in countries like Singapore (“SG”) and Hong Kong (“HK”).

The tax rate in SG and HK is 18% and 16.5% respectively. A UK company will need to top up 10% and 11.5% of tax previously in respect of dividend coming in from those countries. With the new rule, that is not the case anymore. In effect, the profit of a UK Group will suffer 25% if they do business in Malaysia but will only suffer 18% and 16.5% of tax if they do business in SG or HK. That is tax savings of 7% / 8.5% if they can somehow move their profits from Malaysia to SG / HK.

“Zewt, not all business can be done in SG / HK. Maybe some businesses have to be done in Malaysia?”

A very good question indeed if the above occurs to you. Well, with the wonders of globalisation, a lot of things can be done to facilitate profits being made solely in SG and/or HK. In fact, I can tell you that motion has already started by some big UK corporations to ensure that profits are booked in HK.

8.5% of tax savings (if profits are booked in HK) is A LOT of money. Top that up with the pleasure of having to deal with govt agencies in SG/HK vs. Malaysia; I would not bet against UK corporations moving their operations elsewhere.

Well, think about it. If you are a boss of a UK company, what would you do?

2 years go…
Why is the rum gone?


hyperX said...

Too bad then... Even Intel has closed their factory in Malaysia (if I'm not mistaken).

Anonymous said...

even if malaysia was 8% they would still go to indonesia.

"Joe" who is constantly craving said...

well if the way ur post is skewered, the answer is only likely isnt?

unless u want to comment on whether it is feasible to do biz in Sg/HK as oppose to Malaysia for low cost labour items like cost centres? not sure the savings will b 7.5/8.5% though..

Fi-sha said...

Hi Zewt

I watched "Outsourced" last weekend and no one with calculative and business-minded thinking would set a company here in malaysia.

Tax is a double-edged sword right? Apart from high tax rate, we are just so corrupted and such slow coach.

blackjack said...

They don't need this reason to not come here.

Yvonne Foong said...

Interesting post. UK and other international corporations moving out of Malaysia might do us some good. Right now, I think the government needs to start supporting local education and local talents. But we are too dependent on foreign talents, labors, education, products. For many reasons, we are not growing. UK corporations pulling out will mean less profit for our government. I hope this would force the government to seriously look at sustainable economic development. Develop our own talents, free up the market.

Anonymous said...

Will : i hoping more Asean and East Asian company to invest in Malaysia.

James said...

Seriously how many British companies are there in Malaysia?

leyaw said...

Maybe, or maybe not. Thats because the cost of doing business is still relatively cheap in malaysia compared to Singapore and Hong Kong.

Couple that with political stability, decent infrastructures, natural resources, multi-lingual workforce, etc. that we have here, our country will still be able to compete with others in attracting foreign investors to do business here.

To improve, we need to have better managed government departments and agencies which practices tranparency, with no corruptions and are fast and efficient in doing their job.

-eiling- said...

A person with the right mind would definitely move his business to HK or SIN. Less political problems.

zewt said...

hyperX - hello, welcome! yes, they did, and they also retrench quite a number of HQ fellas.

anon @ 28/4 1.17am - sad but true.

constantly craving joe - top the lack of savings with efficiencies and infrastrucrure... no fight lah.

fi-sha - indeed... superbly slow. if you have dealt with them, u will be amazed at the rate they are doing things, or not doing things whichever u wanna call it.

blackjack - indeed...

zewt said...

Yvonne Foong - it will only be good if our nation is capable of achieving what you suggested. unfortunately though, that's not the case.

anon @ 28/4 6.33pm - good and bad...

James - not that many but they have a few big ones. if they pull out, economy will be severely affected.

leyaw - do we have political stability, decent infrastructures and all that you mentioned? we may have them, but we also have a whole load of negative stuff.

-eiling- - that's right. even malaysians wanna move away.

vincent said...

Okay la...

Here's where I tell you.....

Doing what I do, I get to talk to a lot of vendors for my particular industry who have set up base in Malaysia (Brits, Aussies, whatever..)

And this bloke I was talking to last week gave me 10 reasons why they are based in Malaysia and not Singapore or Thailand or Indonesia.

But I am sure if you talk to another company that is based in Thailand, they will give you another 10 reasons why they are there and not in Malaysia.

I think you are looking at it through a tunnel vision. Certain industries, like banking/finance (which is what I think you are talking about) would be good to be set up in Singapore/HK but do you think a UK based manufacturing plant is going to set up shop in either of those two countries?!?!?

That just makes no sense at all.

leyaw said...

Yes, we do have lots of negative. But how many Asian countries don't? And talking about Asia, the points I mentioned, Malaysia could easily be in the top 5.

Dr M may have promoted about the culture of cronyism and corruption but we cannot deny that he has created a healthy environment for foreigners to do business here.

And I would agree with Vincent. It depends a lot on the industries.

Ah Siang said...

Zewt, can shed light in orang biasa terms, what is withholding tax?

zewt said...

vincent - but then again, have you ever considered the contribution of manufacturing business in malaysia? they come here... employ all foreigners as workers except for white collar ones, and then they export most stuff and repatriate all their profit back. then they leave all the foreign workers (mostly illegal) here which result in crime... not exactly something we want isnt it? yeah, manufacturing will definitely wanna stay here but... banking and other funds based stuff will certainly move away.

leyaw - i am not too sure about the healthy environment for business to happen here... there are actually quite a lot of shit. if you have dealt with the agencies, then you'll know. and also another thing, the cream de la creme all went to HK/Sg, what's left in our country are the remnants.

Ah Siang - hello there. let's say a bank in another country, say country X, lends money to a company in malaysia, then the malaysian company will have to pay interest right?

this interest is the income to the bank in country x. but then again, this income is from a malaysian company doing business in malaysia. and so, the malaysian govt wants to claim the tax on this "interest income", and so when the malaysian company pays interest to bank in country x, the malaysian company will need to deduct tax (15%) before remitting interest to bank in country x.

let's say the interest is 100, 15 will go to malaysian govt and 85 goes to bank in country x.

similarly, when a malaysian bank lends money to a company in country x, country x will most probably imposed withholding tax on the interst paid to the malaysian bank.

in effect, withholding tax is a tax imposed on income of foreign corporations derived from malaysian companies. it can be levied on other things too, like dividend or fees.

Ah Siang said...


zewt said...

Ah Siang - no worries... hope u understand it. the explanation was all over the place.

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