Iskandar a nearshore advantage?

This article was contributed and first published in The Business Times on 7 February 2013.

The Iskandar Development Region (IDR) in Johor, Malaysia is three times the size of Singapore and can be considered an appropriate destination for Singapore companies which are seeking to expand their businesses in a location which offers lower land prices and a cheaper talent pool. Faced with rising wage bills, rentals and other operating costs in Singapore, Singapore businesses, particularly small and medium-sized enterprises, may find it commercially feasible to move their low value-added, labour-intensive businesses there. Its accessibility and close proximity to Singapore enhances its attractiveness for Singapore companies seeking to expand overseas.

The plans to connect Singapore and Johor Baru via a rapid transit link by 2018 will not only facilitate greater cross-border trade and investments but also make it easier for Singapore businesses to manage their operations across the border. Recognising the potential of Iskandar, Singapore's Finance Minister Tharman Shanmugaratnam recently acknowledged that the IDR could be "a nice complementary space" for Singapore businesses.

It is not surprising that Singapore is the single largest foreign investor in the IDR, with cumulative investments of S$2 billion since its inception in 2006. According to the Malaysian Investment Development Authority, more than 300 Singapore companies have already set up a manufacturing presence in the IDR.

However, before making a beeline to set up shop in the IDR, Singapore investors should first validate their cost structure and the efficacy of their expansion plans carefully. Issues such as security, the availability of human capital and the presence of supporting services/infrastructure should be carefully evaluated. In addition, IDR business plans should also factor in the effect of the new minimum wage requirements for workers in Peninsular Malaysia which took effect from Jan 1, 2013.

Taking into consideration the advantages of Singapore vis-a-vis Iskandar, it is likely that businesses will set up or shift to the IDR manufacturing or service facilities which require more land and/or labour, but can continue to house high value-added business activities such as headquarter functions, supply-chain control towers, intellectual property ownership and management, treasury functions, etc, in Singapore.

Interestingly, Singapore companies expanding to the IDR can even take advantage of assistance schemes offered by the Singapore government and administered by International Enterprise (IE) Singapore. These include:

  • the Internationalisation Finance Scheme, Loan Insurance Scheme and Trade Credit Insurance Scheme which are meant to provide financial and risk management support for foreign investments; and
  • the Political Risk Insurance Scheme which helps to subsidise the premiums payable by companies to buy political risk insurance as they venture overseas.

IE Singapore also offers grants to help companies develop the talent (for example for training, overseas attachments and human resource strategy development) that they need to support their international business needs. In addition, Singapore businesses are automatically entitled to claim a 200 per cent tax deduction for qualifying expenses incurred on overseas business development, investment study trips or participation in overseas trade fairs.

Further, the newly introduced Integrated Investment Allowance (IIA) scheme allows Singapore companies to claim enhanced writing-down allowances (that is, over and above the normal capital allowances) on equipment used for an approved project outside Singapore.

For example, IIA may be granted for productive equipment purchased by a Singapore company but provided for use to its IDR subsidiary company to carry out a project in the IDR. This project should involve the manufacturing of products or provision of specialised engineering or technical services for the Singapore company (that is, the IDR subsidiary operates as a contract manufacturer or contract service provider to the Singapore principal entity).

On the other side of the causeway, there are a host of attractive incentives and support packages available for companies undertaking qualifying activities in the IDR. These includes tax exemption for certain income sources, investment tax allowance, exemption from withholding tax, exemption from real property gains tax for entities located within approved nodes (Medini is the first approved node), unrestricted employment of expatriate employees, reduced tax rate of 15 per cent for workers residing and working on qualifying activities within the designated zones in IDR, etc.

Tax issues

Subject to appropriate structuring, Singapore investors should be able to earn dividends or branch profits from their Malaysian investments free of both Malaysian and Singapore tax.

Likewise, any gains earned from eventual disposal of the Malaysian investment should also not be taxable in Singapore or Malaysia provided they are regarded as capital gains. Investors can also take advantage of the Singapore-Malaysia tax treaty to enjoy reduced Malaysian withholding tax on other streams of income such as interest and royalties and subject to Singapore tax rules, can claim foreign tax credit for such Malaysian taxes against the Singapore tax payable on that income.

The network of free trade agreements including either or both Singapore and Malaysia will facilitate goods moving across the border without undue delay and charges. It may also help exporters on either side of the border to qualify for preferential treatment in third-country destination markets through either so-called origin cumulation rules or specific relaxations in the rules of some agreements allowing processing in neighbouring countries to count as domestic processing.

Although tax advantages should not be the reason for Singapore companies to expand their business footprint in the IDR (or, for that matter, anywhere else), a favourable tax system in Singapore, which helps to reduce tax costs, can go a long way in helping businesses to grow overseas and yet retain their control towers and value-added functions/activities in Singapore. In the context of encouraging Singapore businesses to expand into Iskandar, it may be worthwhile for the Singapore government to consider the following fiscal measures:

  • businesses should be allowed to deduct borrowing costs incurred to finance investments in designated territories (such as the IDR) against their Singapore trade income;
  • the IIA can be made automatic instead of requiring companies to go through an approval process;
  • foreign tax credit that cannot be fully offset against Singapore taxes on foreign income should be allowed to be set off against Singapore taxes on Singapore-sourced income and/or carried forward for set-off against future income of the Singapore company; and
  • automatic suspension of import GST for goods imported from the IDR or other designated territories for further processing in Singapore before eventual export, without the need to apply for the Major Exporter Scheme nor the need to register the goods at the time of import and re-export.

Singapore is still an attractive place to do business. However, the high cost of doing business here is clearly posing an increasing challenge and the government while still attempting to address these challenges has recognised that certain types of business operations will need to relocate to lower-cost locations such as the IDR. However, Singapore must continue to remain attractive for companies, particularly our home-grown ones, such that they do not move out completely as they seek greener pastures overseas.