Labuan IBFC benefits as the drive towards tax transparency and substance gains momentum
Thirteen thousand – it is just not an ordinary number. This is the total number of companies that Labuan International Business and Financial Centre, Labuan IBFC, aims to incorporate by end-2016. This was conveyed by Datuk Ahmad Hizzad Baharuddin, Director General of Labuan Financial Services Authority, Labuan FSA, in the recent launch of the Authority’s Annual Report 2015.
The midshore jurisdiction is confident that the number can be achieved from the current 12,900 (as of June 2016).
Underpinned by the growth in the Asia Pacific region which is envisaged to ‘remain solid’ this year and in 2017, according to a new Asian Development report released in March, it is forecasted that the economies in the region will grow at 5.6% and 5.7% respectively led by India and China.
Labuan IBFC recorded a 7.2% growth in company incorporation with a total of 836 new companies incorporated last year. These companies originated from more than 100 countries with more than 70% were from Asia – a positive indication that Labuan IBFC remains as a popular intermediation point for trade and investments within Asia, especially ASEAN.
Labuan IBFC recorded a 7.2% growth in company incorporation with a total of 836 new companies incorporated last year. These companies originated from more than 100 countries with more than 70% were from Asia – a positive indication that Labuan IBFC remains as a popular intermediation point for trade and investments within Asia, especially ASEAN.
European investors from the United Kingdom, Netherlands, Germany, Ireland and France made up a total of 13.9% of the incorporated companies while the rest were from the Americas, Middle East and Africa. Most of these companies were trading companies and the remaining were investment companies.
Labuan IBFC continued to gain interest from companies that favour to operate in a more efficient and business-friendly environment, thanks to its business-friendly policies coupled with a robust stance towards regulatory standards, applied by its one-stop regulatory authority Labuan FSA.
The growth of trade and investment within ASEAN countries, facilitated by the ASEAN Economic Community has also allowed Labuan IBFC to grow from strength to strength.
Leasing activities mature to include more foreign-based licensees
For example, leasing business in Labuan IBFC continued to grow with the total number increased to 374 with total assets leased amounted to USD51.8 billion, signifying the continued need for large and heavy equipment such as container ships, aircraft and oil rigs.
In fact, despite the global downward trend in the oil and gas sector, the sector has seen its highest share of contribution of 73% in the leasing business segment. Aviation sector, on the other hand, contributed 25.2% (second highest) of the total assets leased.
A continuity growth trend in the regional aviation sector is projected as airline companies continue to increase their capacity to meet demand. It is expected that on the back of this growth, Labuan IBFC’s leasing business will continue to grow and feature even more prominently as evidenced by the recent setting up of China Aircraft Leasing Group in the midshore jurisdiction.
Commodities trading incentives offer a cost and fiscal efficient option to regional players
The Labuan International Commodity Trading Companies (LITCs) sector also fared well with eight new approvals granted, bringing the total to 43. More than half of the companies were in the trading of petroleum and petroleum-related products, followed by agriculture products (16.3%), chemical products (14%) and the remaining in the trading of base minerals and refined raw material products.
Wealth management continues to be on upward trend
The demand for wealth management solutions have become more prevalent in tandem with the growth of private wealth globally in the recent decades and more essentially in the Asia Pacific region with 4.7 million high net worth individuals (HNWIs) holding USD15.8 trillion.
For Labuan IBFC, the wealth management sector remains one of its fastest growing sectors, chalking up an impressive 28% increase in the number of Labuan foundations, bringing to 166 the number of charitable and private client Foundations set up in Labuan since the Labuan Foundations Act 2010 was enacted.
Such growing trend shows that the midshore jurisdiction’s comprehensive wealth management instruments continue to attract the interest of HNWIs especially in the region with a significant of 77% Labuan foundations originated from Asia Pacific.
Labuan IBFC is also leading in Islamic wealth management where the Authority introduced the Labuan international waqf guidelines in 2015, placing Labuan as the first IBFC to facilitate the establishment of a waqf under common laws.
In addition to Foundations, Labuan has offered trusts since 1996, and special trusts as well as purpose trusts since 2010. Protected Cell Companies, Private Trust Companies and Private Funds complete Labuan’s suit of solutions in the wealth management sector.
Greater confidence in fund placement, conventional and Islamic
2015 also saw a significant increase in the amount of deposits in the Labuan banking system which amounted to USD10.8 billion, a growth of 17.9% compared to the previous year while the total assets of Labuan banks grew by 7% to USD47.4 billion, brought about by higher interbank placements and investments in associate companies.
The value of Shariah-compliant banking facilities also increased significantly during the year with deposits growing by 55% to USD1.8 billion compared to USD993.3 million a year before. As Labuan IBFC’s non-Malaysian Islamic banking business increased, so did the number of non-residents dominating the activity in this sector.
In fact a total of 77.3% of all Islamic financing was for non-Malaysians, helping the sector boosted its profit before tax to USD620.6 million, an increase of 34.6% from 2014.
In addition and in tandem with this increase, the total Islamic assets in the Labuan banking system also enjoyed a healthy increase of 38.6% to USD2.2 billion due to the overall rise in the total Islamic financing.
A healthy risk management industry
The overall insurance sector in Labuan IBFC remained strong with a margin of solvency of 5.7 times above minimum regulatory requirement. It has also welcomed entries from licenced entities from the Middle Eastern countries of Qatar and United Arab Emirates and Switzerland.
The industry capitalisation increased to USD832.3 million from USD783.3 million, with 74% dominated by foreign entities.
Complementing the traditional insurance sector, Labuan IBFC has seen a growing interest for captive insurance as a self-risk management solution. The overall softness of the insurance and reinsurance market, however, meant that the subsector saw a modest growth rate, with premiums growing to USD354 million in 2015, up from USD339.3 million in the previous year.
Agility is the key to diversification
“Just like the Malaysian economy, which has diversified since 1997, the same applies to Labuan IBFC,” said, Datuk Muhammad Ibrahim, Bank Negara Malaysia Governor who also serves as the Chairman of Labuan FSA said at the official launch of the annual report recently.
Previously dominated by banking and insurance, Labuan IBFC has expanded its offerings to include a wider array of financial solutions and services to meet increasing demands of investors.
The Chairman went on to say, “It’s an evolution,” adding that the key to the success of Labuan IBFC lies in its agility to respond to the market needs.
A bold step was taken to reposition the federal territory island from a traditional offshore centre financial centre to become a vibrant international and financial centre in 2008 – with a new focus on wealth management solutions, following the surging growth of HNWIs in Asia, whilst ensuring transparency in all its dealings.
More recently, Labuan FSA has worked towards diversifying its growth sectors and one of the sectors is the Labuan captive business with a masterplan being prepared to position Labuan IBFC as a preferred centre for captive solutions in Asia. It is envisaged that this move will meet with the growing interest for captive solutions from the larger Asian economies as well as the local businesses’ needs.
Competing in a transparent tax landscape
Labuan IBFC continues to play its facilitative role for cross-border trades and investments particularly in the ASEAN region. And it does so whilst ensuring all transactions and dealings which are conducted within the confines of this midshore jurisdiction complies with the latest international standards of transparency and the best practices in anti-money laundering as well as terrorism financing.
In fact, the recent global focus on traditional offshore financial centres has allowed Labuan IBFC to stand out as one of the centres that abides by international standards and best practices in governance and transparency.
Not resting on its laurels, Labuan IBFC continues to evolve and remains agile in the global business landscape of international business and finance.