The Briefing on OECD Global Forum on Transparency and Exchange of Information for Tax Purposes

En. Ahmad Hizzad Baharuddin
Director-General of Labuan Financial Services Authority

14 February 2012
Grand Dorsett Hotel, Labuan

بِسْمِ اللهِ الرَّحْمنِ الرَّحِيمِ

Yang Berusaha Puan Harizan Hussin, Principal Assistant Secretary of Tax Analysis Division, Ministry of Finance;
Puan Eng Choon Meng, Deputy Director, International Tax Division, Inland Revenue Board of Malaysia;
En.Zabidi Abd Rashid, Director Inland Revenue Board, Labuan Branch;
Chairmen of the Labuan Industry Associations;

Distinguished guests;
Ladies and gentlemen.

Assalamu’alaikum and Good Morning.
On behalf of the Labuan Financial Services Authority (Labuan FSA), it is my pleasure to welcome you to the briefing on “OECD Global Forum on Transparency and Exchange of Information for Tax Purposes”, organised by Labuan Financial Services Authority (Labuan FSA), in collaboration with the Ministry of Finance and Inland Revenue Board of Malaysia.
My appreciation also goes to the team from the Ministry of Finance, led by Puan Harizan Hussin, who has accepted our invitation to engage with entities in Labuan IBFC on one of the important business issues affecting centres like Labuan IBFC.

About the Briefing 

The programme today has been drawn-up to share with the industry the initiatives and the standards set by the Global Forum of the OECD concerning transparency and exchange of information from the perspective of tax.

The first part of the briefing, I was informed, would cover an update of the intent and scope of Phase 1 of the Peer Review under the initiatives by the OECD’s Global Forum, where the report on Malaysia and Labuan IBFC was formally adopted at the OECD Global Forum and G20 summit in 2011.

As in most universally accepted practice, the development of standards is to be followed by their effective implementation and operation. Towards this end, the team will also address and prepare the industry participants with the scope of work involving Phase 2 of the Global Forum’s assessment, scheduled to commence in the first half of 2013.

Ladies and gentlemen,

As the framework and the initiatives promoted by the OECD has its impact to the industry, I would like to address several elements in the framework that are relevant to us at Labuan IBFC.

First and foremost is the issue of transparency. From the tenets of good governance, transparency is employed in the organisational system as means of holding individuals and the business accountable for their objectives or responsibilities. The manner in which transparency is practised, more often than not, is aimed at enhancing integrity so that the actions and performance of individuals and organisation. 

Additionally, in addressing the need for transparency, a collaborative working and balanced disclosure of information becomes crucial to avoid situations of misalignment of interest that may compromise the accountability and the integrity of an individual or organisation.

The surge in cross border activities have today dispersed the commercial operations and pushed investment alliances around the globe. This development, while benefiting the economy, has also given rise to other forms of challenges, i.e. in the form of tax revenue collection and tax compliance issues. As trade and investment flow across borders and owing to the complexities in international trade and capital market liberalisation, enforcement of tax laws has become much more difficult and demanding.

Taxpayers naturally have been trying to minimise tax expense. A few went on to conceal their incomes and assets from the authority, by hiding behind veil of secrecy or other impediments to information exchange. This stems from many factors, including unhealthy activities such as concealing proceeds from illegal trades and transnational crime activities such as drugs dealings, human trafficking, terrorism financing, corruption and many others.

In the area of corruption alone, the World Bank had estimated that from the year 2006, over US$1 trillion is paid in bribes each year, acting like a direct tax on doing business, while severely undermining legitimate business activities. As the value chain of these illicit activities lengthen and becomes more complex, multi-national co-operations would require (more) information and regulator must have better oversight of what and who are involve in the chain. Hence, co-operation between governments, tax administrations and industry players are now becoming the make-up of the new tax paradigm. Needless to say, the threshold of tolerance for tax evasion has trending towards dropping to zero.

Ladies and gentlemen,

It is in this context that low tax jurisdictions and offshore centres, (I shall refer to them collectively as tax heaven) have suffered severe reputation issue, where historically they were seen as avenues for laundering the proceeds of illicit activities, based on their business model of high level of client confidentiality, the light and flexible incorporation and licensing regimes, and low or no taxes on business or investment income.

Following intensified scrutiny by the international financial regulators and multi-lateral organisations to provide oversight of the international economy and financial system against non-sustainable activities such as illicit capital flight, corruption and tax evasion, Labuan too has had to face adverse repercussion along with other jurisdictions when it was listed by the OECD’s in 2009 as practicing Harmful Tax Practices. That was part of the offensive of the international community to “name and shame” jurisdictions that are considered uncooperative in its drive for transparency concerning the tax affairs and the effective exchange of information. 

As there is always a silver lining behind every dark cloud, the crisis has in fact given entities in the tax heavens including others in the international financial and business system, opportunities to build appropriate foundations of a new business culture; more ethical and responsible business.

The success or failure of a tax centres, as widely recognised, is also more dependent on its reputation than any other single factor. That reputation, derived from the credibility of the Authority and legitimacy of the business, is the IBFC’s most important asset and it remains as the main point of gaining competitive advantage amongst a relatively large number of its peers. Business ethics, as enforced by accountability through transparency, indeed reflect the strength of a market economy.

Following a move towards transparency during the ensuing years, and especially with the introduction of strict AML regulations, many can now argue that offshore centres are in many cases better regulated than many onshore financial centres. A case in point is in the effort of instituting the “fit and proper” criteria, where in most offshore jurisdictions, a person would need a licence to act as a trustee, whereas in many other parts of the advanced economies, there are still no restrictions or regulations as to who may serve in the fiduciary capacity. Available evidences from the market also indicate that investors prefer to utilise better regulated IBFCs jurisdictions rather than more poorly regulated ones and it is reasonable to expect that no amount of secrecy and protection from the tax authority will attract investors in which investments may be lost due to misperception of poor supervision.

Building the new rules for the post-crisis global economy is a task that demands a collective response. This is why multilateral organisations have acquired a renewed significance, instilling business ethics that is driven by transparency, objectivity, reliability, and prudence. These values not only allow the financial sector to generate its key asset to conduct business and discharge its fiduciary responsibility, it also enhances investors’ confidence, which is the basic element for the well functioning of markets and societies.

Supporting the Cause

With the revolution of business and the financial and tax systems over the years, and a decade of work led by the OECD, significant progress has been made towards better transparency and exchange of information. The OECD Global Forum on Taxation, which consists of OECD and non-OECD economies, is continuously seeking ways to improve transparency and to establish effective exchange of information so that countries and jurisdictions can ensure compliance with their national tax laws and the implementation of the universally accepted and internationally agreed standards.

These ongoing efforts have culminated in a bold international co-operation amongst the regulators, which now produces far-reaching results. As we now observe, countries are working more closely together to prevent abuses of the global financial system in a wide range of areas, especially taxation. Transparency and exchange of information are now an accepted requirement for any jurisdiction that wishes to provide financial services in the globalised world.

Malaysia (and Labuan) came out strong in the OEDC’s Global Forum assessment

As you are aware, Malaysia including Labuan was assessed on its transparency by the OECD in 2011 by the Peer Review Group under Phase 1 of the Global Forum Assessment. I am happy to announce the outcome of the assessment of Malaysia (including Labuan), where the legal and regulatory framework for the availability and access of information, including mechanisms for exchange of information for tax purposes had been reported to be largely in place.

Notwithstanding the satisfactory outcome of the assessment, it was recommended that the competent authority in Malaysia to have the power to obtain all relevant information, including bank information, to respond to requests made pursuant to any double tax convention or taxation information exchange agreement. Following the recommendations, several amendments were made to the relevant laws in the recent parliamentary sitting. For your information, the Finance Act 2012 (Act 742) which contained the amendment to section 22 of LBATA in relation to Exchange of Information for Tax Information Exchange Agreement (TIEA) purposes was gazetted on 9 Feb 2012.

The report by the OECD Global Forum also identified minor gaps concerning the availability of accounting information in the Labuan IBFC and availability of ownership and accounting information with respect to certain nominee arrangements and trusts in Malaysia. You would be very interested to know that measures to improve the gaps pertaining to Labuan IBFC are currently being addressed by Labuan FSA with MOF and IRB.

Since 2009, Labuan FSA has also continued its commitment as a signatory to the International Organisation of Securities Commissions’ Multilateral Memorandum of Understanding, facilitating consultation and co-operation including the exchange of information with the member countries. Progress is also made in the area of Islamic Finance, where Labuan FSA is one of the associate members of the Islamic Financial Services Board and a founding member of the International Islamic Financial Market that is responsible for the standardisation of various documentations for the Islamic money market instruments.

Rest assured that Labuan FSA will continue to ensure that the IBFC has strong legal and supervisory framework, and will actively pursue its role to ensure that all the investment and business in Labuan IBFC remain safe and sound. In this regard, the positive assessment by the OECD Global Forum on Transparency and Exchange of Information in 2011 has indeed enhanced the status of Malaysia and Labuan as a well-regulated jurisdiction and one that is in compliance with international standards and best practices.


Ladies and Gentlemen

As business ethics along with innovation of products and services is positioned at the centre of any road-map for a sustainable global business, one would expect a more stable system with morally acceptable practices. It is paramount that this unification of ethics and economics be done with the support of all stakeholders, including us at Labuan IBFC.

As I hand over the session to our colleague in IRB, I wish you a fruitful engagement and trust that you will benefit from the briefing which has been planned to be consultative one. I encourage you to interact actively, especially during the Q&A session, and hope that you will use this platform to clear any ambiguities on the ensuing work under the initiatives of the OECD Global Forum.

Thank you.
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