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FEER: The Labuan Trick
By web aNtu
15/10/2000 4:31 am Sun
Terdapat dua rencana FEER (Far Eastern Economic Review) yang dikepil sekaligus:
1) Dodge City
Untuk makluman pembaca, Pusat Kewangan Labuan telah
digunakan untuk menyalur pinjaman kepada Hottick dalam
skandal NSC-Hottick-Halim Saad yang mana RM 3 billion
hangus akibat pinjaman yang bersandarkan kolateral saham.
Kesemua pinjaman dikeluarkan oleh bank malaysia yang
bercawangan di Labuan.
The sleepy Malaysian island of Labuan is helping
companies avoid millions in South Korean taxes
Issue cover-dated October 19, 2000
Some very big names are there-- including American
insurance giant AIG, Bell Canada and George Soros.
Combined, they and other companies have invested billions
of U.S. dollars in Korea and walked away with billions in
profits. And thanks to special rules, Labuan has helped
both foreign and Korean companies avoid hundreds of
millions of U.S. dollars in taxes. That's an amount that could
cover about 10% of Korea's projected budget deficit this
The trick is not new, but the sums are getting bigger and
bigger. Even before the financial crisis and subsequent
recovery, Korean companies themselves had cottoned on
to the benefits of Labuan. In the go-go years before the
crash, they were using the island to avoid taxes and,
through Labuan subsidiaries, buying listed shares
specifically designated for foreigners. Financial experts in
Labuan say somewhere between one-third and one-half of
the 2,500 companies registered on the island are somehow
linked to Korea.
"We survive a lot on private investment funds," says Chin
Chee Kee, chairman of the Association of Labuan Trust
Companies. "And since the beginning, Korean companies
have been coming to Labuan to invest in Korea quite a lot."
Here's how it works. Malaysia has a tax treaty with South
Korea that, in general, means Malaysian companies pay
little tax in South Korea and vice versa. But for investment
holding companies, the most important fine print is the rules
on dividends and capital gains. Most foreign investors in
Korea pay an effective 27.5% tax on dividend income and
a capital-gains tax as high as 27.5%. But for Malaysian
investors, taxes on dividends are cut to 10%-15% and on
capital gains, the tax rate is zero. If a company happens to
be registered in Labuan, there are no Malaysian taxes to
"Labuan has been the preferred route for investment into
Korea for some time. That has been because of the
particularly favourable treaty between Malaysia and
Korea," says Leonard Khaw, associate regional director for
tax services at Deloitte Touche Tohmatsu in Hong Kong.
"It's particularly favourable because Korea exempts the
capital-gains tax. And also the dividend tax is one of the
AIG and Bell Canada hit it big in July when they sold their
combined 38.8% stake in Korean cellphone company
Hansol M.com. Their combined initial investment through
their Labuan subsidiaries in late 1998 was $265 million. The
total profit from the sale in July was around $1.2 billion.
Taxes paid to South Korea's treasury: zero. Cost of
incorporating in Labuan: $1,315. And it's all perfectly legal.
Both companies are still wheeling and dealing. AIG heads a
consortium that's investing $1 billion in Korea's Hyundai
Securities and its investment-trust units. Bell Canada
recently sold its 20% stake in Taiwan's KG Telecom for
$790 million--taking advantage of another tax agreement
between Labuan and Taiwan. (Neither AIG nor Bell Canada
responded to questions for this article.)
Labuan is not unique. Other offshore centres offer their own
tax dodges. Korea's Ministry of Commerce, Industry and
Energy estimates that between one-third and one-half of
all foreign direct investment into Korea this year has come
through offshore tax havens.
"A lot of our foreign direct investment this year has come
from tax havens like Malaysia, the Virgin Islands, Bermuda
and the Cayman Islands," says Sejoon Kim, deputy director
of the ministry's investment-policy division. In dollars terms,
foreign direct investment for the first nine months of this year
was up 23% from the year before to $10.4 billion -- including
between $3.5 billion and $5 billion from offshore centres,
and $775 million from Malaysia, according
to the ministry.
Apart from enabling companies to avoid taxes, offshore
centres like Labuan can mask the origin and nature of
foreign investment. "Lost tax revenues are the main
concern. The whole offshore system is allowing individuals
and companies to avoid tax obligations, and that's a
problem, particularly in poor countries," says Jenny
Kimmis, a policy adviser at Oxfam, a British-based charity
that has studied the issue of tax havens and poverty.
"Another factor is financial stability. The lack of
transparency in some offshore centres does encourage
financial actors who are looking for a level of secrecy to
make speculative investments." Read: hot money.
Worldwide, the International Monetary Fund estimates that
as much as $1.7 trillion of investments is channelled
through offshore centres each year. The question is: How
much of that is short-term capital that can be yanked out of
a country at a moment's notice? In late 1997, South Korea
learned at first hand what it's like to get burned by hot
money. That's why, early next year, it's planning to
introduce a system of notification, under which investors
will have to identify the origin and beneficial owners of
"We cannot say whether that kind of tax-haven foreign
direct investment is bad or good," says Kim at the Ministry
of Commerce. "But we want to know if the FDI is dangerous
or not. The danger is that it is hot money."
By Alkman Granitsas
Issue cover-dated October 19, 2000
Mohammad Razif darts around his office on the top floor of
Labuan's financial park. The director-general of the Labuan
Offshore Financial Services Authority, or Lofsa, is pointing
to the island on a map of the South China Sea. "Three
hours flight to Singapore," he says, "three hours to Taipei,
three hours to Hong Kong." And in the middle of nowhere.
Standing by the window, he sweeps his hand across the
harbour and points to a land-reclamation project beyond
the (struggling) Sabah Shipyard, which is just down the
road from an abandoned hotel project. "We hope it will be
an IT park," he says proudly, adding that the Labuan
authorities have been holding talks with Taiwanese
"There are four main thrusts to Labuan," he says. "First, as
an offshore financial centre; second, as a tourism centre;
third, as a manufacturing base; and fourth, as a centre for
But for an island of just 75,000 people, where life moves
slowly and power outages are frequent, it's hard to imagine
such sweeping ambitions being realized. Instead, Labuan's
business community is deliberately coy about the island's
one natural advantage: its tax-haven status. In the 10 years
since it was created on October 1, 1990, Lofsa has resisted
becoming just another brass-plate tax haven like Bermuda
or the Cayman Islands.
"We don't want to be like other offshore tax havens, which
are just a nameplate. We are not worried about numbers,"
says Razif. "It's not easy to become an international
offshore financial centre. It took us 10 years to get where
we are and I wouldn't say we are that successful. We still
have a long way to go."
That's for sure. The established offshore centres of the
Caribbean boast more than 100,000 registered companies.
Labuan has just 2,500. At this rate, it will take 400 years for
the island to get to where its rivals are now. Many financial
professionals in Labuan complain that the island still
struggles with red tape--it's supposed to be an easier
place to do business than the rest of Malaysia, but in
several instances Malaysia's domestic finance laws have
become more liberal than Labuan's.
The three other pillars of Labuan's financial
ambitions--offshore banking, fund management and
insurance--face their own problems. True, all the big
banks have tiny two- to three-person offices, but demand
for offshore borrowing (mostly U.S. dollar-denominated) fell
sharply with the onset of the Asian Crisis. And it's unlikely
to grow much anytime soon in Labuan as long as
Malaysian interest rates remain below U.S. rates.
Offshore lending is limited, in any event. Last year, banks
in Labuan lent about $13 billion--less than a tenth the
amount of Hong Kong's syndicated-loan market. Razif
admits the island can't compete against established centres
such as Hong Kong or Singapore.
Instead, the latest idea is to launch a dollar-denominated,
Internet-based financial exchange. Originally slated to
open this month, the Labuan Financial Exchange has been
delayed at least until November because of technical
problems. Another idea in the works: Islamic banking. But
there, too, discussions about sharia (Islamic) law could
push any project back at least a year.