Laman Webantu   KM2A1: 2996 File Size: 10.5 Kb *

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
2) Borneo Banking

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.



Dodge City

The sleepy Malaysian island of Labuan is helping companies avoid millions in South Korean taxes


Issue cover-dated October 19, 2000

FOUR THOUSAND KILOMETRES south of Seoul, and less than 10 from the north coast of Borneo, Malaysia's offshore financial centre at Labuan has become a big player in South Korea's economy. Set up a decade ago, Labuan was supposed to be a pillar of Malaysia's modernizing economy--a financial centre to challenge Singapore and Hong Kong. That goal remains out of reach, but thanks to a half-forgotten tax treaty, the tiny island is home to some big players--and big tax dodges--in Korea's recovering economy.

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 year.

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 pay either.

"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 lowest."

AIG and Bell Canada hit it big in July when they sold their combined 38.8% stake in Korean cellphone company Hansol 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 capital.

"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 investors.

"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 educational excellence."

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.