INTRODUCTION
Intro headline
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ENTER
Labuan IBFC Special Report
2022-2023 Edition
Contents
Celebrating more than a quarter of a century of regulating Labuan IBFC
ISLAMIC FINANCE
How the BEPS project addresses tax rights and international tax competition
DIGITAL REGULATION
An overview of the Labuan International Business and Financial Centre
LABUAN IBFC
International Investment Editor Mark Battersby introduces this e-zine
The advantages of private over public funds in bridging capital gaps
PRIVATE FUNDS
BEPS 2.0
A STERLING MILESTONE
Welcome to Labuan
Our special report drills down into the latest development of this free zone as its profile continues to increase on the international stage. Our overview article shows Labuan IBFC has become an ever-more integral component of Malaysia’s economy and is now the largest contributor to the island’s Gross Domestic Product (GDP) with economic contributions of about RM5 billion over the past two years. We also highlight how the regulator Labuan Financial Services Authority (Labuan FSA) celebrated its silver jubilee in 2021 and how it has grown through notable milestones during 25-year history of growth, with a myriad of challenges accompanied by rewarding achievements. A further focus in our special report is an update on the Organisation for Economic Co-operation and Development’s (OECD) 15 Base Erosion and Profit Shifting (BEPS) Action Plans aimed at addressing international tax planning strategies employed by the biggest multinational companies. And we home in on private funds as an alternative business financing tool that often offers flexibility to allow sums to be raised quickly in a cost-efficient manner. Labuan IBFC’s reputation continues to grow as it enters its fourth decade with a host of niche areas and new territory to explore amid global headwinds.
Mark Battersby Editor, International Investment
Mark Battersby introduces II's special report on Labuan IBFC
Mark Battersby
Editor, International Investment
areas and new territory to explore amid global headwinds.
T
his year has marked the launch of the big-themed Labuan International Business and Financial Centre (Labuan IBFC) Strategic Roadmap 2022 – 2026, proving the point that this
As economies emerges from pandemic lockdowns, this year has seen Labuan International Business and Financial Centre (Labuan IBFC) forge ahead on multiple fronts to position itself not just as a key play in the Asian economy but across the world. Labuan IBFC is not only Asia and MENA’s fastest-growing risk and reinsurance wholesale intermediation market, boasting more than 220 license holders, it is also the only jurisdiction in Asia that provides for the protected cell company (PCC) structure, with more than 10 PCCs licensed to date. Our special report drills down into the unique role this free zone plays as it carves a special place on the international stage. Our overview article shows how since its establishment over 30 years ago in 1990, the IBFC has become an ever more integral component of Malaysia’s economy with its latest contribution of about RM4.6bn in the nation’s fiscal revenue collection arising from the new tax regime in 2019 and 2020. We also feature insights by the IBFC on how it has embraced the rapidly evolving development in line with international standards. A further focus in our special report is on how Labuan is becoming an innovative base for Islamic financial products, home to the world’s first USD denominated exchangeable sukuk which has reinforced Malaysia’s position as the global leader in sukuk issuance. Captive insurance and its huge potential is another area where the IBFC points towards Asia leading the way. Labuan IBFC looks to be setting the pace as one of the fastest growing domiciles in the world
s economies emerges from pandemic lockdowns, this year has seen Labuan International Business and Financial Centre (Labuan IBFC) forge ahead on multiple fronts to position itself not just as a key play in the Asian economy but across the world.
financial centre is moving onwards and upwards after more than three decades of remarkable growth.
Malaysia
Labuan
Our special report drills down into the latest development of this free zone as its profile continues to increase on the international stage. Our overview article shows Labuan IBFC has become an ever-more integral component of Malaysia’s economy and is now the largest contributor to the island’s Gross Domestic Product (GDP) with economic contributions of about RM5 billion over the past two years. We also highlight how the regulator Labuan Financial Services Authority (Labuan FSA) celebrated its silver jubilee in 2021 and how it has grown through notable milestones during 25-year history of growth, with a myriad of challenges accompanied by rewarding achievements. A further focus in our special report is an update on the Organisation for Economic Co-operation and Development’s (OECD) 15 Base Erosion and Profit Shifting (BEPS) Action Plans aimed at addressing international tax planning strategies employed by the biggest multinational companies. And we home in on private funds as an alternative business financing tool that often offers flexibility to allow sums to be raised quickly in a cost-efficient manner. Labuan IBFC’s reputation continues to grow as it enters its fourth decade with a host of niche
Labuan IBFC, located in Malaysia, lies in the heart of the Asia, sharing a common time zone with major Asian cities, while complementing the financial centres of Hong Kong, Singapore and Shanghai. The Centre has continued to thrive despite challenging externalities, attracting companies and investors from 125 countries. Powered by its strategic location, business-conducive legal and regulatory framework and distinct business propositions, the Centre is now home to more than 880 licensed institutions and more than 17,000 companies. Predominantly driven by international banking, reinsurance, wealth management and the capital market segments/sectors, the Centre has also identified three emerging segments: captive insurance, Islamic finance and digital financial services. Being part of Malaysia, Labuan IBFC is committed to reporting requirements under the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards for Automatic Exchange of Information (CRS-AEOI) and Base Erosion and Profit Sharing (BEPS).
Labuan IBFC – Asia’s Premier International Financial Hub
The launch of the Labuan IBFC Strategic Roadmap 2022-2026 and Market Report 2021 embodies strategic initiatives to expand target sectors that are critical to the Centre’s growth
Labuan IBFC’s captive sector continued to gain momentum, with 65 captives established and total gross premiums registering at US$423.3m as at Q3 2022
S
ince its establishment 30 years ago, Labuan International Business and Financial Centre (Labuan IBFC) has grown into an international business hub and is now the largest contributor to Labuan island’s GDP, with economic contributions of about RM5bn over the last two years.
As a growing captive domicile in Asia Pacific, Labuan IBFC’s captive sector continued to gain momentum, with 65 captives established and total gross premiums registering at US$423.3m as at Q3 2022. In the meantime, digital financial services continued to make its mark, with an almost 10% increase in new players into the Labuan digital space as at Q3 2022, expanding from 90 to 98. Labuan IBFC’s Shariah-compliant sector has also proven its ability to expand and innovate, with the Centre now home to 19 Islamic banks as at Q3 2022, with total Islamic banking assets increasing almost 16% to US$2.2bn.
A key highlight for the year 2022 was Labuan IBFC signing three separate MoUs for marketing collaboration purposes, namely with Shanghai Lin-Gang New Business District Administration Committee, the Indonesian Chamber of Commerce and Industry (KADIN) and the Indonesian Exporters Association. It was reported during the second half of the year that over 90% of Labuan companies had complied with the Organisation for Economic Cooperation and Development’s (OECD) economic substance requirement. Marketing and promotional trips were also made to Singapore and Cambodia, where Labuan IBFC met with business associations and hosted business talks aimed at increasing awareness on the Centre. There was also a marketing and promotional trip to Dhaka, Bangladesh, post-pandemic, where Labuan IBFC participated in a tripartite summit between Indonesia-Malaysia-Bangladesh-themed “Bangladesh: A Land of Opportunities for Trade and Investment’. Coverage of this seminar was widespread, whereby it was featured in the Dhaka Tribune and The Business Post. The Centre’s robust and internationally recognised regulatory framework in tandem with the encouraging captive business growth had led to Labuan IBFC being selected as the Asian Domicile of 2021 by Captive Review, for the third year running. It had also won the coveted International Domicile of the Year 2021 at the European Captive Awards for the first time, marking Labuan IBFC’s enhanced visibility beyond Asia. This winning streak continued in 2022, where the Centre won the Highly Commended award for International Domicile at the European Captive Awards 2022 to cap off another momentous year of achievements.
Datuk Iskandar Mohd Nuli, Executive Chairman cum CEO, Labuan IBFC Incorporated Sdn Bhd
What is key is a full understanding of the ecosystem available in each centre
Updates on emerging segments
Recap
On the regulatory front, Securities Commission Malaysia and Labuan FSA, the Centre’s single regulator, signed an MoU to pave the way for greater regulatory, enforcement, and supervisory cooperation between the two regulators. Labuan FSA also signed a corruption-free pledge for high integrity and good governance. Mid-year saw the launch of the Labuan IBFC Strategic Roadmap 2022-2026 and Market Report 2021 by Labuan FSA. The regulatory body commented: “It is imperative that Labuan IBFC builds on the momentum of past achievements and further enhance the Centre’s capabilities, market reach and prominence to the next level. In this context, consultations with industry players and key stakeholders were undertaken in formulating the Labuan IBFC Strategic Roadmap 2022-2026 – a blueprint for growth trajectory of the Centre for the next five years.” The roadmap embodies strategic initiatives to expand target sectors that are critical to the Centre’s growth, namely, digital financial business, captives and Islamic finance as well as regulatory modernisation essential to ensure ongoing market stability, certainty and orderliness. It is envisaged that with the implementation of the initiatives, Labuan IBFC will evolve into a dynamic, sustainable international business hub of choice for Asia. Labuan FSA also rolled out a new risk-based insurance solvency regime, comprising a set of risk-based capital (RBC) regulations for its insurance industry. This RBC approach is contemporary and risk-focused, and is timely to be practised especially for Labuan IBFC as it has a rapidly expanding international insurance market.
The beginning of the year saw the appointment of Datuk Iskandar Mohd Nuli as the Executive Chairman cum CEO of Labuan IBFC Incorporated Sdn Bhd for a two-year term effective February 2022. Datuk Iskandar is the Deputy Director General of Labuan Financial Services Authority (Labuan FSA) and has over 30 years of experience serving in financial services regulatory and supervisory agencies. Labuan IBFC also launched its very own, standalone website – www.labuanibfc.com – to promote better navigation with the injection of a new branding theme. In March the Malaysian Parliament approved amendments to Labuan-related legislation. The related bills were Labuan Companies (Amendment) Bill 2022, Labuan Financial Services and Securities (Amendment) Bill 2022 and Labuan Islamic Financial Services and Securities (Amendment) Bill 2022.
A key highlight for 2022 was Labuan IBFC signing three separate MoUs for marketing collaboration purposes
The beginning of the year saw the appointment of Datuk Iskandar Mohd Nuli as the Executive Chairman cum CEO of Labuan IBFC for a two-year term effective February 2022. Datuk Iskandar is the Deputy Director General of Labuan Financial Services Authority (Labuan FSA) and has over 30 years of experience serving in financial services regulatory and supervisory agencies. Labuan IBFC also launched its very own, standalone website – www.labuanibfc.com – to promote better navigation with the injection of a new branding theme. In March the Malaysian Parliament approved amendments to Labuan-related legislation. The related bills were Labuan Companies (Amendment) Bill 2022, Labuan Financial Services and Securities (Amendment) Bill 2022 and Labuan Islamic Financial Services and Securities (Amendment) Bill 2022.
Labuan’s captive sector continued to gain momentum, with 65 captives established and total gross premiums registering at US$423.3m as at Q3 2022
fulfilling period of growth, with myriad challenges accompanied by rewarding achievements. The establishment of Labuan FSA had led to the transformation and streamlining of regulatory and supervisory functions in administering the financial activities in Labuan IBFC under a central authority. It aims to promote and develop Labuan IBFC as Asia’s premier international financial hub. From fewer than 20 staff during inception, today Labuan FSA has over 100 staff. The last two decades have seen dynamic progress as Labuan FSA pursued policy changes as well as legislative and regulatory enhancements to meet evolving global standards and industry demands. These efforts have made Labuan IBFC more resilient and stronger today. Its pragmatic regulatory and supervisory approach combines the ease of doing business with high international prudential standards, making the jurisdiction an ideal base for international investors seeking innovations and growth in Asia Pacific.
Marking a sterling milestone: Serving 25 years as the regulator of Asia's wholesale intermediation centre, Labuan IBFC
H
aving begun its journey as the regulator for Labuan International Business and Financial Centre (Labuan IBFC) on 15 February 1996, Labuan Financial Services Authority (Labuan FSA) celebrated its silver jubilee in 2021. Growing from strength to strength, the 25-year progress has been a
Labuan Financial Services Authority (Labuan FSA) is committed to realising a vibrant and forward-looking intermediation centre in Asia, by driving digital transformation in financial services.
2021 and beyond: Prioritising business innovation and market modernisation
Capital Market
Banking
Insurance & Insurance-related
Corporate Secretarial & Trust Services
Digital Financial Services
Financial Exchanges
Company Managment
Commodity Trading
Ancillary Service Providers
Leasing
Wealth Management
Islamic Finance
Democratisation of self-insurance: could Asia lead the way?
Digital Financial Institutions
Digital Service Providers
Digital Platforms
Digital Banks
Digital Securities Dealer
Digital Custody
Payment Portal
Virtual Asset Trading Platform
Digital Securities Exchange
Digital Asset Management
Insurtech
Digital Token/ Assets Issuance
Overview of BEPS 2.0
What is Malaysia’s position on BEPS 2.0?
I
n 2015 the Organisation for Economic Co-operation and Development (OECD) published the final reports on its 15 Base Erosion and Profit Shifting (BEPS) Action Plans. The BEPS Action Plans were developed by the OECD to address international tax planning strategies employed by
the biggest multinational companies and resulted in significant changes to tax legislation around the world, including in Malaysia. The introduction of economic substance requirements for Labuan entities and the removal of intellectual property income from the benefits of the Labuan tax regime, were a result of the OECD BEPS proposals. In January 2019, the OECD began work on its BEP 2.0 Project. BEPS 2.0 is made of two ‘Pillars’, as follows:
Overall, the work and guidance on Pillar Two is more advanced than that on Pillar One. The OECD had originally expected BEPS 2.0 to be substantially implemented by 2023. As discussed further below, while significant work has gone into the BEPS 2.0 Project and it has strong support, the implementation of certain aspects may be delayed.
As the OECD works towards finalising the details of BEPS 2.0, countries have already started discussing and consulting on how they may implement the two Pillars, and the potential impact of implementation. Given that Pillar Two would impact many more companies than Pillar One, many of the country announcements have focused on Pillar Two. Set out below are some of the BEPS 2.0 announcements around the world:
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Pillar One addresses the challenges of the digitalisation of the economy and the allocation of taxing rights to market jurisdictions; and Pillar Two addresses the remaining concerns about potential BEPS activity and the tax rate competition between countries.
The planning and implementation of the BEPS 2.0 project have since gained significant momentum, especially with the increased involvement of the United States (US) in the consultation process. In July 2021, members of the OECD/G20 Inclusive Framework (IF) released a high-level statement reflecting their agreement to the two-pillar solution (Statement). The Statement was updated and agreed on in October 2021 and as of 4 November 2021, 137 out of the 141 IF members have joined the Statement, including Malaysia. Various rules, commentaries and exposure drafts have been released, particularly on Pillar Two.
Pillar One seeks to re-allocate the taxing rights over part of the profits of multinational groups with annual turnovers exceeding €20bn (£17.2bn) and profits exceeding 10%, to the jurisdictions in which their customers are located, i.e., market jurisdictions. This is a fundamental change to international tax law. Currently, an entity would generally only pay income tax in a foreign jurisdiction if it has a taxable business presence (referred to in the tax world as a “permanent establishment”) in that jurisdiction. With the implementation of Pillar One, the world’s largest corporations will end up paying tax in jurisdictions where they do not have a physical presence, such as jurisdictions into which they are selling goods or services through electronic platforms. Generally, such multinationals will have a tax liability in jurisdictions in which they earn at least €1m in revenue, with the threshold being lowered to €250,000 for certain countries. While there are exclusions for taxpayers in the extractives and regulated financial services industries, the groups will need to check whether they qualify for such exclusions. Pillar Two seeks to implement a global minimum tax rate of 15% via two interlocking rules which will require changes to domestic tax laws (together, the Global Anti-Base Erosion (GloBE) rules). Pillar Two also proposes a tax treaty-based subject to tax rule (STTR), which would apply where certain intra-group cross-border payments are subject to low levels of tax. Details on the STTR have yet to be finalised. The GloBE rules are optional and countries can choose whether or not they implement them. The 15% minimum tax under the GloBE rules is calculated on a jurisdiction-by-jurisdiction basis. Where the effective tax rate in a particular jurisdiction is below 15%, the Income Inclusion Rule (IIR) under GloBE provides that a top-up tax will be payable in the jurisdiction of the ultimate parent entity (UPE) in the group. So for example, if a US UPE of a group that is within the scope of Pillar Two owns several subsidiaries in Malaysia (including Labuan) and the blended effective tax rate in Malaysia is only 10% in a particular year, the UPE would need to pay a top-up tax of 5% to the US tax authorities. If for some reason the IIR is not applied in the US (e.g., because the US chooses not to implement the GloBE rules), then another parent entity further down the ownership chain between Malaysia and the US may collect the IIR. If the IIR is not collected anywhere, the top-up tax would be shared among other jurisdictions in which the group has a presence and which have implemented the GloBE Rules. This alternative collection mechanism is known as the ‘Undertaxed Payments Rule’ (UTPR) and would result in taxing rights over the 5% tax shortfall being shared among the jurisdictions in which the Group has tangible assets and / or employees. Pillar Two would apply to multinational groups with turnovers of more than €750m in two out of the four years prior to the relevant year that is being tested. Certain exceptions and carve-outs apply. For example, income from international shipping operations is excluded from the minimum tax under Pillar two. However, various conditions and rules must be complied with, for this exception to be applied.
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The IF was established to ensure interested countries and jurisdictions, including developing economies, can participate on an equal footing in the development of standards on BEPS related issues, while reviewing and monitoring the implementation of the BEPS Project.
Both Pillars are fairly complex in design and remain a work-in-progress, but they can be generally described as tax rules that intend to achieve the following objectives:
On 3 June 2022, the Ministry of Finance issued the 2023 Pre-Budget Statement (Statement). The Statement indicates that the Government and the OECD are currently discussing the implementation of the taxation of the digital economy, under the two Pillar approach. The Statement concludes its BEPS 2.0 discussion to say that Malaysia is currently reviewing the technical details of the two Pillars, including the possibility of introducing the Qualified Domestic Minimum Top-Up Tax (QDMTT) under Pillar Two. The QDMTT would allow Malaysia to impose a 15% minimum tax, using Pillar Two principles, on in-scope groups that have an effective tax rate of below 15% in Malaysia. This would prevent Malaysia from ceding taxing rights (over profits earned in Malaysia) to other countries, meaning other countries would not be able to collect IIR or UTPR on profits earned in Malaysia. This would also simplify compliance.
How are other jurisdictions reacting?
On 5 May 2022, New Zealand (NZ) published an “official’s issues paper” (Paper) discussing the potential adoption of the Pillar Two GloBE rules. The Paper outlines the NZ Inland Revenue Officials’ (Officials) views as to whether NZ should adopt the GLOBE rules, and if so, how and when the rules should apply. The document represents the views of the Officials and the NZ Government has yet to make a final decision on NZ’s adoption of the Pillar Two proposals. The Paper indicates that the Officials support the implementation of the GloBE rules in NZ, but that NZ may not need to implement a domestic minimum tax such as the QDMTT. With respect to the timing of implementation, the Officials’ view is that NZ should wait to ensure that a “critical mass” of other jurisdictions adopt the GLOBE rules before progressing further. As well as looking to the EU, the UK and the US, NZ will look to follow Australia’s lead given the close economic relationship between the two countries. On 26 May 2022, Ireland announced a public consultation on how the Pillar Two Framework will be implemented into domestic law. Ireland is supportive of implementing the GloBE rules as well as a domestic minimum tax of 15% (referred to in the Irish consultation paper as a “Qualified Domestic Top-Up Tax” or QDTUT). In any case, as part of the EU, Ireland will be required to comply with the EU Directive in respect of Pillar Two.
How has the timeline moved and what can businesses expect?
The OECD’s initial plans to have BEPS 2.0 substantially implemented by 2023 may be somewhat delayed, with significant work remaining to be done on Pillar One in particular and with this Pillar now expected to be implemented in 2024. With respect to Pillar Two, while the OECD has indicated that much of the technical work is complete, many countries will be awaiting further guidance, in particular the detailed Implementation Framework. Countries are committed to implementing Pillar Two but may do so later than the original OECD target dates of having the IIR implemented by 2023 and the UTPR by 2024. For example, on 14 June 2022 the UK indicated that it will delay implementation of Pillar Two to accounting periods beginning on or after 31 December 2023. It does appear that Pillar Two will result in multinational groups with global revenues of over €750m being subjected to higher corporate taxes than smaller groups, with the IIR, UTPR and QDMTT potentially impacting these larger groups. Taxpayers will need to ensure that boards of directors and senior management are aware of the potential financial impact and that systems are capable of generating the data and calculations needed to comply with Pillar Two requirements. Companies that have not yet begun assessing the impact that BEPS 2.0 will have on their businesses should commence work on this immediately, as the analysis can be complex, the implications to the tax position can be significant, and changes to the systems to enable compliance can take a considerable amount of time. Tax authorities will need to ensure that the relevant changes are made to domestic tax law and that tax filing platforms can cater to Pillar 2. Malaysia has sent a clear message in the 2023 Pre-Budget Statement that the technical elements of BEPS 2.0 are being studied and the QDMTT is being explored. The authorities will want to ensure that Malaysia’s tax system is in line with international best practices and that Malaysia protects its taxing rights over profits generated here, while ensuring that the country remains attractive to foreign investors. It is relevant to note that for the purposes of calculating the effective tax rate for Malaysian operations under Pillar Two, Labuan is part of Malaysia and hence due consideration will also need to be given to the BEPS 2.0 impact on the Labuan tax system. More details may become available in Budget 2023, which is expected to be tabled on 28 October 2022. With a more level tax playing field, investors and businesses will place increased importance on non-tax advantages offered by jurisdictions, such as cost competitiveness, the ease of setting up and doing business, reduced administrative burden and the availability of a skilled workforce and good physical and digital infrastructures. Labuan, and Malaysia as a whole, will continue to have a lot to offer to investors in a BEPS 2.0 world.
The Government of Jersey released a policy paper on 12 April 2022 outlining its policy thinking on BEPS 2.0. According to the policy paper, Jersey commits to implement the minimum standards in Pillar One and the STTR. Jersey has not yet decided on its approach in relation to the GloBE Rules, but indicates that its analysis to-date suggests that the best policy could be to implement GloBE with a 15% domestic minimum tax applying alongside the existing corporate tax framework. If Jersey decides to implement GloBE, the implementation is likely to take place after 1 January 2024. The paper discusses that most companies operating in Jersey will be outside the scope of GloBE and the corporate tax position of such companies would remain unchanged. The Government of Jersey will work closely with Guernsey, the Isle of Man, the United Kingdom (UK) and other like-minded jurisdictions on the implementation of BEPS 2.0. The European Union (EU) will implement Pillar Two by way of an EU Council Directive (Directive), which will be adopted by all EU Member States. Once adopted, Member States shall transpose the provisions of the Directive into law by 31 December 2023 and then apply these provisions for the fiscal years starting on or after 31 December 2023 except the UTPR, which would apply for the fiscal years starting on or after 31 December 2024. The current wording of the draft Directive allows Member States with no more than 12 parented groups within scope of Pillar Two to choose not to adopt the IIR and UTPR for six fiscal years beginning from 31 December 2023. During an Economic and Financial Affairs Council (ECOFIN) meeting held on 17 June 2022 by the EU Council, Hungary, which had initially supported the draft Directive, changed its position and objected to its adoption. Hungary expressed concerns about the Directive, referring to undesirable delays of Pillar One and mentioning the Ukraine war and recent elections in Hungary as a new circumstance. The draft Directive requires a unanimous decision by all Member States for adoption. French Minister Bruno Le Maire said that he remains optimistic and he still hopes to reach agreement during the French Presidency of the EU Council, which ends on 30 June 2022. With 26 Member States committed to Pillar Two introduction, and one country blocking, the EU remains close to adopting the minimum tax rules. There may be further developments after an EU leaders meeting in Luxembourg on 21 June 2022.
Auckland, New Zealand
Kuala Lumpur, Malaysia
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Singapore’s Budget 2022 statement on 18 February 2022 indicated that Singapore will adjust its tax system in response to the Pillar 2 GloBE rules. This would be accomplished by exploring a Minimum Effective Tax Rate (METR) to top up the effective tax rate of multinational enterprises that are within the scope of Pillar Two, to 15%. Singapore will seek to design the METR with the objectives of certainty and compliance simplicity, to help maintain Singapore’s reputation as a country with an open and business-friendly environment. Hong Kong’s 2022/23 Budget Speech delivered on 23 February 2022 indicated that a legislative proposal would be submitted in the second half of 2022 to implement the 15% global minimum tax rate under Pillar 2, as well as other relevant requirements under the BEPS 2.0 Project. These amendments will only apply to multinational enterprise groups with annual consolidated group revenues exceeding €750m. To safeguard Hong Kong’s taxing rights, Hong Kong is also considering the introduction of a domestic minimum tax. This minimum tax will only apply from the year of assessment 2024 / 2025. Further, Hong Kong reiterated its commitment to maintain its simple and transparent tax system, including taxation based on territorial principles, and will take steps to minimise the compliance burden on multinationals when implementing BEPS 2.0 measures. The Government of Jersey released a policy paper on 12 April 2022 outlining its policy thinking on BEPS 2.0. According to the policy paper, Jersey commits to implement the minimum standards in Pillar One and the STTR. Jersey has not yet decided on its approach in relation to the GloBE Rules, but indicates that its analysis to-date suggests that the best policy could be to implement GloBE with a 15% domestic minimum tax applying alongside the existing corporate tax framework. If Jersey decides to implement GloBE, the implementation is likely to take place after 1 January 2024. The paper discusses that most companies operating in Jersey will be outside the scope of GloBE and the corporate tax position of such companies would remain unchanged. The Government of Jersey will work closely with Guernsey, the Isle of Man, the United Kingdom (UK) and other like-minded jurisdictions on the implementation of BEPS 2.0. The European Union (EU) will implement Pillar Two by way of an EU Council Directive (Directive), which will be adopted by all EU Member States. Once adopted, Member States shall transpose the provisions of the Directive into law by 31 December 2023 and then apply these provisions for the fiscal years starting on or after 31 December 2023 except the UTPR, which would apply for the fiscal years starting on or after 31 December 2024. The current wording of the draft Directive allows Member States with no more than 12 parented groups within scope of Pillar Two to choose not to adopt the IIR and UTPR for six fiscal years beginning from 31 December 2023. During an Economic and Financial Affairs Council (ECOFIN) meeting held on 17 June 2022 by the EU Council, Hungary, which had initially supported the draft Directive, changed its position and objected to its adoption. Hungary expressed concerns about the Directive, referring to undesirable delays of Pillar One and mentioning the Ukraine war and recent elections in Hungary as a new circumstance. The draft Directive requires a unanimous decision by all Member States for adoption. French Minister Bruno Le Maire said that he remains optimistic and he still hopes to reach agreement during the French Presidency of the EU Council, which ends on 30 June 2022. With 26 Member States committed to Pillar Two introduction, and one country blocking, the EU remains close to adopting the minimum tax rules. There may be further developments after an EU leaders meeting in Luxembourg on 21 June 2022.
Singapore’s Budget 2022 statement on 18 February 2022 indicated that Singapore will adjust its tax system in response to the Pillar 2 GloBE rules. This would be accomplished by exploring a Minimum Effective Tax Rate (METR) to top up the effective tax rate of multinational enterprises that are within the scope of Pillar Two, to 15%. Singapore will seek to design the METR with the objectives of certainty and compliance simplicity, to help maintain Singapore’s reputation as a country with an open and business-friendly environment. Hong Kong’s 2022/23 Budget Speech delivered on 23 February 2022 indicated that a legislative proposal would be submitted in the second half of 2022 to implement the 15% global minimum tax rate under Pillar 2, as well as other relevant requirements under the BEPS 2.0 Project. These amendments will only apply to multinational enterprise groups with annual consolidated group revenues exceeding €750m. To safeguard Hong Kong’s taxing rights, Hong Kong is also considering the introduction of a domestic minimum tax. This minimum tax will only apply from the year of assessment 2024 / 2025. Further, Hong Kong reiterated its commitment to maintain its simple and transparent tax system, including taxation based on territorial principles, and will take steps to minimise the compliance burden on multinationals when implementing BEPS 2.0 measures.
In Q2 2022, Labuan FSA signed a corruption-free pledge for high integrity and good governance
Malaysia has sent a clear message that the technical elements of BEPS 2.0 are being studied and the QDMTT is being explored
Private funds as an alternative business financing tool
Labuan IBFC is Asia and MENA’s fastest-growing risk and reinsurance wholesale intermediation market
It will be advantageous to the business community to be familiar with all types of alternative financing options besides traditional bank financing. The flexibility offered by some of these structures may allow businesses to raise financing quickly, in a cost-efficient manner and retain a significant amount of control in running and growing their businesses.
Private funds are required to lodge their information memorandum only with Labuan FSA, therefore significantly shortening the time to market to raise funds unlike public funds that need to go through lengthy registration processes; Key information of a Labuan private fund is protected by law with no public searchable records. This confidentiality will be welcomed by many high-net-worth investors; There is no requirement to appoint a licensed fund manager to manage the fund’s investment. This opens up the opportunity to competent individuals and businesses to establish and manage their own private funds to meet their respective objectives with significantly lower operating costs; and Labuan IBFC has innovative financial and the most efficient taxation legislations that make it an ideal jurisdiction for establishing and managing private funds in Asia.
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An Islamic private fund with a similar definition as the above and is in compliance with Shariah principles may be established in Labuan under the Labuan Islamic Financial Services and Securities Act 2010. Some of the key advantages of Labuan IBFC that allow individuals and businesses to establish and manage private funds for diverse purposes are as follows:
Not offered to the general public, are owned by not more than 50 investors, and where the first-time investment of said investors is not less than RM250,000 or such other sum as may be prescribed by Labuan Financial Services Authority (Labuan FSA) or the equivalent in a foreign currency; or Owned by any number of investors, where the first-time investment of each such investor is not less than RM500,000 or such other sum as may be prescribed by Labuan FSA or the equivalent in a foreign currency.
Businesses and individuals in Asia that are interested to establish private funds may consider Labuan International Business and Financial Centre (Labuan IBFC). Labuan IBFC has robust legislations that allow private funds to be established and structured via a trust, company, partnership, protected cell company, or foundation. A private fund under the Labuan Financial Services and Securities Act 2010 is defined as a fund whose shares are:
Robust legislations
The looser regulatory requirement on private funds enables businesses to use them as an effective fund-raising tool. Businesses may finance their ventures by establishing private funds to solicit investments from targeted investors. A private fund’s investment strategy may be set very broad, allowing the manager of the fund to make all investment decisions unencumbered by investment restrictions typically imposed on public funds by regulators. Its investment strategy can be tailor-made to meet specific non-conventional objectives by allowing investing in unlisted equities, joint ventures, contracts, notes, exchange-traded funds (ETFs), collective investment schemes, real estate, digital and alternative assets, and many more. Private funds may also be structured to accept subscriptions by investors not limited to fiat currency but to also include digital currencies, asset or share swaps, guarantees, and so on. Unlike soliciting financing from banks that often requires collaterals, or investment from private equity funds that take a controlling interest and engage actively in the management of the company or business, private funds can be structured with minimum interference to the business. Private funds are not subject to public disclosures and enjoy more freedom in how everything is handled from reporting to redemptions. This allows private funds to look at illiquid investments and alternative assets that a public fund would shun due to the difficulties of regular valuation and liquidation in the case of rising redemptions. It is for this flexibility that many hedge funds are private funds. In addition to investment flexibility, private funds can also be vehicles of choice for managing family wealth and succession. Wealthy families can inject their businesses into private funds and use them as protection and succession vehicles where assets in these funds are unitised and can be subscribed, transferred, or redeemed by family members only. The mindset of investors investing directly with a company or business deviates largely from investors who are investing in a fund. The former will often evaluate very critically the many factors that will affect the growth and profitability of a business before investing, while the latter may only consider the risk and attractiveness of the potential yield of a fund. This makes it relatively easier to attract investors using a fund structure.
Private funds are not subject to public disclosures and enjoy more freedom in how everything is handled from reporting to redemptions
usiness financing is the core of every business organisation. Whether you want to start a business, expand an existing one, implement new technology, develop new products, or make investments, financing is a key issue that needs to be carefully addressed. While banking is the
predominant provider of business financing, businesses that are start-ups, thematic, intellectual property-centric or knowledge-based, innovative technology-based ventures and other non-traditional businesses often face challenges in accessing bank-based financing, largely due to the characteristics of bank financing that are often incompatible with these ventures. Lending with high collateral remains a key feature of bank lending, and collateral is often lacking among newer and start-up businesses. Businesses can explore alternative financing to bridge this gap. Notable examples of alternative financing are crowdfunding and peer-to-peer (P2P), private equity, venture capital, asset-based lending structures, factoring, private lending schemes, and collective investing. In recent years, we have also seen the merging of a new way of financing using cryptocurrency. In this article we would like to share briefly on how private funds can be used as an alternative financing tool. In general, funds may be categorised into public and private funds. Both funds are collective investment vehicles where the manager of the fund pools together the money invested by all the investors and uses this money to make investments on behalf of the fund. In general, most mutual funds are public funds where the initial investment amount requirement is low to enable the public at large to invest in these funds. Public funds are required to be properly registered with a relevant authority, managed by a licensed fund manager, and heavily regulated to protect investors’ interests. Private funds, on the other hand, may be unregistered and the regulations around them are often much looser than public funds. Due to the light regulatory touch on private funds, they are required in most jurisdictions to only deal with qualified, professional, sophisticated, or accredited investors and not solicit investments from the public at large or small investors. The initial investment amount for a private fund is often much higher, too. Although private funds are allowed more flexibility compared to public funds, managers of private funds are expected to uphold a high degree of professionalism and are also responsible for protecting the interests of investors.
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Labuan IBFC legislation allows private funds to be established and structured via a trust, company, partnership, protected cell company, or foundation
