The ease of doing business in Malaysia has seen a steady improvement in the last decade but despite the many endeavours to establish a conducive business environment, it remains one of the most complex jurisdictions for foreign businesses to operate in.
In fact, Malaysia is the ninth most complex country in the world for multinationals to do business in and the third most complex in Asia, according to the Global Business Complexity Index (GBCI) 2020 report. The report is compiled by the TMF Group, a global administrative support services company for international business expansion.
According to the report, the country’s dismal position is mainly due to “high complexity” when it comes to the process for foreign businesses, which can take up to a month.
Incorporation in Malaysia involves obtaining licences for all business premises. Licences are also required for operating in some industry sectors, which will affect the required share capital, it states.
“Malaysia offers a wealth of opportunities for international businesses, and there is clearly an appetite to attract more investment into the country. However, investors in Malaysia must be able to navigate its changing social, political and economic landscape,” says Sharon Yam, TMF Group’s managing director for Malaysia.
However, the government is trying to address this problem to make Malaysia a more attractive place to do business where it launched a digital submission platform for audits and financial statements, says Yam.
“While its use is not compulsory, the government is encouraging the companies to use it by giving an annual rebate of RM5,000 per year.
“This is part of the Malaysian government’s strategy of simplifying processes to attract foreign direct investment which has helped move the country forward. We can expect to see the country’s business complexity to start reducing as a result,” she adds.
The report finds that in most jurisdictions, the national government is the common point of authorisation for incorporation, followed by city- or local-level requirements.
“In some jurisdictions, the incorporation process involves 30 or more interactions with various bodies. In the most complex of these, businesses have to register with multiple authorities, depending on the industry in which they are operating,” it states.
In Indonesia, for example, entity activation involves obtaining up to 11 permits. “There are 22 industry sectors and about 200 subsectors, each with different requirements for notification.”
It states that these processes are a “legislative minefield for incorporation” and it is reflected in Indonesia’s high ranking in the GBCI 2020 report. However, the report adds that the country is trying to streamline the process in the coming years with legislation designed to simplify incorporation.
“There has been substantial progress across the globe: in 71% of jurisdictions the relevant authorities are automatically notified during the incorporation process. This streamlining lessens complexity and saves incorporation time.
“The British Virgin Islands operates a registered agency model. Foreign businesses have a single point of contact – their registered agent – who engages with and notifies all the relevant bodies and agencies on their behalf. This simplicity is reflected in the BVI’s GBCI 2020 ranking as one of the least complex jurisdictions.
The GBCI analyses key areas of business administration and compliance across 77 jurisdictions.
The index is compiled based on over 250 different criteria including the time it takes for businesses to incorporate, changes in tax legislation policies around wages and benefits to the challenges of opening a bank account.
It found that in Asia, only Indonesia (1st) and mainland China (6th) represented a larger challenge for multinational firms looking to establish and operate local subsidiaries. Meanwhile, Taiwan, India and South Korea held the 16th, 17th and 18th position respectively.
On the contrary, the special administrative regions of Hong Kong (66th) and Singapore (60th) are the Asia continent’s simplest jurisdictions for business.
Additionally, the report found that legislative change is a major cause of complexity, particularly if it happens suddenly and requires a substantial effort to adapt to new practices and rates.
“In Ecuador, political instability has led to frequent changes in tax legislation with almost immediate ramifications, such as the recent increase in the withholding tax rate. In Greece, about 70 new tax laws are introduced every year, typically in March or April, which are applied retroactively to the start of the calendar year. Companies are forced to retrofit their accounts and tax submissions to comply with these changes.”
But some state institutions around the world are attempting to act more as a partner to businesses as the number of jurisdictions that require mandatory audits of company accounts has decreased, it states.
“In 2020, 12% of jurisdictions require all companies to have their accounts audited, compared to 17% the previous year. The jurisdictions driving this trend are Bolivia, India, Luxembourg, Malaysia and Ukraine.
“In the Republic of Ireland, a comprehensive online taxation system allows authorities to choose to audit a company if its submissions look suspicious or are clearly incorrect, cutting down on audits for their own sake. Greater digitalisation of tax processes around the world in the wake of the Covid-19 pandemic is likely,” states the report.
The GBCI 2020 also finds that the least complex jurisdictions have used information and communications technology to enhance communication and contract mechanisms so that setting up and operating a business becomes much easier.
“Other jurisdictions will want to ensure that they are not left behind. Given that three in 10 jurisdictions do not currently make official submissions to the government electronically, many of them may not have the tools to adapt to an environment that increasingly relies on the latest technology.
“Such tools are a fundamental requirement for operating at full throttle in the global economy. The successful jurisdictions will be those that offer the common international practices preferred by overseas companies,” it adds.
Moreover, the coronavirus pandemic is likely to motivate international bodies to step up actions to coordinate and regulate trade across borders to benefit all stakeholders.
“With eight in 10 jurisdictions already signed up to the OECD’s Common Reporting Standard (CRS), there is a clear desire to continue participating in international regulatory alignment. It is likely that further global governance initiatives will follow in its wake.”
The OECD initiative is aimed at making sharing account data between financial institutions across borders more transparent.