Investors’ Guide

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INVESTORS’ GUIDE

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I. Investment Incentives by Legislation (As at 28 October 1999) ....................... 169

(A) Promotion of Investments Act, 1986 ........................................................ 169

(B) Income Tax Act, 1967 ................................................................................ 172

(C) Labuan Offshore Business Activity Act, (LOBATA) 1990 ..................... 183

(D) Customs Act, 1967; Sales Tax Act, 1972 and Excise Duty Act, 1976 183

(E) Non Tax Incentives ..................................................................................... 189

II. Industrial Coordination Act, 1975........................................................................... 194

III. Guidelines on Foreign Investment ......................................................................... 195

IV. Advisory Services Centre on Investment .............................................................. 197

V. Transfer of Technology ............................................................................................ 199

VI. Intellectual Property Protection ............................................................................... 201

VII International Offshore Financial Centre ................................................................ 202

VIII. Petroleum Development Act, 1974 ........................................................................ 205

IX. Gas Supply Act, 1993 ............................................................................................. 205

X. Securities Commission ............................................................................................. 206

XI. Kuala Lumpur Options & Financial Futures Exchange Bhd. ............................. 210

XII. Commodity and Monetary Exchange of Malaysia (COMMEX Malaysia) ......... 213

XIII. Regulations of Acquisition of Assets, Mergers and Take-Overs ...................... 216

XIV. Exchange Control Policy ......................................................................................... 218

XV. Double Taxation Agreements.................................................................................. 221

XVI. Investment Guarantee Agreements ........................................................................ 223

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I. INVESTMENT INCENTIVES BYLEGISLATION (AS AT 28 OCTOBER1999)

A. Promotion of Investment Act, 1986

M alaysia offers incentives for investments inpromoted products and activities in the

manufacturing, agriculture, hotel and tourismindustry, research and development (R&D) andtraining activity. These incentives are containedin the Promotion of Investment Act, 1986 and theIncome Tax Act, 1967. The incentives are designedto grant partial or to a limited extent of reliefincome tax.

(1) Pioneer Status (PS)

A company that is granted PS will enjoydifferent degree of exemptions stated asfollows:

(a) Promoted product/activity - Company willbe granted exemption of income tax on70% of the statutory income for 5 years.The balance 30% of that statutory incomewill be taxed at the prevailing company taxrate.

(b) Promoted product/activity in promoted area-Company located in Sabah, Sarawak andthe designated Eastern Corridor ofPeninsular Malaysia which include, Kelantan,Terengganu, Pahang and the district ofMersing in Johor, will be granted exemptionof income tax on 85% of the statutory incomefor 5 years. The balance 15% of that statutoryincome will be taxed at the prevailingcompany tax rate.

Investors’ Guide

(c) Promoted product/activity for high technologycompanies - Company will be granted fullexemption of income tax i.e. on 100% ofthe statutory income for 5 years.

(d) Promoted product in an approved industriallinkage scheme - Company will be grantedfull exemption of income tax i.e. on 100%of the statutory income for 5 years (SMIsproducing intermediate goods).

(e) Promoted product/activity of national andstrategic importance including the MSCstatus companies and product/activity inthe approved linkage programme whichachieve world class status;

(i) Company wil l be granted fullexemption of income tax i.e. on 100%of the statutory income for 5 yearsand is eligible for extension of another5 years.

(ii) Companies accorded MultimediaSuper Corridor (MSC) Status are alsoeligible for this incentive in additionto other incentives under the Bill ofGuarantees. The tax incentiveaccorded to the MSC companies isalso extended to multimedia facultieslocated outside the MSC. Amultimedia faculty under the proposedincentive is referred to as a centreof learning which provides coursesin media, computer, informationtechnology, telecommunications,communications and contents relatingto data, voice, graphics and images.

(iii) Companies in approved industriallinkage scheme capable of achievingworld class standards in terms ofprice, quality and capacity are alsoeligible. Companies that have started

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operation are also eligible but theincentives will only be given on theadditional income. For companiescurrently enjoying PS may apply forthe incentives at the end of theexisting incentive period.

(f) Contract Research and Developmentcompany (R&D) - A company that providesR&D services in Malaysia to a companyother than its related company, will begranted full exemption of income tax i.e.on 100% of the statutory income for 5 years.

Terms and conditions for companies enjoyingPS:

(i) Company granted PS must within 6 monthsrequest for a pioneer certificate, specifyingamong others the date of production fromwhich the partial exemption/full exemptionwill be granted.

(ii) Capital allowances have to be utilised duringthe pioneer period and will not be allowedto be carried forward to the post pioneerperiod.

(iii) Losses unabsorbed during the pioneerperiod will not be allowed to be carriedforward to the post pioneer period exceptfor PS for Contract Research andDevelopment Company.

(iv) Dividends paid out of tax-exempt incometo shareholders will also be exempted fromtax.

(2) Investment Tax Allowance (ITA)

The Investment Tax Allowance is an alternativeto the pioneer status and is designed to cater forprojects which have large capital investments andlong gestation periods.

As in the case of PS, a company granted ITAwill enjoy different degree of exemptions statedas follows:

(a) Promoted product/activity - Company willbe granted an allowance of 60% in respectof qualifying capital expenditure (such asfactory, plant, machinery or other equipmentused for approved project) incurred within

5 years from the date that the first capitalexpenditure was incurred. The allowancecan be utilised to set off up to 70% of thestatutory income in the assessment year.The balance of that statutory income willbe taxed at the prevailing company taxrate. Any unutilised allowance can be carriedforward to subsequent years until the wholeamount has been used up.

(b) Promoted product/activity in promoted area- Company located in Sabah, Sarawak anddesignated Eastern corridor of PeninsularMalaysia which covers Kelantan,Terengganu, Pahang and the district ofMersing in Johor will be granted anallowance of 80% in respect of qualifyingcapital expenditure incurred within 5 yearsfrom the date that the first capital expenditurewas incurred. The allowance can be utilisedto set off up to 85% of the statutory incomein the assessment year. The balance ofthat statutory income will be taxed at theprevailing company tax rate. Any unutilisedallowance can be carried forward tosubsequent years until the whole amounthas been used up.

(c) Promoted product/activity for high technologycompanies - Company will be granted anallowance of 60% in respect of qualifyingcapital expenditure incurred within 5 yearsfrom the date from which that the first capitalexpenditure was incurred. The allowancecan be utilised to set off against 100% ofstatutory income in the year of assessment.Any unutilised allowance can be carriedforward to subsequent years until the wholeamount has been used up.

(d) Promoted product in an approved industriallinkage programme - Company will begranted an allowance of 100% in respectof qualifying capital expenditure incurredwithin 5 years from the date from whichthe first capital expenditure was incurred.The allowance can be utilised to set offagainst 100% of statutory income in theyear of assessment. Any unuti l isedallowance can be carried forward tosubsequent years until the whole amounthas been used up.

(e) Promoted product/activity of national andstrategic importance including MSCcompanies and product/activity in the

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approved linkage programme which achieveworld class status;

(i) Company wil l be granted anallowance of 100% in respect ofqualifying capital expenditure incurredwithin 5 years from the date fromwhich that the first capital expenditurewas incurred. The allowance can beutilised to set off against 100% ofstatutory income in the year ofassessment.

(ii) Companies accorded MultimediaSuper Corridor (MSC) Status are alsoeligible for this incentive in additionto other incentives under the Bill ofGuarantees. The tax incentiveaccorded to the MSC companies isalso extended to multimedia facultieslocated outside the MSC. Amultimedia faculty under the proposedincentive is referred to as a centreof learning which provides coursesin media, computer, informationtechnology, telecommunications,communications and contents relatingto data, voice, graphics and images.

(iii) Companies in approved industriallinkage scheme capable of achievingworld class standards in terms ofprice, quality and capacity are alsoeligible. Companies that have startedoperation are also eligible but theincentives will only be given on theadditional investment. For companiescurrently enjoying ITA may apply forthe incentives at the end of theexisting incentive period.

(f) Research and Development Activities -Different incentives are given to companiesspecialising in R & D activities, i.e. incentivesfor “R&D company” and incentives for“Contract R & D Company”, as follows:

(i) R & D Company (a company thatprovides R&D services in Malaysiato its related company or to any othercompany)

Company wil l be granted anallowance of 100% in respect ofqualifying capital expenditure incurredwithin 10 years from the date fromwhich the first capital expenditure

incurred. The allowance can beutilised to set off up to 70% of thestatutory income in the assessmentyear. The balance of that statutoryincome will be taxed at the prevailingcompany tax rate. Any unutilisedallowance can be carried forward tothe subsequent years until it is fullyutilised.

(ii) Contract R&D Company (a companythat provides R&D services inMalaysia to a company other thanits related company)

Company wil l be granted anallowance of 100% in respect ofqualifying capital expenditure incurredwithin 10 years from the date fromwhich the first capital expenditurewas incurred. The allowance can beutilised to set off up to 70% of thestatutory income in the assessmentyear. The balance of that statutoryincome will be taxed at the prevailingcompany tax rate. Any unutilisedallowance can be carried forward tothe subsequent years until it is fullyutilised.

(iii) In-house R & D (research anddevelopment carried on in Malaysiawithin a company for the purpose ofits own business)

Company wil l be granted anallowance of 50% in respect ofqualifying capital expenditure incurredwithin 10 years from the date fromwhich the first capital expenditureincurred. The allowance can beutilised to set off up to 70% of thestatutory income in the assessmentyear. The balance of that statutoryincome will be taxed at the prevailingcompany tax rate. Any unutilisedallowance can be carried forward tosubsequent years until the wholeamount has been used up.

(g) Technical or Vocational training company- Company will be granted an allowanceof 100% in respect of qualifying capitalexpenditure incurred within 10 years fromthe date from which the first capitalexpenditure incurred. The allowance canbe utilised to set off up to 70% of the

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statutory income in the assessment year.The balance of that statutory income willbe taxed at the prevailing company taxrate. Any unutilised allowance can becarried forward to subsequent years untilthe whole amount has been used up.

Companies with existing technical orvocational training institutes and whichincur new investment to upgrade theirtraining equipment or expand their trainingcapacities are also eligible for thisincentives.

(3) Industrial Adjustment Allowance (IAA)

The IAA is available to companies in selectedmanufacturing sector mainly in wood based, textile,machinery and engineering, stamping, mould, toolsand dies and machinery sub-sector. Further more,the companies should already be in existencebefore 31.12.1990 and have been participatingin certain industrial adjustment activities such asreorganisation, reconstruction or amalgamationwithin the sector.

Companies will be granted an allowance of60% to 100% based on the industrial adjustmentactivities undertaken. The allowance will be givenin respect of qualifying capital expenditure incurredwithin 5 years. The allowance can be utilised toset off against 100% of adjusted income in theyear of assessment.

Terms and conditions for companies enjoyingITA & IAA:

(i) Any unutilised allowance can be carriedforward to the subsequent years until it isfully utilised.

(ii) Dividends paid out of tax-exempt incometo shareholders will also be exempted.

(4) Infrastructure Allowance (IA)

The IA is available to any company residentin Malaysia engaged in manufacturing, agricultural,hotel, tourist or other industrial/commercial activityin Sabah, Sarawak and the designated EasternCorridor of Peninsular Malaysia.

Company will be granted an allowance of 100%in respect of capital expenditure on infrastructure(such as reconstruction, extension, or improvementof any permanent structure including a bridge,jetty, port or road). The allowance can be utilisedto set off up to 85% of statutory income in theyear of assessment. The balance of that statutoryincome will be taxed at the prevailing companytax rate. Any unutilised allowance can be carriedforward to the subsequent years until it is fullyutilised.

(5) Double Deduction on Expenses forPromotion of Exports

This incentive is available to any companyresident in Malaysia seeking opportunities forexports of manufactured products, servicesproducts and agricultural products.

The expenses eligible for double deduction are:

(a) overseas advertising;

(b) supply of free samples abroad;

(c) export market research;

(d) preparation of tenders for the supply ofgoods overseas;

(e) supply of technical information abroad;

(f) exhibits and/or participation required in tradeor industrial exhibitions held locally or abroadapproved by the Ministry of InternationalTrade and Industry;

(g) fares in respect of travel overseas byemployees of companies for business;

(h) accommodation and sustenance expensesincurred by Malaysian businessman goingoverseas for business, subject to RM200per day; and

(i) cost of maintaining sales office overseasfor the promotion of exports.

For pioneer companies, the deduction areaccumulated and allowed against their post-pioneerincome.

B. Income Tax Act, 1967

(1) Exemption of Income

(a) Approved Service Projects (ASP)-(Section 127)

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The income of companies undertaking ASPis exempted at statutory level. The quantumof tax exemption on statutory income variesbetween 70% and 100% for a period of 5to 10 years from the date of generation ofincome. The quantum of exemption availableare as follows:

(i) companies undertaking ASP will begranted partial exemption of incometax on 70% of the statutory incomefor 5 years. The balance 30% of thatstatutory income will be taxed at theprevailing company tax rate;

(ii) companies undertaking ASP inSabah, Sarawak and the designated‘eastern corridor’ of PeninsularMalaysia will be granted partialexemption of income tax on 85% ofthe statutory income for 5 years. Thebalance 15% of that statutory incomewill be taxed at the prevail ingcompany tax rate;

(iii) companies undertaking ASP ofnational and strategic importance willbe granted full exemption of statutoryincome from payment of income taxfor 10 years.

Note:

• Dividends paid out of tax-exemptincome to shareholders will also beexempted from tax.

• Capital al lowances and lossesunabsorbed have to be utilised duringthe exemption period and will not beallowed to be carried forward to thepost exemption period.

(b) Trading Companies

Companies approved as “InternationalTrading Company” are given income taxexemption amounting to 70% of the statutoryincome arising from increased export sales.For the purpose of this incentive, exportsales do not include trading commissionsand profits derive from trading at thecommodity exchange. This exemption isfor f ive (5) years. To qualify as an‘International Trading Company’, a companymust satisfy the following criteria:

(i) be incorporated in Malaysia;

(ii) achieve an annual sales turnover ofmore than RM25 million;

(iii) equity holding of at least 70% byMalaysian;

(iv) market manufactured goods,especially those from small andmedium scale industry; and

(v) be registered with MATRADE.

In addition, the company must satisfy thefollowing conditions to enjoy for the taxincentive:

(i) not more than 20% of annual salesis derived from trading ofcommodities;

(ii) not more than 20% of annual salesis derived from the sales of the goodsof related companies; and

(iii) use local services such as banking,finance, insurance, ports and airports.

(c) Operational Headquarters Company (OHQ)

An approved OHQ company is a locallyincorporated (Please refer to the illustrationbelow) which carries on a business inMalaysia of providing qualifying servicesto its offices or related companies outsideMalaysia and which is approved by theMinister of Finance.

Under Section 60E of the Income Tax Act1967, income derived by an approved OHQcompany is given a tax concession fromthe provision of qualifying services inrespect of:

(i) general management andadministration;

(ii) business planing and co-ordination;

(iii) procurement of raw materials,components and finished products;

(iv) technical support and maintenance;

(v) marketing control and sales promotionplanning;

(vi) training and personnel management;

(vii) treasury and fund managementservices;

(viii) corporate financial advisory services;

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(ix) research and development work;

(x) Income arising from sources outsideMalaysia and received in Malaysiaby a resident company is not subjectto tax;

(xi) The tenure of the OHQ incentives isfor a period of five (5) years whichmay be extended for another five (5)years;

(xii) Companies granted an approvedOHQ status wil l enjoy a 10%concessionary tax on businessincome, income from loan/fundmanagement services (interest onapproved loans raised throughfinancial institutions in Malaysia andextended to its offices or relatedcompanies outside Malaysia) androyalty income received from researchand development work.

(d) Tour Operators

(i) Incentive for bringing in ForeignTourists

Exemption from tax on income earnedfrom the business of operating toursprovided that the tour operators arelicensed with the Ministry of Culture,Arts & Tourism and the tour operatorsbring in at least 500 foreign touriststhrough group inclusive tours. Thisincentive will be available until yearof assessment 2000 (for income1999).

(ii) Incentive for Domestic Tourism

Exemption from tax on income earnedfrom the business of operating toursprovided that the tour operators arelicensed with the Ministry of Culture,Arts and Tourism and the touroperators conduct domestic tourpackages with at least 1,200 localtourist per year. For this purpose, adomestic tour package means anytour package within Malaysiaparticipated by local tourist(individuals who are Malaysiancitizens or residing in Malaysia)inclusive of transportation by air, landor sea and providing at least onenight accommodation. This incentive

wil l be available for year ofassessment 1999 and 2000 (forincome 1999).

(e) Promotion of International Conference

Local companies which promote internationalconferences in Malaysia will be eligible forincome tax exemption on income earnedfrom bringing at least 500 foreign participantsinto the country.

(f) Promotion of Export

(i) exemption of statutory incomeequivalent to 10% of the value ofincreased exports is given tomanufacturers provided that thegoods exported attains at least 30%value added;

(ii) exemption of statutory incomeequivalent to 15% of the value ofincreased exports is given tomanufacturers provided that thegoods exported attains at least 50%value added;

(iii) exemption of statutory incomeequivalent to 10% of the value ofincreased exports is given tocompanies which export fruits andcut flowers;

(iv) exemption of statutory incomeequivalent to 10% of the value ofincreased exports is given tocompanies in selected services sectoras follows:

(a) legal;

(b) accounting;

(c) engineering consultancy;

(d) architecture;

(e) marketing;

(f) business consultancy;

(g) office services;

(h) construction management

(i) building management

(j) plantation management; and

(k) health and education.

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(g) Promotion of Car and Motorcycle RacingEvents

Drivers and organizers of car andmotorcycles racing of international standardheld in Malaysia are eligible for:

(i) full tax exemption on income earnedby the drivers;

(ii) 50% tax exemption on income earnedby the organisers.

(h) Promotion of Boat/Yacht MaintenanceActivities in Langkawi

Companies undertaking repair andmaintenance activities of luxury boats andyacht in Langkawi are eligible for full incometax exemption for 5 years.

(2) Investment Allowance (IA) (Schedule 7B)

The IA is an alternative to income tax exemptionunder section 127 for companies undertaking ASP.Under IA, the quantum of allowance available tocompanies undertaking ASP in respect of qualifyingcapital expenditure incurred within 5 years fromthe date the qualifying capital expenditure is firstincurred varies between 60% to 100%. Theallowance can be utilised to set off against 70%to 100% of the statutory income. The quantumof allowance available are as follows:

(i) companies undertaking ASP will be grantedIA of 60% in respect of qualifying capitalexpenditure incurred within 5 years fromthe date the capital expenditure is firstincurred. The allowance can be utilisedto set off against 70% of the statutoryincome;

(ii) companies undertaking ASP in Sabah,Sarawak and the designated easterncorridor of Peninsular Malaysia will begranted IA of 80% in respect of qualifyingcapital expenditure incurred within 5 yearsfrom the date the capital expenditure isfirst incurred. The allowance can be utilisedto set off against 85% of the statutoryincome;

(iii) companies undertaking ASP of nationaland strategic importance will be grantedIA of 100% in respect of qualifying capital

expenditure incurred within 5 years fromthe date the capital expenditure is firstincurred. The allowance can be utilisedto set off against 100% of statutory income.

Note:

• Dividends paid out of tax-exempt incometo shareholders will also be exempted.

• Any unutilised allowance can be carried tothe subsequent years until it is fully utilised.

(3) Reinvestment Allowance (RA)

The RA is given to manufacturing and agriculturalcompanies producing essential food (rice, maize,vegetable, tubers, livestock farming, productionof aquatic products and any other activitiesapproved by the Minister of Finance) undertakingexpansion, modernisation and diversificationactivities.

The level of RA granted are as follows:

(a) Projects in promoted areas;

(i) Sabah, Sarawak and designatedEastern corridor of PeninsularMalaysia which covers Kelantan,Terengganu, Pahang and the districtof Mersing in Johor.

(ii) The RA of 60% in respect of qualifyingcapital expenditure incurred. Theallowance can be utilised to set offagainst 100% of statutory income inthe year of assessment.

(b) Projects in non-promoted areas (WesternCorridor of Peninsular Malaysia);

(i) The RA of 60% in respect of qualifyingcapital expenditure. The allowancecan be utilised to set off up to 70%of statutory income in the assessmentyear. The balance of the statutoryincome will be taxed at the prevailingcompany tax rate.

(ii) Companies that carry outreinvestment which can improvesignificantly their productivity levelwill be granted RA of 60% which isallowed to be utilised to set off against100% of statutory income.

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Definit ion of “signif icant increase inproductivity”

PER has increased by at least the same rateas the GDP growth rate for that industry.

Formula: Process Efficiency Ratio (PER)

PER = Total Output - BIMSTotal Input - BIMS

Whereby, BIMS (Bought in materials andservices) is defined as value of materials consumedin the production process (including payment forthe transport, tax paid including those on materials)+ value of equipment used such as packagingmaterials, daily used materials (including officestationery, materials for improvement andmaintenance) + publication cost + lubricants +cost of goods sold in same condition such asutilities (water, electricity and fuels) + paymentsto contractors + payment to industrial work doneby others + payment for non-industrial services.

Eligibility criteria

The RA is subjected to the following criteria:

(i) The company must be in operation for atleast 12 months.

(ii) The RA will be given for a period of 5years beginning from the year the firstreinvestment is made;

(iii) Assets acquired from RA cannot bedisposed within 2 years of reinvestment.

Note:

• Effective from the year of assessment 2000,the RA will be granted to manufacturingcompanies that reinvest to expand/modernise/ diversify which result in improveproductivity, as measured by “PER”. Anyreinvestment that does not result in improveproductivity is no longer eligible for RA.

(4) Double Deduction Incentive

(i) Research & Development

Companies including companies in theservices sector are eligible for double

deduction incentive on expenses incurredfor undertaking R&D activities. For thispurpose, R&D is defined as follows:

“Research and development meansany systematic or intensive studyundertaken in the field of science ortechnology with the object of using theresults of the study for the productionor improvement of materials, devices,products, produce or processes butdoes not include:

(i) quality control of products orroutine testing of materials,devices, products or produce;

(ii) research in the social sciencesor the humanities;

(iii) routine data collection;

(iv) eff iciency surveys ormanagement studies;

(v) market research or salespromotion; and

(vi) with effect from year ofassessment 1998, a companycarried out designing orprototyping as an independentactivity will also qualify for R&Dincentives”

Incentives given for R & D are as follows:

(a) Approved Research- Section 34A ofIncome Tax Act, 1967

(i) Double Deduction on non-capitalexpenditure incurred on researchand development approved by theMinister of Finance.

(b) Payment for Services - Section 34B (1)(b) & (c) Double deduction on paymentfor use of services of:

(i) approved research institutions; *

(ii) approved research and developmentcompany; **

(iii) a contract research anddevelopment company. **

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Note:

* Approved research institution includesthe following:

(a) all government researchinstitutions, includinginstitutions corporatised underSection 24 of the CompaniesAct, 1965.

(b) government funded universitieswhich undertake research thatconform to the definition of R&D as indicated above.

** R & D company or contract R& D company refers tocompanies which areestablished in conformity withSection 2 of the Promotion OfInvestment Act, 1986.

(c) Cash Contributions Section34B (1) (a)

Double deduction on cashcontributions made toapproved research institutions.The list of approved researchinstitutions as at 28 October1999 are:

(i) Malaysian AgriculturalResearch andDevelopment Institute(MARDI)

(ii) Rubber ResearchInstitute of Malaysia(RRI)

(iii) Forest ResearchInstitute Malaysia(FRIM)

(iv) Malaysian Institute ofMicro Electronic System(MIMOS)

(v) Palm Oil ResearchInstitute of Malaysia(PORIM)

(vi) Standard and IndustrialResearch Institute ofMalaysia (SIRIM)

(vii) Mineral ResearchInstitute

(viii) Malaysian Centre forRemote Sensing(MACRES)

(ix) Veterinary ResearchInstitute

(x) Fisheries ResearchInstitute

(xi) Institute for MedicalResearch (IMR)

(xii) Malaysian Institute forNuclear TechnologyResearch (MINT)

(xiii) Unit PengurusanPenyelidikan, UniversitiKebangsaan Malaysia(UKM)

(xiv) Pusat Inovasi danPerundingan, UniversitiSains Malaysia (USM)

(xv) Pusat Penyelidikan danPerundingan, UniversitiUtara Malaysia (UUM)

(xvi) Unit Penyelidikan,Universit i PutraMalaysia (UPM)

(xvii) Pusat Penyelidikan,Universit i IslamAntarabangsa Malaysia(UIA)

(xviii) Unit Perundingan,Universiti Malaya (UM)

(xix) Unit Penyelidikan danP e m b a n g u n a n ,Universiti Teknologi

(xx) Malaysia (UTM)

(xxi) Pusat Sains danTeknologi Pertahanan,K e m e n t e r i a nPertahanan

(ii) Training

Effective from 1.7.1993 double deductionfor expenses on training will be consideredonly for companies which do not contributeto the Human Resource Development Fund(HRDF) and the trainees must be full-time employees who are Malaysian citizens.

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(a) Approved Training Institutions

(i) Companies under the servicessector not covered by the HumanResources Develop-ment Fund(HRDF) are eligible for doubledeductions on training expensesif such training were to beundertaken in approved traininginstitution or government traininginstitutions. In order to qualify asan approved training institution,it must be an association basedinstitute.

(ii) Qualified manufacturing and non-manufacturing companiesundertaking training in approvedtraining institutions could claimdouble deduction on expensesbilled by the respective approvedtraining institutions. (No otherexpenses are allowed for doublededuction). The approved traininginstitutions as at 28 October 1999are as follows:

(a) National ProductivityCorporation ( NPC)

(b) Standard and IndustrialResearch Institute ofMalaysia (SIRIM)

(c) Institut Teknologi Mara(ITM)

(d) Malaysian AgriculturalResearch and Develop-ment Institute (MARDI)

(e) Forest Research Instituteof Malaysia (FRIM)

(f) The Centre For Instructorand Advanced Skil lTraining (CIAST)

(g) Penang Skills Develop-ment Centre (PSDC)

(h) Institut Kemahiran Mara(IKM)

(i) Industrial Training Institute(ITI)

(j) German-Malaysia Institute(GMI)

(k) Malaysia Timber IndustryBoard (MTIB)

(l) Federation of MalaysianManufacturer -Entrepreneur and SkillsDevelopment Centre(FMM- ESDC) (certainprogrammes only)

(m) Perak Entrepreneur andSkills Development Centre(PESDC)

(n) Tuas Polytech (Brit ishMalaysian Institute)

(o) ASEAN Timber Techno-logy Centre (ATTC)

(p) Sarawak Timber IndustryDevelopment Corporation(STIDC)

(q) Kedah Industrial Skills &Management Develop-mentCentre (KISMEC)

(r) Malaysia France Institute(MFI)

(s) Selangor Human ResourceDevelopment Centre(SHRDC)

(t) Pusat PembangunanTenaga Industri Johor(PUSPATRI)

(u) Malaysian Institute ofNeuclear Technology(MINT)

(v) Pahang skills Develop-ment Centre

(b) Approved Training Programmes

(i) Manufacturing companies inproduction

Manufacturing companiesundertaking training programmeslocally or overseas approved byMIDA for the purpose of

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upgrading/developing craft,supervisory skills, technical skills,productivity and qualityimprovements.

(ii) Manufacturing companies not yetin production

Qualif ied manufacturingcompanies undertaking trainingprogrammes that are approvedby MIDA for the purposeacquiring/developing craft,supervisory or technical skills, thatcan contribute to futureproduction.

(iii) Training for handicapped person

A company which incurredtraining expenses in the trainingof any handicapped person whois not an employee of thecompany. The training should bedone either in-house or at anyapproved training institution inMalaysia. Such handicappedperson must be classified ashandicapped by the Ministry ofNational Unity and SocialDevelopment and the trainingundertaken must serve toenhance his/her employmentprospect.

(iv) Tourism Industry

Companies in the hotel or touroperating business whichundertake training for the purposeof upgrading the level of skillsand professionalism in the tourismindustry and approved by theMinister of Culture, Arts andTourism.

(v) Non-manufacturing companies

Non-manufacturing companiesthat send their employees toattend training programmesapproved by the Ministry ofFinance in the followinginstitutions (1 January 1999):

(a) Institute Bank-BankMalaysia (IBBM)

(b) Malaysian InsuranceInstitute (MII)

(c) Persekutuan PenghantarFret Malaysia

(d) Association of ConsultingEngineers Malaysia(ACEM)

(e) Persatuan Elektrik &Elektronik

(f) AFCM Training ServicesSdn. Bhd

(g) Institut Pengurusan(Malaysia (MIM)

(h) Institut Jurutera Malaysia(IEM)

(iii) Freight Charges

Double deduction on freight charges formanufacturers in Sabah & Sarawak whoexport rattan and wood-based products.

(iv) Insurance Premiums

(a) Double deduction on premiums paidfor export credit insurance.

(b) Double deduction on insurancepremiums paid for the import of goodsprovided the risk are insured with aninsurance company incorporated inMalaysia.

(c) Double deduction on insurancepremiums paid for export of goodsprovided the risk are insured with aninsurance company incorporated inMalaysia.

(v) Overseas Promotion

(a) Tourism industry

Double deduction for tourism industryis granted on expenditure incurred byhotels and tour operators for overseaspromotions as follows:

(i) expenditure on publicity andadvertisement in any massmedia outside Malaysia;

(ii) expenditure on the publicationof brochures, magazines and

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guide books, including deliverycosts which are not charged tothe overseas customers;

(iii) expenditure on market researchto explore for new marketsoverseas, subject to the priorapproval of the Ministry ofCulture, Arts and Tourism;

(iv) expenditure which includes faresto any country outside Malaysiafor purposes of negotiating orsecuring a contract foradvertising or participating intrade fairs, conferences or forumapproved by the Ministry ofCulture, Arts and Tourism. Suchexpenses are subject to amaximum for RM200 per dayfor lodging and RM100 per dayfor food for the duration of thestay overseas;

(v) expenditure on organising tradefairs, conferences or forumapproved by the Ministry ofCulture, Arts and Tourism;

(vi) maintenance of sales officeoverseas.

(b) Approved International Trade Fairs

Double deduction is allowed for expenditureincurred by a company for participating inan approved international trade fair held inMalaysia.

(c) Export of services

The incentive on double deduction onexpenses incurred pertaining to promotionof export of services, which is currentlyavailable to the tourism sub sector, isextended to the entire services sector.

The expenses eligible for double deductionare as follows:

(i) export market research;

(ii) preparation of tenders for the supplyof services overseas;

(iii) supply of technical informationabroad;

(iiv) fares in respect of travel overseasby employees of companies forbusiness;

(v) accommodation and sustenanceexpenses incurred by Malaysianbusinessmen going overseas forbusiness, subject to RM200 per dayfor lodging and RM100 per day forfood;

(vi) cost of maintaining office overseasfor purpose of promotion of services.

Double deduction on promotion of exportof services for companies eligible for taxincentives under Section 127 or Schedule7B of the Income Tax Act 1967, is allowedto be accumulated and offset against theirpost exemption income.

(vi) Promotion of Local Brand Name

Double deduction on expenses incurredfor advertising locally Malaysian Brandnames products. The cost of advertisementthrough internet, magazines andnewspaper, television, advertisementhandling trade publications or sponsoringapproved international events orinternational book conference/exhibition.To be eligible, the local brands must satisfythe following criteria:

(a) Band name is owned by a companywhich is locally incorporated withat least 70% Malaysian;

(b) the brand name is registered inMalaysia;

(c) the brand name product mustachieve export quality standards;and

(d) expenditure incurred in advertisingmust be incurred in Malaysia.

(5) Single Deduction

(a) Approved Investment Overseas

Single deduction on pre-operating expensessuch as cost of market research for approvedinvestment overseas.

(b) Training Expenses

Single deduction on pre-operating trainingexpenses incurred by any company.

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(c) Technical or Vocational Training InstituteSingle deduction for contribution in cashto a technical or vocational training instituteestablished and maintained by theGovernment or statutory body.

(d) Organisation for the Promotion andConservation of the Environment

Single deduction for donations to anapproved organisation establishedexclusively for the protection andconservation of the environment.

(e) Single deduction for gift under Section44(6A)

Single deduction for an amount equal tovalue as determined by the Department ofMuseums & Antiquities, the NationalArchives or National Art Gallery of any giftor artefact or manuscript made to the State/National Art Gallery, Government or StateGovernment.

(f) Single deduction for gift in cash and kindunder Section 34(6)Single deduction for an amount equal toexpenditure incurred:

(i) on the provision of services, publicamenities and contribution to a charityor community project pertaining toeducation, health, housing andinfrastructure approved by therelevant authority;

(ii) on the provision and maintenance ofa child care centre for the benefit ofpersons employed by him in hisbusiness;

(iii) in establishing and managing amusical or cultural group approvedby the Minister;

(iv) on sponsoring local and foreigncultural performances approved bythe Ministry of Culture , Art andTourism.

(6) Industrial Building Allowance (IBA)

Industrial Building Allowance (IBA) is grantedto companies incurring capital expenditure onconstruction or purchase of a building which isused for operational purposes. In this regard,companies are eligible for an initial allowance of10% and an annual allowance of 2% .

IBA is granted to an industrial building andapproved buildings used for the following purposes:

(a) buildings or structures used for the operationof approved service sector projects;

(b) private hospital, maternity home, nursinghome licensed under any written law forthe registration of private hospital, maternityhome or nursing home;

(c) hotel business (granted PS/ITA);

(d) approved research projects and approvedresearch companies;

A special allowance which is 1/10 of theexpenditure incurred on the construction orpurchase of the building is given for the following:

(a) warehouse buildings which are used forstoring goods for exports and reexport;

(b) approved industrial training, technical orvocational training and education;

(c) accommodation of employees inmanufacturing business approved servicesproject, hotel or tourism business;

(d) providing child care facilities to employeesin sectors in (g);

Annual allowance of 1/5 of qualifying capitalexpenditure incurred is given for accommodationof employees on a farm or in the forest.

(7) Special Capital allowance

(a) Computer and information technologyassets.

Init ial allowance of 20% and annualallowance of 40%.

(b) Environmental protection equipment.

Init ial allowance of 40% and annualallowance of 20%.

(c) Deduction for acquiring property rights

Capital expenditure on acquiring proprietaryrights such as patent, industrial design andtrademarks is allowed as capital allowancefor 10 years.

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(8) Deduction for Capital Expenditure onApproved Agricultural Projects

Capital expenditure on approved agriculturalprojects under schedule 4A of the Income TaxAct, 1967 allows a person carrying on an approvedagricultural project to elect so that the qualifyingcapital expenditure incurred by him in respect ofthat project is deducted from his aggregate income,including income from other sources. Where thereis insufficient aggregate income for the qualifyingfarm, expenditure to be deducted from theunabsorbed expenditure will be carried forwardto subsequent years of assessment. If he so elects,he will not be entitled to any capital allowanceor agricultural allowance on that same capitalexpenditure.

This incentive is not available to companieswhich have been granted incentive under thePromotion of Investment Act, 1986 and the repealedInvestment Incentive Act, 1968 and whose taxrelief period have not started or have not expired.

The qualifying capital expenditure eligible fordeduction for purposes of this incentive are asfollows:

(a) the clearing and preparation of land;

(b) the planting (but not replanting) of a croprelating to an approved agricultural project;

(c) the construction on a farm of a road orbridge;

(d) the construction on a farm of a buildingused for the purposes of an approvedagricultural project which is carried out onthat farm or the construction on that farmof building provided for the welfare andaccommodation or persons employed inthat project and which, if that project ceasedto be carried out, is likely to be little or novalue to any person except in connectionwith the working of another farm;

(e) the construction of a pond or the installationof an irrigation or drainage system whichis used for the purposed of an approvedagricultural project.

Only expenditure incurred within a specific timeframe and in respect of a farm cultivation andutilising a specified minimum hectarage for each

approved project as stipulated by the Minister ofFinance will qualify. The approved projects areas follows:

Project Period MinimumHectarage

1. Aquaculture 2 years 40 hectares(Prawns)

2. Cultivation of Crops:

papaya 1 year 40 hectares

bananas 1 year 40 hectares

passion fruit 1 year 40 hectares

star fruit 2 years 8 hectares

guava (jambu) 2 years 8 hectares

mangosteen 7 years 8 hectares

3. Floriculture 2 years 8 hectares

(Plants, bulbs, tubers and roots with or withoutflowerbuds, of the kind specified in chapter6 of the Custom Duties Order 1988, whichare suitable for planting ofornamental use,excluding mushroom spawn,budded orseedling rubber stamp and rubber budwood).

(9) Special Tax Treatment for Gift

(a) Training Activity

Special tax treatment for donation of usedmachinery or equipment, to a technicalor vocational training institute establishedand maintained by the Government orstatutory body or technical or vocationaltraining institute approved by the Ministerof Finance.

(b) Research Activity

Special tax treatment for donation of usedmachinery or equipment to approvedresearch institutes.

(c) For both (a) & (b)

The disposal value of such machineryor equipment is deemed as zero. Anyunutilised capital allowance (residualexpenditure) in respect of the machineryor equipment will be given full deductionin the year of assessment in which themachinery or equipment are donated.

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(ii) products that are eligible must beapproved by the Minister of Finance.Maize cultivation for feed meal and cattlerearing have been approved for thisincentives.

(iii) at least 80% of sales is for domesticmarket

(iv) the project must be implemented withinone year from the date of approval

The incentive is mutually exclusive with PS,ITA, capital allowance under Schedule 4A IncomeTax Act, 1967 and RA.

Applications should be received by the Ministryof Agriculture by 31 December 1999.

C. Labuan Offshore Business ActivityAct (LOBATA) 1990

I. Offshore companies in Labuanundertaking offshore business can chooseeither to:

(i) pay tax at a rate of 3% from netprofit; or

(ii) pay RM20,000.

II. Income of offshore companies from non-trading activities is not subjected to anytaxes.

D. Customs Act, 1967; Sales Tax Act,1972; Excise Duty Act, 1976

(1) Manufacturing Sector

(a) Import duty exemption on raw materials/components:

(i) Production for export

Full exemption from import dutywill be considered on importeddirect raw materials/componentwhich are not manufactured locally,or where they are manufacturedlocally are not of acceptable qualityand price.

Prior to this, the disposal value of suchgifts is taken to be the market value andif the value is higher than the utilisedcapital allowance, the donor is subjectto tax on the balancing charge.

(10) Tax Exemption to Further PromoteLabuan as International OffshoreFinancial Center (IOFC)

(i) Management and technical fees,interest and royalty paid by offshorecompanies to non-residents or to otheroffshore companies are exempted fromwithholding tax.

(ii) Dividend paid or received from offshorecompanies is not subjected to incometax except for dividend received fromcompanies undertaking offshorebusiness activities.

(iii) Expatriates in Labuan in the field ofmanagement who are engaged byoffshore companies are exempted fromincome tax on 50% of their grossincome.

(iv) Eligible professional services in legalservices, accounting, f inance orsecretarial services, rendered tooffshore companies in Labuan areexempted from income tax up to 65%of their statutory income, effective fromyear of assessment 1997 until year ofassessment 2000. Income Tax(Exemption)(No.2) Order 1997.

(v) Adjusted income from activities relatingto provision of infrastructure in Labuanis exempted from income tax on 50%of their income.

(11) Group Relief for companies engaged inFood Production

Losses incurred by companies engaged inapproved food production are allowed as adeduction from income of other companies in thesame group.

The qualifying criteria are as follows:

(i) The companies are related companiesin the same group where 70% of theequity owned by the same shareholders

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(ii) Production for domestic market

Effective 1 January 1999, fullexemption from import duty willbe considered on direct rawmaterials/components which arenot available locally.

(b) Import duty and Sales Tax exemptionon machinery and equipment

It is the policy of the government not toimpose taxes on machinery/equipmentwhich are not produced locally and useddirectly in the manufacturing process.However, due to difficulties arising fromtariff classification rules, some machinery/equipment which are not locallymanufactured are categorised undertaxable items.

Therefore, full exemption is given on:

(i) import duty and sales tax forimported machinery/equipment thatare not available locally;

(ii) sales tax and excise duties on locallypurchased machinery/equipment.

Duty exemption on spares andconsumables was withdrawn in 1996 toencourage domestic production. Howeverto reduce cost of production in the midstof economic turmoil, duty exemption wasgranted selectively based on specificcriteria until 31 October 1999. The criteriaare as follows:

(i) Company must export at least 80%of their production;

(ii) Such spares and consumables havelimited demand and do not havepotential for domestic production;

(iii) Import duty on such items exceed5%.

(c) Duty Drawback

Manufacturers who have paid duty onthe imports of their raw materials &component and used it to produce goodsfor export within a year are eligible toclaim drawback on the duty paid.Manufacturers should claim the drawback

from the Customs Department but mustsatisfy the conditions laid out in Section99 of the Customs Act, 1968.

(d) Sales Tax Exemption

Manufacturers of taxable goods withannual sales turnover exceedingRM100,000 need to be licensed underSales Tax Act, 1972 and hence will beeligible to obtain exemption from salestax on inputs (in line with single stagetax concept) . For manufacturers withannual sales turnover less thanRM100,000, they have the option to obtainexemption from sales tax on inputs (bybeing licensed) or pay sales tax on inputsbut enjoy exemption on output.

There are a few categories of goods areexempted at both the input and outputstage, for example machinery.

(2) Agricultural Sector

(a) Duty exemption on raw materials/components

(i) Produce for export market

Full exemption from import duty willbe considered on imported directraw materials/components which arenot available locally or where theyare available locally are not ofacceptable quality and price

(ii) Produce for domestic market

Full exemption from import duty willbe considered on direct rawmaterials/components which are notavailable locally.

(b) Duty exemption on machinery/equipment

Full exemption from:

(i) import duty and sales tax onimported machinery/equipmentwhich are not available locally.

(ii) Sales tax and excise duties on locallypurchased machinery/equipment.

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(3) Service Sector

(a) Duty exemption on raw materials/components

Exemption from import duty and salestax is given on imported raw materials/components which are used directly inthe implementation of approved serviceprojects and are not available locally.

(b) Duty exemption on machinery/equipment

Exemption is given on sales tax andexcise duties on locally purchasedmachinery/equipment which are used inthe implementation of approved serviceprojects.

(4) Tourism Sector

Duty exemption on materials/equipments foraccommodation and non-accommodation tourismprojects

Full exemption from:

(a) import duty and sales tax on identifiedimported materials/equipments.

(b) sales tax and excise duties on identifiedlocally purchased equipments.

(5) Film & Music Sector

Duty exemption on equipments for recordingstudios, production houses and cineplexes.

Full exemption from:

(a) import duty and sales tax on identifiedimported equipments.

(b) sales tax and excise duties on selectedlocally purchased equipments.

(6) Research Activity

Duty exemption on machinery/equipment,materials, raw materials and samples used forapproved research projects, in house research,contract research and development company andresearch and development company.

Full exemption from:

(a) import duty and sales tax on importeditems used for R & D irrespective whetherit is available locally.

(b) sales tax and excise duties on locallypurchased items used for R &D.

(7) Training Activity

Duty exemption on machinery/equipment,materials, raw materials and samples used forapproved training programme, approved traininginstitution and technical or vocational trainingcompany.

Full exemption from:

(a) import duty and sales tax on importeditems used for training irrespectivewhether it is available locally.

(b) sales tax and excise duties on locallypurchased items used for training.

(8) Environment Protection

(a) Manufacturing companies that purchasedcontrol pollution machinery/ equipment.

Full exemption from:

(i) import duty and sales tax onimported machinery/equipment thatare not available locally.

(ii) sales tax and excise duty on locallypurchased machinery/equipment.

(b) Companies engaged in storage, treatmentand disposal of toxic and hazardouswaste; or manufacturing companieswhich produce toxic and hazardous waste(waste generators) and have their ownstorage, treatment and disposal facilities(on site/off site).

Full exemption from:

(i) import duty and sales tax onimported machinery/equipment thatare not available locally.

(ii) sales tax and excise duty on locallypurchased machinery/equipment.

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The level and criteria of exemption onraw material/component are the sameas the exemption on raw material/component for the manufacturing sector.

(c) Catalytic Converters

Exemption from import duty and salestax on catalytic convertors to motorvehicle assemblers.

(9) All goods except petroleum and petroleumproducts are exempted from sales tax,import duty and excise duty, as Labuanis a free port.

(10) International Procurement Centre (IPC)under the Free Zone Act, 1990, CustomsAct, 1968

The term International Procurement Centre (IPC)refers to a locally incorporated company whetherlocal or foreign owned which carries on a businessin Malaysia to undertake procurement and salesof raw materials, components and finished productsto its group of related and unrelated companiesin Malaysia or abroad. This would includeprocurement and sales from local sources or fromthird country.

The following incentives will be available to anapproved IPC:

(a) expatriate posts will be approved based onrequirement of IPC;

(b) open one or more foreign currency accountswith any licensed commercial bank to retaintheir export proceeds without any limitimposed;

(c) enter into foreign exchange forward contractswith any licensed commercial bank to sellforward export proceeds based on projectedsales;

(d) exempted from the requirements of theMinistry of Domestic Trade and ConsumerAffairs Guidelines on foreign equityownership on wholesale and retail trade;and

(e) bring in raw materials, components orfinished products without payment of custom

duties into Free Zones or LicensedManufacturing Warehouses for repackaging,cargo consolidation and integration beforedistribution to the final consumers.

Companies that have a sizeable network ofcompanies outside Malaysia which are wellestablished and sizeable in terms of assets andemployees with a substantial number of qualifiedprofessionals, technical and other supportingpersonnel can apply for an approved IPC status.In order to qualify for the incentives offered, theIPC must satisfy the following conditions:

(a) locally incorporated under the Company’sAct 1965 with a minimum paid-up capitalof RM0.5 million;

(b) a minimum total operating expenditure ofRM1.5 million per year;

(c) a minimum annual business turnover (sales)of RM100 million; and

(d) goods to be handled directly throughMalaysian ports and airports.

Summary of Direct & Indirect TaxIncentives by Sectors

(1) Manufacturing Sector

(a) Pioneer Status or Investment Tax Allowance

(b) Industrial Adjustment Allowance

(c) Infrastructure Allowance

(d) Double deduction on expenses for promotionof exports

(e) Reinvestment Allowance

(f) Double deduction incentives for research

(g) Double deduction incentives for training onlyfor SMI’s

(h) Double deduction on freight charges forrattan and wood

(i) Double deduction on insurance premium(export credit premium, premium for import,premium for capital)

(j) Single deduction on pre-operating trainingexpenses

(k) Industrial Building Allowance

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(l) Special Capital Allowance for computers

(m) Duty exemption on machinery, raw materials& components/duty drawback for:

(i) producing manufactured goods

(ii) research activity

(iii) training activity

(iv) environment protection

(n) Special capital Allowance for Environmentfriendly equipment

(o) Tax Exemption On value of incurred exports

(p) Special tax treatment for gifts

(2) Agricultural Sector

(a) Pioneer Status or Investment Tax Allowance

(b) Infrastructure Allowance

(c) Agriculture Allowance

(d) Reinvestment Allowance

(e) Double deduction incentives for research

(f) Double deduction incentives for training

(g) Single deduction on pre-operating trainingexpenses

(h) Industrial Building Allowance

(i) Special deduction for capital expenditureon approved agricultural projects

(j) Special tax treatment for gifts

(k) Duty exemption on machinery, raw material& components for:

(i) producing manufactured goods

(ii) training activity

(iii) research activity

(iv) environment protection

(l) Group relief for food production

(m) Double deduction on insurance premium(export credit insurance premium for import,premium for export)

(n) Tax exemption on value of increased exports

(o) Double deduction for promotion of export

(p) Special capital allowance for computers

(q) Special capital allowance for environmentfriendly equipment

(3) Service Sector

(i) Approved Service Projects (ASP)

(a) Tax Exemption/Investment Allowance

(b) Industrial Building Allowance

(c) Duty Exemption on Machinery/Equipment & Raw Materials/Components

(d) Double Deduction Incentive onPromotion of Export of Services

(e) Double Deduction Incentive ForResearch & Development (EntireServices Sector)

(f) Double Deduction Incentive onTraining (Entire Services Sector)

(g) Tax exemption on value of increasedexport

(h) Special capital al lowance forcomputers

(i) Special capital al lowance forenvironment friendly equipment

(ii) Tourism Sector

(a) Pioneer Status/Investment TaxAllowance

(b) Infrastructure Allowance

(c) Double deduction incentive forresearch

(d) Double deduction incentives fortraining

(e) Double deduction for promotionalexpenditure

(f) Single deduction on pre-operatingtraining expenses

(g) Industrial Building Allowance

(h) Special Capital Allowance forcomputers

(i) Special capital al lowance forenvironmental friendly equipment

(j) Tax exemption for tour operators

(k) Duty exemption on materials &equipments

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(l) No import and excise duty on CKDcomponents for locally assembledtourist buses.

(m) No sales tax on pewterware, camera,watches, lighters, fountain pens,transistor radios,pererfumes andcosmetic products.

(n) Abolishment of service tax in Labuan& Langkawi

(o) Deduction for internationalConference Promotion

(p) Incentives for Domestic Tourism

(q) Incentives for bringing in foreigntourists

(r) Double deduction in approvedInternational Trade fairs.

(iii) Research & Development Activity

(a) Pioneer Status for Contract Researchand Development Company.

(b) Investment Tax Allowance (ITA) forResearch and Development Companyand Contract Research andDevelopment Company (as analternative to PS).

(c) ITA for in-house research

(d) Double Deduction Incentive

(e) Industrial Building Allowance

(f) Special Capital Allowance forcomputers

(g) Special Tax Treatment for Gifts

(h) Duty Exemption on Machinery &Materials

(iv) Training Activity

(a) Investment Tax Allowance for new& existing Technical or vocationalTraining Company.

(b) Double Deduction Incentive

(c) Single deduction for gift in cash

(d) Industrial Building Allowance

(e) Special Capital Allowance forcomputers

(f) Special Tax Treatment for Gifts

(g) Duty Exemption on Machinery &Materials

(4) Environment Protection Activity

(a) Pioneer Status/Investment Tax Allowancefor carrying out promoted product/activitysuch as:

(i) forest plantation project (strategicproject);

(ii) processing of agricultural andchemical waste and storing;

(iii) treating and disposing of dangeroustoxic waste.

(b) infrastructure Allowance

(c) Single deduction for gift in cash

(d) Special Capital Allowance

(e) Duty exemption on machinery & materials

(f) Duty exemption on catalytic convertors

(5) Investment Overseas Activity

(a) Tax exemption on income;

(b) Single deduction on pre-operatingexpenses for approved investmentoverseas.

(6) Labuan IOFC

(i) Offshore companies in Labuanundertaking offshore business can electto pay tax at a rate of 3% from net profit;or pay RM20,000.

(ii) Income of offshore companies from non-trading activities is not subjected to anytaxes.

(iii) Management and technical fees, interestand royalty paid by offshore companiesto non-residents or to other offshorecompanies are exempted from withholdingtax.

(iv) Dividend paid or received from offshorecompanies is not subjected to incometax except for dividend received fromcompanies undertaking offshore businessactivities.

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(v) All documents relating to business ofoffshore companies are not subjected tostamp duty.

(vi) Expatriates in Labuan in the field ofmanagement who are engaged byoffshore companies are exempted fromincome tax on 50% of their gross income.

(vii) All goods except petroleum and petroleumproducts are exempted from sales tax,import duty and excise duty, as Labuanis a free port.

Supporting Companies in Labuan IOFC

(i) Eligible professional services in legalservices, accounting, f inance orsecretarial services, rendered to offshorecompanies in Labuan are exempted fromincome tax up to 65% of their statutoryincome, effective from year of assessment1997 until year of assessment 2000.Income Tax (Exemption) (No.2) Order,1997.

(ii) Adjusted income from activities relatingto provision of infrastructure in Labuanis exempted from income tax on 50% oftheir income.

E. Non-Tax Incentives

A number of other non-tax incentives are alsoprovided to spur the private sector to takeadvantage of investment opportunities that willassist the development of the Malaysian economy.These incentives include:

1. Export Credit Refinancing Facilities;

2. Export Credit Insurance and GuaranteeSchemes; and

3. Industrial Technical Assistance Fund.

1. Export Credit Refinancing Facilities

Under the Export Credit Refinancing (ECR)Scheme which is currently administered by theExport-Import Bank of Malaysia Berhad (EXIMBank) effective from 1 January 1998 (previouslythe Scheme had been administered by the Central

Bank of Malaysia), direct and indirect exportersof eligible manufactured goods, agriculturalproducts and selected primary commodities canobtain short-term financing for purposes of exportsunder the pre-shipment and post-shipment ECRfrom the commercial banks (ECR banks) atcompetitive rates of interest.

(i) Post-shipment Facility

Exporters of eligible products, who export onusance or credit terms of a minimum of 30 days,may obtain post-shipment ECR upon shipment oftheir goods. The period of financing is by theperiod of credit extended by the exporter to theforeign buyer, but subject to a minimum of sevendays and a maximum of six months. The maximumamount of refinancing is 100% of the value of theexport, subject to a maximum limit of RM50 millionloans outstanding at any one time, while theminimum amount eligible for refinancing isRM10,000. The post-shipment ECR loans mustbe liquidated on or before their maturity date orupon receipt of the export proceeds, whicheveris earlier.

(ii) Pre-shipment Facility

Exporters of eligible products and their domesticsuppliers of input materials can obtain pre-shipmentECR to finance their working capital for productionof goods for export. For trading companies, theycan obtain pre-shipment ECR to finance theirpurchase of domestic intermediate/final productsfrom local suppliers for export. The period offinancing is between the receipt of an export orderand the time of export, subject to a maximumperiod of four months. The maximum amount ofrefinancing under this facility is 80% of the exportorder value, subject to a maximum limit of RM50million loans outstanding at any one time. Directexporters possessing the following characteristicsare eligible to utilise the order-based method:-

(a) new exporters, whose tenor of their exportbusiness is less than 12 months; or

(b) exporters whose maximum exports ofeligible goods for the last financial yearand the preceding 12 months is less thanRM1 million; or

(c) seasonal exporters

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Domestic input suppliers may have access tothe pre-shipment ECR facility through the issuanceof an ECR Domestic Letter of Credit (DLC) or theECR Domestic Purchase Order (DPO) issued bythe exporters in their favour. The maximum amountof refinancing for the domestic input suppliersare 80% of the ECR DLC or the ECR DPO value,subject to a maximum limit of RM50 million loansoutstanding at any one time.

As an alternative, direct exporters may haveaccess to the pre-shipment ECR facility throughthe Certificate of Performance (CP-based) method.To utilise the CP-based method, direct exportersmust have exported a minimum of RM1 millionof eligible products during the last financial yearand the preceding 12 months. (However, if theexport is between RM1.0 million to RM3.0 million,the exporter can use either the Order Based orCertificate of Performance method). Applicationfor a CP shall be made to EXIM Bank, throughan ECR bank. The validity period of a CP is 12months, while the maximum eligible amount forthe manufacturer is 80% of the export value duringthe preceding 12 months (the maximum eligibleamount for trader is 90% of the export valueduring the preceding 12 months). The eligibleamount is segregated into three periods of fourmonths each, subject to a maximum refinancingamount of RM50 million per period.

For both pre-shipment and post shipmentfacilities, exporters may request for an amountexceeding RM50 mil l ion, subject to therecommendation by exporter’s banks.

The pre-shipment ECR loans must be liquidated,on or before their maturity date or upon receiptof the export proceeds and post-shipment proceeds,whichever is earlier. For loans extended to thedomestic suppliers on the ECR DLC/DPO basis,the loans are to be liquidated upon receipt ofpayment from the buyer’s bank or upon maturityof the loan, whichever is earlier.

Goods not specified in the Negative List of theECR Scheme (Appendix 2 of the ECR Guidelines)would be eligible for financing, subject to fulfillingthe criteria of having a minimum local content of30% and a minimum value added of 20%.Exporters, whose products do not meet thesecriteria, may apply to EXIM Bank for special

consideration on a case-by-case basis. Exemptionfrom the local content and value added criteriaare, however, extended to agricultural products,selected primary commodities, wood articles, basemetals and textiles (refer to Appendix 3 of theECR Guidelines). Further details on the ECRScheme are available in the “Guidelines onExport Credit Refinancing Facilities” issued byEXIM Bank.

2. Export Credit Insurance and GuaranteeSchemes

Malaysia Export Credit Insurance Berhad(MECIB), incorporated in 1977, and is awholly owned subsidiary of Bank IndustriMalaysia Berhad, a Government developmentfinancial institution.

MECIB’s objective is to help promote Malaysianexports and foreign investments by providing arange of export credit insurance and guaranteeservices. MECIB provides protection, whereby itundertakes to indemnify its policyholders for theirlosses arising from any of the following risksinherent in international trade.

Risks Covered

(i) Commercial Risks

(a) Buyer’s insolvency;

(b) Buyer’s default; and

(c) Buyer’s non-acceptance of goods.

(ii) Country Risks or Non-CommercialRisk

(a) Blockage or delay in transfer ofpayments to Malaysia;

(b) War, revolution and other annoyances,including war between buyer’s andexporter’s country;

(c) The imposition of import restrictions andImport licence cancellation;

(d) Cancellation of export licences; and

(e) The default of a foreign Governmentbuyer.

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Facilities Offered

(a) Insurance Policies

(i) Comprehensive Policy (Shipments)

This policy covers non-payment resultingfrom commercial/ country risks in respectof goods and commodities exported oncredit terms of not more than 180 days.The cover commences from the date ofshipment. Percentage of cover is up to95% of the amount of loss.

(ii) Comprehensive Policy (Contracts)

This policy covers goods specificallyproduced under a contract of sale foroverseas buyers especially where loss canbe sustained in the event of the contractbeing frustrated in the pre-shipment period.Hence, cover commences from the dateof the contract. Percentage of cover is upto 95% of the amount of loss.

(iii) Comprehensive Policy (Service)

This Policy covers export of services otherthan tangible goods to overseas clientsor principals such as technical orprofessional assistance; repairs; refitsconversion carried out on ships; andpayment under royalty agreement etc; oncredit terms of not more than 180 days.Cover is effective from date of invoice.Percentage of cover is up to 95% of theamount loss.

(iv) Specific Policy (Tailor Made)

This policy covers export of capital or semi-capital goods and/or services with lengthymanufacturing and/or payment periods andhigh contract values. It is tailored to theneeds and features of each project ormanufacturer in Malaysia. The credit termsmust be for a minimum of two years andthe policy is issued on a one-off projectbasis. Cover is effective from the date thecontract is signed. Percentage of coveris up to 95% of the amount of loss.

(v) Banker’s Comprehensive Policy(Shipments)

This policy is issued to the bank againstnon-payment by the buyer on the exportbills discounted in favour of the exporter.Percentage of cover is up to 95% on theamount of loss sustained by the bank.

(vi) Domestic Credit InsuranceThis policy is issued to local supplier tocover risks of non-payment for goods andservices sold to buyer in home market oncredit terms not exceeding 180 days.Percentage of cover is up to 85% of loss.

(b) Short Term Bank Guarantees

(i) Banker’s Export Finance InsurancePolicy (BEFIP)

BEFIP facilitates short-term pre-exportworking capital f inancing throughcommercial banks especially for Small andMedium- sized Enterprises (SMEs) andnew exporters who lack sufficient collateral.

The short term pre-export working capitalcan be utilised by the exporters to purchaseraw materials, manufacturing and packingof goods.

The policy indemnifies commercial banksthat loan/advances pre-export credit toexporters against failure of exporters torepay as a result of insolvency and/orprotracted default. Coverage provided isup to a maximum of 95% for SMEs and90% for other companies. A maximumcredit period of 180 days is allowed.

(ii) Bank Letter of Credit Policy (Bank LCPolicy)

Bank LC Policy provides throughcommercial banks post-shipment financingfor exporters selling goods and servicesto mainly non-traditional and/or difficultmarkets on LC terms of payment. Withthe policy, the LC negotiating commercialbank’s concerns about the credit standingof the LC issuing bank and/or the politicaland economic conditions prevailing in thebuyers’ country are mitigated.

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The policy covers the LC negotiating bankfor non-reimbursement by the LC issuingbank up to 95% of the face value of theLC.

This policy promotes greater Malaysianexports to non-traditional and difficultmarkets and at the same time makes thefinancing available through commercialbank for exports to these regions.

(c) Medium and Long-Term Bank Guarantees

(i) Buyer Credit Guarantee

This guarantee is provided to financialinstitutions lending to a foreign sovereign,public or private buyer for financing thepurchase of Malaysian goods and servicestypically capital goods or turnkey projects.

Without the loan, the foreign buyer maynot be able to purchase the Malaysiangoods and services.

Percentage of cover is on case-by-casebasis, but generally, for a loan to asovereign buyer, a 100% comprehensivecoverage is extended. The loan, in turn,could provide financing for up to 85% ofthe Malaysian contract value related tothe overseas project or export transaction.If the contract contains goods other thanMalaysian goods and services, a Malaysiancontent and value added requirement of30% is necessary.

(ii) Supplier Credit Guarantee and SpecificPolicy

This guarantee applies to loans given bythe financial institutions to finance aMalaysian supplier/exporter of Malaysiangoods and services or Malaysian turnkeycontractor undertaking an overseas project.

Without the loan, the Malaysian exporteror turnkey contractor may not be able toimplement the project.

To mitigate its balance sheet exposure topolitical risks in the buying country, theMalaysian exporter or turnkey contractor

can insure these risks with MECIB underthe Specific Policy.

The percentage of cover for the SupplierCredit Guarantee is determined on case-by-case basis up to a maximum of 100%.The loan, in turn, could provide financingfor up to 85% of the Malaysian contractvalue related to the overseas project orexport transaction. If the contract containsgoods other than Malaysian goods andservices, a Malaysian content and valueadded requirement of 30% is necessary.

The maximum percentage of cover forthe Specific Policy is 95% only.

(iii) Project Finance Guarantee

This guarantee applies to loans given byfinancial institutions to companiesundertaking overseas privatisation projectse.g. Build-Operate-Transfer or Build-Owned-Operate-Transfer on l imitedrecourse financing basis where the sourceof repayment is from the cashflow of theproject itself.

Guarantee provided can be in the formof political risk cover only or both politicaland commercial risks coverage. The extentof commercial risk coverage is determinedon case-by-case basis subject to maximumof 100%. The project is normally requiredto be financed through injection mix ofdebt and equity, and, typically a 70:30mix is ideal for an infrastructure project.

(iv) Overseas Investment Insurance

The insurance protects Malaysian investorsof their investment typically related to anoverseas project either in the form of equityor commercial loan against losses arisingfrom restrictions or blockage in repatriationof profits, dividends, loan repayments etc.,expropriatory acts by the host governmentwhether directly or indirectly and damagesto tangible assets due to war and civildisturbances. On a case-by-case basis,where concession has been awarded toan investor, extended coverage ofrepudiation of contract by host governmentmay be considered.

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Standard coverage of 90% of anyinvestment losses arising from theaforementioned polit ical r isks is available.

(v) Bond Guarantee

MECIB can either issue bonds or provideguarantee to commercial banks toencourage the issuance of bonds on behalfof the Malaysian companies to meet therequirement of the overseas buyers ofMalaysian goods and services.

The types of bonds typically covered aretender bonds, advance payment bondsand performance bonds. Coverage is100%.

An unfair calling of bonds is also availableproviding protection to Malaysiancompanies against unfair calling of thebond by the overseas buyer/principal.Standard coverage of 95% is available.

For further information, please contact MECIB atthe nearest office:

Kuala Lumpur

Malaysia Export Credit Insurance Berhad(32522-U)Level 17, Bangunan Bank IndustriBandar WawasanNo. 1016, Jalan Sultan IsmailP.O. Box 11048,50734 Kuala LumpurTel: 03.- 2910677Fax: 03 - 2910353E-mail: mecib@mecib.po.myWebsite: www.mecib.com.

Penang

2nd Floor, 53 Jalan Selat,Taman SelatP.O. Box 157,12000 Butterworth,PenangTel: 04 - 3321862Fax: 04 - 3322172

Johor

2nd Floor, 95 Jalan Damai,Taman Setia off Jalan Stulang Darat,80300 Johor Bahru,Johor.

Tel: 07 - 2231191

Fax: 07 - 2240370.

3. Industrial Technical Assistance Fund(ITAF)

The Industrial Technical Assistance Fund (ITAF)was initially set up by the Government with anallocation of RM50 million for the purpose ofproviding grants to small and medium-scaleindustries (SMIs). On depletion of the originalallocation, an additional RM70 million has beeninjected into the fund to be utilised for the followingschemes:

(i) Business Planning and DevelopmentScheme (ITAF1);

(ii) Process Improvement and ProductDevelopment Scheme (ITAF 2);

(iii) Productivity and Quality CertificationScheme (ITAF 3); and

(iv) Market Development Scheme (ITAF 4).

SMIs that operate in the manufacturing sectoror services directly-related to manufacturingactivities and fulfil the following conditions areeligible to apply for assistance:

(i) Incorporated under the Companies Act,1965;

(ii) Annual sales turnover not exceedingRM25 million and with full-time employeesnot exceeding 150;

(iii) At least 70% of their equity are held byMalaysians of which not more than 25%held by large companies;

(iv) Companies which are not yet incommercial production but possessproduction facilities or have access tofacilities approved by the Governmentsuch as the Incubator Scheme or theTechnology Park Scheme;

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(v) Priority wil l be given to SMIsmanufacturing products(s) or providingmanufacturing-related services promotedunder the Promotion of Investments Act(PIA) 1986; and

(vi) Companies appointed under the IndustrialLinkage Programme (ILP).

Assistance is given in the form of a matchinggrant whereby 50% of the project cost isborne by the Government and the remaining50% is borne by the applicant company subjectto a maximum grant as stipulated for eachscheme.

Further information on ITAF can be obtainedfrom:

ITAF Secretariat,Perbadanan Pembangunan Industri Kecil danSederhana (SMIDEC)701D, Level 7, Tower D,Uptown 5,Jalan SS 21/39,Damansara Uptown,47400 Petaling Jaya,Selangor.

Telephone No: 03-9258585Fax No: 03-9259119

II. THE INDUSTRIAL CO-ORDINATIONACT, 1975

The objective of the Industrial Co-ordinationAct, 1975 (ICA) is to ensure orderly developmentand growth in the manufacturing sector. The ICArequires person(s) engaging in any manufacturingactivity to obtain a licence from the LicensingOfficer in respect of such manufacturing activity.Only manufacturing companies with shareholders’funds of RM2.5 million and above or engaging75 or more full-time employees need to apply fora licence under the ICA.

All applications for manufacturing licences shouldbe made in the prescribed form to the Director-General of the Malaysian Industrial DevelopmentAuthority (MIDA) in Kuala Lumpur, Malaysia. MIDAis the Government’s principal agency for thepromotion and coordination of industrialdevelopment in Malaysia.

The relevant definitions in the ICA are as follows:

(a) The “Licensing Officer” is the Secretary-General of the Ministry of International Tradeand Industry (MITI).

(b) “Manufacturing activity” means the making,altering, blending, ornamenting, finishingor otherwise treating or adapting any articleor substance with a view to its use, sale,transport, delivery or disposal and includesthe assembly of parts and ship repairingbut shall not include any activity normallyassociated with retail or wholesale trade.

(c) “Shareholders’ funds” means the aggregateamount of a company’s paid-up capital (inrespect of preference shares and ordinaryshares and not including any amount inrespect of bonus shares to the extent theywere issued out of capital reserve createdby revaluation of fixed assets), reserves(other than any capital reserve which wascreated by revaluation of fixed assets andprovisions for depreciation, renewals orreplacements and diminution in value ofassets), balance of share premium account(not including any amount credited therein at the instance of issuing bonus sharesat premium out of capital reserve byrevaluation of fixed assets) and balance ofprofit and loss appropriation account.

(d) “Full-time paid employees” means allpersons normally working in theestablishment for at least six hours a dayand at least 20 days a month for 12 monthsduring the year and who receive a salary.Persons such as travell ing sales,engineering, maintenance and repairpersonnel, or who are paid by and are underthe control of the establishment are alsoincluded. Full-time paid employees alsoinclude directors of incorporated enterprisesexcept those paid solely for the attendanceat Board of Directors meetings. Familyworkers who receive regular salaries orallowances and who contribute to theEmployees Provident Fund (EPF) or othersuperannuation funds are also included inthe definition.

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1. Guidelines for Approval of IndustrialProjects

Malaysia’s rapid industrial growth over the pastdecade has created a high demand for labour inthe manufacturing sector. The last few years hasseen a tightening in the labour market situation.

In view of this, the Government has set downguidelines for the consideration of industrial projectbased on the Capital Investment Per Employee(C/E) Ratio. With effect from 26 August 1995,projects with a C/E Ratio of less than RM55,000will be defined as labour-intensive and will notbe considered for a manufacturing licence or fortax incentives by MITI.

However, projects which fulfil one of the followingcriteria will be exempted from the above guideline:

(a) If value-added is more than 30%.

(b) If the Managerial, Technical and Supervisory(MTS) Index is more than 15%.

(c) If the project undertakes activities or productslisted as promoted activities and productsof high technology.

(d) If the project is located in the EasternCorridor of Peninsular Malaysia, Sabah andSarawak.

2. Expansion of Production Capacity andDiversification of Products

An existing licensed company which proposesto undertake an expansion of production capacityfor its approved products or diversification tomanufacture additional products is required tosubmit an application for the expansion ordiversification in the prescribed form to MIDA.

III. GUIDELINES ON FOREIGNINVESTMENT

1. Equity Policy In The Manufacturing Sector

The Malaysian Government welcomes foreigninvestment in the manufacturing sector. In keepingwith the objective of increasing Malaysian

participation in manufacturing activities, it is thepolicy of the Government to encourage projectsto be undertaken on a joint-venture basis betweenMalaysians and foreign entrepreneurs.

1.1 Equity Policy Applicable to NewInvestments, Expansion orDiversification

Foreign equity participation inmanufacturing projects has been governedby the level of exports. Effective from 31July 1998, the Malaysian Government hasliberalised the equity policy for themanufacturing sector in respect of newinvestments, expansion or diversificationas follows:

(a) Foreign investors can now hold 100%equity irrespective of the level ofexports.

(b) This relaxation is applicable for allapplications received from 31 July1998 until 31 December 2000 to setup manufacturing projects with theexception of specific activities andproducts where Malaysians small andmedium scale companies have thecapabilities and expertise. Theseactivities and products are paperpackaging; plastic packaging (bottles,films, sheets and bags); plasticinjection moulded components; metalstamping, metal fabrication andelectroplating; wire harness; printingand steel service centres. For theseactivities and products, the prevailingspecif ic equity guidelines areapplicable.

(c) This policy will apply to all applicationsreceived from 31 July 1998 to 31December 2000, as well asapplications already received, but forwhich decisions are pending.

(d) All projects approved under this policywill not be required to restructuretheir equity after the period.

(e) The Government will review this policyafter 31 December 2000.* The Eastern Corridor of Peninsular Malaysia covers Kelantan,

Terengganu, Pahang and the district of Mersing in Johor.

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1.2 Equity Policy Applicable to ExistingCompanies

(a) Companies which have beenlicensed before 31 July 1998 haveto comply with the equity conditionas stated in the licence. However,for existing companies undertakingexpansion or diversification, theequity policy as in para 1.1 aboveapplies to the expansion anddiversification projects.

The equity policy as in para 1.1 abovealso applies to the following companies:

(b) Companies previously exemptedfrom the Manufacturing Licence butwhose shareholders’ funds have nowreached RM2.5 million or haveengaged 75 or more full-t imeemployees; and

(c) Existing l icensed companiesexempted from the equity conditionwhich are required to inform MITIwhen their shareholders’ funds reachRM2.5 million.

1.3 Relaxation of Export Conditions forExisting Manufacturers

To encourage greater levels of industriallinkages and local sources, the Governmenthas relaxed the export conditions imposedon manufacturing companies effective from1 January 1998 to 31 December 2000.With this relaxation, all existing companieswith export conditions can apply to MIDAfor approval to sell up to 50% of theiroutput in the domestic market.

The products which are eligible to beconsidered for increased domestic salesare as follows:

(a) All products with nil duty.

(b) All products with import duty whichare not available locally or wherelocal supply is inadequate.

The above temporary relaxation of exportconditions will not affect the current equitystructure and incentives of existingcompanies.

The relaxation is also extended to newcompanies once they commence operation.

2. Protection Of Foreign Investment

2.1 Equity Ownership

A company that has been approved witha certain equity participation will not berequired to restructure its equity at anytime, provided that the company continuesto comply with the original conditions ofapproval and retains the original featuresof the project.

2.2 Investment Guarantee Agreements

Malaysia’s readiness to concludeInvestment Guarantee Agreements (IGAS)is a testimony of the Government’s desireto increase the confidence of foreigninvestors in Malaysia.

An IGA will provide the foreign investorwith the following:

(a) Protection against nationalisationand expropriation.

(b) Prompt and adequate compensationin the event of nationalisation orexpropriation.

(c) Free transfer of profits, capital andother fees.

(d) Settlement of investment disputesunder the Convention on theSettlement of Investment Disputesof which Malaysia has been amember since 1966.

Malaysia has concluded InvestmentGuarantee Agreements with the followingcountries (in order of precedence): UnitedStates of America, Germany, Canada,Netherlands, France, Switzerland,Sweden, Belgo-Luxembourg, UnitedKingdom, Sri Lanka, Romania, Norway,Austria, Finland, Organisation of IslamicCountries (OIC), Kuwait, Association ofSouth-East Asian Nations (ASEAN), Italy,South Korea, China, United Arab

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Emirates, Denmark, Vietnam, Papua NewGuinea, Chile, Laos, Taiwan, Hungary,Poland, Indonesia, Albania, Zimbabwe,Turkmenistan, Namibia, Cambodia,Argentina, Jordan, Bangladesh, Croatia,Bosnia Herzegovina, Spain, Pakistan,Kyrgyz Republic, Mongolia, India,Uruguay, Peru, Kazakhstan, Malawi,Czech Republic, Guinea, Ghana, Egypt,Botswana, Cuba, Uzbekistan, Macedonia,North Korea, Yemen, Turkey, Lebanon,Burkina Faso, Republic of Sudan,Republic of Djibouti, Republic of Ethiopia,Senegal and State of Bahrain.

2.3 Convention on the Settlement ofInvestment Disputes

In line with the national policy ofpromoting and protecting foreigninvestment, the Malaysian Governmentin 1966 ratified the provisions of theConvention on the Settlement ofInvestment Disputes established underthe auspices of the International Bankfor Reconstruction and Development(IBRD).

Facilities for international conciliationor arbitration are established by theConvention through the InternationalCentre for Settlement of InvestmentDisputes which is located at the principaloffice of the IBRD in Washington.

2.4 Regional Centre for Arbitration

The Kuala Lumpur Regional Centrefor Arbitration was established in 1978under the auspices of the Asian-AfricanLegal Consultative Committee (AALCC)- an inter-governmental organisation incooperation with and with the assistanceof the Government of Malaysia.

The Centre serves the Asian andPacif ic region. It is a non-profitorganisation and has been establishedwith the objective of providing a systemfor the settlement of disputes for thebenefit of parties engaged in trade andcommerce and investments with andwithin the region.

IV. ADVISORY SERVICES CENTRE ONINVESTMENT

Since 1 October 1988, the Malaysian IndustrialDevelopment Authority (MIDA) has beendesignated as the Coordinating Centre onInvestment. Investors need only to approach MIDAto obtain most of the approvals required at theFederal level in respect of manufacturing and forthe granting of tax incentives in respect of integratedagriculture, hotels and tourist projects softwaredevelopment, R&D projects and technical andvocational training institutes. MIDA receives,processes these applications and the decisionsare conveyed to the applicants by the AdvisoryServices Centre. This measure is aimed at furtherstreamlining the administrative procedures inrespect of investment at the Federal level.

MIDA’s present role is more encompassing,thus reducing the number of agencies anddepartments that investors have to approach andthe time taken to get the relevant approvals. Themain functions of MIDA are to receive, processand convey decisions on the following:

(a) Applications for Manufacturing Licencesunder the Industrial Coordination Act 1975and for all matters relating to the conditionsof the Manufacturing Licences. The Ministryof International Trade and Industry will,however, continue to consider applicationsrelating to the conditions of licencesconcerning Government Policy on equityand employment, such as the restructuringof companies, the issuance of a clearanceletter on the postponement of compliancewith equity conditions, amendments to theequity conditions and the allocation ofBumiputera shares;

(b) Applications for tax incentives under thePromotion of Investments Act 1986;

(c) Applications for expatriate posts;

(d) Applications for double deduction ofexpenditure incurred for approved trainingin the manufacturing sector;

(e) Applications for tariff protection;

(f) Applications for exemption from import dutyon raw materials and component parts;

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(g) Applications for custom duties and salestax exemption on machinery or equipment;

(h) Applications for extension of business visitpasses (not exceeding three months) relatingto manufacturing projects only;

(i) Requests for verification or amendment oftariff codes; and

(j) Approvals of technology transferagreements.

In taking upon the functions as the one-stopagency or the Centre on Investment, senior officersfrom the following ministries and departments andrelevant corporations have been emplaced in MIDA:

(a) Ministry of Finance;

(b) Ministry of Human Resources;

(c) Immigration Department;

(d) Royal Customs and Excise Department;

(e) Department of Occupational Safety andHealth;

(f) Department of Environment;

(g) Tenaga Nasional Berhad; and

(h) Telekom Malaysia Berhad.

On 3 May 1999, an Industry Support Divisionwas set up in MIDA to strengthen and institutionaliseits follow-up and monitoring function. The objectivesof the Division are:

(a) to provide support services to themanufacturing sector in a more effectiveand pro-active manner in all areas ofimplementation and operation which fallwithin the purview of the Federal and StateGovernment, including assistance insecuring infrastructural facilities such aswater, electricity, telecommunication andtransport facilities;

(b) to achieve a higher rate of implementationof approval projects;

(c) to ensure the smooth operation of existingprojects; and

(d) to extend support to existing companies inplanning expansion, diversification, industriallinkages and other reinvestment.

Investment Centre at State Level

At the state level, investment centres havealso been formed to provide efficient services toinvestors. Presently, nine states have set up suchcentres. These are Johor, Kelantan, Melaka, NegeriSembilan, Pahang, Perak, Sabah, Selangor andTerengganu. The State Government of Sarawakhas also agreed in principle to set up a similarcentre. The three other states of Kedah, Perlisand Pulau Pinang are still operating under thisexisting systems where applications are submitteddirectly to the respective agencies for approval.If complications or delays should arise in thegranting of certain approvals, the State EconomicDevelopment Corporations (SEDCs) of Kedah andPerlis and the Penang Development Corporation(PDC) will then convene a meeting among theagencies concerned to expedite the granting ofsuch approvals.

The investment centres at the state level areeither at the SEDCs as in Johor, Kelantan, Melaka,Pahang and Perak or at the State EconomicPlanning Units (SEPUs) as in the case of NegeriSembilan, Selangor and Terengganu. In Sabah,the centre is at the Department of IndustrialResearch and Development (DIRD). In Sarawak,the State Government has agreed that the centrebe based at the Ministry of Industrial Development(MID).

To assist these centres to function effectively,Special Committees have been established. Therole of these Committees is to coordinate anddecide all matters concerning the issue of licences,permits and approvals and problems faced byinvestors at the state level. All applications andcomplaints received are channelled by the centres(which also serve as the secretariats to the SpecialCommittees) to the relevant agencies forconsideration. The centres at state level doundertake different functions but they are generallyvery similar and their functions relate more toexpediting the necessary approvals for theimplementation of their projects.

The essential Terms of Reference of the centresat the state level are as follows:

(a) to establish an investment information centrefor collecting, updating and providingrelevant information or data to investors;

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Types of Agreements

Technology transfer agreements cover licencerights over specific processes, formulae ormanufacturing technology (may be patented orunpatented), other knowledge and expertisenecessary for the setting up of a plant, and provisionof various technical assistance and supportingservices.

Under these arrangements, a specific agreemententered into could be in the form of:-

(i) Joint-Venture Agreement;

(ii) Technical Assistance and Know-HowAgreement;

(iii) Licence Agreement;

(iv) Patent and Trademark Agreement;

(v) Turnkey Contract; and

(vi) Management Agreement.

Guidelines on Transfer of Technology

Agreements on transfer of technology mustdefine in detail the following:

(i) technological content and principal featuresof technology or process;

(ii) anticipated production;

(iii) quality and specification of products; and

(iv) particulars of technical assistance, servicesand manner in which they are to beprovided.

The transfer of technology must be effectedthrough the following:

1. Access to Improvements

The technology to be supplied shouldincorporate:

(i) the latest development know-how of thesupplier; and

(ii) access to innovations or breakthrough intechnology, including new patents appliedfor or registered.

(b) to receive, process and convey decisionson applications for licences, permits andapprovals required by investors at the statelevel for the implementation and operationof their projects;

(c) to monitor the progress of projects with theview to assisting investors in theimplementation of their projects; and

(d) to advise the State Governments from timeto time on all matters pertaining to thedevelopment of the industrial sector in thestate.

With the establishment of the investment centresat the state level, the administrative proceduresinvolved in the granting of approvals, permits andlicences required for the implementation andoperation of the projects at the respective statelevel have been streamlined. It would not onlymake it easier for the investors as they wouldhave to deal only with the centres in respect ofmost, if not all, of the problems they wouldencounter at the state level, but the time takento secure the necessary approvals would also bereduced. This would save the investors valuabletime, effort and resources in their dealingswith the State Governments and wouldconsequently enhance the overall investmentclimate not only of the states but also of thenation as a whole.

As the apex of this structure, a Referral Unithas been established in the Office of the Ministerof International Trade and Industry. This Unitreceives representations from the centres, andfrom local and foreign investors concerning issuesand problems that require communicationbetween Ministers at the Federal level as wellas those requiring communication between theMinister of International Trade and Industry andthe Menteri Besar or Chief Minister of the relevantstate.

V. TRANSFER OF TECHNOLOGY

All manufacturing concerns, licensed by theMinistry of International Trade and Industry (MITI),should obtain the prior written approval of MITIbefore entering into any agreement involving foreignpartners.

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2. Remuneration for Technology

Payment for technology can be in the form ofa ‘fixed lump sum fee’ or a ‘running royalty’ ora combination of lump sum fee and running royaltyfor a specified period. Lump sum payments areusually allowed in cases where the know-howcan be fully and completely transferred andabsorbed within a specified period. The methodof payment that is preferable is the running royaltybased on net sales. Initial lump sum paymentsin addition to royalties are not encouraged byMITI. Where such payments are requested, itshould be only for the recovery of actual expensesincurred by the Licensor for preliminary servicesprovided to the Licensee.

3. Method of Payment

(a) Royalty is imputed in relation to the levelof technology and principal elements oftransfer. Depending upon the merits ofeach case, a rate of 1% to 5% of netsales can be considered. Net sales aredefined as gross sales less sales discountsor returns, transport costs (includingfreight), insurance, duties, taxes and othercharges including where applicable, costsof raw materials, parts and componentsimported from the foreign l icensorconcerned or its subsidiaries or affiliatedcompanies.

(b) The Government has liberalised the presentpolicy for regulating technology transferagreements by allowing automatic approvalof the following:

(i) Technology transfer agreementssigned between 100% foreign—owned companies in Malaysia andany foreign party or foreign holdingcompany.

(ii) All technical assistance, licence andknow-how agreements signedbetween Malaysian-owned/Malaysian joint-venture companiesand any foreign party where theroyalty payment is as follows:

(a) running royalty not exceeding3% of net sales; or

(b) lump sum payment notexceeding RM500,000; or

(c) lump sum payment and runningroyalty in total not exceeding3% of net sales.

(iii) Trade mark and patent agreementssigned between Malaysian-owned/Malaysian joint-venture companiesand any foreign party involvingroyalty payments not exceeding 1%of net sales for each category.

(c) Practice of itemisation of service underseparate agreements is discouraged.

(d) Capitalisation of know-how fees or royaltyis not encouraged.

4. Duration and Renewal

(a) Duration of the agreement should beadequate for full absorption of technology.The life of any patent relating to thetechnology is also taken into consideration.

(b) An initial period of five years is normallyapproved and any renewal is subject tothe prior approval of MITI.

5. Training

A provision for adequate training of the localcompany’s personnel in the technology supplier’splant facilities as well as in-house training in thelocal company’s plant should be incorporated andclearly specified. In the case of the former, thenumber of personnel to be trained, the areas oftraining and its duration, together with arrangementsand the facilities to be made available for thetraining should also be defined. The costs of trainingshould be borne by the technology supplier butall expenses related to salaries, wages, livingand travelling allowances should be borne by thelocal company.

6. Patents and Trade Marks

Patents and trade marks may come as one ofthe components of the whole technology transferpackage. In the case of patents, it is of utmostimportance that those patents involved in anyprocess know-how be explicitly defined in the

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agreements and the local company is granteduser rights over all such patents. Where the lifeof the patents extends beyond the duration of theagreement concerned, an arrangement shouldbe made for the continued use of the patentsafter the expiry of the agreement.

7. Confidentiality/Secrecy

Confidentiality of information should be confinedto the duration of the agreement only.

8. Guarantee/Warranty

The agreement should define a guarantee withrespect to the production capacity, product qualityand specifications and other features of themanufacturing process.

9. Taxes

A withholding tax of 15% is levied on paymentsmade to foreign suppliers of technology and thistax has to be borne by the foreign recipient.Exemption under the Double Taxation Agreement,where applicable, has to be made to the Ministryof Finance separately.

10. Sales Territory

The local company should be free to sell itsproduce (manufactured with the l icensedtechnology) in the whole of Malaysia and all othercountries except where the foreign technologysupplier is manufacturing directly or where hehas given exclusive rights to others or where heis legally not empowered to allow sales basedon his technology.

11. Governing Laws and Arbitration

The governing laws for any technology transferarrangement should be Malaysian laws andarbitration proceedings must be conducted inMalaysia in accordance with either the MalaysianArbitration Act, 1952 (Revised 1972) or the UnitedNations Commission on International Trade Law(UNCITRAL) Rules and conducted at theAsian-African Legal Consultative Committee(AALCC) Regional Centre for Arbitration, KualaLumpur.

VI. INTELLECTUAL PROPERTYPROTECTION

Intellectual property in Malaysia comprises ofpatents, trademark, industrial designs andcopyright. Malaysia provides adequate protectionin the field of intellectual property for both localand foreign investors. Malaysia is a member ofthe World Intellectual Property Organization andsignatories to two conventions administered bythe world body, namely, Paris Convention (forthe protection of industrial property - patents,trademarks and industrial designs) and the BerneConvention (for the protection of Copyright).Malaysia is also a signatory to the TRIPSAgreement (Agreement on Trade Related Aspectsof Intellectual Property Rights), an agreement underthe auspices of the World Trade Organization.

1. Patents Act, 1983

Patents protection in Malaysia is governed bythe Patents Act 1983 and the Patents Regulations1986.

An application for a patent can be filed inMalaysia and upon registration, protection isprovided for its exploitation in the country. Aninvention is patentable if it is new, involves aninventive step and is industrially applicable. Besidespatent, a utility innovation certificate is also grantedfor an innovation or a ’minor’ invention whichdoes not require to satisfy the test of inventivenessas of patent.

The period for patent protection is 15 yearsfrom the date of grant, subject to yearly renewal.A utility innovation certificate is granted for aperiod of 5 years from the date of grant and maybe extended for another 5 years plus 5 years.The proprietor of the patent has the right to exploitthe patented invention, to assign or to license theuse of a patent.

2. Trade Marks Act, 1976

Trademarks protection in Malaysia is governedby the Trade Marks Act 1976 and the Trade MarksRegulations 1997 which provides effective andadequate protection for registered trademarks inMalaysia.

The period of protection is 10 years which isrenewable for a period of every 10 years thereafter.

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The proprietor of the trademark has the right toassign as well as to licence the use of a trademark.

The protection of a trademark is not limited intime, provided its registration is periodicallyrenewed.

3. Copyright Act, 1987

Copyright protection in Malaysia is governedby the Copyright Act 1987 which came into forceon 1 December 1987. The Act provides for theprotection of literary works, artistic works, musicalworks, films, sound recordings, broadcasts andpublished editions. Copyright generally subsistsduring the life of the author and 50 years afterhis death. Duration of protection of films, soundrecordings, broadcasts and published editions is50 years.

The Act also provides for civil as well as criminalsanctions. A unique feature of the Act is theinclusion of provisions for enforcement whichprovides the power to enter premises suspectedof having infringing copies and contrivances andthe appointment of a special team of offices toenforce the Act. The Act accords similar protectionto local and foreign works.

The Act was last amended in 1997 to fulfil therequirement of the Multimedia Super Corridor(MSC).

4. Industrial Designs

Designs now registered in the United Kingdomare protected in Malaysia by virtue of the existingUnited Kingdom Designs (Protection) Act, 1949of West Malaysia; the United Kingdom Designs(Protection) Ordinance Chapter 152 of Sabah andthe Designs (United Kingdom) Ordinance, Chapter59 of Sarawak. However, these legislations willbe replaced by the Industrial Designs Act, 1996which will be enforced on 1 September 1999.Beginning from that date, Malaysian residentsand others who desire design protection must filein Malaysia.

VII. INTERNATIONAL OFFSHOREFINANCIAL CENTRE

To further enhance the role of Malaysia as afinancial centre, the Federal Territory of Labuan

was launched as an International Offshore FinancialCentre (IOFC) on 1 October 1990. Labuan as anIOFC will complement the onshore financial systemin Kuala Lumpur. The business and activitiespromoted in Labuan IOFC are:

(i) Offshore banking including investmentbanking;

(ii) Offshore insurance and offshore insurance-related businesses;

(iii) Trusts business;

(iv) Investment holdings;

(v) Mutual funds, units trust and fundmanagement;

(vi) Leasing;

(vii) Venture capital;

(viii) Company management;

(ix) Money broking;

(x) Money market, Corporate Treasury; and

(xi) Islamic financing.

The Administration of Labuan IOFC

The businesses and activities of Labuan IOFCare administered by the Labuan Offshore FinancialServices Authority (LOFSA) - a Single RegulatoryAgency which was established on 15 February1996. The purpose of LOFSA is to act as a one-stop agency to streamline and rationalise theGovernment administrative machinery insupervising the activities and operations of theoffshore financial services industry in Labuan,and be responsible for setting national objectives,policies and priorities for the orderly developmentand administration of the Labuan IOFC. However,matters relating to taxation continue to beadministrated by the Inland Revenue Board.

Legislation

The legislation governing the conduct of offshorebusinesses and investment activities in LabuanIOFC is as follows:

(a) Offshore Companies Act, 1990;

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(b) Labuan Trust Companies Act, 1990;

(c) Offshore Banking Act, 1990;

(d) Offshore Insurance Act, 1990;

(e) Labuan Offshore Business Activity TaxAct, 1990;

(f) Labuan Offshore Financial ServicesAuthority Act, 1996;

(g) Labuan Offshore Trust Act, 1996;

(h) Labuan Offshore Limited Partnership Act,1997; and

(i) Labuan Offchore Securities Industry Act,1998.

Investment/Mutual Fund Business

The investment/mutual fund business is a newactivity which has been promoted in Labuan andis regulated under the Labuan Offshore SecuritiesIndustry Act, 1998 (LOSIA). The LOSIA providesthe necessary legal framework for the creationand management of offshore investment funds,including Islamic funds as well as the provisionof fund administration services. The Act also allowsfor the setting-up of the Labuan InternationalFinancial Exchange (LIFE) which can be used forthe listing of mutual funds and other permittedoffshore instruments. As investment opportunitiesin the South East Asian region are plentiful, Labuanoffers an attractive domicile to foreign funds seekingto undertake investments in the region.

The main features of the LOSIA are describedbelow:

(i) Two types of funds can be establishedunder LOSIA, namely, a private and apublic fund. A private fund is defined asa fund which has either not more than100 subscribers whose each first timeinvestment is not less than RM100,000 orany number of subscribers whose eachfirst time investment is not less thanRM500,000. On the other hand, a publicfund is a fund in which its shares areoffered for subscription to the generalpublic.

(ii) While both type of funds need to beregistered with LOFSA in accordance withthe procedures provided under the Act,private funds are accorded more flexibility.

Minimal requirements are imposed forestablishing private funds in Labuan. Forexample, private funds need not apply toLOFSA for approval of their prospectus,fund manager and fund administrator.

(iii) LOSIA only allows a person who is licensedor registered with LOFSA to manage oradminister a fund duly registered underthe Act. However, in certain circumstances,LOFSA may allow a fund manager outsideLabuan and licensed in a recognizedcountry to manage or administer any fundestablished in Labuan.

(iv) The offshore banks and Labuan trustcompanies are allowed to be the custodianof any fund launched in Labuan. LOSIAalso provides that only a Labuan trustcompany may be appointed as the trusteeof the fund. However, LOSIA allows anauthorized trustee under the laws of anyrecognised country or jurisdiction to carryout similar functions in Labuan.

(v) A public fund is statutorily required to keepproper accounting records and prepareannual f inancial statements. Thesedocuments must be kept in Labuan andmay be inspected by LOFSA, potentialinvestors or the public.

(vi) No public fund shall be offered to thepublic unless a prospectus pertaining tothe fund has been published and filedwith the Authority. This would ensure thatpotential investors have adequateinformation about the fund.

(vii) The Act provides that if a person hassubscribed to a fund and the fund did notcomply with the provisions of LOSIA, theperson may rescind the subscriptioncontract or claim damages from the fundoperator. It is an offence under LOSIA toissue any misleading prospectus.

(viii) Any public fund which conducts anybusiness outside Labuan is required tofile with LOFSA a certificate to be issuedby a competent Authority who is responsiblefor the regulation and supervision of theconduct of its business in that recognisedcountry or supervision. The certificate shallstate the fund is carrying on or engagedin a lawful business.

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(ix) LOSIA provides for the establishment ofLabuan International Financial Exchange(LIFE). The purpose of the establishmentof LIFE is to provide listing facilities to afund launched in Labuan or abroad.

Tax System

An offshore company must be incorporated orregistered under the Offshore Companies Act,1990 to carry on offshore business activities inor from Labuan and to enjoy the preferential taxtreatment under the Labuan Offshore BusinessActivity Tax Act, 1990 (LOBATA). The LOBATAprovides for the imposition, assessment andcollection of tax on offshore business activitiescarried on by an offshore company in or fromLabuan, effective from the year of assessment1991. An offshore company includes an offshoretrust created in Labuan.

(a) Offshore Companies

An offshore company carrying on an offshoretrading activity (which includes banking, insurance,trading, petroleum operations, managementactivities, chartering and leasing of ships) for thebasis period for a year of assessment will betaxed at a rate of 3% of its net profits or at afixed rate of RM20,000 upon election by thecompany for that year of assessment payable tothe Inland Revenue Department. An offshorecompany carrying on an offshore non-tradingactivity (which refers to an activity relating to theholding of investments in securities, stocks, shares,loans, deposits and immovable properties by anoffshore company on its own behalf) for thebasis period for a year of assessment is not subjectto tax for that year of assessment.

(b) Companies other than OffshoreCompanies/Residents and Non-ResidentIndividuals

Companies operating in Labuan, incorporatedor registered under the Companies Act 1965, arenot recognised as offshore companies and do notenjoy the preferential tax treatment under theLOBATA. Such companies continue to be taxedunder the Income Tax Act, 1967. Tax incentives

under the LOBATA are also not applicable tocompanies carrying on industrial and/ormanufacturing activities but instead they may applyfor incentives under the Promotion of InvestmentsAct, 1986. Non-resident and resident individualsin Labuan will continue to be taxed under theIncome Tax Act, 1967.

(c) Preferential Tax Treatment AccordedUnder Income Tax, 1967 and Stamp Act,1949

The preferential tax treatments are:

(i) Treatment on Dividends

Dividends received by an offshore companyfrom a Malaysian resident company arenot subject to income tax and no refundor set-off is given in respect of tax deductedfrom such dividends. Dividends paid byan offshore company out of income derivedfrom an offshore business activity or outof exempt income is not subject to incometax in the hands of the recipient. Suchdividends will be paid gross without anytax deduction at source.

(ii) Treatment on Distribution By OffshoreTrust

Distribution made by an offshore trust isnot subject to income tax in the hands ofthe beneficiary.

(iii) Treatment on Royalty

Royalty paid by an offshore company toa non-resident person or another offshorecompany is not subject to income tax andhence is not subject to withholding tax.

(iv) Treatment on Interest

Interest paid by an offshore company toa non-resident person or another offshorecompany is not subject to income tax.However, where the interest accrues toa banking, finance company or insurancebusiness carried on by a non-residentperson in Malaysia, that interest will besubject to income tax as part of businessincome. Interest paid by an offshore

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company to a resident person, other thana person carrying on a banking, financecompany or insurance business inMalaysia, is not subject to income tax.

(v) Treatment on Technical Or ManagementFees

Technical or management fees paid byan offshore company to a non-resident oranother offshore company is not subjectto income tax.

(vi) Exemption from Stamp Duty

All instruments made in connection withan offshore business activity by an offshorecompany are not subject to stamp dutyunder the Stamp Act, 1949.

(vii) Abatement of Tax for ProfessionalServices

Income derived from qualifying professionalservices rendered to an offshore companyin Labuan is exempted from tax up to anamount equivalent to 65% of the statutoryincome from that source. This incentiveis applicable from the year of assessment1997 to the year of assessment 2000.

(viii) Abatement of Tax for Business Relatingto or Letting of a Qualifying Asset

Income derived from the carrying on ofa business that relates to a qualifying assetor the letting of a qualifying asset in Labuanis exempted from tax up to an amountequivalent to 50% of the adjusted incomefrom that source. This incentive is availableif the construction project of a qualifyingasset commenced before 1 October 1996.

(ix) Abatement of Tax for Employment

Income derived by a non-citizen individualfrom an employment exercisable in amanagerial capacity of an offshorecompany in Labuan is exempted from taxup to an amount equivalent to 50% of thegross income from that employment. Thisexemption applies from year of assessment1997 to year of assessment 2000.

VIII. PETROLEUM DEVELOPMENTACT, 1974

The Petroleum Development Act, 1974 cameinto force on 1 October 1974. The purpose of theAct is to regulate the petroleum and petrochemicalindustries. The power to regulate all activities inthe upstream petroleum sector is vested in thePetroleum Nasional Berhad or PETRONAS. ThePetroleum Regulations 1974, which were amendedon 14 January 1991, vested powers to the Ministryof Domestic Trade and Consumer Affairs and theMinistry of International Trade and Industry (MITI)to regulate all activities in the downstream sectorof the petroleum industry.

The Ministry of Domestic Trade and ConsumerAffairs has been given the powers to issue licencesfor the marketing and the distribution of petroleumand petrochemical products. MITI is vested withthe powers to issue licences for the processingand refining of petroleum as well as the manufactureof petrochemical products.

In addition, the Petroleum (Income Tax) Act,1967 was amended in 1976 to bring the structurein line with the production sharing contracts signedbetween PETRONAS and the various oilcompanies. Effective from the year of assessment1998, income tax on the petroleum industry wasreduced from 40% to 38% while the export dutyfor crude oil and condensate was reduced from20% to 10% with effect from 1 January 1998.

IX. GAS SUPPLY ACT, 1993

The Gas Supply Act, 1993 was gazetted on4 February 1993 to safeguard the interests ofconsumers supplied with gas through pipelinesand from storage tanks or cylinders specificallyused for reticulation of gas. Gas was reticulatedto commercial and industrial outlets as well asresidential consumers.

The Gas Supply Act, 1993 came into effectsimultaneously with the gazetting of the Gas SupplyRegulations, 1997 on 17 July 1997. TheRegulations include procedures for the issuanceof a license to supply, installation of gas pipelines,inspection, tests and maintenance of gasinstallations as well as the certification andregistration of competent persons to undertakethe relevant work in such a manner as to ensurepublic safety. Both the Act and its Regulationsare enforced by the Director General of theElectricity and Gas Supply Department.

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With the gazetting of the Gas Supply Act, 1993,the relevant sections in the Petroleum DevelopmentAct 1974 pertaining to the gas reticulation processhave also been amended to prevent duplicationsbetween the two Acts. This is to ensure that allgas reticulation and related transmission and supplyactivities will be conducted in accordance withthe Gas Supply Regulations, 1997.

X. SECURITIES COMMISSION

The Securities Commission (SC) was formallyestablished and started operations on 1 March1993 with the coming into force of the SecuritiesCommission Act, 1993. With the coming into forceof the Securities Commission Act, 1993, thefunctions of the Capital Issues Committee (CIC)established under the Securities Industry Act 1983and those of the Panel on Take-overs and Mergersset up under the Companies Act, 1965 are nowvested with the SC.

The SC comprises the following nine membersappointed by the Minister of Finance:

(a) Executive Chairman who is also entrustedwith the day-to-day administration of theSC;

(b) Deputy Chief Executive who is entrustedwith the supervision, compliance andenforcement aspects of SC operations;and

(c) Seven other members from governmentand private sectors.

A member of the SC shall hold office for a termnot exceeding three years and is eligible forreappointment.

Functions of the Securities Commission

The functions of the SC as stipulated in theSecurit ies Commission Act, 1993, are asfollows:

(a) to advise the Minister of Finance on allmatters relating to the securities andfutures’ industries;

(b) to regulate all matters relating to securitiesand futures contracts;

(c) to ensure that the provisions of thesecurities laws are complied with;

(d) to regulate the take-overs and mergersof companies;

(e) to regulate all matters relating to unit trustschemes;

(f) to be responsible for supervising andmonitoring the activities of any exchange,clearing house and central depository;

(g) to take all reasonable measures to maintainthe confidence of investors in the securitiesand futures’ markets by ensuring adequateprotection for such investors;

(h) to promote and encourage proper conductamong members of the exchanges, clearinghouses, central depository and all licensedpersons;

(i) to suppress illegal, dishonourable andimproper practices in dealings in securitiesand trading in futures contracts and theprovision of investment advice or otherservices relating to securities or futurescontracts;

(j) to consider and make recommendationsfor the reform of the law relating tosecurities and futures contracts;

(k) to encourage and promote the developmentof securities and futures’ markets inMalaysia including research and trainingin connection thereto;

(l) to encourage and promote self-regulationby professional associations or marketbodies in the securities and futuresindustries;

(m) to license and supervise all licensedpersons as may be provided for underany securities law; and

(n) to promote and maintain the integrity ofall licensed persons in the securities andfutures’ industries.

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Governing Acts and Guidelines

The SC is responsible for the administrationand enforcement of the following Acts/Codes:

(a) Securities Commission Act, 1993 (furtheramendments made in 1995);

(b) Futures Industry Act, 1993 (furtheramendments made in 1995);

(c) Securities Industry (Central Depository)Act, 1991 (further amendments made in1996 and 1998); and

(d) Malaysian Code on Take-overs andMergers.

The SC, together with the Registrar ofCompanies, is also responsible for the enforcementof the Securities Industry Act, 1983, which wasfurther amended in 1996 and 1998.

Some of the guidelines issued by the SC, infacilitating the discharge of its duties, are as follows:

(a) Policies and Guidelines on Issues/Offerof Securities;

(b) Guidelines for Public Offerings of Securitiesof Infrastructure Project Companies;

(c) Guidelines for Public Offerings of Securitiesof Closed-End Funds;

(d) Guidelines on Asset Valuations forSubmission to the Securities Commission;

(e) Guidelines on Unit Trust Funds;

(f) Guidelines on Property Trust Funds;

(g) Guidelines for the Establishment of ForeignFund Management Companies;

(h) Guidelines for Issue of Call Warrants;

(i) Guidelines on Securities Borrowing andLending in Malaysia;

(j) Guidelines for Application of Licence underthe Futures Industry Act, 1993;

(k) Guidelines for the Public Offering ofSecurities of Foreign- Based Companieswith Listing and Quotation on the KualaLumpur Stock Exchange.

(l) Guidelines for Application for FundManager’s Licence under the SecuritiesIndustry Act, 1983.

(m) Guidelines on Reporting Requirements forFund Managers; and

(n) Malaysian Code on Take-overs andMergers

Applications For Corporate Proposals

A public company is required to seek approvalof the SC, as required by the Securities CommissionAct 1993, before undertaking any of the followingproposals:

(a) Make available, offer for subscription orpurchase, or issue an invitation to subscribefor or purchase securities in Malaysia,outside Malaysia, or to list such securitieson a securities exchange outside Malaysia.

(b) Make a bonus issue of securities of apublic company other than by way ofcapitalisation of unappropriated profits.

(c) By way of issue of securities effect:

(i) a compromise or arrangementwhether or not for the purpose of orin connection with a scheme,compromise or arrangement for theamalgamation of two or morecorporations or for reconstruction ofany corporation; or

(ii) an employee share or employee shareoption scheme; or

(iii) an acquisition of securities or assets.

(d) Apply for the listing of a corporation orfor the quotation of securities on a stockmarket of a stock exchange.

(e) Distribute assets of a public company toits members other than distribution in cashor distribution of assets to members of apublic company on its winding up.

(f) Effect a restructuring exercise involvingan acquisition or disposal of assets(whether or not by way of issue ofsecurities) which results in a significantchange in the business direction or policyof a listed public company.

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In considering proposals stipulated above, theSC may have regard to any of the following matters:

(a) whether or not it appears that there willbe adequate disclosure of materialinformation in the prospectus or that thereis an adequately informed market andinvestors;

(b) whether the enquiries (if any) of thecorporation concerned, its off icers,underwriters and advisers provide adequateverif ication of the accuracy andcompleteness of information disclosed;

(c) whether the persons in respect of whoma proposal has been made, need protectionthrough the process of approval anddisclosure pursuant to Part IV of theSecurities Commission Act, 1993 and PartIV of the Companies Act, 1965;

(d) the type of business in which thecorporation is engaged and the risksassociated with it;

(e) the record of the corporation and thecharacter, skills and experience of itsmanagement;

(f) the purpose for which the company israising funds;

(g) the suitability of permitting the proposalor permitting trading in securities on thestock market of a stock exchange or anystock market outside Malaysia;

(h) interests of the public; or

(i) whether the operation of the market forces,including those with respect to price,provide an adequate mechanism for dealingwith risks and merits of the proposal.

The SC acts as a one-stop agency, in as faras submission of proposals are concerned, forall those authorities (such as the Foreign InvestmentCommittee, Ministry of International Trade andIndustry and the Central Bank) where approvalsare also required, besides that of the SC, for theundertaking of proposals. However, when aproposal only requires the approval of otherauthorities, but not the SC’s, the affectedsubmission should be made directly to theauthorities concerned and not through the SC.

Initial Public Offering of Securities with Listingand Quotation on a Stock Exchange

The general policies and principles adopted bythe SC on public companies intending to undertakeinitial public offerings of securities with listingand quotation on a stock exchange are stipulatedin the “Policies and Guidelines on Issue/Offer ofSecurities” (Issues Guidelines), which becameeffective on 1 January 1996 and replaced theprevious “Guidelines for the New Issue of Securitiesand the Valuation of Public Limited Companies”issued by the then CIC.

In evaluating an applican’ s suitability for listing,the SC will take into consideration a number offactors including adherence to quantitative andqualitative requirements as well as otherrequirements set out in the Issues Guidelines.Some of the more pertinent requirements thatwould have to be met are as follows:

1. Issued and Paid-up Capital

(a) Listing on Main Board

A public company seeking listing of and quotationfor its securities on the Main Board should havean issued and paid-up capital of not less thanRM60 million, comprising ordinary shares ofRM1.00 each.

(b) Listing On Second Board

A public company seeking listing of and quotationfor its securities on the Second Board shouldhave a minimum issued and paid-up capital ofRM40 million.

2. Historical Profit Performance

(a) Listing on Main Board

The company should either have a profit trackrecord of either three or five years, with anaggregate after-tax profit of not less than RM30million over the said three or five years, and atleast RM8 million after-tax profit for the latestfinancial year.

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(b) Listing on Second Board

The company should have a track record ofeither three or five years, with an aggregate after-tax profit of not less than RM12 million over thesaid three or five years and at least RM4 millionafter-tax profit for the latest financial year.

3. Pricing

In determining the pricing of the securities tobe issued or offered for sale, the company’smaintainable profit, standing and economic sectorshould be taken into account. The pricing of suchsecurities is no longer constrained by the priceearnings multiple (PE) yardsticks imposed by theSC in the past and would neither be approvednor disapproved. However, the SC has the rightto review the pricing of such securities, inconsultation with issuers and their corporateadvisors, if the pricing is too aggressive.

Flexibilities in Listing Criteria for BumiputeraCompanies

Flexibilities in compliance with the listingrequirements for applications on proformaaccounts are given by SC for Bumiputera-controlled companies that have pooled togetherfor listing on the Kuala Lumpur Stock Exchange(KLSE).

Paragraph 10.10(1)(e) of the Issues Guidelinespertaining to the use of proforma accounts for thepurpose of listing state the following:

“Where a group of companies is seeking listingon the stock exchange, at least one (1) company(which is the qualifying company) within thegroup, should be able to fulfil the profit trackrecord requirements. If no one company qualifies,listing based on the strength of the group’sproforma accounts may be consideredprovided that all the companies within thegroup;

(a) are involved in the same orcomplementary business activities;

(b) have common directors; and

(c) have common shareholders withcontrolling shareholding, on a collectivebasis.

over the profit track record period.

For the purpose of determining controllingshareholding, only legal or registered ownershipwill be accepted, and control is taken as morethan 50% of the voting rights.”

With the flexibilities, a group of Bumiputera-controlled companies applying for listing basedon the strength of the group’s proforma accountswould only have to comply with the first criterionof being involved in the same or complementarybusiness activities and not the other two criteriaof having common directors and common controllingshareholders.

However, Bumiputera companies groupedtogether for the purpose of listing must fulfil thefollowing conditions:

(a) The group must have a genuine pooledarrangement;

(b) The company which is the single largestcontributor, on an average basis for thepast three full financial years, to profitswithin the proforma group (not necessarilythe single largest contributor) should havebeen incorporated and have been inbusiness operation for at least 5 fullfinancial years prior to making submissionto the SC;

(c) Each company to be pooled together musthave been a Bumiputera-controlledcompany under the control of the sameBumiputera shareholders with controllingshareholding for at least 3 full financialyears prior to making submission to theSC (or throughout the duration of thecompany if the company has beenincorporated for a period of less than 3financial years); and

(d) The company used as the listing vehiclemust, upon and subsequent to listing, bea Bumiputera-controlled company.

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The purpose of the flexibilities is to provideindividual Bumiputera entrepreneurs with theopportunities to access the capital market.

Regulations Relating to Take-overs andMergers

Persons involved in any take-over and mergerexercise are required to observe the provisionsrelating to take-overs and mergers contained insections 33 to 33E of the Securities CommissionAct, 1993 (SCA) and the Malaysian Code on Take-overs and Mergers 1998 (Code). In administeringthe Code, the SC will take into account thedesirability of ensuring that the acquisition of votingshares or control of companies takes place in anefficient, competitive and informed market.

Pursuant to section 33B(2) of the SCA, anacquirer who has obtained control in a companyis required to make a take-over offer, other thanin respect of voting shares of the company whichat that date of the offer are already held by theacquirer or which the acquirer is entitled to exercise.In this regard, control, in relation to an acquisitionof shares, is defined under section 33 of the SCAas the acquisition or holding of, or entitlement toexercise or control the exercise of, voting sharesof more than 33% in a company.

Pursuant to section 33B(3) of the SCA, anacquirer who has obtained more than 33% of thevoting shares in a company but less than 50%of voting shares in that company shall not acquireany additional voting shares in that company,except in accordance with the provisions of theCode. In this regard, section 6(1) (b) of the Codeprovides that an acquirer who holds more than33% but less than 50% of the voting shares ofa company and such person acquires in any periodof six months more than 2% of the voting sharesof the company, such person shall be subjectedto the provisions in the Code relating to mandatoryoffers.

A person who fails to comply with the mandatoryoffer requirement is liable, upon conviction, to afine not exceeding one million ringgit or toimprisonment for a term not exceeding 10 yearsor both pursuant to section 33B(4) of the SCA.

Additionally, where any document or informationis required to be submitted to the SC, in relationto or in connection with a take-over offer or merger

and a person submits or causes to be submittedany document or information that is false ormisleading, the person will be liable, uponconviction, to a fine not exceeding three millionringgit or to imprisonment not exceeding 10 yearsor both pursuant to section 33E(3) of the SCA.

Certain restrictions are imposed on both theacquirer as well as persons who sell their sharesto an acquirer. Pursuant to section 7 of the Code,acquirers who are subject to the mandatory offerrequirement are restricted from appointing anydirector to the board of the offeree or exercisingthe voting rights attached to the voting sharesacquired before the acquirer sends out an offerdocument to the offeree shareholders. Section10 of the Code provides that persons who selltheir voting shares to an acquirer are not allowedto resign or cause a director who is accustomedto act in accordance with his or its directions toresign from the board of the offeree until the firstclosing date of the take-over offer or the datewhen the take-over offer becomes or is declaredunconditional as to acceptances, whichever isthe later.

Practice Notes attached to the Code provideguidance on the interpretation of provisions ofthe Code. Amongst others, it provides for instanceswhere the mandatory offer obligation would bedeemed to be incurred as well as circumstancesunder which a person may apply for exemptionfrom the mandatory offer provisions.

The Code is available on the SC website atwww.sc.com.my and can also be obtained fromthe Government Printers.

XI. KUALA LUMPUR AND FINANCIALFUTURES EXCHANGE BHD.

The Kuala Lumpur Options and Financial FuturesExchange Bhd (KLOFFE), Malaysia’s first financialderivatives exchange was launched on 15December 1995. KLOFFE was established toprovide for the growing needs of investors, offeringboth domestic and international investors andportfolio managers access to effective risk andportfolio management tools never before available.

At inception KLOFFE was a 100% subsidiaryof KLOFFE Capital, whose shareholders wereRenong Bhd, HLG Capital Bhd, New Straits TimesPress (M) Bhd and Rashid Hussain Bhd. However,

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in January 1999 a Sales and Purchase agreementwas finalised between the Kuala Lumpur StockExchange (KLSE) and shareholders of KLOFFECapital for the purchase of KLOFFE Capital byKLSE for RM27 million. The KLSE then becamethe 100% shareholders of KLOFFE capital, hencethe ultimate shareholders of KLOFFE.

The imposition of capital controls in September1998 resulted in moderate volumes, with theaverage daily volume at the exchange standingat 1,872 contracts in July 1999 as compared to4,311 contracts in June 1998. The DerivativesRatio, representing the ratio of the turnover valueof the futures to the turnover value of the componentstocks, also fell from 119% in June 1998 to 23.5%in July 1999.

On the home front, KLOFFE has expandedmuch effort in the areas of marketing and educationof the exchange and its products to the public.Among the steps taken include holding regulareducational symposiums and presentations forthe public and participating in local and internationalderivative exhibitions. To further increase publicawareness of KLOFFE we now have daily marketcommentaries on the television and radio as wellas the publishing of educational articles in localbusiness magazines and newspapers.

Internationally, KLOFFE was awarded“Derivatives Exchange of The Year 1996” by theUK-based World Equity Magazine in recognitionof its progress despite the challenges faced inthe first year of operations. KLOFFE is a memberof the International Options Market Association(IOMA), an indication of its commitments to beapart of the international derivatives industry. InDecember 1996, KLOFFE also became a signatoryto the Windsor Agreement, upon which KLOFFEis now in a position to apply to be a RecognisedFutures Exchange pursuant to the rules of otherforeign futures exchanges. KLOFFE has alsorecently received approval to have its productstraded in Australia and Taiwan and is in the processof establishing its distribution channels in therelevant countries.

The Market Structure and RegulatoryFramework

The Ministry of Finance is responsible underthe Futures Industry Act (FIA), 1993 to regulatethe trading of futures and options contracts and

has empowered the Securities Commission toregulate all matters relating to the derivativesindustry. The two bodies are jointly responsiblein setting guidelines for the operations of theKLOFFE. The Securit ies Commission wasestablished under the Securities Commission Act,1993 with the principal objective of regulatingand monitoring the securities and futures industries.The Securities Commission is also the approvingauthority for all contracts traded in accordancewith the provisions of the FIA and for the licensingof participants in the market such as:

(i) Futures Brokers and its representatives;

(ii) Futures Trading Advisers and itsrepresentatives; and

(iii) Futures Fund Managers and itsrepresentatives.

In addition to the overall governance providedunder the FIA, KLOFFE is also a self-regulatoryorganisation. Under KLOFFE’s Business Rules,four committees have been set up to handle mattersrelating to membership, members’ businessconduct, product development and the fidelity fundto ensure the orderly conduct of the futures marketas follows:

(i) Membership Committee

This committee evaluates membershipapplications, reviews the need forintroducing new classes of membershipand looks at other membership issues.

(ii) Fidelity Fund Committee

This committee administers the FidelityFund on behalf of KLOFFE. This Fund isdesigned to compensate any person whosuffers a financial loss as a result ofdefalcation or misappropriation of fundson the part of a futures broker. Each tradingmember is required to place an initialminimum deposit of RM30,000 into thisfund with a subsequent deposit ofRM10,000 for the next five years.

(iii) Business Conduct Committee

This committee handles all matters relatingto members’ conduct and the integrity ofthe market place. In addition, it has wideranging investigative and adjudicativepowers.

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(iv) Product Development Committee

This committee handles the introductionof new derivative contracts. It looks at theviability of futures and options productsto meet the needs of a diverse user group.

The Clearing House

The clearing house that clears contracts tradedin KLOFFE is the Malaysian Derivatives ClearingHouse (MDCH) which is managed independentlyfrom KLOFFE. The primary function of a clearinghouse is to provide financial stabil i ty byguaranteeing the performance of all contractstraded. Essentially, it acts as the counter partyto all contracts traded by assuming the obligationas a buyer (seller) to the original seller (buyer)of the contract.

MDCH is now the common clearing house for thetwo derivatives exchange, namely, KLOFFE andthe Commodity and Monetary Exchange ofMalaysia (COMMEX Malaysia).

Electronic Trading Platform

The screen based trading system used byKLOFFE is known as the KLOFFE AutomatedTrading System (KATS). KATS is based on thesystem used by Deutsche Bourse, the Germanfutures and options exchange. KATS is speciallydesigned to:

(i) Make execution more efficient;

(ii) Make risk and credit management effective;and

(iii) Streamline broker back-office functions.

One of the main features of KATS is to providefor total segregation of all individual client accounts.This enhanced level of recording trade detailsand collateral enables the Exchange, The MalaysianDerivatives Clearing House (MDCH) and Tradingmembers to continuously monitor and assess riskat individual client account levels at all times,thus enabling all parties to effectively managerisk at their respective levels particularly duringvolatile market conditions.

Prior to May 1999, KLOFFE provided front-endclearing functions while MDCH performed the back-end clearing functions for KLOFFE traded products.It was later decided, at an industry level, that theMDCH should provide both front and back endclearing functions for both KLOFFE and COMMEXproducts. Hence, on 10 May 1999, the newderivatives industry solution which also addressedY2K compliance was successfully rolled-out.

Membership on KLOFFE

Membership on KLOFFE is divided into twocategories:

(a) Trading Members

Trading Members are companies set-up specifically to carry out a futures brokingbusiness. They are also known as FuturesBrokers and must be licensed as FuturesBrokers under the FIA. Trading Membershipis only available to companies incorporatedunder the Companies Act, 1965 with aminimum paid-up capital of RM5 million.This membership enables a company totrade in futures and options contracts foritself and also on behalf of its clients. Itis obtainable by way of subscription to an“A” Preference Share issued by KLOFFEwhich has attached to it all the rights andobligations of a Trading Member.

Trading Members will have full and directaccess to the trading facilities of KLOFFE.They can also choose to become ClearingMembers and by doing so will have accessto the clearing facility. They are also knownas Futures Brokers and they must belicensed under the FIA. The person whodirectly deals with the customers of aTrading Member is a futures brokerrepresentative(FBR). As at 31 July 1999there are 28 licensed Trading Memberson KLOFFE.

(b) Local Members

Local Membership is offered toindividuals who wish to trade on their ownbehalf. These individuals cannot trade onbehalf of clients. They only have accessto the trading facilities of KLOFFE for the

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purpose of executing their own trades ofwhich matched trades must be clearedthrough a nominating Clearing Member.As at 31 July 1999 there are 59 LocalMembers trading on KLOFFE.

Local Members are not required to belicensed under the Act as they are notconsidered to be intermediaries in theindustry. Instead, they will have to undergoa registration process with KLOFFE andvetting by the Securities Commission.

Products

KLOFFE currently has only one product tradedon its Exchange, namely the Kuala Lumpur StockExchange Composite Index (KLSE CI) FuturesContract. Future plan include the launch of optionson the KLSE CI (which will position KLOFFE asthe first and ever exchange to trade optionscontracts in Malaysia) and individual stock options,to provide investors with a wider range of equityderivative instruments to hedge their underlyingportfolio. In terms of new products research, weare looking into the possibility of introducing aregional based index derivative as well as KLSE-based sectoral index derivatives in the near future.

XII. COMMODITY AND MONETARYEXCHANGE OF MALAYSIA(COMMEX Malaysia)

Commodity and Monetary Exchange of Malaysia(COMMEX Malaysia) is a membership ownedfutures exchange which was incorporated on 14July 1980 as The Kuala Lumpur CommodityExchange. In 1992 The Kuala Lumpur CommodityExchange formed a wholly-owned subsidiaryMalaysia Monetary Exchange in order to offertrading in financial futures. The business operationsof Malaysia Monetary Exchange was merged withthat of COMMEX Malaysia on 7 December 1998.

COMMEX Malaysia operates under thejurisdiction and supervision of the SecuritiesCommission and is governed by the FuturesIndustry Act 1993 (FIA), thus offering investorsthe security of trading on a regulated Exchangewith proven procedures and standards whichconform to international standards.

COMMEX Malaysia provides and regulates thefacilities and place for trading of both commodityand financial futures contracts pursuant to thebusiness rules of the exchange. All futures contractstraded on the exchange are guaranteed by theclearing house, Malaysian Derivatives ClearingHouse Bhd.

Management of COMMEX Malaysia

The powers of management of the exchangeare vested in the Management Board of theExchange. As stipulated in section 5 of the FIA,the Management Board comprises of:

(i) An Executive Chairman and two otherdirectors appointed by the Minister ofFinance; and

(ii) Six directors elected by the members.

Membership

The membership structure of Commodity andMonetary Exchange of Malaysia has two distinctfutures markets namely the commodity and financialfutures markets. Members of the ExchangeCompany are corporations (brokers and non-brokers), categorised as General Members,Commodity Members and Financial Members.Members of the Exchange are individual LocalMembers, Local Lessees, Trading Permit Holdersand corporate Trade Affiliates.

A broker member of COMMEX Malaysia is acorporate member holding a futures broker licenseissued by the Securities Commission (SC) underthe Futures Industry Act (FIA), 1993, to carry onfutures brokering business. Consequently, underthe FIA, every director and relevant employee ofa futures broker member are required to be licensedby the SC as futures broker’s representatives(FBR).

Seats

The trading rights of members of the Exchangeare attached to Seats, (minimum 1 seat) whichare either owned or leased. As for the Membersof the Exchange Company, they must at leastown 2 seats, a prequisite to their trading rights.Seats are categorised as Commodity Seats,

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Financial Seats and Individual Seats. Seats maybe purchased from the Exchange or from Memberswishing to sell in the secondary market, subjectto the approval and in accordance with the BusinessRules of the Exchange.

Market Safeguards

COMMEX Malaysia has many safeguards ofhigh standards to protect the integrity of themarkets. They are as follows.

(i) The Clearing House

In protecting the financial integrity ofthe marketplace, COMMEX Malaysiatogether with its clearing house, theMalaysian Derivatives Clearing HouseBerhad (MDCH), adopts a financial andoperational safeguard system that iscomparable to the best internationalpractices. This system is designed toprovide the highest level of safety withvery early detection of unsound practiceson the part of any member. Protectionagainst market defaults is imperative andremains the ultimate goal of the clearingsystem.

Financial performance of all contractstraded on the floor of COMMEX Malaysiais guaranteed, initially by the ClearingMembers, and thereafter by the MDCH,once the contract has been matched andaccepted for clearing. All participants ofthe Exchange must have their tradescleared through a Clearing Member of theMDCH to ensure themselves of a financiallystrong party behind their contracts as soonas they are transacted.

Once a contract has been accepted forclearing, the MDCH substitutes itself asthe buyer to the seller and vice versa.MDCH will then hold each Clearing Memberaccountable for every position it carriesregardless of whether the position is carriedfor the account of another member, forthe account of a non-member client, orfor the Clearing Member’s own account.In short, the MDCH looks solely to theClearing Member carrying andguaranteeing the account to secure allpayments and performance obligations.

(ii) The Audit, Compliance & Surveillance(ACS) Division

The ACS division has an overallresponsibility of upholding the integrity ofCOMMEX Malaysia’s futures markets. TheDivision carries out a wide range of dutiesthrough its highly dedicated and competentaudit staff which include daily and regularmonitoring of the market and members,regular visits to members’ offices for fieldaudits and monitoring of the activities onthe trading floor of the Exchange.

The duties of the ACS Division can beclassified into the following major areas:

(a) Audit and Compliance

The Division is responsible for detectingviolation of the Rules and the Act. Itconducts routine and surprise auditson Broker Members as well asreviewing the adequacy of their internalcontrols.

(b) Financial Surveillance

The Division is also responsible fordetection of any failure by Membersto meet the minimum financialrequirements of the Exchange. Itconducts regular monitoring ofMembers’ financial positions andclients’ funds in segregation. Earlywarning levels are established tofacilitate more intensive monitoringwhere necessary, on the BrokerMembers’ financial positions.

(c) Market Surveillance

The Division is responsible for detectionof any adverse situations that maythreaten the orderly trading orl iquidation of contracts on anyCOMMEX Malaysia’s futures marketsavoiding possible market disruptions.It conducts daily monitoring of thefutures prices and prices of theunderlying commodity in the cash andforward markets, and the prices ofsubstitutes of the underlying commodityof the futures contracts, as well asthe open positions of large traders.

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(d) Floor Surveillance

The Division is also responsible fordetecting any fraudulent tradingpractice, abuse, and any other violationof COMMEX Malaysia’s BusinessRules or the objects contained inCOMMEX Malaysia’s Floor ProceduresManual. Their duties include ensuringall traders on the Floor maintain ahigh standard of conduct andprofessionalism, conduct regular auditson Members pertaining to Floor Rulesviolation, investigate complaintsofficially received from Members,Locals, the Clearing House, and othersources, and carry out special auditsat the request of the ComplianceCommittee of the Exchange.

A CCTV (closed-circuit television)Surveillance System is in place toenhance the Division’s performance.The system includes cameras locatedat strategic positions within the tradingfloor, microphones, television monitors,videocassette recorders, and a scannerwith pan, tilt and zoom capabilities.

Other than carrying out itsresponsibilities of detecting violationsthat may affect the integrity of themarket, the division also adopts aproactive approach to assist Membersin complying with the Rules. Membersare strongly encouraged to consult thedivision on regulatory issues. Earlywarnings to Members in somesituations where Members face somerisks of violating the Rules are alsoprovided. In addition, the Divisionregularly initiates amendments to theRules in steering towards a moreefficient marketplace.

In addition to the above, the Divisionalso acts as the Secretariat to theDispute Committee of the Exchangein settling disputes between Membersand clients. The framework forenforcing the Rules is firmly established

and well-tested, with the ComplianceCommittee of the Exchange havingsome limited disciplinary powers likeimposing compound fines for somespecific minor violations, and orderingBroker Members to trade for liquidationonly for failure to meet minimumfinancial requirements. All major andserious violations detected are referredto the Business Conduct Committeefor a full disciplinary hearing.

iii. Registration of Brokers

A Member of the Exchange, who handlesclients’ futures accounts must be registeredas a Futures Broker with the SecuritiesCommission (SC) under the Futures IndustryAct (FIA), 1993. The SC is an independentnational regulatory agency responsible forthe regulation and supervision of bothcommodity futures and financial futurestrading in Malaysia.

A Futures Broker must also ensure thatall its employees, who handle clients, areregistered as Futures Broker’sRepresentatives (FBRs) and are registeredwith the SC.

iv. Reportable Posit ion and SpeculativePosition Limits

Members are required to report to theExchange when its proprietary account, orany of its client’s, has a position equal toor in excess of the reportable level set bythe Exchange for each contract.

Reportable position for Crude Palm Oilfutures contract is set at 100 or more opencontracts, either long or short, in any onedelivery month. As for the Three-monthKLIBOR futures contract, an open positionof 100 or more Contracts in any one (1)delivery month which is owned or controlledby a Member or Client, alone or in conjunctionwith any other person or corporation, at theclose of the Afternoon Session on anyBusiness Day shall constitute ReportablePosition.

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Speculative position limits are also set forall contracts. For CPO futures, the limit is500, net long or short, in any delivery monthor in all months combined. This limit is setat 2,000 contracts, nett gross open positionsfor all delivery months of the contract forKLIBOR futures.

Exemptions from position limits can beobtained for bona fide hedging trades. Theselimits are enforced strictly to prevent pricemanipulation or cornering of the market, henceprotecting the integrity of the Exchange.

v. Segregation of Clients’ Funds

Members are required to maintain aseparate bank account for all clients’ funds.Clients’ funds cannot be withdrawn from thesegregated account except for the purposesof payment of deposits and margins, paymentof debts due to the Member from the clients,and monies drawn on clients’ authority.Members are also not permitted to use moniesbelonging to one client for margining orfinancing the trades and positions of anotherclient or the Member itself.

COMMEX Malaysia’s Products

COMMEX Malaysia, Malaysia’s premier andfirst multi-product futures exchange, currently offerstwo futures contracts.

The Crude Palm Oil (CPO) Futures contract,launched in 1980, caters to the price riskmanagement needs of the oils and fats’ industry.Over the last few years, the market has gainedtremendously in stature. Prices discovered onthe trading floor are now recognised as the pricingbenchmark for palm oil and its products worldwide.

The Three-Month Kuala Lumpur InterbankOffered Rate (3-month KLIBOR) futures contractwas launched in 1996. This contract caters to thehedging and trading needs of financial institutionsand large corporations with Ringgit-based assets.Major users of the contract currently include thecommercial banks, large corporations and manyothers with risk exposure to interest ratemovements.

XIII. REGULATION OFACQUISITION OF ASSETS,MERGERS AND TAKE-OVERS

The Foreign Investment Committee (FIC)Guidelines of 1974 were formulated to establisha set rules regarding the acquisition of assets orany interest, mergers or take-overs of companiesand business. The Guidelines may be viewed asa means of restructuring the pattern, ownershipand control of the corporate sectors in line withthe objectives of the New Economic Policy (NEP)of 1970-90. Through these Guidelines, theGovernment endeavours to reduce the presentimbalances in the distribution of the corporatewealth and to encourage those forms of privateinvestment that would contribute to the developmentof the country in consonance with the objectivesof the NEP. Since efforts made in restructuringthe equity ownership in the corporate sector willcontinue under the National Development Policyfor the period after 1990, the 1974 FIC Guidelineswill continue to apply regarding the acquisitionof assets or any interest, mergers and take-oversof companies and businesses in furtherance ofthe restructuring objectives.

Rules and Regulations Regarding Acquisition,Mergers and Take-Over

The Guidelines for the acquisition of assets,mergers or take-overs by foreign or Malaysianinterests are governed among others by thefollowing rules:

(a) Against the existing pattern of ownership,the proposed acquisition of assets or anyinterest, mergers or take-overs shouldresult directly or indirectly in a morebalanced Malaysian participation inownership and control.

(b) The proposed acquisition of assets or anyinterest, mergers or take-over should leaddirectly or indirectly to net economicbenefits in relation to such matters as theextent of Malaysian participation,particularly Bumiputera participation,ownership and management, incomedistribution, growth, employment, exports,quality, range of products and services,economic diversification, processing andupgrading of local raw material, training,efficiency, and research and development.

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(c) The proposed acquisition of assets or anyinterest, mergers or take-overs ofcompanies and businesses should not haveadverse consequences in term of nationalpolicies in such matters as defence,environmental protection or regionaldevelopment.

(d) The onus of proving that the proposedacquisition of assets or any interest,mergers or take-overs of companies andbusinesses is not against the objectivesof the NEP is on the acquiring partiesconcerned.

The above guidelines will apply to the following:

(a) any proposed acquisition by foreigninterests of any substantial fixed assetsin Malaysia;

(b) any proposed acquisition of assets or anyinterest, mergers and take-overs ofcompanies and businesses in Malaysiaby any means, which will result in ownershipor control passing to foreign interest;

(c) any proposed acquisition of 15% or moreof the voting power by any one foreigninterest or associated group or by foreigninterests in the aggregate of 30% or moreof the voting power of a Malaysia companyor business;

(d) control of Malaysian companies orbusinesses through any form of joint-venture agreement, managementagreement and technical assistanceagreement or other agreement;

(e) any merger and take-over of any companyor business in Malaysia whether byMalaysians or foreign interests; and

(f) any other proposed acquisition of assetsor interests exceeding in value of RM5million whether by Malaysians or foreigninterests.

The guidelines, however, do not apply to specificprojects approved by the Government comprisingthe following:

(a) acquisition by Ministries and GovernmentDepartments;

(b) acquisit ion by Minister of FinanceIncorporated, Menteri Besar Incorporatedand State Secretary Incorporated; and

(c) privatisation projects approved by theFederal or State Government.

Foreign Investment Committee

For the purpose of implementing the guidelines,the FIC was established and is responsible formajor issues on foreign investment. The functionsof the FIC are:

(a) to formulate policy guidelines on foreigninvestments in all sectors of the economyto ensure the fulfillment of the objectivesof the NEP;

(b) to monitor the progress and help resolveproblems pertaining to foreign privateinvestments and to recommend suitableinvestment policies;

(c) to supervise and advise ministries andGovernment agencies in all mattersconcerning foreign investments;

(d) to coordinate and regulate the acquisitionof any assets or interests, mergers andtake-overs of companies and businessesin Malaysia; and

(e) to monitor, assist and evaluate the form,extent and conduct of foreign investmentsin the country and to maintaincomprehensive information to foreigninvestments.

The FIC comprises the following members:

(a) Director-General of the Economic PlanningUnit (as Chairman);

(b) Secretary-General of the Ministry ofFinance;

(c) Governor of the Central Bank ;

(d) Secretary-General of the Ministry ofInternational Trade and Industry;

(e) Chairman of the Securities Commission;

(f) Chairman of the Malaysian IndustrialDevelopment Authority;

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(g) Director-General of the implementation andCoordination Unit;

(h) Secretary-General of the ministry ofDomestic Trade and Consumer Affairs;

(i) Secretary-General of the Ministry ofEntrepreneur Development; and

(j) Registrar of Companies.

Further details on the Guidelines and proceduresfor submission of proposals to the FIC areobtainable from:

The SecretaryForeign Investment Committee (FIC)Economic Planning UnitPrime Minister’s DepartmentJalan Dato’ Onn50502 KUALA LUMPUR.

XIV. EXCHANGE CONTROL POLICY

The exchange control policy of Malaysia isapplied uniformly to transactions with all countriesexcept Israel and the Federal Republic ofYugoslavia (Serbia and Montenegro) for whichspecial restrictions apply. The exchange controlpolicy, in general, is aimed at monitoring thesettlement of payments and receipts as well asencouraging the use of the country’s financialresources for productive purposes in Malaysia.For monitoring and compilation of balance ofpayments statistics, residents are required tocomplete statistical forms, Form P or Form R, foreach payment and receipt of more than RM10,000vis-a-vis non-residents. On 1 September 1998,several new exchange control measures wereimposed to regulate short-term capital flows aswell as to promote financial stability and economicrecovery.

Payment for Import of Goods and Services

There are no restrictions on payments,irrespective of amount, to non-residents for importof goods and services. All payments for importof goods and services, however, must be madein foreign currency.

Export Proceeds

All export proceeds are required to be repatriatedback to Malaysia in accordance to the payment

schedule as specified in the sales contract, whichin any case should not exceed six months fromthe date of export. The export proceeds must bereceived in foreign currency and must be sold forringgit or retained in approved foreign currencyaccounts with onshore commercial banks, up toan aggregate overnight limit between USD1 millionand USD10 million.

Import and Export of Currency by Travelers

All travelers are required to complete TravelersDeclaration Forms at the Immigration check-pointor carry valid Travelers Declaration Pass upontheir exit or arrival at Malaysia, irrespective of theamount carried.

Resident and non-resident travelers are allowedto carry ringgit notes up to RM1,000 on personor in their baggage, upon arrival at or departurefrom Malaysia. A resident traveler is freely allowedto take out foreign currency notes, includingtraveler’s cheques, up to the equivalent ofRM10,000 per person. A non-resident traveler isalso allowed to take out foreign currency notes,including traveler’s cheques, up to the amountbrought into Malaysia. Resident and non-residenttravelers are allowed to bring in any amount offoreign currency notes, including traveler’s cheques,upon their arrival in Malaysia.

Prior permission of the Controller of ForeignExchange (the Controller) is required for a travelerto export or import ringgit notes, or to exportforeign currency exceeding the permitted limits,and for any person other than a traveler to exportor import foreign currency or ringgit notesirrespective of amount.

Foreign Direct Investment

Foreign direct investors are freely allowed torepatriate their investment, including capital, profitand dividends, without being subject to any levy.

Investment Abroad by Residents

Residents are required to seek prior approvalfrom the Controller to remit funds in excess ofRM10,000 for overseas investment purposes.

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External Credit Facilities from Non-Residents

Credit Facilities in Foreign Currency

Residents are freely permitted to obtain creditfacilities in foreign currency up to the equivalentof RM5 million. Any amount exceeding the permittedlimit would require the prior approval of theController. There is also no restriction for repaymentof credit facilities obtained from non-residents aslong as such credit facilities have been obtainedin accordance to the relevant exchange controlrule.

Credit Facilities in Ringgit

Residents are not allowed to obtain creditfacilities in ringgit from non-residents without theprior approval of the Controller.

Extension of Credit Facilities to Non-Residents

Credit Facilities in Foreign Currency

Commercial banks are freely allowed to extendcredit facilities in foreign currency to non-residentsfor purposes other than financing the acquisitionor development of immovable property in Malaysia.

Credit Facilities in Ringgit

Banking institutions are allowed to extend creditfacilities in ringgit up to the aggregate of RM200,000to a non-resident for purposes other than to financethe acquisition or development of immovableproperty in Malaysia. Prior approval of the Controlleris required for the extension of credit facilitiesexceeding the limit.

Notwithstanding the above, commercial banksparticipating in the Institutional Settlement Servicesprovided by SCAN are allowed to extend intra-day overdraft facility up to RM200 million andovernight limit up to RM5 million in aggregate tonon-resident stockbrokers using the ISS.

Banking institutions and other non-bank residentsare allowed to extend credit facilities in ringgitto non-residents who are working in Malaysia tofinance up to 60% of the purchase price orconstruction cost of a residential property inMalaysia for their own accommodation.

The resident stockbroking companies areallowed to extend margin financing facilities tonon-resident clients for the purchase of shareslisted on the Kuala Lumpur Stock Exchange (KLSE),subject to the compliance with the rules imposedby the KLSE.

Portfolio Capital

Non-resident portfolio investors are encouragedto hold their investment over a long term inMalaysia. Effective from 1 September 1998, thenon-residents were required to hold their principalsum for portfolio investment for at least 12 monthsin Malaysia. This rule was relaxed on 15 February1999. Since then, capital and profits of the portfolioinvestments were allowed to be repatriated anytime, subject to payment of appropriate levy.

For fund brought into Malaysia before 15February 1999, principal capital repatriated withinthe one-year holding period was subjected to levyat the decreasing rate from 30-10%, dependingon the duration the principal was held in the country.All profit realised on investments made duringthe one-year holding period were free from levy.Profits earned on reinvestment made after theone-year holding period will attract a levy of 10%upon repatriation.

For fund brought into Malaysia on or after 15February 1999, repatriation of principal capitaldoes not attract any levy. For repatriation of profits,there was a two-tiered levy of 30% and 10%.Profits realised and repatriated within 12 monthsafter investment is made were subject to repatriationlevy of 30% and profits repatriated after 12 monthswere subject to repatriation levy of 10%.

No levy will be imposed on the repatriation ofproceeds from the sale of investments in immovableproperty (for both principal capital and profits).

On 21 September 1999, the levy system wasfurther modified with a flat 10% levy on repatriationof profits on portfolio funds to replace the two-tiered levy of 30% and 10%. The relaxation wasaimed at further streamlining the administrativeprocedures to ensure efficient implementation ofthe levy system. The principal sum for funds broughtinto Malaysia between 1 September 1998 and 14February 1999 is exempted from levy. Repatriationof proceeds from the sale of investments inimmovable property (for both principal capital andprofits) continued to be exempt from levy.

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Credit Facilities in Ringgit to Non-ResidentControlled Companies

Non-Resident Controlled Companies (NRCCs)operating in Malaysia are freely permitted to obtaincredit facilities up to RM10 million per corporategroup from domestic sources. Besides this, theyare also allowed to obtain short-term tradefinancing facilities of any amount from bankinginstitutions.

Of the total amount of credit facilities obtainedfrom banking institutions, at least 60% must befrom Malaysian-owned banking institutions. Forborrowing in excess of RM10 million in theaggregate, NRCCs are required to obtain priorapproval. The NRCCs are also required to ensurethat the ratio between their domestic borrowingand capital funds is less than three times.

Foreign Currency Accounts of Residents

Resident exporters are permitted to open foreigncurrency accounts to retain export proceeds inforeign currency between USD1 million and USD10million, depending on their export receipts.

Resident companies with domestic creditfacilities are permitted to open foreign currencyaccounts to retain foreign currency receivables,other than export proceeds, up to an aggregateovernight limits of USD0.5 million with commercialbanks in Malaysia and with Labuan offshorebanks.

Resident companies with no domestic creditfacilities are permitted to open foreign currencyaccounts with commercial banks in Malaysia toretain foreign currency receivables other than exportproceeds with no overnight limit specified by BankNegara Malaysia.

Resident individuals are also allowed to openforeign currency accounts solely to facilitateeducation and employment overseas up to anaggregate overnight limits of USD100,000 withcommercial banks in Malaysia, USD100,000 withLabuan offshore banks, and USD50,000 withoverseas banks.

Foreign Currency Accounts of Non-Residents

Commercial banks and merchant banks arefreely allowed to open foreign currency accountsfor non-residents. There are no restrictions onthe inflow and outflow of funds through the foreigncurrency accounts of non-residents. No levy isimposed on repatriation of foreign currency funds.

External Accounts of Non-Residents

Banking institutions are freely allowed to openaccounts in ringgit known as External Accounts(or Special External Accounts opened effectivefrom 15 February 1999) for non-residents.

The sources of funds of the External Accountsmay be from the sale of ringgit instruments,securities registered in Malaysia or other assetsin Malaysia, salaries, wages, rental, commissions,interest, profits or dividends, and sale of foreigncurrency.

The uses of funds in the External Accounts arefor restricted purposes such as purchase of ringgitassets/placement of deposits, payment ofadministrative and statutory expenses in Malaysia,payment of goods and services for use in Malaysia,and granting of loans and advances to staff inMalaysia according to the terms and conditionsof services.

Prior approval is required for transfer of fundsbetween External Accounts and for uses of fundsother than permitted purposes. There are norestrictions on the operations of the ExternalAccounts of non-residents working in Malaysia,embassies, consulates, high commission,supranational or international organisations inMalaysia.

Designated External Accounts

Commercial banks are allowed to open ringgitaccounts known as Designated External Account(DEA) for non-residents, solely for the purposeof facilitating the trading at the Commodity andMonetary Exchange of Malaysia and Kuala LumpurOptions and Financial Futures Exchange. Fundsin the DEA are not subject to levy on repatriation.

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Special Status Granted to Selected Companies

Offshore Entities in Labuan InternationalOffshore Financial Centre

Entities setup in Labuan International OffshoreFinancial Centre (IOFC) are declared as non-residents for exchange control purposes. Offshoreentities in Labuan IOFC are freely allowed todeal in foreign currency with non-residents. Besidesthis, Licensed Offshore Banks in Labuan arepermitted to receive payments in ringgit fromresidents arising from fees, commission, interestfrom deposit of funds or dividends. OffshoreInsurance Entities in Labuan are also permittedto use their ringgit account for payment of claimsand receive insurance premium arising fromreinsurance of domestic insurance business. Theyare freely allowed to maintain ringgit accountswith onshore banks to facilitate defraying ofstatutory and administrative expenses in Malaysia.

Multimedia Supercorridor Companies

Companies operating in MultimediaSupercorridor (MSCs) are given exemption fromexchange control upon the companies beingawarded the MSC status, except for submissionof statistics for monitoring purposes.

Approved Operational Headquarters

Approved Operational Headquarters (OHQs)are allowed to open foreign currency accountswith commercial banks in Malaysia to retain exportproceeds up to a maximum aggregate overnightlimit of USD10 million, irrespective of the amountof export receipts. OHQs are also allowed to openforeign currency accounts with commercial banksin Malaysia, Labuan offshore banks or overseasbanks for crediting foreign currency receivables,other than export proceeds, with no restriction onovernight limit.

Besides this, OHQs are permitted to obtainany amount of foreign currency credit facilitiesfrom commercial banks and merchant banks inMalaysia, and from any non-residents for theirown use or on-lend to their related companiesoverseas.

Approved International Procurement Centres

Approved International Procurement Centres(IPCs) are allowed to retain any amount of exportproceeds in foreign currency accounts maintainedwith onshore commercial banks. They are alsoallowed to enter into forward exchange contractswith onshore commercial banks to hedge exchangerisk based on projected volume of trade.

XV. DOUBLE TAXATIONAGREEMENTS

Double taxation agreements provide for theavoidance of incidences of double taxation oninternational income, such as business profits,dividends, interests and royalties, derived in onecountry and remitted to another country. Thisremoves the “tax barrier” to international tradeand investment. The agreements also provide forthe exchange of information on relevant incomeand this is useful to prevent evasion of taxes onincome.

Under double taxation agreements, businessprofits are taxed only in the country in which theenterprise is situated. Where the enterprise carrieson business through a permanent establishmentsituated in the other contracting country, tax islevied in the other country on profits attributableto or derived by the permanent establishment inthe country where it is situated.

Under most double taxation agreements, profitsfrom shipping and air transport operations ininternational traffic are taxed only in the countrywhere the management and control of the enterpriseare exercised.

In most double taxation agreements whichMalaysia has entered into, countries of residenceaccord tax sparing credit. A tax sparing credit isa credit given if no tax or a lower rate of tax ispaid in the host country. In case of dividends paidby companies exempted from tax under thePromotion of Investments Act 1986, the recipientsare also exempted from Malaysian income tax onsuch dividends. If the recipients are also taxedin their country of residence on the dividends,then the country of residence will give credits asif Malaysian tax has been paid.

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Under most of the agreements, interests onapproved loans and approved industrial or technicalroyalties derived from Malaysia by residents ofother countries are exempted from tax in Malaysia.In addition, there is a provision for credit to begiven by the country of residence for the taxspared by Malaysia in respect of such income.

To date, 52 countries have double taxationagreements with Malaysia, namely:

Country Date of SigningAgreement

1. Singapore 26.12.1968(Supplementary Agreement) 6.7.1973

2. Japan 30.1.1970

3. Sweden 21.11.1970

4. Denmark 4.12.1970

5. Norway 23.12.1970

6. Sri Lanka 16.9.1972

7. United Kingdom 30.3.1973

8. Belgium 24.10.1973

9. Switzerland 30.12.1974

10. France 24.4.197531.1.1975 (Protocol)

11. New Zealand 19.3.1976

12. Canada 16.10.1976

13. India 25.10.1976

14. Federal Republic ofGermany1 8.4.1977

15. Poland 27.3.1978

16. Australia 20.8.1980

17. Thailand 29.3.1982

18. Republic of Korea 20.4.1982

19. Philippines 27.4.1982

20. Pakistan 29.5.1982

21. Romania 26.11.1982

22. Bangladesh 19.4.1983

23. Italy 28.1.1984

24. Finland 28.3.19841 Germany since 3.10.1990.

Country Date of SigningAgreement

25. People’s Republic ofChina 23.11.1985

26. Russia 31.7.1987(The Former Union of SovietSocialist Republics)

27. Netherlands 7.3.1988

28. United States of America 18.4.1989(Limited Agreement)

29. Hungary 24.5.1989

30. Austria 20.9.1989

31 Indonesia 12.9.1991

32. Mauritius 23.8.1992

33. Islamic Republic of Iran 10.11.1992

34. Papua New Guinea 20.5.1993

35. Saudi Arabia 18.7.1993

36. Sudan 7.10.1993

37. Republic of Albania 24.1.1994

38. Zimbabwe 28.4.1994

39. Turkey 27.9.1994

40. Jordan 1.10.1994

41. Mongolia 27.7.1995

42. Vietnam 7.9.1995

43. Malta 3.10.1995

44. United Arab Emirates 28.11.1995

45. Republic of Fiji 19.12.1995

46. Czech Republic 8.3.1996

47. Kuwait 6.4.1997

48. Arab Republic of Egypt 14.4.1997

49. Sri Lanka 16.9.1997

50. Republic of Argentina 3.10.1997

51. Myanmar 9.3.1998

52. Namibia 28.7.1998

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XVI. INVESTMENT GUARANTEEAGREEMENTS

The purpose of the Investment GuaranteeAgreements (IGAs) is to ensure against non-commercial risks such as expropriation andnationalisation and to allow for remittances andrepatriation of capital. For a developing countrysuch as Malaysia, it is hoped that the IGAs willhelp to quicken the pace of industrialisation byencouraging the inflows of foreign capital. It isgenerally considered that the IGAs, which preventarbitrary action by a recipient country, will generateconfidence in foreign investors.

Coverage

The IGA normally covers the following:

(a) A guarantee that there shall be noexpropriation or nationalisation except fora lawful or public purpose and under dueprocess of law and with prompt andadequate compensation.

(b) A permission to remit or repatriate in anyfreely usable currency, profits or capitalon investment.

Beneficiaries

Under most IGAs, the beneficiaries would be:

(a) nationals or citizens according to the lawsof each contracting party; and

(b) companies which are incorporated in eithercontracting party’s country and substantiallyowned by, and whose management andcontrol are vested in the nationals of eachcontracting party.

Arbitration

Under the IGAs, two forms of disputes mayarise. First, disputes on the interpretation or theapplication of the agreement itself and secondly,disputes in connection with the investments inthe contracting countries.

(a) In most of the IGAs that Malaysia hassigned, it is provided for that consultationsthrough diplomatic channels shall settle

disputes on the interpretation or applicationof the agreement with the view towardsarriving at an amicable solution. Wherea dispute fails to be settled in the abovemanner, it will be submitted to an arbitrationboard or an arbitration tribunal forsettlement. If these measures fail to resolvethe dispute, it would be referred to theInternational Court of Justice.

(b) Disputes in connection with the investmentbetween the national or company (investor)and the host country shall first be settledby making use of local administrative andjudicial facilities. If the above means failto settle the issue, it should then besubmitted for reconciliation or arbitrationto the International Centre for Settlementof Investment Disputes (ICSID) which isestablished under the auspices of theInternational Bank for Reconstruction andDevelopment (IBRD) or the InternationalAdhoc Arbitral Tribunal established underthe Arbitration Rules of the United NationsCommission on International Trade Law(UNCITRAL).

Status of Investment Guarantee Agreements

Malaysia has signed IGAs with the followingcountries:

Country Date of SigningAgreement

1. United States of 21.4.1959America (amended on

24.6.1965)

2. Federal Republic of 22.12.1960Germany1 (amended on

5.11.1965)

3. Netherlands 15.6.1971

4. Canada 1.10.1971

5. France 24.4.1975

6. Switzerland 1.3.1978

7. Sweden 3.3.1979

8. Belgium-Luxembourg 22.11.1979

9. United Kingdom 21.5.1981

10. Sri Lanka 16.4.1982

1 Germany since 3.10.1990.

224

Country Date of SigningAgreement

Country Date of SigningAgreement

11. Romania 26.11.1982(amended on25.6.1996)

12. Norway 6.11.1984

13. Austria 12.4.1985

14. Finland 15.4.1985

15. Organisation of IslamicConference (OIC) 30.9.1987

16. Kuwait 21.11.1987

17. Association of South-East Asian Nations 15.12.1987(ASEAN)

18. Italy 4.1.1988

19. Republic of Korea 11.4.1988

20. People’s Republic of China 21.11.1988

21. United Arab Emirates 11.10.1991

22. Denmark 6.1.1992

23. Socialist Republic of 21.1.1992Vietnam

24. Papua New Guinea 27.10.1992

25. Republic of Chile 11.11.1992

26. Lao People’s DemocraticRepublic 8.12.1992

27. Taiwan 18.2.1993

28. Republic of Hungary 19.2.1993

29. Republic of Poland 21.4.1993

30. Republic of Indonesia 22.1.1994

31. Republic of Albania 24.1.1994

32. Republic of Zimbabwe 28.4.1994

33. Turkmenistan 30.5.1994

34. Republic of Namibia 12.8.1994

35. Kingdom of Cambodia 17.8.1994

36. The Argentine Republic 6.9.1994

37. Jordan 2.10.1994

38. Republic of Bangladesh 12.10.1994

39. Republic of Croatia 16.12.1994

40. Bosnia Herzegovena 16.12.1994

41. Spain 4.4.1995

42. Pakistan 7.7.1995

43. Kyrgyz Republic 20.7.1995

44. Mongolia 27.7.1995

45. Republic of India 3.8.1995

46. Oriental Republic of 9.8.1995Uruguay

47. Republic of Peru 13.10.1995

48. Republic of Kazakhstan 27.5.1996

49. Republic of Malawi 5.9.1996

50. Czech Republic 9.9.1996

51. Republic of Guinea 7.11.1996

52. Republic of Ghana 11.11.1996

53. Arab Republic of Egypt 14.4.1997

54. Republic of Botswana 31.7.1997

55. Republic of Cuba 26.9.1997

56. Republic of Uzbekistan 6.10.1997

57. Macedonia 11.11.1997

58. Democratic People’s 4.2.1998Republic of Korea

59. Republic of Yemen 11.2.1998

60. Republic of Turkey 25.2.1998

61. Republic of Lebanon 26.2.1998

62. Burkina Faso 23.4.1998

63. Republic of Sudan 14.5.1998

64. Republic of Djibouti 3.8.1998

65. Republic of Ethiopia 22.10. 1998

66. Senegal 11.2. 1999

67. State of Bahrain 15.6. 1999.