MICCI: Tax incentives for Malaysia’s automotive sector lack transparency

Malaysia must take proactive steps in improving the transparency of incentives for investments into the automotive sector and remove protectionism, says Malaysian International Chamber Of Commerce & Industry (MICCI).

Speaking to the New Straits Times (NST), MICCI automotive industry council member Cheah E-Ling said:

"The lack of transparency in the domestic automotive sector has a direct impact in the industry as manufacturers are not able to clearly study the market and plan their product mix and offerings.

"There's a lot of 'back-and-forth' in getting incentive approvals.

"Furthermore, there is also an urgent need to improve transparency in the incentive scheme and protectionism must be removed as there is no meaning in national cars these days."

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The English daily explained that Malaysian Investment Development Authority (MIDA) has evaluated and approved tax incentives for 13 automotive projects with investments of RM4.6 billion from 2014 to date.

"The question here, is there volume to sustain investments? Volume is crucial to justify ROI for even Tier 1 automotive component suppliers where their present technology are predominantly legacies from the ‘80s.

"Secondly, is there bilateral trade support for export to increase volume? Are the investments just a means to qualify for the incentive scheme?

"And finally, is the rakyat really benefiting from this scheme?," she asks.

Although import duties have since been abolished for qualified cars from Japan and the ASEAN region (minimum 60 percent ASEAN-sourced content), excise duties, which can range from 60 to 105 percent are still imposed.

However, few locally-assembled (CKD) cars pay the full rate, as there are various schemes, including the Industrial Linkage Program (ILP) and Energy Efficient Vehicles (EEV) that grant excise tax rebates to manufacturers.

How these rebates are given out however, is not so clear cut as incentives are considered on a case-by-case basis, negotiated behind closed doors.

This murky process irks investors who are looking to setup local assembly (CKD) operations here as a way to skirt around the high tax barriers.

To qualify, companies are required to share their long-term plans with the relevant government agencies, but without the security of knowing what the outcome will be.

Our neighbours Thailand and Indonesia have a much more transparent approach. The criteria for considerations for tax deductions are all spelled out in detail and companies know what they need to do to qualify.

No closed door negotiations are necessary. It’s all simply a matter of submitting the relevant documents to prove that the applicant companies meet the country’s criteria.

Technically, Malaysia no longer has a national car policy but in practice, Proton and Perodua continue to enjoy protection from foreign competition as ILP allows these quasi-national car companies to use their R&D expenditure here as a reason to pay little to no excise tax.

When asked by NST on the strategies and policies that need to be urgently addressed to solidify Malaysia's position as an attractive investment destination for automotive industry players worldwide and a hub for energy-efficient vehicles (EEV), Cheah said the government and agencies must formulate a cohesive national plan to boost Malaysia as an EEV hub in the region.

These include increasing the power supply capacity, changing the electricity generation ratio to increase renewable energy generation in order to align with EEVs.

"The government must also look into energy-efficient policies from upstream all the way to downstream and capacity building to move from an aging automotive components industry to high tech, sophisticated components manufacturers."

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"There is also a need for town planning roadmap to provide EV charging facilities across the country," she said.