Insights

Reanda Malaysia shares regular on tax and professional information to our most valued and privileged clients including GST/Tax Updates, Incentives updates, Business Brief and other updates on the latest changes affecting your business.

The Challenges and Opportunities of Digital Free Trade Zone, DFTZ

What is crucial now is a 21st century version of globalization-there’s an old saying “the world is changing, and changing fast! If you don’t embrace these rapid timescales, you will be buried by this new phenomenon. ”

The adapting of new thing is so fast that you can’t help but be swept away in a tidal wave of progress-whether you’re ready for it or not. As you may or may not realise, the invention of lighters has caused the distinction of matches. Calculator has faded away the abacus, and now, we prefer to send e-card instead of traditional season’s greeting card! Our conventional mobile SMS becomes stone-age communication tool with the existence of new-age messaging Apps such as WeChat, WhatsApp and etc.

We have entered a time of unprecedented changes in the world.  Malaysia from a staple foodstuff agriculture society, to Industrial Revolution shifted the center of economic activity from agriculture to industry and manufacturing. Today, in the era of scientific and technological revolution, the rapid growth of e-commerce is coupled with the increasing of mobile Apps usage. Technology has transformed human life and it has literally changed every aspect of the way any business operates. The business environment is becoming increasingly complex. 

It is a time when countries and international organisations are looking to the world stage and re-examining the role they want to play in its future. Faced with such a situation, we must ask ourselves a question: “If internationalism defined the 20th century, what will define the 21st century? Globalisation? Or the borderless e-commerce world?” E-commerce has emerged as a new force of global commerce. In a bid to help the e-commerce sector in Malaysia achieve its full potential, Malaysia has introduced the National e-Commerce Strategy Roadmap in 2016.  The aim is to double the nation’s e-commerce growth and increase the GDP contribution to RM 211 billion by year 2020.

Recently, Malaysia and the Alibaba Group launched the Digital Free Trade Zone (DFTZ), which is the first digital free trade zone outside of China.  The DFTZ will be a boost to Malaysia’s e-Commerce roadmap. With the launch of DFTZ, Malaysia will serve as a regional e-fulfilment centre and become the regional hub for SMEs, marketplaces and monobrands. Malaysia Airports Holdings Berhad (MAHB) will work with Cainiao Network, the logistics arm of e-commerce giant Alibaba Group to develop a regional e-commerce and logistics hub in the KLIA Aeropolis, the planned integrated airport city, as part of the DFTZ.

Prime Minister Dato’ Sri Najib Tun Razak announced that DFTZ will start its operations in early October, after his recent visit to Alibaba Group head office in Hangzhou during the Belt and Road Forum in May. A total of 1,500 SMEs, with suitable products and services, will be chosen to participate in this new platform. DFTZ is expected to offer various incentives to help SMEs expand their markets, mainly to Chinese market.

In Hangzhou, Najib also witness­ed the signing of a memorandum of understanding (MoU) among three parties to connect China (Hangzhou) Comprehensive E-Commerce Pilot Zone with Malaysia’s DFTZ, which will facilitate global trade for SMEs around the world. The MoU seeks to enable the building of infrastructure for seamless cross-border e-commerce trade between Malaysia and China, and we hope that the world at large is Malaysia SMEs’ e-market place ultimately!

A vibrant small and medium-sized enterprise (SMEs) sector is a vital ingredient for a healthy economy. SMEs are essential for maintaining an economic balance in a transition country. A greater number of SMEs with higher value-added activities, will empower and establish a formidable middle class of which may eliminate the middle income trap in Malaysia. Although SMEs make up over 90% of the total number of Malaysia’s businesses, their collectively contribution are well below its potential, i.e. only 36% of the GDP. While the government has set a target of 41% by 2020 in the 2012-2020 SME Blueprint.

From the Alibaba’s proposal, DFTZ will encourage, especially traditional brick-and-mortar businesses by SMEs, a seamless transition into the e-commerce sphere and it is also to enable young people and SMEs to have more opportunities to trade. Eventually, this digital economy would help to increase GDP contribution from SMEs in Malaysia to at least 60% - 80%.

Slower and decreased numbers of hiring have had a wider impact on the economy, affecting particularly the youth and new jobseekers. In 2015, the unemployment rate among youths was estimated to have reached 10.7%. This is equivalent to more than threefold of national unemployment rate of 3.1% according to Bank Negara in its 2016 annual report.

There are notable factors and issues that are worrying the ordinary Malaysian currently – higher unemployment rate among youths, rapid rise of property prices, slowdown in the rate of economic growth, high dependency on foreign workers, etc. The main factors why so many Malaysian youths and fresh graduates are now jobless could be the low level of R&D and innovation of business sectors and high reliance on low skill cheap labour and low value added activities.

But the reality is that trade and world economic integration and globalisation have suffered setbacks for one big reason: lack of shared economy or shared benefits. Hence, this proposed e-hub would empower and provide a platform for young entrepreneurs and SMEs with creative business ideas to venture overseas. Additionally, it will help the economic transformation of the country. DFTZ is expected to create 60,000 jobs by 2025, and Alibaba’s e-talent development unit will help local entrepreneurs and startups to train and develop e-talents. It will attract more highly skilled talents from within and outside the country to work in Malaysia.

At the local front, there is now a new impetus of growth. With the DFTZ, the digital economy will become the catalyst to spearhead the country’s economic development. However, DFTZ offers a unique trove of opportunities as well as challenges.

From tax point of view, the establishment of DFTZ, could potentially result in some loss of tax revenue in the immediate future.

In order to ensure a successful DFTZ implementation, a number of benefits, including speedier Customs clearance procedures, tax incentives and tax exemptions are expected to be granted. These facilities are aimed to reduce tax barriers to enable Malaysians to play an active role in e-commerce not only in the country but also at the international level.

Before the launch of the DFTZ, the Second Malaysian International Trade and Industry Minister, Datuk Seri Ong Ka Chuan mentioned that duty free concession and GST Relief will be given to DFTZ for the purchase of goods via internet, or e-commerce valued at RM1,200 and below. However, the current GST Act allows any person importing goods using air courier services with total value not exceeding RM500 per consignment and imported via specified international airports in Malaysia be granted GST relief. In addition, there may be the tax exemptions of up between 70%-100% of statutory income for a period of 5-10 years.

In Malaysia, taxable income comprises all earnings derived from Malaysia. On the other hand, most foreign-source incomes are exempted. Often enough, the imposition and collection of tax on online transactions can be subjective and difficult.  This can potentially result in a major gap in ta collections.

As we push forward with our mandate to make this DFTZ a success story in this region, it is imperative that this project is implemented with a critical eye with the aim to ensure sustainable income arising from this investment. Let’s imagine, should there be no provision for Alibaba Group to have an establishment in Malaysia, as the DFTZ expands, there could be a significant loss of tax revenue as Alibaba could have potentially operated outside of Malaysia.

One of the concerns of this free-trade zone is the issue of cheaper duty-free Chinese imports to DFTZ. There is risk of DFTZ becoming a “dumping ground” for China goods.  Consequently, our supply chain which mainly consists of local wholesalers, retailers, manufacturers, etc. especially the SMEs at large can be adversely affected.  Our SMEs with annual turnover of less than RM500,000, cannot register for GST and as a result any supply made by these SMEs will be much more costly as no input tax can be claimed on their acquisitions or purchases. This illustrates just some of the potential threats and challenges of local businesses with this emerging free-trade zone. The question then becomes- what do we do about it?

"The world is changing, our mindset and way of doing business has to be changed. We either grow, or be left behind in this ever-changing world!"

We’d encountered numerous challenges and issues at the implementation stage of GST. According to the Survey on the GST Implementation carried out by the Associated Chinese Chambers of Commerce and Industry of Malaysia, ACCCIM, 63% of the respondents indicated that they have problems to operate the GST software. One of the reasons that certain businesses are adversely affected is that they are not technology savvy and incapable to adapt to new trend. 

From a macro perspective, the emergence of DFTZ is a game changer and as we embark on this journey, this initiative will help the nation to succeed economically. While DFTZ is expected to create more jobs, on the contrary, it may also result in some job losses due to closure of conventional businesses. DFTZ, will create demand for new skill sets and potentially boost certain sectors, in particular, logistics services, production and processing services and professional services, i.e. legal, accountancy and real estate industry.

The underlying factors for national economic well-being are closely correlated with one another. If Malaysia can achieve breakthrough in this aspect, there will be more earning opportunities which enlarge the middle class and widen the national tax base. The rise of new industries could potentially attract more talents from outside Malaysia to work, stay and spend in Malaysia. These factors will stimulate the economic growth as well as raise property values and rents.  In turn, income tax and GST collection would increase.

Looking forward, the main concern of the world now is the Fourth Industrial Revolution, and how artificial intelligence (AI) will change the world. With the topic of “A New Era of Intelligence”, the 2017 China (Shenzhen) IT Leadership Summit, which was held on 1st and 2nd April brought together BAT, i.e. Founder and Chairman of Baidu, Mr. Li Yanhong, Chairman of Alibaba Group, Mr. Jack Ma and Chairman cum CEO of Tencent, Mr. Ma Huateng, to joint together to discuss this future development trend in the coming decades.
Back in Malaysia, I was recently invited as the moderator of “2050 National Transformation (TN50) Town Hall in Selangor” to gather feedback from youths regarding Malaysia’s aspiration to be a top 20 country in the world by 2050 and also the issues that young people believe will occur 30 years down the road. This TN50 Town Hall mainly covered the issues of digital and technology transformation to guide us to 2050. Through TN50, we aim to set a new “vision’ for the nation. 

Gartner’s predictions is that by 2025, which is halfway through our TN50, every industry will be transformed by digital business. Based on Jack Ma's concept, DFTZ is one of the bigger stepping stones towards this predictions. Furthermore, Alibaba Cloud’s South-East Asian data centre - a platform for big data under Jack Ma’s plan will be set up in Malaysia later this year to provide SMEs in Malay­sia and the region with powerful, scalable and cost-effective cloud capabilities to support their global expansion.

The planned data centre, set to become the first global public cloud platform in Malaysia, will add to Alibaba Cloud’s data centre in 14 lo­­cations worldwide, covering main­­land China, Hong Kong, Singa­pore, Japan, Australia, the Middle East, Europe and the United States. This data centre is aimed at helping Malaysian SMEs succeed in the digital age through technology such as big data and the Internet of Things.

DFTZ’s shared value can take many forms. We must strike the balance and prepare ourselves so that no one is left behind! The question we need to ask ourselves is are we ready to adapt to this new changing era?