WT/TPR/S/366/Rev.1

25 May 2018

(18-3141) Page: 1/137

Trade Policy Review Body

TRADE POLICY REVIEW

REPORT BY THE SECRETARIAT

MALAYSIA

Revision

This report, prepared for the seventh Trade Policy Review of Malaysia, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from Malaysia on its trade policies and practices.

Any technical questions arising from this report may be addressed to John Finn (tel: 022 739 5081); Usman Ali Khilji (tel: 022 739 6936); and Zheng Wang (tel: 022 739 5288).

Document WT/TPR/G/366 contains the policy statement submitted by Malaysia.

Note: This report was drafted in English. WT/TPR/S/366/Rev.1 • Malaysia

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CONTENTS SUMMARY ...... 8 Economic Environment ...... 8 Trade Policy Framework ...... 8 Trade Policy Developments ...... 9 Sectoral Policy Developments ...... 10 1 ECONOMIC ENVIRONMENT ...... 12 1.1 Main Features of the Economy ...... 12 1.2 Recent Economic Developments ...... 13 1.2.1 Balance of payments ...... 16 1.3 Developments in Trade and Investment ...... 18 1.3.1 Trends and patterns in merchandise and services trade ...... 18 1.3.1.1 Composition of merchandise trade ...... 19 1.3.1.2 Direction of merchandise trade ...... 20 1.3.2 Trends and patterns in FDI ...... 21 2 TRADE AND INVESTMENT REGIMES...... 23 2.1 General Framework ...... 23 2.2 Trade Policy Formulation and Objectives ...... 23 2.2.1 Structure of Trade Policy Formulation ...... 23 2.2.2 Trade policy objectives ...... 25 2.2.3 Trade laws and regulations ...... 26 2.3 Trade Agreements and Arrangements ...... 26 2.3.1 WTO ...... 26 2.3.2 Regional and preferential agreements ...... 29 2.3.2.1 ASEAN ...... 29 2.3.2.2 New RTAs ...... 30 2.3.3 PTAs ...... 33 2.3.4 Other agreements and arrangements ...... 33 2.4 Investment Regime ...... 33 2.4.1 Overview ...... 33 2.4.2 Foreign investment regime ...... 36 3 TRADE POLICIES AND PRACTICES BY MEASURE ...... 38 3.1 Measures Directly Affecting Imports ...... 38 3.1.1 Customs procedures, valuation, and requirements ...... 38 3.1.2 Rules of origin ...... 39 3.1.3 Tariffs ...... 40 3.1.3.1 Applied MFN tariff ...... 40 3.1.3.2 Duty concessions/exemptions ...... 43 3.1.3.3 Tariff preferences ...... 43 3.1.4 Other charges affecting imports ...... 44

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3.1.5 Import prohibitions, restrictions, and licensing ...... 44 3.1.5.1 Prohibitions (first schedule) ...... 45 3.1.5.2 Import licensing (second, third, and fourth schedules) ...... 45 3.1.5.2.1 Second schedule ...... 45 3.1.5.2.2 Third schedule ...... 46 3.1.5.2.3 Fourth schedule ...... 47 3.1.6 Anti-dumping, countervailing, and safeguard measures ...... 49 3.2 Measures Directly Affecting Exports ...... 51 3.2.1 Customs procedures and requirements ...... 51 3.2.2 Taxes, charges, and levies ...... 52 3.2.3 Export prohibitions, restrictions, and licensing ...... 52 3.2.3.1 Export prohibitions (first schedule) ...... 53 3.2.3.2 Export licensing (second and third schedules) ...... 53 3.2.4 Export support and promotion ...... 54 3.2.4.1 Export support ...... 54 3.2.4.2 Tariff and tax concessions ...... 55 3.2.4.3 Free trade zones and other measures ...... 55 3.2.4.4 Export promotion ...... 55 3.2.5 Export finance, insurance, and guarantees ...... 56 3.3 Measures Affecting Production and Trade ...... 57 3.3.1 Taxation and incentives ...... 57 3.3.1.1 Tax structure ...... 57 3.3.1.1.1 Indirect taxes ...... 57 3.3.1.1.2 Direct taxes ...... 58 3.3.1.2 Tax incentives ...... 59 3.3.1.2.1 Main incentives ...... 59 3.3.1.2.2 More favourable incentives ...... 60 3.3.1.2.3 Incentives on indirect taxes ...... 61 3.3.1.3 Other support measures, and SMEs ...... 61 3.3.2 Standards and other technical requirements ...... 62 3.3.3 Sanitary and phytosanitary requirements ...... 64 3.3.4 Competition policy and price controls ...... 65 3.3.4.1 Competition policy ...... 65 3.3.4.1.1 Legal framework ...... 65 3.3.4.1.2 Institutional framework and enforcement ...... 66 3.3.4.1.3 International cooperation ...... 67 3.3.4.2 Price and supply controls ...... 68 3.3.5 State trading, government-linked enterprises, and privatization ...... 68 3.3.5.1 State trading ...... 68 3.3.5.2 Government-linked companies (GLCs) ...... 68

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3.3.5.3 Privatization ...... 69 3.3.6 Government procurement ...... 70 3.3.6.1 Overview ...... 70 3.3.6.2 The legal framework and government procurement system ...... 70 3.3.6.3 Procurement methods and the use of e-procurement ...... 72 3.3.6.4 Integrity and bid challenges review mechanism ...... 73 3.3.7 Intellectual property rights ...... 74 3.3.7.1 Overview ...... 74 3.3.7.2 Enforcement ...... 77 4 TRADE POLICIES BY SECTOR ...... 79 4.1 Agriculture, Forestry, and Fisheries ...... 79 4.1.1 Agriculture ...... 79 4.1.1.1 Features ...... 79 4.1.1.2 Agriculture trade ...... 80 4.1.1.3 Domestic policies ...... 81 4.1.1.3.1 Selected sub-sectors ...... 83 4.1.1.4 Trade policy ...... 89 4.1.1.5 Support levels ...... 90 4.1.2 Fisheries ...... 92 4.1.2.1 Features ...... 92 4.1.2.2 Trade ...... 93 4.1.2.3 Policy ...... 94 4.2 Mining and Energy ...... 97 4.2.1 Mining and quarrying ...... 97 4.2.2 Energy ...... 99 4.2.2.1 Petroleum and gas ...... 100 4.2.2.2 Electricity ...... 105 4.3 Services ...... 106 4.3.1 General ...... 106 4.3.2 Financial services ...... 108 4.3.3 Telecommunications ...... 118 4.3.4 Transport ...... 122 4.3.4.1 Air transport ...... 122 4.3.4.2 Maritime transport ...... 124 4.3.5 Tourism ...... 129 5 APPENDIX TABLES ...... 132

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CHARTS

Chart 1.1 Product composition of merchandise trade, 2013 and 2016 ...... 19 Chart 1.2 Direction of merchandise trade, 2013 and 2016 ...... 21 Chart 1.3 Foreign direct investment, 2000-16 ...... 22 Chart 3.1 Average applied MFN tariff rates, by HS section, 2013 and 2017 ...... 41 Chart 3.2 Distribution of MNF tariff rates, 2013 and 2017 ...... 42 Chart 3.3 Tariff distribution by type of duty, 2017 ...... 42 Chart 4.1 Contribution to GDP from agriculture, rubber, forestry, and fishing, 2010-16 ...... 79 Chart 4.2 Domestic support in Malaysia, 2004-16 ...... 91 Chart 4.3 Exports and imports of petroleum and petroleum productions, and natural gas, 2013-16 ...... 102 Chart 4.4 PETRONAS' contribution to government and state revenues, 2012-16 ...... 103 Chart 4.5 KLCI and market capitalization, 2013-17 ...... 116

TABLES

Table 1.1 Selected macroeconomic indicators, 2013-16 ...... 12 Table 1.2 Basic economic and social indicators, 2013-16 ...... 13 Table 1.3 Balance of payments, 2013-16 ...... 17 Table 1.4 Trade in services, 2013-16 ...... 18 Table 2.1 Sectoral plans, and trade and investment tools ...... 25 Table 2.2 WTO notifications, 1 November 2013 to 10 November 2017 ...... 27 Table 2.3 Main features of new RTAs, 2014-17 ...... 31 Table 2.4 ASEAN – India: Malaysia's tariff elimination and reduction commitments ...... 32 Table 3.1 Import time and cost, 2017 ...... 38 Table 3.2 Malaysia's tariff structure, 2013 and 2017 ...... 40 Table 3.3 Summary analysis of Malaysia's preferential tariffs, 2017 ...... 43 Table 3.4 Import prohibition and licensing schedules ...... 44 Table 3.5 Import licensing ...... 45 Table 3.6 Imports subject to TBT requirements ...... 47 Table 3.7 Anti-dumping investigations and measures imposed, 2014-17 ...... 49 Table 3.8 Definitive anti-dumping measures in force, by country and product, 2014- 30 June 17 ...... 49 Table 3.9 Initiation of safeguard investigations, provisional measures, final measures, and termination 2014-17 ...... 50 Table 3.10 Export time and cost, 2017 ...... 52 Table 3.11 Malaysia export duties, 2017 ...... 52 Table 3.12 Export prohibition and licensing schedules ...... 53 Table 3.13 Export licensing ...... 53 Table 3.14 Structure of direct and indirect tax revenue, 2013-16 ...... 57 Table 3.15 Tax incentives...... 59

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Table 3.16 More favourable tax incentives - manufacturing ...... 60 Table 3.17 Accreditation ...... 64 Table 3.18 Number of complaints, investigations and findings, 2014-16 ...... 67 Table 3.19 Government procurement value by public sector, 2014-16 ...... 70 Table 3.20 WIPO-administered treaties ...... 75 Table 3.21 IPR data ...... 77 Table 4.1 Exports and imports of agricultural products and rubber, 2013-16 ...... 80 Table 4.2 Agrobank financing for agriculture, 2013-16 ...... 82 Table 4.3 Self-sufficiency forecasts in NAP 2010-2020 and actual levels ...... 82 Table 4.4 Oil palm, selected indicators, 2010-16 ...... 83 Table 4.5 Export duty rate (after partial duty exemption) ...... 84 Table 4.6 Rubber, selected indicators, 2010-16 ...... 85 Table 4.7 Rubber production incentive, 2015, 2016 and 2017 ...... 86 Table 4.8 Livestock indicators, 2008-15 ...... 87 Table 4.9 Rice, selected indicators, 2008-15 ...... 88 Table 4.10 Incentives for rice production 2009, 2014, and 2016 ...... 89 Table 4.11 Budget outlay for agriculture, 2017 ...... 90 Table 4.12 Financing scheme funds operated by Agrobank, 2013-16 ...... 91 Table 4.13 Selected indicators, 2010-16 ...... 92 Table 4.14 Marine and inland capture fishing and aquaculture, 2007-15 ...... 92 Table 4.15 Malaysia's fishing fleet, 2015 ...... 93 Table 4.16 Exports and imports of fish and fish products, 2013-16 ...... 93 Table 4.17 Fishing zones in Malaysia ...... 95 Table 4.18 Government spending on fisheries, 2011-16 ...... 96 Table 4.19 Mining and quarrying production, 2010-16 ...... 97 Table 4.20 Imports and exports of non-petroleum minerals, 2013-16 ...... 97 Table 4.21 Mineral licences issued, 2013-16 ...... 99 Table 4.22 Primary energy supply and consumption, 2010-16 ...... 99 Table 4.23 Oil and gas production and use, 2010-16 ...... 101 Table 4.24 Electricity generation mix, 2010-16 ...... 105 Table 4.25 Regulated prices for natural gas in Malaysia, January 2014-June 2017 ...... 106 Table 4.26 Services contribution to GDP, 2010-16 ...... 107 Table 4.27 Financial sector indicators, 2013-16 ...... 108 Table 4.28 Islamic banking system, 2013-16 ...... 111 Table 4.29 Takaful sector, 2013-16 ...... 114 Table 4.30 Mobile service providers, 2016 ...... 118 Table 4.31 Selected telecommunication indicators, 2012-16 ...... 119 Table 4.32 Telecommunications licensing regime, 2017 ...... 120 Table 4.33 Telecommunications licences issued, 2012-16...... 121 Table 4.34 Functions of the Department of Civil Aviation and the Malaysian Aviation Commission ...... 122

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Table 4.35 Air transport, selected indicators, 2011-16 ...... 123 Table 4.36 Total vessels registered in the Malaysian Ship Registry by type, 2011-16 ...... 125 Table 4.37 Total vessels registered in the Malaysian International Ship Registry by type, 2011-16 ...... 126 Table 4.38 Main ports and activities, 2011-16 ...... 128 Table 4.39 Tourism indicators, 2012 to 2016 ...... 129 Table 4.40 Foreign equity limits for tourism ...... 130 Table 4.41 Fiscal incentives for hotels and tourism projects, 2017 ...... 130

BOXES

Box 4.1 Islamic banking and finance ...... 110

APPENDIX TABLES

Table A1. 1 Merchandise exports by group of products, 2013-16 ...... 132 Table A1. 2 Merchandise imports by group of products, 2013-16 ...... 133 Table A1. 3 Merchandise exports by destination, 2013-16 ...... 134 Table A1. 4 Merchandise imports by origin, 2013-16 ...... 135

Table A3. 1 Summary analysis of Malaysia's MFN tariff, 2013 and 2017 ...... 136

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SUMMARY

Economic Environment

1. Malaysia is a middle-income country with a diverse economy. Trade is very important, with exports and imports of goods and services equivalent to about 130% of GDP. For the past four years, real GDP growth has averaged nearly 5% despite a number of external and domestic shocks, including global commodity price and financial market volatility, weak external demand, and domestic political controversy. Growth has been based on domestic demand and helped by the diversified production and export base, a flexible exchange rate, responsive macroeconomic policies, and strong financial markets.

2. From 2013 to 2016, there were some changes to the structure of trade in goods. In US dollar terms, exports and imports declined, mainly due to lower commodity prices. On the export side, the value of exports of fuels and palm oil declined while exports of office machines and telecommunications equipment increased. Other Asian countries, and other ASEAN members in particular, are the main source of imports and destination for exports.

3. Long-term economic policy is set out in Vision 2020 which includes the objective of achieving high-income country status by 2020, by, inter alia, sharply accelerating the growth of labour productivity. In addition, the Eleventh Malaysia Plan and sectoral plans, such as the National Agrofood Policy 2011-20 and the National Commodity Policy 2011-20, emphasize the importance of productivity, innovation, and trade in achieving economic growth.

Trade Policy Framework

4. There have been no major changes to the institutions responsible for trade policy formulation since 2014. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations.

5. As an active Member of the WTO, Malaysia has submitted notifications to the WTO in a number of areas. However, at end-October 2017, several notifications were outstanding, including on: agriculture (domestic support); quantitative restrictions; and customs valuation. During the review period, Malaysia was not involved in any new WTO dispute settlement cases either as complainant or respondent. It participated as a third party in four cases.

6. As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral RTAs with: Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey. The Malaysia-Turkey FTA (MTFTA) entered into force in 2015. On 31 December 2015, the first phase of the ASEAN Economic Community (AEC) Blueprint 2015 was completed and ASEAN leaders then adopted the AEC Blueprint 2025.

7. Restrictions on foreign investment remain in fisheries, energy, telecommunications, finance, and transport services, and foreign participation in public-private-partnership projects is limited to a ceiling of 25% of share capital. Some policies supporting the ethnic Malay community (bumiputera), including minimum equity participation in some sectors, may affect FDI. However, the Government has continued to relax foreign investment restrictions. Currently there is no foreign equity restriction in the capital market except for a 70% cap on investment banks.

8. The Government has been making efforts to modernize Malaysia's business licensing system, by reviewing licences and making them accessible online. The Malaysia Productivity Corporation (MPC) conducted sectoral regulatory reviews to reduce unnecessary regulatory burdens on business.

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Trade Policy Developments

9. There has been no major change to customs procedures during the review period. Malaysia ratified the WTO Trade Facilitation Agreement (TFA) in May 2015, and notified that it designated all provisions under Category A with some exceptions. Malaysia's ease of trading across borders remains highly ranked in international comparisons.

10. The tariff is the main trade policy instrument, despite its low share in total tax revenue (1.7%). Due to changes in nomenclature (HS12 to HS17) and for other technical reasons, the average applied MFN tariff increased from 5.6% in 2013 to 7.5% in 2017, although tariffs increased on only a single tariff line (at 10-digit level). Almost all rates (99% of tariff lines) are ad valorem, while duty-free lines accounted for 56.2% of all tariff lines. The number of different tariff rates increased from 19 in 2013 to 25 in 2017. Ad valorem tariff rates range from zero to 60% for industrial products and zero to 90% for agricultural products. Among different product groups, average tariffs are highest for transport equipment (the simple average tariff rate was 21.5% in 2017). These averages do not include the 1% of lines subject to non-ad valorem tariffs which are mostly applied to tobacco and alcohol products, with ad valorem equivalents that range from 0.2% to 465% for certain manufactured tobacco. Simple average rates under all preferential arrangements are lower than the simple average MFN rate, although the averages among arrangements are different, ranging from 0.1% to 7.4%.

11. Malaysia applies nine tariff quotas affecting 27 tariff lines at the HS 10-digit level. According to the authorities, this is to meet the requests of domestic small producers. Import duty exemptions are applied to local and foreign manufacturing companies on raw materials and components used in the manufacture of goods for export, and for machinery and equipment not available in Malaysia but used directly in the manufacturing process. In addition, imports of 16 product categories required import licences.

12. During the review period, the number of antidumping investigation initiations reached its peak in 2015, and the number of definitive anti-dumping measures reached its peak in 2016. Imports from nine Members were affected, and antidumping duties were applied mostly on biaxially oriented polypropylene film, and steel wire rod. Between 2014 and 2017, four safeguard investigations were initiated, all concerning steel products.

13. Export duties range from 5%-30% and apply to 217 tariff lines (mainly crude oil, palm oil, and wood) in 2017. The number of tariff lines with export duties declined from 482 in 2014, partly reflecting the merging of tariff lines during the transposition exercise.

14. A significant change to Malaysia's tax structure was the replacement of the sales tax with a 6% goods and services tax (GST) (from 1 April 2015), which is essentially a value added tax-type system. In 2016, revenue from GST accounted for 24% of total tax revenue. The share of petroleum income tax to total tax revenue declined, from 19% in 2013 to 5% in 2016, reflecting falling oil prices.

15. Malaysian incorporated companies, local or foreign, are eligible for incentives. Tax incentives continued to be implemented mainly through the pioneer status and the investment tax allowance schemes. Direct tax incentives grant partial or total relief from income tax for a specified period, and incentives on indirect taxes are in the form of exemptions from import tariffs and excise duties. In addition, Malaysia provides support in the form of a statutory income tax exemption to manufacturers based on the value of increased exports. Exemption of statutory income tax equivalent to 50% of the value of increased export is available to companies in selected services sectors.

16. Regarding standards, Standards Malaysia, Malaysia's national standardization and accreditation body, is focusing on establishing standards that have a high impact on the public, including industries, rather than on the number of standards. As a result, the number of Malaysian standards dropped from 6,381 in 2012 to 5,284 in 2017. Malaysia continues to align its standards with international ones: in 2017, 60% of Malaysian standards were aligned with international standards, up slightly from 59.8% in 2014, and 54% were identical, down from 57.5% in 2014. In 2017, 510 or 9.7% (6.5% at end-2012) of all Malaysian standards were compulsory.

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17. State involvement in the economy is considerable, with government-linked investment companies involved in petroleum, electricity, telecommunications, postal services, air transport, public transport, and financial services. Malaysia notified the WTO that Padiberas Nasional Berhad (BERNAS) acts as a state trading enterprise for rice importation. General purpose flour, cooking oil, and liquefied petroleum gas (LPG) are subject to price controls and subsidies are provided to support ceiling prices.

18. There have been no major changes to the legal and institutional framework governing competition policy since the previous review. The government procurement regime remains a decentralized system, and continues to be used to favour locally owned businesses. Foreign suppliers are not allowed to participate in domestic tenders, while international tenders are invited only if there are no domestically produced supplies or services available. Malaysia is an observer to the plurilateral WTO Agreement on Government Procurement.

19. There has been no significant change to the IPR regime in Malaysia during the review period. Enforcement, despite having improved, remains an area of concern. Malaysia ratified the Protocol Amending the TRIPS Agreement on Public Health in December 2015.

Sectoral Policy Developments

20. Malaysia has a dichotomous agricultural structure with large plantations dominating palm oil production and small producers dominant in other sectors. Several large corporations with international activities are responsible for a large proportion of production and processing of palm oil. While the area under rubber trees has declined relative to the mid-2000s, rubber remains important in terms of agricultural production and as an input to industry, with both domestic production and imports of natural rubber being used. Although rice production represents a relatively small part of the total value of agricultural production, the Government has continued to prioritize the sector, which is dominated by small-scale producers, through self-sufficiency targets (which also apply to fruits, vegetables, and livestock), minimum prices, input subsidies, and direct payments to producers. In general, small-scale producers tend to be supported by the Government, while large plantations tend to be taxed.

21. Petroleum and gas remain important to the economy, contributing about 10.5% to GDP and about 14% to government revenues in 2016. The sector is dominated by the state-owned company PETRONAS, which has exclusive ownership of all oil and gas deposits and exclusive rights for exploration and production in Malaysia, both on land and offshore, and responsibility for planning and investment. It is also responsible for regulation of upstream activities. Exploration, development and exploitation of petroleum and gas takes place through production sharing or risk service contracts between oil companies and a subsidiary of PETRONAS. Another subsidiary of PETRONAS, MISC Bhd, is a major energy shipping company with a large fleet of tankers and LNG vessels. In addition to producing crude oil, Malaysia also imports crude for refining. Although the value of both exports and imports of petroleum products and natural gas has declined over the past few years, the volumes traded have increased significantly and investment continues, bringing Malaysia towards its objective of being a principal hub for oil and gas in the Asia-Pacific area. At end-2014, subsidies for petrol and diesel were removed although regulated prices continue to be applied. Subsidies remain for LPG and regulated prices of gas to the power sector are being increased.

22. In line with the Eleventh Malaysia Plan, 18 services subsectors were liberalized in 2012 and up to 100% foreign equity participation is now allowed for wholesale and retail trade, healthcare, professional services, environmental services, courier, and education subsectors. Since then, progress has slowed, although foreign equity restrictions in unit trust management companies and in credit rating agencies were removed in 2014 and 2017, respectively. However restrictions remain in several sectors including telecommunications, transport, and investment banks.

23. Under the Malaysian Aviation Commission Act of 2015, the Malaysian Aviation Commission was established, taking over some of the responsibilities of the Ministry of Transport, including economic regulation, allocation and management of air traffic rights, monitoring of slot allocations, and licensing of air services, ground handling, and aerodrome operators. All except two of Malaysia's airports are owned by the State, and the government-linked company, Malaysia Airports Bhd, manages five of the six international airports.

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24. Malaysia has a well-integrated and mature financial sector, which has undergone consolidation over a number of years. The financial sector, which is comprised of banks, insurance, and capital markets, contributed 6.4% to GDP in 2016 with increasing levels of cross border activity. Furthermore, Malaysia is at the forefront of the global Islamic finance industry and has a highly developed Islamic finance sector. Islamic financial institutions operate in parallel with conventional financial institutions, both offering a full range of financial products and services and often using the same infrastructure. Islamic banking has grown rapidly over the past ten years with its market share increasing from about 12% in 2007 to 28% at the end of 2016. In addition, Malaysia issued more than 54% of the total global sukuk (Islamic bonds).

25. Malaysia's diverse economic base and general openness to trade helped the economy to continue to grow through a difficult period caused by low commodity prices which affected several sectors, particularly petroleum and gas, and palm oil. Growth was also helped by pragmatic government policies such as the floating exchange rate, which allowed the Malaysian ringgit to fall against other currencies while government revenues were supported by the introduction of the goods and services tax in 2015, despite the decline in oil-based revenues. On the other hand, the State remains very involved in the economy through government-linked enterprises and their subsidiaries, and investment restrictions remain in some sectors. However, trade and investment policies are becoming more liberal as investment restrictions are being relaxed, and Malaysia has expanded its network of trade agreements – both through ASEAN and on its own behalf. Given Malaysia's abundance of natural resources, strategic location, and pragmatic policies, growth should continue towards the goal of becoming a high-income country by 2020.

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1 ECONOMIC ENVIRONMENT

1.1 Main Features of the Economy

1.1. Malaysia is an open and diverse middle-income economy. Services account for over 50% of GDP, followed by manufacturing, agriculture, mining and quarrying (including crude oil and natural gas), and construction. The economy is well integrated into regional and global value chains; as such, trade is vital to growth and economic development. Imports and exports of goods and services account for around 130% of GDP and the country has been running current account surpluses for a number of years. Government debt remains manageable at under 53% of GDP in 2016, while both unemployment and inflation remain low (Table 1.1).

Table 1.1 Selected macroeconomic indicators, 2013-16

2013 2014 2015 2016 National accounts (% age change, unless otherwise indicated) Real GDP (at 2010 prices) 4.7 6.0 5.0 4.2 Consumption 6.9 6.4 5.7 4.9 Private consumption 7.2 7.0 6.0 6.0 Government consumption 5.8 4.4 4.4 0.9 Gross fixed capital formation 8.1 4.8 3.6 2.7 Exports of goods and non-factor services 0.3 5.0 0.3 1.1 Imports of goods and non-factor services 1.7 4.0 0.8 1.1 XGS/GDP (%) (at current market price) 75.6 73.8 70.6 67.7 MGS/GDP (%) (at current market price) 67.1 64.5 62.9 61.0 Unemployment rate (%) 3.1 2.9 3.1 3.4 Productivity (%age change) Labour productivity -0.9 3.7 3.4 3.5 Prices and interest rates Inflation (CPI, %age change) 2.1 3.2 2.1 2.1 Fixed 3-months deposit rate (%) 2.97 3.05 3.13 3.03 Savings deposit rate (%) 1.01 1.03 1.06 1.00 Exchange rate RM/US$ (annual average) 3.15 3.27 3.91 4.15 Real effective exchange rate (% age change) 0.5 -0.7 -8.0 -4.3 Nominal effective exchange rate (% age change) 0.4 -1.8 -9.1 -5.3 Overall government balance (% of GDP) -3.9 -3.5 -3.3 -3.2 Current government balance 0.2 0.1 0.2 0.2 Current revenue 20.9 19.9 18.9 17.3 Tax revenue 15.3 14.8 14.3 13.8 Current expenditure 20.7 19.8 18.7 17.1 Development expenditure, net 4.1 3.6 3.5 3.4 Government total debt (end-period) 53.0 52.7 54.5 52.7 Domestic 37.4 37.5 37.4 35.4 External 15.6 15.2 17.1 17.3 Saving and investment (% of GDP) Gross national savings 29.4 29.4 28.1 28.1 Gross domestic investment (gross fixed capital 25.9 25.0 25.1 26.0 formation) Savings-investment gap 3.5 4.4 3.0 2.0 External sector (% of GDP, unless otherwise indicated) Current account balance 3.5 4.4 3.0 2.4 Net merchandise trade 9.5 10.2 9.4 8.2 Merchandise exports 62.6 61.4 58.8 55.8 Merchandise imports 53.1 51.1 49.4 47.5 Services balance -0.9 -1.0 -1.8 -1.6 Capital account 0.0 0.0 -0.1 0.0

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2013 2014 2015 2016 Financial account -2.0 -7.2 -4.8 -0.1 Direct investment -0.6 -1.6 -0.2 1.1 Balance-of-payments 1.4 -3.3 0.3 1.2 Merchandise exports (%age change in RM) -1.1 6.5 0.4 0.7 Merchandise imports (%age change in RM) 1.7 4.5 1.2 2.2 Service exports (%age change in RM) 5.9 3.7 -1.1 7.5 Service imports (%age change in RM) 6.3 4.3 5.7 5.5 Gross official reserves (US$ billion, end-period) 134.9 115.9 95.3 94.5 in months of retained imports 9.5 8.3 8.4 8.7 Total external debt (US$ billion; end-period) 221.1 228.5 214.3 220.8 of which short term 107.5 111.2 90.1 90.9

Source: Bank Negara Malaysia online information; data provided by the authorities; and IMF, International Financial Statistics.

1.2 Recent Economic Developments

1.2. During the period under review, real GDP growth averaged nearly 5% annually, and is expected to be in excess of 5% in 2017.1 However, after peaking at 6% in 2014, the rate of growth declined (Table 1.1). Despite a number of external and domestic shocks since late 2014, including global commodity price and financial market volatility, weak external demand, spillovers from China, and domestic political controversy, the economy has remained resilient. It was able to do so because of the diversified production and export base, strong balance sheet positions, a flexible exchange rate, responsive macroeconomic policies, and deep financial markets.

1.3. During the period under review, growth was driven by domestic demand, which was reflected in the construction and services sectors. Within the services sector, the growth of wholesale and retail trade, restaurants and hotels, transport, storage and communications, and real estate and business activities was particularly pronounced (Table 1.2). In contrast, the agricultural sector contracted; while mining and quarrying (which includes crude oil and natural gas) grew, albeit at a declining rate. These changes are due to a significant fall in global commodity prices as well as the adverse impact of the weather on agricultural production.

Table 1.2 Basic economic and social indicators, 2013-16

2013 2014 2015 2016 Real GDP at market price (US$ million, 2010 prices) 303,113 309,347 272,271 267,152 Real GDP at market price (RM million, 2010 prices) 955,080 1,012,449 1,063,355 1,108,227 Current GDP at market price (US$ million) 323,276 338,066 296,434 296,535 Current GDP at market price (RM million) 1,018,614 1,106,443 1,157,723 1,230,120 GDP per capita at current market price (US$) 10,882 11,184 9,649 9,508 GDP by economic activity at constant 2010 prices (% age change) Agriculture 2.0 2.0 1.3 -5.1 Mining and quarrying 1.2 3.3 5.3 2.2 Manufacturing 3.4 6.1 4.9 4.4 Construction 10.6 11.7 8.2 7.4 Electricity, gas and water 4.4 3.8 3.6 5.4 Services 6.0 6.8 5.2 5.6 Wholesale and retail trade; motor vehicles 6.3 8.9 6.9 6.2 Restaurants and hotels 5.9 6.5 6.4 7.1 Transport, storage, and communication 7.3 8.1 7.9 7.1 Finance and insurance 2.0 2.3 -0.7 2.5 Real estate and business activities 8.0 8.0 6.5 6.9 Government services 7.4 6.3 4.0 4.9 Other services 5.6 4.8 4.7 4.8 Import duties 5.7 10.0 18.6 8.8

1 Information provided by the authorities.

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2013 2014 2015 2016 GDP by economic activity at current prices (%) Agriculture 9.1 8.9 8.5 8.7 Mining and quarrying 10.2 9.9 9.0 8.5 Manufacturing 22.8 22.9 22.7 22.3 Construction 4.2 4.4 4.7 4.9 Electricity, gas and water 2.7 2.8 2.7 2.7 Services 49.9 50.1 51.2 51.7 Wholesale and retail trade; motor vehicles 14.4 15.0 15.7 15.9 Restaurants and hotels 2.8 2.8 3.0 3.1 Transport, storage, and communication 8.4 8.5 8.8 9.0 Finance and insurance 7.1 6.8 6.6 6.4 Real estate and business activities 4.1 4.1 4.3 4.4 Government services 8.8 8.6 8.4 8.4 Other services 4.3 4.2 4.3 4.3 Import duties 1.1 1.1 1.3 1.3 Share of sector in total employment Agriculture, forestry and fishing 13.0 12.2 12.5 11.4 Mining and quarrying 0.6 0.6 0.7 0.7 Manufacturing 17.1 17.1 16.5 16.9 Electricity, gas and water 1.1 1.1 1.0 1.1 Construction 9.5 9.2 9.3 8.8 Services 58.7 59.7 60.0 61.1 Wholesale and retail trade, repair of motor vehicles 16.7 16.8 16.8 17.1 and motor cycles Accommodation and food service activities 7.7 8.3 8.2 8.9 Transport and storage 4.6 4.3 4.4 4.5 Information and communication 1.4 1.5 1.5 1.5 Financial and insurance activities 2.4 2.4 2.5 2.4 Real estate 0.5 0.6 0.5 0.6 Professional, scientific and technical activities 2.3 2.4 2.6 2.6 Administrative and support service activities 4.2 4.7 4.5 4.6 Public administration and defence 5.6 5.4 5.3 5.3 Education 6.0 6.3 6.4 6.6 Human health and social work activities 3.6 3.8 4.1 4.0 Other services 3.6 3.3 3.2 3.1

Source: Bank Negara Malaysia online information.

1.4. According to the IMF, risks to the growth outlook stem from both external and domestic factors.2 External risks include structurally weak growth in advanced and emerging markets resulting in sustained lower commodity prices. Heightened global financial stress and associated capital flows could also have an adverse impact on domestic markets.

1.5. On the domestic front, risks arise from public sector and household debt levels as well as certain vulnerabilities in the corporate sector. Furthermore, according to the IMF, relatively high government debt and contingent liabilities limit policy space to respond to shocks. However, the authorities feel that the concern regarding high government debt and contingent liabilities is no longer valid as Malaysia's debt level is significantly below the self-imposed limit of 55% of GDP.

1.6. The authorities are cognizant of the above risks and realize that the external economic and financial environment will remain fraught with uncertainty and that they need to remain vigilant. However, they feel that Malaysia's diverse economic structure, strong fundamentals and buffers built up over a number of years will hold it in good stead.

1.7. The authorities reiterated their commitment to fiscal sustainability and the continuous improvement of fiscal policy through diversifying revenue, reviewing expenditure, improving the

2 IMF Country Report No. 17/101.

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- 15 - tax system, and monitoring and mitigating fiscal risks. Furthermore, according to the authorities, contingent liabilities, although considerable, do not pose a risk, as guarantees have been strategically provided to non-financial entities with healthy balance sheets. The authorities also emphasized that the flexible exchange rate would continue to adjust and absorb shocks and the current reserve level was adequate to smooth volatility. Banks continue to be well capitalized and have ample liquidity; they would be in a good position to deal with increased vulnerabilities relating to household and corporate debt.

Monetary policy and exchange rate policy

1.8. The objective of monetary policy is "to maintain price stability while giving due regard to the developments in the economy" from the Bank Negara Malaysia, which in recent years has implied long-term inflation of about 3% with positive low real interest rates conducive to sustainable growth of the economy.

1.9. With a view to fostering growth against a relatively benign inflationary environment, the central bank, Bank Negara Malaysia (BNM), has pursued an accommodative monetary policy. BNM's main policy instrument is the overnight policy rate (OPR).

1.10. After maintaining the OPR at 3.25% since July 2014, the BNM reduced it by 25 basis points to 3% in July 2016 and maintained it at that level following a review in September 2017, thereby reaffirming that, with the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to support growth in a stable price environment.

1.11. The IMF classifies Malaysia's exchange rate regime as "other managed". However, the authorities consider that, in practice, it is closer to "floating". As such, Malaysia has relied on the foreign exchange reserves and the flexibility of the exchange rate to cushion the impact on the economy of volatile capital flows and terms of trade shocks (fall in global commodity prices).

1.12. The ringgit has depreciated by over 30% against the US dollar compared to its value in 2013. This was due mainly to large portfolio outflows in 2014, with the BNM allowing the exchange rate to adjust to these outflows. Additionally, the BNM also intervened in the foreign exchange market by using reserves to cushion the impact of the outflows and maintain orderly market conditions.

1.13. Inflation, as measured by the consumer price index, peaked at 3.2% in 2014; however, it has since moderated to 2.1%, which is at the lower end of the BNM's forecast range of 2-3%. Inflation declined mainly due to lower domestic fuel prices. Additionally, moderate domestic demand and a subdued external price environment also helped dampen domestic inflationary pressures.

Fiscal policy

1.14. During the review period, Malaysia continued to run a fiscal deficit, albeit at a declining rate, reaching 3.1% of GDP in 2016. The fiscal deficit being due entirely to development expenditure, as the balance on current revenue and expenditure remained positive.

1.15. Current revenue declined from nearly 21% of GDP in 2013, to around 17% of GDP in 2016. The decline came about as a result of a fall in oil and gas revenues, which was due to a decline in oil and gas prices. It is estimated that the fall in oil- and gas-related revenue was 3.7% of GDP over 2014-17.3 However, the impact of lower oil- and gas-related revenue was mitigated to a large extent by the introduction of the goods and services tax (GST) in 2015, which increased revenue by around 1.5% of GDP between 2014 and 2017.

1.16. Current expenditure also declined from 20.7% of GDP to 17.1% of GDP over the review period. The reduction in expenditure came about due to the rationalization of untargeted fuel and other subsidies, which started in 2013. Additionally, spending optimization measures across ministries and agencies also helped reduce expenditure and sustain revenues, as did a

3 IMF Country Report No. 17/101.

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- 16 - reprioritization of programmes and projects with high multiplier effect coupled with lagged adjustment in the PETRONAS dividend.4

1.17. As a result, total government debt declined to 52.7% of GDP in 2016, which is below the government's self-imposed limit of 55%.

Structural reforms

1.18. The authorities envisage sustaining growth and achieving high-income status by 2020.5 In this regard, the 11th Malaysia Plan lays out a comprehensive reform agenda to transform Malaysia into a productivity-driven and knowledge-based economy.

1.19. The plan focuses on, inter alia: the labour market, education, skills productivity and innovation. Within the labour market, policies are geared towards increasing the female participation rate, through providing for more flexible work arrangements and creating more opportunities for women in all fields of education and jobs. In this regard, measures taken by the authorities include the launching of a portal (Flexworklife.my) in June 2013, which aims to build a network of employers and talent to optimize work-life integration. Furthermore, with a view to encouraging women to return to the workforce, the authorities launched a career comeback programme. It provides financial incentives for employers to implement programmes to recruit and retain women who have been on career breaks.

1.20. Under the plan, Malaysia has set a productivity growth target of 3.7% annually between 2016 and 2020. In this regard, efforts to boost productivity will focus on accelerating innovation and entrepreneurship and leveraging advancements in technology. The authorities stated that the measures envisaged include: restructuring the workforce by raising the number of high-skilled workers, tightening entry of low-skilled workers, and meeting demands of the future economy; strengthening the readiness of enterprises to effectively adopt and exploit technology and digital advantage, such as the Fourth Industry Revolution; addressing regulatory constraints and developing a robust accountability system to ensure effective implementation of regulatory reviews; and driving accountability in productivity performance through an effective governance mechanism.

1.21. Important gains have been made in access to, and gender equality in education. However, according to the authorities, the standard of education needs to be improved. In this regard, the Malaysian Education Blueprint 2013-25 is aimed at improving the quality of school education through curriculum transformation, improving the quality of teachers and increasing English proficiency. Additionally, efforts are also underway to make technical and vocational training more appealing. With a view to increasing productivity and efficiency, skill mismatches and the up-skilling of female and elderly workers are also being addressed. As such, the Ministry of Education, has upgraded 80 vocational schools to vocational colleges since 2012 offering vocational courses and awarding students with the Malaysian Vocational Diploma (DVM). To date, over 90% of the graduates have gained employment in their related field.

1.22. According to the IMF, to move to a knowledge-based economy, policies should continue to encourage R&D, including through streamlining institutional arrangements. The authorities are in the process of finalizing a strategy to boost productivity and aim to double the share of R&D spending in GDP by 2020 from its 2012/13 level.

1.2.1 Balance of payments

1.23. During the period under review, Malaysia's current account surplus declined from 3.5% of GDP in 2013 to 2.4% of GDP in 2016, reflecting a narrowing of the difference between gross national savings and gross national investment (Table 1.3).

4 IMF Country Report No. 16/110. 5 BNM Annual Report 2016.

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Table 1.3 Balance of payments, 2013-16 (RM million) 2013 2014 2015 2016 Current account balance 35,485.3 48,553.6 35,154.8 29,023.4 Goods and services balance 86,959.0 102,620.4 88,592.0 82,292.1 Goods balance 96,551.5 113,326.7 109,223.6 101,382.4 Exports 637,682.5 678,865.1 681,274.8 686,075.3 Imports 541,131.0 565,538.4 572,051.2 584,692.8 Services balance -9,592.5 -10,706.2 -20,631.6 -19,090.4 Exports 132,685.0 137,618.3 136,095.5 146,313.1 Transportation 14,701.2 15,616.6 16,364.6 16,792.2 Travel 67,732.9 73,950.6 68,674.9 74,975.0 Imports 142,277.5 148,324.5 156,727.0 165,403.5 Transportation 38,610.2 41,666.1 40,929.8 40,305.2 Travel 38,566.1 40,717.6 41,733.8 43,448.7 Income balance -33,975.2 -36,653.8 -32,111.9 -34,604.1 Compensation of employees -4,006.7 -4,901.5 -5,595.4 -5,636.3 Investment income -29,968.5 -31,722.3 -26,516.5 -29,003.9 Current transfers (net) -17,498.5 -17,443.0 -21,325.3 -18,628.5 Capital account -15.0 344.1 -1,135.6 107.6 Financial account -20,216.2 -79,954.5 -55,350.5 -1,126.2 Direct investment -6,275.7 -17,973.6 -1,810.2 14,130.5 Malaysia's direct investment abroad -44,450.4 -53,573.7 -41,186.8 -33,051.9 Direct investment in Malaysia 38,174.7 35,600.0 39,376.6 47,182.4 Portfolio investment -3,012.0 -39,353.9 -26,122.1 -15,418.8 Assets -32,088.3 -28,112.0 -9,098.1 -15,010.8 Liabilities 29,076.3 -11,241.9 -17,024.1 -408.0 Financial derivatives -253.4 -975.0 -663.1 -802.1 Other investment -10,675.1 -21,651.9 -26,755.0 964.2 Public sector -3,965.0 1,082.8 -1,878.0 -3,032.6 Private sector -6,710.2 -22,734.7 -24,877.0 3,996.8 Net errors and omissions -605.3 -5,450.7 25,081.6 -13,226.2 Overall balance of payments 14,648.7 -36,507.4 3,750.3 14,778.5

Source: Bank Negara Malaysia (Central Bank of Malaysia) online information. Viewed at: http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_msb&ac=243&en&uc=2.

1.24. After rising to 4.4% of GDP in 2014, the current account surplus declined due to a fall in the surplus for trade-in-goods as import growth outpaced exports. The faster decline in the value of exports was caused by the fall in world commodity prices. However, export volumes rose due to higher demand from major trading partners and increased commodity production as earlier investment projects came on stream. The ringgit depreciation also helped mitigate some of the adverse price affects. Imports were less affected due to strong domestic demand, capacity expansion, and implementation of large infrastructure projects.

1.25. In ringgit terms, the services deficit almost doubled, from RM 9.6 billion to RM 19.1 billion, from 2013 to 2016. The increase in the deficit was due mainly to the higher usage of foreign professional, technical and engineering services particularly in the aviation, oil and gas, and utilities sectors.6

1.26. Net payments in lieu of transport services have declined since 2014 on account of both lower payments and higher receipts of transport services, while the surplus on the travel account has narrowed, reflecting the higher number of Malaysians travelling abroad and a relatively slower increase in inbound travellers (Table 1.4).

6 BNM Annual Report 2016.

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Table 1.4 Trade in services, 2013-16

2013 2014 2015 2016 Total credit (RM billion) 132.7 137.6 136.1 146.3 % of total credit Maintenance and repair 0.7 0.9 1.1 1.0 Construction 2.4 2.0 3.0 2.8 Transport 11.1 11.3 12.0 11.5 Travel 51.0 53.7 50.5 51.2 Insurance and pension services 1.1 1.1 1.1 1.0 Financial services 0.8 0.8 1.0 1.4 Charges for the use of intellectual property n.i.e. 0.3 0.2 0.3 0.3 Telecommunications, computer, and information services 6.8 6.6 7.6 6.8 Oher business services 19.5 16.7 16.0 16.2 Personal, cultural and recreational services 0.5 0.7 1.1 1.0 Government services 0.2 0.2 0.3 0.2 Othera 5.6 5.8 6.2 6.5 Total debit (RM million) 142.3 148.3 156.7 165.4 % of total debit Maintenance and repair 0.7 0.7 0.9 1.0 Construction 5.7 5.8 6.7 7.4 Transport 27.1 28.1 26.1 24.4 Travel 27.1 27.5 26.6 26.3 Insurance and pension services 6.1 6.1 5.9 5.7 Financial services 1.0 0.9 1.1 1.3 Charges for the use of intellectual property n.i.e. 3.1 3.1 3.2 3.4 Telecommunications, computer, and information services 7.1 6.9 8.1 7.7 Oher business services 19.6 18.2 18.5 20.2 Personal, cultural and recreational services 1.9 2.1 2.0 1.9 Government services 0.4 0.4 0.6 0.6 Othera 0.1 0.1 0.1 0.2 a Manufacturing services on physical inputs owned by others. Source: Bank Negara Malaysia (Central Bank of Malaysia) online information. Viewed at: http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_msb&ac=243&en&uc=2.

1.27. The income account continues to remain in deficit as incomes accrued to Malaysian companies investing abroad, particularly in the mining and services sectors, were impacted by weaker global demand, while foreign investors in Malaysia, particularly in the manufacturing sector, continue to earn sizable profits. Outflows of foreign worker remittances have also remained robust reflecting the increased reliance on foreign workers in the labour-intensive sectors of the economy.7

1.28. The deficit on the financial account improved as direct investment in Malaysia rose while portfolio outflows declined from their peak in 2014. Furthermore, other investments recorded a surplus. The turnaround was due to loan repayments by non-resident financial institutions to Malaysian banks and the maturity of overseas deposits held by Malaysian banks. The slowdown in trade also resulted in lower trade credits. On the whole, the balance of payments recorded a surplus of around RM 15 billion in 2016. Consequently foreign exchange reserves rose to RM 423.9 billion (US$94.5 billion) at the end of 2016 providing nearly nine months of retained import cover.

1.3 Developments in Trade and Investment

1.3.1 Trends and patterns in merchandise and services trade

1.29. As an extremely open and diverse economy that is well integrated into regional and global value chains, Malaysia is dependent on trade. Trade in goods and services, as a proportion of GDP,

7 BNM Annual Report 2016.

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- 19 - was nearly 130% in 2016. After peaking at over RM 113 billion in 2014, the trade in goods surplus declined to RM 101 billion in 2016. The decline was due to weak global demand and the fall in global commodity prices. On the other hand, the services deficit doubled during the review period mainly on the back of increased usage of foreign professional services.

1.3.1.1 Composition of merchandise trade

1.30. Malaysia's export composition reflects the diversified nature of the economy. In 2016, manufacturing accounted for 68% of exports, while mining products (including crude oil and natural gas) and agriculture were responsible for 17.9% and 13.5% of exports respectively (Chart 1.1 and Table A1. 1). Chart 1.1 Product composition of merchandise trade, 2013 and 2016 Chart 1.1 Product composition of merchandise trade, 2013 and 2016

2013 2016

(a) Exports (f.o.b.)

Other 0.6% Other Other consumer goods Palm oil & its fractions 0.6% 8.8% 5.4% Other consumer Palm oil & its fractions goods 10.8% 4.8% Textiles & clothing Other agriculture Other agriculture 2.8% 8.7% Textiles & clothing 8.7% Other electrical 3.3% machines Agriculture Other electrical Agriculture 5.2% 13.2% Fuels machines 13.5% 14.0% 6.1% Mining Mining Fuels 17.9% Manufactures 25.6% 22.3% 60.6% Manufactures 68.0% Other mining 3.9% Office machines & telecommunication Chemicals equipment Other mining Office machines & 7.6% 27.7% 3.3% telecommunication equipment Chemicals Other semi-manuf. 30.4% 6.6% 5.1% Non-electrical Other Non-electrical machinery semi-manuf. machinery 3.7% 5.8% 4.7%

Total: US$228.3 billion Total: US$189.4 billion

(b) Imports (c.i.f.)

Other Other 2.2% 1.8% Agriculture Other consumer goods Agriculture Other consumer goods 10.4% 6.4% 9.7% 8.8% Transport equipment Transport equipment 7.1% Fuels 6.6% 10.3% Other electrical Fuels Other electrical machines 16.2% machines 5.7% Mining 6.0% Mining Other mining 22.2% 15.3% 5.0%

Iron & steel Manufactures Manufactures Other mining 3.2% 65.9% 72.5% 6.0% Chemicals Office machines & Iron & steel Office machines & 10.2% telecommunication 3.6% telecommunication equipment equipment Chemicals 21.9% 23.9% 9.0% Other semi-manuf. Non-electrical 4.9% Non-electrical Other semi-manuf. machinery machinery 4.2% 8.8% 7.9%

Total: US$205.8 billion Total: US$168.4 billion Source: UNSD, Comtrade database (SITC Rev.3).

Source: UNSD, Comtrade database (SITC Rev.3).

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1.31. During the period under review, the share of agriculture rose slightly. While prices fell significantly in US dollar terms, including for palm oil (Malaysia's main agricultural export), the depreciation of the ringgit helped boost export volumes. The decline in the share of mining exports, which comprise mainly oil and gas, was due to the decline in the global prices of these commodities. In contrast, the share of manufactured goods rose. Within manufactures, growth was driven by increased exports of electronic integrated circuits and micro assemblies, mainly semiconductors. Exports of these were boosted by the weaker currency, and the acquisition of advanced packaging technology for semiconductors, which is in line with moving up the value chain in manufacturing.

1.32. The structure of Malaysia's imports is also reflective of the diverse nature of the economy and its integration into value chains. During the review period, the share of primary products in imports declined due to a fall in global commodity prices (Chart 1.1 and Table A1. 2). On the other hand, the share of manufactures, particularly of electronic integrated circuits and micro assemblies, increased. These are used in semiconductor assembly and test production.

1.3.1.2 Direction of merchandise trade

1.33. In 2016, Malaysia's main export destinations were Singapore, China, and the European Union. During the period under review, the shares of Singapore, the European Union, and the United States rose (Chart 1.2 and Table A1. 3). The share of the United States rose on the back of increased semiconductor exports, while those to Singapore and the European Union rose on the back of increased exports of optical and scientific products. In contrast, the shares of China and Japan declined. Malaysia's exports to China comprise manufactures, which are part of the regional supply chain, as well as palm oil and other non-oil commodities. The reason for the decline is a fall in commodity prices. Exports to Japan consist of mainly LNG. With the coming back online of nuclear power plants in Japan, demand for LNG has fallen resulting in its declining share.

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- 21 - Chart 1.2 Direction of merchandise trade, 2013 and 2016

Chart 1.2 Direction of merchandise trade, 2013 and 2016 2013 2016

(a) Exports (f.o.b.)

Hong Kong, Hong Kong, China India China India Japan 4.3% 3.6% Japan 4.8% 4.1% 11.0% Australia 8.1% Australia 4.1% 3.4% Other Asia China Other Asia 9.5% 12.5% 8.0% China Other Asia Other Asia 13.5% 40.8% 45.9% Other Other 6.5% 5.5% Other ASEAN 5.7%

Other ASEAN ASEAN United States 8.1% Indonesia ASEAN United States 3.9% 28.0% 29.4% 3.5% 10.2% Indonesia 4.6% Thailand 5.6% EU-28 Thailand EU-28 9.1% 5.5% 10.2% Singapore Singapore Middle East Middle East 14.6% 13.9% 3.4% 2.9%

Total: US$228.3 billion Total: US$189.4 billion

(b) Imports (c.i.f.)

Chinese Taipei Chinese Taipei Japan 4.9% Japan 6.0% 8.7% Korea, Rep. of 8.2% Korea, Rep. of 4.7% 5.2%

Other Asia China China Other Asia 7.4% 20.4% 16.4% 7.2% Other Asia Other Asia 42.0% Other 47.0% Other 8.0% 6.7%

Other ASEAN 4.1% ASEAN United States United States 26.7% ASEAN 7.8% Other ASEAN 8.0% Indonesia 4.0% 24.6% 4.3% Indonesia 4.2% Thailand EU-28 EU-28 6.0% 9.9% 10.8% Thailand 6.1% Middle East Singapore Middle East Singapore 3.9% 12.4% 4.6% 10.4%

Total: US$205.8 billion Total: US$168.4 billion

Source: UNSD, Comtrade database.

1.34. China remains Malaysia's largest import supplier followed by Singapore and the European Source: UNSD, Comtrade database. Union (Chart 1.2 and Table A1. 4). During the period under review, the share of China rose significantly as did that of Asia as a whole. In contrast, the shares of Singapore, the European Union and ASEAN declined over the same period.

1.3.2 Trends and patterns in FDI

1.35. Malaysia's relatively liberal foreign investment regime and ease of doing business have resulted in robust FDI inflows for a number of years (Chart 1.3). However, since 2014, FDI inflows have moderated due mainly to lower investments in the mining and manufacturing sectors. The

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- 22 - challenging global economic environment resulted in many large multinational corporations, especially in the electronics sector, undergoing restructuring and consolidation of their operations in Malaysia. Lower oil and gas prices also resulted in a decline in FDI in the upstream oil and gas industry. On the other hand, FDI in the services and construction sectors increased on the back of a large investment by China General Nuclear in 13 power plants in Malaysia and abroad, as well as continued expansion in the finance and insurance and the retail and wholesale trade services sectors. The ongoing residential and infrastructure projects such as those in the Klang Valley and Iskander Malaysia have also attracted FDI. The largest investors in Malaysia are Singapore, Japan, the Netherlands, China and the United States.

ChartChart 1.1. 3Foreign Foreign direct direct investment investment, 2000-16

(US$ billion) (US$ billion)

160 20

18 140 16 120 14 100 12

80 10

8 60 6 40 4 20 2

0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Left-hand scale: Right-hand scale: FDI inward stock FDI outward stock FDI inflow FDI outflow

Source:Source: UNCTAD,UNCTAD, World World Investment Investment Report Report 2017 online2017 onlineinformation. information.

1.36. The growth of the Malaysian economy has resulted in the growth of Malaysian companies, which have invested their earnings and savings abroad. As such, there is considerable direct investment abroad (DIA) by Malaysian companies. DIA is concentrated in the services sectors – underscoring the growing regionalization of Malaysian companies in the finance, insurance, real estate and business services, information and communication, and utilities sub-sectors – followed by sizable investments in the mining and agricultural sectors.

1.37. The bulk of DIA is channelled into regional economies namely: Singapore; Indonesia; and to a lesser extent Hong Kong, China; India; and Thailand. There is also considerable DIA in Canada and Australia. Furthermore, a considerable amount of DIA is invested in international offshore financial centres, where investible funds are pooled before being redirected to economic sectors in various locations.

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2 TRADE AND INVESTMENT REGIMES

2.1 General Framework

2.1. Malaysia is a constitutional monarchy. The Constitution came into force in 1957. Malaysia is a federation of 13 states and 3 federal territories (Kuala Lumpur, Putrajaya, and Labuan). Since the previous Review in 2014, there has been no change to the constitutional and institutional framework.

2.2. The legislative authority of the Federation is vested in Parliament, consisting of the Yang di- Pertuan Agong (Head of State) and the two Houses of Parliament: the Senate (Dewan Negara) and the House of Representatives (Dewan Rakyat). The Dewan Negara is made up of 70 appointed members, and the Dewan Rakyat of 222 elected members. A law is made when a bill is passed by both Houses and has received royal assent from the Yang di-Pertuan Agong, which is deemed given if the bill is not assented to within 30 days of presentation and publication in the Federal Government Gazette.

2.3. Each state has its own state constitution, executive council, and legislative assembly. Under Article 74 of the Constitution, Parliament has exclusive power to make federal laws over matters falling under the Federal List, and shared power (shared with the state legislatures) to make laws on matters under the Concurrent List in the Ninth Schedule. Matters falling under federal competence include: external affairs, trade, commerce, industry, shipping, fisheries, communications, and transport.

2.4. The executive power of the Federation is vested in the Head of State (Yang di-Pertuan Agong) and exercisable by him or the Cabinet, which is presided over by the Prime Minister. The fifteenth and current Head of State began his reign on 13 December 2016, after being elected in October 2016.

2.5. Malaysia's judicial system consists of:

a. superior courts: the Federal Court, the Court of Appeal, the High Court in Malaya, and the High Court in Sabah and Sarawak; and

b. subordinate courts: the sessions courts and the magistrates' courts.

2.6. Among the superior courts, the Federal Court is the highest and final court of appeal in Malaysia, followed by the Court of Appeal and the two high courts. The jurisdiction of the superior court is set out in the Court of Judicature Act 1964 (Act 91), whilst the jurisdiction of the subordinate courts is stipulated in the Subordinate Courts Act 1948 (Act 91). The superior courts and the subordinate courts do not have any jurisdiction in matters falling within the sphere of the Syariah courts. Syariah courts have jurisdiction only over Muslims in Malaysia on Syariah matters.1

2.7. Treaties or international legal instruments (including WTO agreements) are not implemented automatically; appropriate national legislation is required to give the treaty force of law domestically.

2.8. According to the World Bank's Doing Business Report, in Malaysia in 2017, resolving a standard contract enforcement dispute took 425 days and cost 37.3% of the claim, placing it 42nd out of 189 economies in the ease of enforcing contracts.2 Its performance is better than the East Asia and Pacific average (560 days and 49.1% of the claim).

2.2 Trade Policy Formulation and Objectives

2.2.1 Structure of Trade Policy Formulation

2.9. Trade and investment policies are formulated by the Ministry of International Trade and Industry (MITI). Key MITI agencies include the Malaysian Investment Development Authority

1 A native court deals with cultural practices of the Iban community in Sarawak. 2 World Bank (2017), Doing Business 2017 – Malaysia. Viewed at: http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/mys.pdf [17/03/17].

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(MIDA), taking the lead in promoting manufacturing and services sectors; the Malaysian External Development Corporation (MATRADE), responsible for export development and promotion activities; and the Malaysia Productivity Corporation (MPC), undertaking various activities related to monitoring and enhancing the productivity and competitiveness of the economy. Other agencies include: SME Corporation Malaysia, SME Bank, Malaysian Industrial Development Finance, Halal Industry Development Corporation, Malaysia Automotive Institute, and Malaysia Steel Institute.3

2.10. MITI formulates industrial development, international trade, and investment policies and makes policy decisions in consultation with relevant stakeholders including: the Economic Planning Unit (EPU), responsible for developing Malaysia's five-year development plans; and the Performance Management and Delivery Unit (PEMANDU), responsible for implementing the Government's Economic Transformation Programme. A Fiscal Policy Committee (FPC), chaired by the Prime Minister and comprising key ministers and the central bank governor, was established in 2013 to formulate policies to strengthen public finance as well as to monitor progress with respect to fiscal sustainability and long-term macroeconomic stability. In May 2016, a Fiscal Risk and Contingent Liabilities Technical Committee – a sub-committee of the FPC – was established to update the FPC on the potential sources of fiscal risks.

2.11. Malaysia's ongoing reforms since 2007 under the Special Taskforce to Facilitate Business (PEMUDAH) have been a joint effort between the Government and the private sector to streamline regulatory frameworks, reduce business licensing requirements, and promote information technology use by government agencies. Malaysia was ranked 60th out of 193 economies in 2016 by the United Nations in its e-Government survey.4 Information related to the Government is available at www.malaysia.gov.my, which is a gateway to multiple government online services. The Government applies a "No Wrong Door Policy", meaning that queries are forwarded to and answered by the relevant ministry and agency. Legislation related to investment, in various languages, is available on MIDA's website (http://www.mida.gov.my).

2.12. On 16 October 2014, the Guidelines on Public Consultation Procedures were launched by the Chief Secretary to the Government of Malaysia, serving as a reference for ministries and agencies in implementing public consultations. According to the Government, public consultation is one of the key tools to improve transparency, efficiency and effectiveness of regulation and is an important element of Regulatory Impact Analysis (RIA)5. Regular dialogues and consultations with the business community, including chambers of commerce and industry associations, are undertaken by various ministries and agencies to obtain feedback from the private sector. For example, the Malaysia Productivity Corporation (MPC) coordinates ministries and agencies in the performance of RIAs.6

2.13. The Malaysian Anti-Corruption Commission (MACC), established in 2009 under the MACC Act, is responsible for combating corruption through investigation, prevention and community action. The MACC has ratified the United Nations Convention against Corruption (UNCAC), and is involved in various bilateral, regional, and international cooperation efforts to combat corruption.

2.14. The Governance and Integrity Committee (JITU) was set up via a directive from the Prime Minister on 3 June 2014 to elevate the integrity enhancement efforts of the government administrative system in all federal and state government ministries, departments and agencies. The Auditor General's (AG) Dashboard and the Putrajaya Inquisition are further efforts to ensure greater transparency. The AG's Dashboard tracks and monitors the responses and actions taken by relevant government ministries, departments and agencies. Any issue that cannot be resolved at ministry/department/agency level is brought to the Putrajaya Inquisition. According to the Auditor General's report, from 2011 to 2015, a total of 4,904 cases were tracked and monitored through the AG's Dashboard. As at 14 June 2017, 4,145 issues were resolved, while the remaining issues are under due process for corrective and punitive actions.

3 MITI online information. Viewed at: http://www.miti.gov.my/index.php/pages/view/261?mid=49 [20/03/17]. 4 UNPACS online information. Viewed at: https://publicadministration.un.org/egovkb/en- us/Data/Country-Information/id/103-Malaysia [20/03/17]. 5 A RIA is a system that analyses the positive and negative effects of proposed regulations at an early stage of policy-making. 6 OECD (2016), Malaysia: Economic Assessment 2016. Viewed at: http://www.oecd.org/eco/surveys/Malaysia-2016-OECD-economic-survey-overview.pdf [24/03/17].

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2.2.2 Trade policy objectives

2.15. The long-term policy document Vision 2020 sets Malaysia a target of achieving high-income country status by 2020, by sharply accelerating the growth of labour productivity to 3.7% per year on average from 2016 to 2020, from the average of 2% during the 2010-15 period.7

2.16. The Economic Planning Unit (EPU) in the Prime Minister's Department developed the 11th Malaysia Plan (11th MP) for 2016-20, as the final part of Vision 2020. The main aim of the 11th MP is to rebrand Malaysia as a centre for high technology and global activities. Strategies in the next five years include strengthening investment in the manufacturing and services sectors, and promoting both domestic and foreign investment. It identified six strategic thrusts:

a. enhancing inclusiveness towards an equitable society;

b. improving well-being for all;

c. accelerating human capital development for an advanced nation;

d. pursuing green growth for sustainability and resilience;

e. strengthening infrastructure to support economic expansion; and

f. re-engineering economic growth for greater prosperity.

2.17. The 11th MP also highlighted six "game changers" to accelerate Malaysia's development: unlocking the potential of productivity; lifting the bottom 40% of households towards a middle- class society; enabling industry-led technical and vocational education and training; embarking on green growth; translating innovation to wealth; and investing in competitive cities.

2.18. In addition, there are a number of sectoral plans with trade and investment policy tools to supplement the 11th MP (Table 2.1).

Table 2.1 Sectoral plans, and trade and investment tools

Sectoral plans Trade and investment tools Third Industrial Focuses on manufacturing, services, and agriculture sectors. Strategic thrusts include: Master Plan 2006- enhancing Malaysia's position as a major trading nation; generating investment in the 20 targeted sectors; strengthening the role of the private sector; and creating a more competitive business environment Malaysia Education Involvement of private sector in vocational education Blueprint 2013-25 Financial Sector Greater flexibility was allowed in 2013 for foreign banking institutions Blueprint 2011-20 Services Sector Partnership programmes between large and small enterprises to facilitate knowledge Blueprint 2015-20 transfer for SMEs; Establishing a consortium to strengthen the competitiveness of Malaysian service providers; Enhancing the Services Export Fund; Enhancing franchise development programmes to raise capabilities across a broad group of services providers; Introducing the Research Incentive Scheme; Establishing the Incentive Coordination & Collaboration Office for better incentive management Logistics and Trade Authorized Economic Operator (AEO) Programme; Facilitation Master Mutual Recognition Arrangements (MRA); Plan Strengthening the institutional and regulatory framework; Enhancing trade facilitation mechanisms; Developing infrastructure and freight demand; Strengthening technology and human capital; Internationalizing logistics services National Agrofood Promoting R&D, expanding international markets, and improving quality and safety Policy 2011-20

7 OECD (2016), Malaysia: Economic Assessment 2016. Viewed at: http://www.oecd.org/eco/surveys/Malaysia-2016-OECD-economic-survey-overview.pdf [24/03/17].

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Sectoral plans Trade and investment tools National Enhancing regional and international cooperation; Commodity Policy Branding of quality, sustainable and environmental friendly commodity-based products; 2011-20 Encouraging compliance with international standards; Expanding markets; Participating in RTA negotiations SME Masterplan Aiming at creating globally competitive SMEs. The Masterplan proposed an Action Plan to 2012-20 address challenges to SMEs. The Action Plan comprises six High Impact Programmes, and other complementary initiatives.

Source: 11th MP. Viewed at: http://epu.gov.my/en/rmk/eleventh-malaysia-plan-2016-2020 [08/06/2017]; and information provided by the authorities.

2.2.3 Trade laws and regulations

2.19. A number of laws and regulations have been amended or promulgated since 2014. In August 2015, the Malaysian Aviation Commission Act was promulgated. It came into force on 1 March 2016. The Malaysian Aviation Commission (MAVCOM) was established on the same day, pursuant to the Malaysian Aviation Commission Act, to regulate economic and commercial matters related to civil aviation in Malaysia.8

2.20. The Companies Act 2016 (Act 777) was approved in 2016. The Companies Commission of Malaysia (CCM) is the main agency responsible for its implementation. The Act simplified the procedure to start a company. It applies a "no par value" regime, where companies are no longer required to state their authorized share capital, and a flat-rate fee is applied for incorporation (as opposed to ad valorem incorporation fees). It also contains several deregulatory measures to reduce the cost of doing business. In particular, it introduced new provisions to reform corporate insolvency provisions in the form of corporate rescue mechanisms: judicial management and corporate voluntary arrangement. According to PEMUDAH's annual report, the Focus Group on Resolving Insolvency helps raise public awareness of the new provisions and facilitate their smooth implementation.9

2.21. Other legislative changes include: the Gas Supply (Amendment) Act 2016, which came into effect in January 2016; various amendments to the Food Regulations 1985 to, inter alia, harmonize with the Codex standard, and regulate the sale of alcoholic beverages; the amendment to the Malaysian Biofuel Industry Regulation 2014, to reduce dependency on fossil fuels for a greener environment and expand palm oil usage; and the implementation of the Import Legality Regulation under the Timber Legality Assurance System, to ensure all imported timber is from legal sources.

2.3 Trade Agreements and Arrangements

2.3.1 WTO

2.22. Malaysia is an active Member of the WTO, and grants at least MFN treatment to all trading partners. Malaysia is an observer to the plurilateral Government Procurement Agreement (GPA). Under the GATS, Malaysia made commitments in nine of the twelve sectors, and it is a signatory to the GATS protocols on telecommunications (Fourth Protocol) and financial services (Fifth Protocol).10 It ratified the Protocol Amending the TRIPS Agreement in December 2015.

2.23. In May 2015, Malaysia became the fifth Member to ratify the Trade Facilitation Agreement; before that, in July 2014, it notified the Preparatory Committee that Malaysia had designated all provisions under Category A, except Article 7.8 (Expedited Shipments) and Article 11.9 (Advance filing and processing of transit documentation and data prior to the arrival of goods).11

8 MAVCOM online information. Viewed at: http://www.mavcom.my/en/who-we-are/ [31/05/17]. 9 PEMUDAH (2016), Annual Report 2015. Viewed at: http://www.mpc.gov.my/pemudah/wp- content/uploads/sites/21/2017/01/PEMUDAH-Annual_Report-2015.pdf [23/05/17]. 10 WTO documents GATS/SC/52/Suppl.2, 11 April 1997; and GATS/SC/52/Suppl.3, 26 February 1998. 11 WTO document WT/PCTF/N/MYS/1, 23 July 2014.

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2.24. In WTO negotiations, Malaysia is a member of the following groups: Asian Developing Members, APEC, ASEAN, and the Cairns Group.12 Malaysia is a participant in the WTO Information Technology Agreement (ITA). As a result of the negotiations, about 88% of IT product tariff lines were eliminated on 1 July 2016 while the remainder will be completely phased out by July 2023.13

2.25. Malaysia is finalizing the details of its preferential treatment for LDCs' services providers in accordance with the 2013 Ministerial Declaration (Bali Package). It continues to participate in the discussion to find a solution on public stockholdings for food security purposes and develop a special safeguard mechanism.14

2.26. Between March 2014 and October 2017, Malaysia was not involved in any new WTO dispute settlement cases either as a complainant or respondent. It participated as a third party in:

a. the Australia – Tobacco Plain Packaging complaint raised by Ukraine (DS434), Honduras (DS435), Dominican Republic (DS441), Cuba (DS458), and Indonesia (DS467);

b. the EU – Fatty Alcohols complaint by Indonesia (DS442);

c. the India – Solar Cells complaint by the United States (DS456); and

d. the EU – Biodiesel complaint by Argentina (DS473).

2.27. Malaysia has submitted notifications to the WTO in a number of areas (Table 2.2). It submitted its MFN tariffs for 2016 and 2017 to the IDB, as well as its import data for 2015 and 2016. However, as at May 2017, notifications were outstanding in the areas of: agriculture (domestic support); quantitative restrictions; and customs valuation. It has not notified "any new, or any changes to existing laws, regulations or administrative guidelines which significantly affect trade in services", which it is obliged to notify under Article III:3 of the GATS.

Table 2.2 WTO notifications, 1 November 2013 to 10 November 2017

WTO document and date (latest Agreement Requirement/content Periodicity document if recurrent) Agreement on Agriculture Articles 10 & Tables ES:1 and ES:2 - Annual G/AG/N/MYS/30, 14 February 2014 18.2 Export subsidies G/AG/N/MYS/35, 18 September 2015 G/AG/N/MYS/36, 5 April 2016 Article 18.2 Tables DS:1 and DS:2 – Annual G/AG/N/MYS/32, 23 July 2014 Domestic support Article 18.2 Table MA:2 – imports Annual G/AG/N/MYS/39, 13 July 2017 under tariff quotas G/AG/N/MYS/34/Corr.1, 28 September 2015 G/AG/N/MYS/34, 27 March 2015 Articles 5.7 Table MA.5 – Special Annual G/AG/N/MYS/38, 4 July 2017 and 18.2 safeguard G/AG/N/MYS/37, 5 October 2016 G/AG/N/MYA/33, 24 March 2015 G/AG/N/MYA/31, 16 July 2014 GATS Article III:4 Enquiry point Ad hoc S/ENQ/78/Rev.16, 22 April 2016 and/or IV:2 Article V:7(a) Regional trade agreements Ad hoc S/C/N/822, 24 August 2015 Agreement on Implementation of Article VI of the GATT 1994 (Anti-dumping) Article 16.4 Semi-annual reports of Semi-annual G/ADP/N/300/MYS, 6 September 2017 anti-dumping actions G/ADP/N/294/MYS, 8 March 2017 (taken within the G/ADP/N/286/MYS, 31 August 2016 preceding six months) G/ADP/N/280/MYS, 10 March 2016 G/ADP/N/272/MYS, 31 August 2015 G/ADP/N/265/MYS, 15 April 2015

12 WTO online information. Viewed at: https://www.wto.org/english/thewto_e/countries_e/malaysia_e.htm [02/05/2017]. 13 European Commission (2016), The Expansion of the Information Technology Agreement: An Economic Assessment. Viewed at: http://trade.ec.europa.eu/doclib/docs/2016/april/tradoc_154430.pdf [13/10/2017]. 14 APEC (2016), IAP update for Malaysia 2014-2016. Viewed at: http://www.apec.org/About-Us/About- APEC/Achievements%20and%20Benefits/2016-Bogor-Goals [12/05/17].

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WTO document and date (latest Agreement Requirement/content Periodicity document if recurrent) G/ADP/N/259/MYS, 10 October 2014 G/ADP/N/252/MYS, 23 January 2014 G/ADP/N/244/MYS/Rev.1, 19 November 2013 Agreement Implementation of Article XXIV:7(a) of the GATT 1994 (Free trade areas) Article XXIV of Free trade agreement Ad hoc WT/REG379/N/1, 21 February 2017 the between Malaysia and GATT 1994 Turkey Agreement on Rules of Origin Paragraph 4 Preferential rules of origin Ad hoc G/RO/N/156, 21 July 2017 of Annex II under the FTA between Turkey and Malaysia Understanding on the Interpretation of Article XVII of the GATT 1994 (State trading) Article State-trading activities Annual G/STR/N/16/MYS, 17 October 2016 XVII:4(a) G/STR/N/15/MYS, 29 October 2014 Agreement on Import Licensing Procedures Articles 5.1, Notification of an Ad hoc G/LIC/N/2/MYS/8, 18 August 2017 5.2, 5.3 automatic import licensing G/LIC/N/2/MYS/7, 23 September 2016 programme G/LIC/N/2/MYS/6, 23 January 2014 Article 7.3 Replies to questionnaire on Annual G/LIC/N/3/MYS/12, 5 December 2016 import licensing G/LIC/N/3/MYS/11, 10 March 2016 procedures G/LIC/N/3/MYS/10, 6 November 2014 G/LIC/N/3/MYS/9, 24 January 2014 G/LIC/N/3/MYS/8, 23 January 2014 Agreement on Safeguards Article 12.1(a) Initiation of investigations Ad hoc G/SG/N/6/MYS/5, 2 June 2016 G/SG/N/6/MYS/4, 2 June 2016 G/SG/N/6/MYS/3, 14 September 2015 G/SG/N/6/MYS/2, 18 August 2014 Article 12.1(b) Findings, decisions Ad hoc G/SG/N/8/MYS/3/Suppl.1, and 12.1(c) G/SG/N/10/MYS/3/Suppl.1, G/SG/N/111/MYS/3/Suppl.1, 18 May 2017 G/SG/N/8/MYS/3, G/SG/N/10/MYS/3, 21 April 2017 G/SG/N/8/MYS/2/Suppl.1, G/SG/N/10/MYS/2/Suppl.1, G/SG/N/111/MYS/2/Suppl.1, 18 May 2017G/SG/N/8/MYS/2, G/SG/N/10/MYS/2, 21 April 2017 G/SG/N/8/MYS/1, G/SG/N/10/MYS/1, G/SG/N/11/MYS/1/Suppl.1, 1 July 2015 Article 12.4 Proposed provisional Ad hoc G/SG/N/7/MYS/3, G/SG/N/11/MYS/3, 29 safeguard measure, September 2016 footnotes G/SG/N/7/MYS/2, G/SG/N/11/MYS/2, 29 September 2016 G/SG/N/7/MYS/1, G/SG/N/11/MYS/1, 12 December 2014 Article 9.1 Footnote 2 Ad hoc G/SG/N/8/MYS/1, G/SG/N/10/MYS/1, G/SG/N/11/MYS/1/Suppl.1, 1 July 2015 Decision of Termination Ad hoc G/SG/N/9/MYS/2, 19 January 2016 the Committee on Safeguards Agreement on the Application of Sanitary and Phytosanitary Measures Article 7 and Laws, regulations and Ad hoc G/SPS/N/MYS/40, 1 August 2017 Annex B emergency measures G/SPS/N/MYS/39, 24 February 2017 G/SPS/N/MYS/38, 8 February 2017 G/SPS/N/MYS/37, 1 Sept 2015 G/SPS/N/MYS/36, 1 April 2015 G/SPS/N/MYS/35, 17 March 2015 G/SPS/N/MYS/34, 17 March 2015 G/SPS/N/MYS/33, 2 October 2014 G/SPS/N/MYS/32, 11 August 2014 G/SPS/N/MYS/31, 6 May 2014 G/SPS/N/MYS/30, 6 May 2014 G/SPS/N/MYS/29, 6 May 2014 G/SPS/N/MYS/28, 6 May 2014 G/SPS/N/MYS/27, 10 March 2014

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WTO document and date (latest Agreement Requirement/content Periodicity document if recurrent) Agreement on Subsidies and Countervailing Measures Article 25.1 Article XVI:1 of the GATT Full G/SCM/N/315/MYS, 9 October 2017 1994 and Article 25 of the notification G/SCM/N/284/MYS, 9 October 2017 SCM Agreement every three G/SCM/N/253/MYS, 28 Nov 2014 years; annual updating Agreement on Technical Barriers to Trade Articles 2.9, Proposed and adopted Ad hoc 2017: G/TBT/N/MYS/72-77 2.10, and 5.6 technical regulations 2016: G/TBT/N/MYS/64-71 2015: G/TBT/N/MYS/53-63 G/TBT/N/MYS/15/Rev.3 2014: G/TBT/N/MYS/37-52, G/TBT/N/MYS/15/Rev.2, G/TBT/N/MYS/36/Rev.1 Agreement on Trade Facilitation WT/L/911 Notification of Category A Ad hoc WT/PCTF/N/MYS/1, 23 July 2014 superseded by commitments WT/L/931

Source: WTO Secretariat.

2.3.2 Regional and preferential agreements

2.3.2.1 ASEAN

2.28. Malaysia is a member of the Association of South East Asian Nations (ASEAN), which has component agreements on goods (ASEAN Trade in Goods Agreement – ATIGA), services (ASEAN Framework Agreement on Services – AFAS), and investment (ASEAN Comprehensive Investment Agreement – ACIA). On 31 December 2015, the first phase of the ASEAN Economic Community (AEC) Blueprint 2015 was completed. The authorities stated that, through the progressive reduction in barriers to trade and investment, ASEAN is now offering an integrated market, closely linked economy, improved business environment, and enhanced connectivity. The AEC Blueprint also led to the narrowing of the development gap and the promotion of equitable development in the region. Under the AEC 2015, intra-ASEAN import tariffs have been virtually eliminated and formal restrictions in the services sector gradually removed.

2.29. In November 2015, ASEAN leaders adopted the AEC Blueprint 2025 to create a highly integrated, cohesive, competitive and dynamic ASEAN. The focus of the AEC 2025 Blueprint is on innovation, promoting growth through raising productivity and working towards further reducing the development gap within the region. ASEAN leaders reaffirmed their commitment in two areas: internal integration and global economic engagement.

2.30. Internal integration is to be achieved through enhancing trade facilitation, among others. An ASEAN Trade Facilitation Joint Consultative Committee (ATF – JCC) comprising representatives from the public and private sectors was established to accelerate work on trade facilitation and to implement mechanisms such as:

a. ASEAN Single Window for customs clearance;

b. ASEAN Self-Certification System: to be implemented by 2018, allowing Certified Exporters (CEs) to make export declarations with invoices; they will no longer be required to apply for ATIGA Form D, as the invoice declaration will enable their goods to benefit from preferential tariff concessions under ATIGA;

c. ASEAN Trade Repository to document trade, customs law and procedures;

d. ASEAN Solutions for Investments, Services and Trade (ASSIST), a consultative mechanism for expedited and effective resolution of problems encountered by ASEAN- based enterprises on issues related to AEC implementation;

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e. ASEAN Tariff Finder, a free online search tool to help businesses (especially MSMEs) to obtain information on the preferential tariffs under ATIGA, as well as other tariff-related information including rules of origin;

f. ASEAN Customs Transit System (ACTS) to facilitate the movement of transit goods by road within ASEAN through computerization and online management of enquiries; and

g. the harmonization of standards and technical regulations within ASEAN.

2.31. Efforts by ASEAN leaders to improve internal integration also involve:

a. reducing trade and investment barriers, especially those often referred to as "behind- the-border measures" as well as burdensome regulatory procedures;

b. enhancing connectivity with the implementation of the 2025 ASEAN Master Plan on Connectivity; and

c. conducting active consultation and engagement with the private sector and other stakeholders.

2.32. As regards further strengthening ASEAN's global economic engagement, the authorities consider that one of the immediate priorities is to complete negotiations on the Regional Comprehensive Economic Partnership (RCEP) Agreement between ASEAN and six RTA partners (Australia, China, India, Japan, Republic of Korea, and New Zealand).15 The authorities stated that early implementation of the RCEP will enable the business sector to tap into the huge potential of the 16 countries, which at the same time will contribute to global economic growth.

2.33. The AEC 2025 Consolidated Strategic Action Plan (CSAP) was endorsed by the ASEAN Economic Ministers and the ASEAN Economic Community (AEC) Council Ministers on 6 February 2017. The AEC 2025 CSAP complements the AEC 2025 Blueprint, by serving as a single reference document for the public to inform stakeholders of the key actions to be implemented under the ASEAN economic integration agenda from 2016 to 2025, and by allowing for more structured tracking and reporting of the implementation process.

2.34. As part of ASEAN, Malaysia is a signatory to RTAs with Australia and New Zealand, China, India, Japan, and the Republic of Korea. During the review period, the ASEAN – India Agreement was expanded to cover trade in services (Table 2.3). The FTA between ASEAN and Hong Kong, China was concluded, and expected to be signed soon. Malaysia also has bilateral RTAs with: Australia, Chile, India, Japan, New Zealand, Pakistan, and Turkey. The Malaysia – Turkey FTA (MTFTA) entered into force in 2015 (Table 2.3). Malaysia is negotiating with the European Union and the EFTA.

2.35. Concerning TPP negotiations, the authorities stated that in light of the US withdrawal, Ministers from the remaining 11 members are considering next steps. Malaysia will continue to engage with other TPP parties and decide the way forward after evaluating all the available options.

2.3.2.2 New RTAs

2.36. Two new RTAs entered into force during the review period: ASEAN – India Free Trade Agreement, and Malaysia – Turkey Free Trade Agreement (Table 2.3).

15 ASEAN online information. Viewed at: http://asean.org/?static_post=rcep-regional-comprehensive- economic-partnership%20 [11/05/2017].

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Table 2.3 Main features of new RTAs, 2014-17

ASEAN RTA ASEAN – India Free Trade Agreement Date of signature 13/08/2009 (goods) 13/11/2014 (services) Entry into force 01/01/2010 (goods) 01/07/2015 (services) End of implementation period 2024 Coverage (selected features) Goods and services Malaysia's merchandise trade 2.4% of total imports; 4.1% of total exports with India (2016) WTO consideration status Factual presentation distributed (Goods: 2017; services: 2016) WTO document series WT/COMTD/RTA/8/1, 14 December 2016; and WT/REG372/1, 22 August 2016 BILATERAL RTA Malaysia-Turkey Free Trade Agreement (MTFTA) Date of signature 17/04/2014 Entry into force 01/08/2015 End of implementation period 2023 Coverage (selected features) Goods Malaysia's merchandise trade 0.2% of total imports; 0.9% of total exports with Turkey (2016) WTO consideration status Factual presentation not distributed WTO document series WT/REG379/N/1, 21 February 2017

Source: WTO Secretariat, based on RTA Information System. Viewed at: http://rtais.wto.org/.

2.37. The Agreement between ASEAN and India on goods entered into force in 2010, while that on services entered into force in 2015. Regarding goods, key imports to Malaysia from India were chemicals and minerals, which along with base metals and vegetables accounted for about 65% of Malaysia's imports from India.16 Machinery and minerals were important exports from Malaysia to India. Parties will reduce or eliminate tariffs under normal tracks (normal track 1 and 2), a sensitive track, a special products list (only for India), a highly sensitive list, and an exclusion list:

a. normal track 1: Malaysia's tariffs under normal track 1 were reduced and eventually eliminated by the end of 2013;

b. normal track 2: Malaysia's tariffs were reduced and eventually eliminated by the end of 2016;

c. sensitive track: tariff rates above 5% were reduced to 5% by the end of 2016; for the remaining products subject to 5% duty, the rate was reduced to 4.5% when the Agreement entered into force; applied MFN tariff rates on 4% of the tariff lines in the sensitive track are to be eliminated by the end of 2019;

d. highly sensitive list: tariff reduction as scheduled in Annex I of the Agreement; and

e. exclusion list: annual tariff review, which has not happened in practice yet.

2.38. At the end of the transition period (2019), 1,818 tariff lines (17.5% of total lines in the tariff schedule) will remain dutiable (Table 2.4), with an average final tariff rate of 13.3%.17 The tariff lines that will remain subject to duty once the Agreement is fully implemented include: plastics and rubber; base metals; chemical products; textiles and clothing; and vehicles.

16 WTO document, WT/COMTD/RTA/8/1, 14 December 2016. 17 WTO document, WT/COMTD/RTA/8/1, 14 December 2016.

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Table 2.4 ASEAN – India: Malaysia's tariff elimination and reduction commitments

Duty phase-out Duty liberalization Duty reduction period Number of % of total lines in the Number of % of total lines in the lines tariff schedule lines tariff schedule MFN duty free 6,625 63.8 (2010) 01-Jan-10 18 0.2 2,541 24.5 01-Jan-11 57 0.5 01-Jan-12 35 0.3 01-Jan-13 444 4.3 70 0.7 31-Dec-13 597 5.7 1 0.0 01-Jan-14 3 0.0 01-Jan-15 23 0.2 01-Jan-16 13 0.1 31-Dec-16 887 8.5 31-Dec-19 11 26.6 Remain dutiable 1,818 17.5 Total 10,389 100.0 2,754 52.8

Source: Factual Presentation: Free Trade Agreement between the ASEAN and India (Goods), report by the Secretariat, WT/COMTD/RTA/8/1, 14 December 2016.

2.39. Malaysia's services schedule under this Agreement contains horizontal restrictions on: commercial presence in relation to acquisition, mergers and takeovers (limitations on market access); land-property and real estate; and incentives/preferences (limitations on national treatment). Horizontal commitments under Mode 4 are identical to those under the GATS, covering intra-corporate transferees, and others (including specialists; professionals with academic credentials, professional qualifications, experience and/or expertise; and business visitors).

2.40. Regarding sector-specific commitments, comparing to its GATS commitments, Malaysia made improvements in, inter alia, computer and related services; construction and related engineering services; professional services; telecommunications services; and audiovisual services. It did not reproduce some of the specific commitments made under the GATS in: rental/leasing services without operators; some (other) business services; the whole financial sector; entertainment services; sporting and other recreational services; and some maritime transport services. Partial commitments were made in sectors and/or sub-sectors for which Malaysia has no GATS commitments, such as higher education services, and road transport services.

2.41. Under the Free Trade Agreement between Malaysia and Turkey, which entered into force in 2015, parties agreed that for originating goods under:18

a. fast track: tariffs were to be eliminated on the date of entry into force of the FTA;

b. normal track: tariffs were to be reduced and ultimately eliminated in four equal annual stages beginning on the date of entry into force of the FTA;

c. sensitive track: tariffs were to be reduced and ultimately eliminated in six equal annual stages beginning on the date of entry into force of the FTA;

d. highly sensitive track: tariffs were to be reduced and ultimately eliminated in nine equal annual stages beginning on the date of entry into force of the FTA;

e. standstill: tariffs were to remain at the Base Rates;

f. exclusion list: no obligation relating to tariffs;

g. reduced duty: tariffs were to be reduced from the Base Rate to the mutually agreed reduced duty on the date of entry into force of the FTA;

18 MITI online information. Viewed at: http://fta.miti.gov.my/miti-fta/resources/Malaysia%20- %20Turkey/MTFTA_Main_Agreement.pdf [11/05/2017].

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h. tariff quota: tariff quotas are set out in Appendix 3-B-1 and 3-B-2 of the FTA.

2.42. Currently, provisions in the MTFTA regulate trade in goods between Malaysia and Turkey. Its evolutionary clause stipulated that both parties agreed to begin negotiations in trade in services, and exploratory talks on investment, one year after the entry into force of the MTFTA.19 The authorities indicated that these negotiations have not yet begun.

2.3.3 PTAs

2.43. Malaysia receives GSP (Generalized System of Preferences) treatment from Japan (for 76 tariff lines), Norway, the Russian Federation, Belarus, and Switzerland.

2.3.4 Other agreements and arrangements

2.44. Malaysia is a signatory to the Global System of Trade Preferences (GSTP) among Developing Countries, and grants a 10% preferential tariff for certain woven fabrics made of man-made fibres.20

2.45. By the end of 2016, 40 countries had signed (among which, 31 ratified) the Framework Agreement on the Trade Preferential System of the Organization of the Islamic Conference (TPS-OIC). The Agreement entered into force in 2003, although it has not been operational. Under the TPS-OIC, 31 countries signed (among which, 18 ratified) the Protocol on the Preferential Tariffs Scheme, which entered into force in 2010; and 30 countries signed (among which, 18 ratified) the Rules of Origin, which entered into force in 2011.

2.46. Malaysia also signed the Developing Eight Preferential Tariff Arrangement (D8-PTA), together with Bangladesh, Egypt, Indonesia, Iran, Nigeria, Pakistan, and Turkey. Malaysia lowered its tariffs under the D8-PTA from 2013 to 2016 (Section 3.1).

2.47. As an APEC member, Malaysia has:

a. fulfilled the commitments to eliminate or reduce import tariffs to 5% on the 54 products under the APEC Environmental Goods List 2012, which came into effect on 1 January 2016;

b. co-led the project with the Philippines to integrate SME automotive suppliers into OEM (original equipment manufacturer) global value chains, and the GVC-SME Automotive Sector project which is a multi-year and 2-phase project to be completed in 2019;

c. participated in the Core Drafting Group on the Collective Strategic Study on the Free Trade Area of the Asia-Pacific (FTAAP);

d. contributed to the APEC Services Competitiveness Roadmap (2016-2025), and undertaken discussions on the 14 APEC-wide actions identified under the Roadmap; and

e. contributed to the APEC SME O2O Initiative, which intends to facilitate the growth of SMEs through online-to-offline business models.

2.4 Investment Regime

2.4.1 Overview

2.48. According to the World Bank's Doing Business report, Malaysia ranked 23rd among 190 economies in the world in 2017 in overall terms of the ease of doing business (22nd among 189 economies in 2016).21 During the review period, Malaysia made starting a business less costly

19 WT/REG379/N/1, 21 February 2017. 20 WTO online information. Viewed at: http://rtais.wto.org/UI/PublicShowRTAIDCard.aspx?rtaid=146 [11/05/17]. 21 World Bank (2017), Doing Business 2017 – Malaysia. Viewed at: http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/mys.pdf [16/05/17].

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- 34 - by reducing the company registration fees, but made it more difficult by requiring that companies with annual revenue of more than RM 500,000 register as GST payers (Section 3.3.1). Its ranking in terms of the ease of starting a business dropped significantly from 59th in 2016 to 112th in 2017.

2.49. The World Economic Forum's (WEF) Global Competitiveness Report ranked Malaysia 25th out of 138 economies in 2016-17, down from 18th out of 140 economies in 2015-16.22 The authorities stated that, despite the slide, Malaysia continued to be the highest ranked among developing Asian countries.23 Its ranking in the WEF's Global Enabling Trade report improved from 38th out of 134 economies in 2014 to 37th out of 136 economies in 2016.24 The most problematic factors involved in doing business in Malaysia, as identified in the Global Competitiveness Report, include: access to financing, corruption, and inefficient government bureaucracy.

2.50. Since the previous review in 2014, there has not been any significant change to the legislative and institutional framework governing investment. Both domestic and foreign investment in Malaysia continues to be regulated under the Promotion of Investment Act (PIA) 1986, and the Industrial Co-ordination Act (ICA) 1975. The PIA sets out rules on corporate income tax relief for the establishment and development in Malaysia of certain economic activities, as well as for the promotion of exports. The ICA aims at maintaining orderly development and growth in Malaysia's manufacturing sector, and requires manufacturing companies of a certain size to be licensed.25

2.51. The principal agency for the promotion of the manufacturing and services sectors (excluding financial services and utilities) in Malaysia remains the Malaysian Investment Development Authority (MIDA), which was incorporated as a statutory body under the Malaysian Industrial Development Authority Act.26 MIDA evaluates applications for the following in relation to projects in manufacturing and related services sectors: manufacturing licences; fiscal and non-fiscal incentives; expatriate posts; duty exemptions on raw materials and components; and duty exemptions on machinery and equipment for the agricultural sector and selected services sectors.

2.52. MIDA acts as a focal point to coordinate applications related to investment projects through:

a. a Taskforce on Investment, which streamlines programmes such as trade and investment missions, and collates investment figures in the manufacturing and services sectors;

b. a Business Information Centre, and a Customer Service Centre, both of which were established to facilitate investors' enquiries relating to investment policies and procedures;

c. an Advisory Services Centre, which stations representatives from government agencies such as Royal Malaysian Customs, Department of Immigration, Department of Labour, Telekom Malaysia Berhad, Tenaga Nasional Berhad, and Department of Environment, to assist investors;

In 2017, for the first time, the Doing Business report collected data on Somalia, bringing the total number of economies covered to 190. 22 World Economic Forum (2017), The Global Competitiveness Report 2016-2017. Viewed at: http://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016- 2017_FINAL.pdf [17/05/17]. 23 MIDA (2017), 2016 Malaysia Investment Performance Report. Viewed at: http://www.mida.gov.my/home/administrator/system_files/modules/photo/uploads/20170414162927_MIDA- FINAL%20MIPR2016%2022032017.pdf [17/05/17]. 24 World Economic Forum (2016), The Global Enabling Trade Report 2016. Viewed at: http://www3.weforum.org/docs/WEF_GETR_2016_report.pdf [17/05/17]. 25 In accordance with the ICA, person(s) engaging in any manufacturing activity with shareholders' funds of RM2.5 million and above or employing 75 or more full-time paid employees must obtain a manufacturing licence. Manufacturing licences are issued automatically within seven days unless they relate to sensitive industries/activities: security, safety, health, environmental and religious considerations; projects proposed to be located in Sabah or Sarawak; or projects requiring approval under the Petroleum Development Act. Responses to manufacturing licence applications in these sensitive areas should be provided within four weeks. 26 MIDA online information. Viewed at: http://www.mida.gov.my/home/about-mida/posts/ [17/05/17].

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d. an Immigration Unit, set up in MIDA, which issues visas and work permits for expatriates and dependents in the manufacturing and services sectors;

e. one-stop centres set up at state/regional government level to facilitate project implementation by assisting investors in obtaining licences, permits and approvals;

f. investment promotion bodies at the federal and state levels, and economic corridors; and

g. online enquiries/information.

2.53. According to MIDA, Malaysia continued to adopt a more focused and targeted approach to attracting quality investment in high technology, capital-intensive and knowledge-intensive industries; high value added industries; R&D activities; and in new growth areas. In line with the 11th MP, MIDA focuses on promoting niche and more complex products for the manufacturing sector. In addition, the 11th MP identified three catalyst subsectors (electrical and electronic products, machinery and equipment, and chemicals) and two growth subsectors (aerospace and medical devices). MIDA facilitated the setting up of Industry Advisory Panels (IAPs) for these subsectors and pharmaceuticals. Focus in the services sector is in the areas of principal hubs27, logistics, and the ecosystem surrounding e-commerce, green technology, renewable energy, and waste management.28

2.54. MIDA identified the following initiatives to improve the business environment:

a. fine-tuning investment policies, as well as continuing collaboration and engagement with industry players and stakeholders to attract investment;

b. direct cooperation between MIDA and agencies at federal and state levels in securing infrastructure facilities, expediting approvals relating to building plans, and business licences, and "handholding" and assisting investors in obtaining all necessary approvals for projects until they are operational; and

c. collaboration with MITI, MOF and Customs to simplify the mechanism to grant import duty and/or sales tax exemption on machinery, equipment, spare parts, consumables, prime movers and container trailers.

2.55. The Government is moving towards a more facilitative role in boosting investment. One of the major reforms implemented in recent years is the streamlining of the tax system. The sales and services tax (SST), which was charged at the manufacturing level only (not to the rest of the supply chain), was abolished and replaced with a single tax – the goods and services tax (GST), which is applicable at all levels of the supply chain.29 The Government is also working to reduce the time and costs of procedures by establishing online portals, and simplifying processes in areas such as starting a business, registering properties, and paying taxes, among others.

2.56. PEMUDAH, the public-private sector task force, continues to be responsible for identifying measures to improve the business environment in Malaysia. It launched the Business Licensing Electronic Support System (BLESS) in 2008, a virtual one-stop services centre that provides information and helps companies apply for licences or permits to start operating businesses in Malaysia. The number of licence applications through BLESS increased more than threefold from 25,047 in 2014 to 81,344 in 2016.

27 A principal hub is a locally incorporated company that uses Malaysia as a base for conducting its regional and global businesses and operations to manage, control and support its key functions including management of risks, decision making, strategic business activities, trading, finance, management and human resources. 28 MIDA (2017), 2016 Malaysia Investment Performance Report. Viewed at: http://www.mida.gov.my/home/administrator/system_files/modules/photo/uploads/20170414162927_MIDA- FINAL%20MIPR2016%2022032017.pdf [17/05/17]. 29 APEC (2016), IAP update for Malaysia 2014-2016. Viewed at: http://www.apec.org/About-Us/About- APEC/Achievements%20and%20Benefits/2016-Bogor-Goals [31/05/17].

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2.57. The Government has been making efforts to modernize Malaysia's business licensing system. The authorities indicated that, to date, 799 licences at the federal level have been reviewed, among which 454 licences were streamlined and simplified, and 214 licences were made accessible online through BLESS. The Malaysia Productivity Corporation (MPC) conducted sectoral regulatory reviews to reduce unnecessary regulatory burdens on business. Areas being reviewed include: logistics, medical professionals, professional services to the construction industry, and construction. The MPC, in line with the Malaysia Productivity Blueprint launched in May 2017, has been tasked with reducing any non-tariff measures that impede business growth to improve the logistics sector.

2.58. The circular on the National Policy on the Development and Implementation of Regulations (NPDIR) was issued on 15 July 2013. According to this, all federal ministries and agencies are required to implement good regulatory practice (GRP) and undertake regulatory impact assessment (RIA) in developing new and amending regulations. This is to ensure that regulations are developed according to best international practice in regulatory management.30

2.59. Malaysia has also been developing regional development hubs such as the Malaysian Vision Valley, and education business parks.

2.4.2 Foreign investment regime

2.60. Malaysia's laws governing investment do not provide general principles and rules for foreign participation in local businesses. Malaysian incorporated companies, whether locally or foreign- owned, are eligible for incentives if they invest in promoted activities (Section 3).

2.61. The Government continued to reduce foreign investment restrictions during the review period. Restrictions on quantity surveying services were lifted in January 2016, bringing to 45 the total number of services sub-sectors (such as medical services, education, and legal services, among others) that have had their foreign investment restrictions lifted since 2009. Malaysia liberalized foreign equity restrictions on credit rating agencies in 2017, and unit trust management companies in 2014. Currently there is no foreign equity restriction in the capital market; according to the authorities, the 70% cap on investment banks was removed as well.

2.62. Restrictions on foreign investment in fisheries, energy, telecommunications, finance, and transport, remain. For example, as at the time of the previous review, foreign equity in power generation is allowed up to 49%, while for electricity distribution, only up to a 30% stake in a designated franchise is generally allowed. The Ministry of Transport set foreign equity ceilings for domestic airline companies at 49%, with the same ceiling permitted for convention and exhibition centres with a seating capacity below 5,000.31Foreign participation in public-private-partnership projects is in general limited to a maximum of 25% of its share capital. For projects of strategic and national importance, foreign ownership is required to be widespread to ensure that no single foreign party has a dominant influence on the company.32

2.63. Some of Malaysia's policies supporting the ethnic Malay community (Bumiputera) may affect FDI. First, acquisitions of properties valued at RM 20 million or more from Bumiputeras and government agencies by foreigners or local people must obtain approval from the Economic Planning Unit. Second, foreign-owned companies and local companies, with predominantly Malaysian-based operations that are seeking listing on the Malaysian Stock Exchange must allocate at least 12.5% of their public spread during initial public offering (enlarged issues and paid-up capital) to Bumiputera investors at the point of their listing. Third, foreign-owned hypermarkets must maintain 30% of Bumiputera equity; according to the authorities, this is to encourage local business partners to absorb knowledge and skills from foreign retailers.

2.64. As of July 2017, Malaysia had signed 64 investment guarantee agreements (IGAs). All contain provisions for investor-state dispute settlement through arbitration using the rules under the International Centre for Settlement of Investment Disputes (ICSID), United Nations

30 PEMUDAH (2017), Annual Report on Modernisation of Regulations 2016. Viewed at: http://www.mpc.gov.my/wp-content/uploads/2016/12/ARMR-2016.pdf [23/05/17]. 31 TPR Malaysia 2014. 32 TPR Malaysia 2014.

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Commission on International Trade Law (UNCITRAL), Kuala Lumpur Regional Centre for Arbitration (KLRCA), or other fora.

2.65. Malaysia has double taxation agreements (DTAs) in force with 74 jurisdictions. Since 2014, one DTA has been signed (between Malaysia and the Slovak Republic). It entered into force on 14 March 2016.

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3 TRADE POLICIES AND PRACTICES BY MEASURE

3.1 Measures Directly Affecting Imports

3.1.1 Customs procedures, valuation, and requirements

3.1. Customs procedures remain managed by the Royal Malaysian Customs Department (RMCD) under the Customs Act 1967, and no significant changes have been made to its legislative or institutional framework since the previous trade policy review of Malaysia in 2014.

3.2. Customs procedures are automated: import declarations, duty assessment, payment of duties, and customs release are submitted electronically. The issue of most import licences is paperless, and they can be submitted electronically with customs declarations. However, to date, Customs has no facility to enable electronic submission of other supporting documents (e.g. invoice, bill of lading) with the import/export declaration. In 2017, there were 59 authorized economic operators (AEOs) in Malaysia, up from 48 in 2014. Registered AEOs are encouraged to conduct electronic transactions for better security management in the supply chain.1 For importers registered as AEOs, automatic release at Customs takes one minute.

3.3. In 2017, Malaysia stood at 60th in the ranking of 190 economies on the ease of trading across borders. To import, it takes 72 hours and US$321 to conduct border compliance, and 10 hours and US$60 to conduct documentary compliance (Table 3.1). Documents required are: import declaration, commercial invoice, packing list, bill of lading, and certificate of origin. Importers file a declaration with Customs, while additional declarations are required for taxable goods valued over RM 20,000. Malaysia's rank was lower than that of the Republic of Korea (32nd), Singapore (41st), Hong Kong, China (42nd), and Japan (49th), but higher than the regional average (East Asia and Pacific).2

Table 3.1 Import time and cost, 2017

Indicator Malaysia East Asia and Pacific Time to import: border compliance (hours) 72 71 Cost to import: border compliance (US$) 321 436 Time to import: documentary compliance (hours) 10 71 Cost to import: documentary compliance (US$) 60 128

Source: World Bank (2017), Doing Business 2017 – Malaysia. Viewed at: http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/mys.pdf [12/06/17].

3.4. Malaysia ratified the WTO Trade Facilitation Agreement (TFA) in May 2015, and notified that it designated all provisions under Category A with some exceptions (Section 2.3.1). It is party to the World Customs Organization Revised Convention on the Simplification and Harmonization of Customs Procedure (Revised Kyoto Convention).

3.5. Malaysia ranked 37th out of 136 countries in the World Economic Forum's Enabling Trade Index in 2016, and 17th in its availability and quality of transport infrastructure sub-index.3 According to the OECD trade facilitation indicators, as of 2015 (the latest year for which data are available), Malaysia performed better than the averages of Asian and upper-middle-income countries in the areas of fees and charges, harmonization and simplification of documents, automation, streamlining of procedures, and governance and impartiality.4 Its performance for information availability and both internal and external border agency cooperation is below the averages of Asian and upper-middle-income countries.

1 Malaysia International Trade Repository online information. Viewed at: http://mytraderepository.customs.gov.my/en/Pages/at_loat.aspx [13/06/17]. 2 World Bank (2017), Doing Business 2017 – Malaysia. Viewed at: http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/mys.pdf [12/06/17]. 3 World Economic Forum (2016), The Global Enabling Trade Report 2016. Viewed at: http://www3.weforum.org/docs/WEF_GETR_2016_report.pdf [12/06/17]. 4 OECD Trade Facilitation Indicators – Malaysia. Viewed at: http://www.oecd.org/tad/facilitation/Malaysia_OECD-Trade-Facilitation-Indicators.pdf [13/06/17].

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3.6. To facilitate trade, the Government: simplified document requirements for the issuance of landing permits for domestic charter flights; reduced unnecessary regulatory supply chain requirements for the processed food industry; removed requirements from MAQIS (Malaysian Quarantine and Inspection Services) for the issuance of import and export permits for agricultural products, including processed food; established the National Single Window, the Malaysian National Trade Repository portal, and the ASEAN Trade Repository Portal. In addition, the authorities stated that other major trade facilitation initiatives include:

a. setting up a Trade Facilitation Cluster Working Group as the national trade facilitation committee, to coordinate and monitor trade facilitation efforts so as to ensure compliance with the WTO's TFA;

b. revival of the ASEAN Trade Facilitation Joint Consultative Committee to conduct trade facilitation reforms with the aim of strengthening cooperation, reducing transaction costs, and promoting efficient trade among ASEAN members;

c. implementing the ASEAN Single Window, which is a regional initiative connecting and integrating national single windows by enabling the electronic exchange of cross border documents among ASEAN members; and

d. Pilot testing the ASEAN-wide Self-Certification Scheme, which is to be realized by 2018 (Section 2.3.2.1).

3.7. To date, smuggling remains a concern, despite the value of seized items decreasing by 38% from 2014 to 2016 reflecting enhanced enforcement initiatives to mitigate this problem. In 2016, the value of seized merchandise was RM 446.9 million, equivalent to 0.26% of total merchandise imports. Major items included drugs, cigarettes, vehicles, alcoholic beverages, and firecrackers.

3.8. Complaints against customs decisions may be made to the Director General of Customs, and appeals may be lodged with the Customs Appeal Tribunal, the Minister of Finance, and the High Court. To date, 118 cases have been lodged with the Customs Appeal Tribunal, among which, 25 were lodged after 2014.5

3.9. Customs valuation is based on the Customs (Rules of Valuation) Regulations 1999, amended in 2000, and is largely determined in accordance with the WTO Agreement on Customs Valuation. Transaction value based on the c.i.f. price is used for most imports. If this method cannot be used, valuation is based on the transaction value of identical or similar goods, the deductive value, the computed value or flexible valuation.6 The Minister of Finance approves the minimum value of goods recommended by the Customs Valuation Management Section. Regarding the valuation of passenger cars and motorcycles, Customs is reviewing its practices to adopt the transaction value method.

3.1.2 Rules of origin

3.10. Malaysia has no national law governing rules of origin for imports, and it does not maintain any non-preferential rules of origin. Preferential rules apply to imports under preferential trading arrangements and FTAs (Sections 3.1.3.3 and 2.3.2), and are generally based on two criteria:

a. Wholly obtained or produced, for natural products; and

b. Substantial transformation: comprising the value added method, the change in tariff classification at HS 2-digit, 4-digit or 6-digit levels, specified process of manufacture involving products such as textiles and chemicals, or a combination of the above.

5 Details of the appeal cases are available online at: http://tribunalkastam.treasury.gov.my/index.php/en/ringkasan-keputusan-rayuan [28 /09/17]. 6 Customs (Rules of Valuation) Regulations. Viewed at: http://www.customs.gov.my/en/pg/Pages/pg_act.aspx [13/06/17].

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3.1.3 Tariffs

3.11. As part of the national budget process, Malaysia's tariff schedule is reviewed annually. Regular reviews of the tariff structure and tariff rates are held through dialogues between the authorities and the business community.

3.12. Malaysia's implementation of its Uruguay Round tariff binding was achieved in 2005. As during the previous review period, about 20% of its tariff lines are unbound, and the simple average bound rate is 11.0% for agricultural products (WTO definition) and 16.5% for non-agricultural products. Malaysia's bound tariffs are in HS 02 nomenclature.7

3.1.3.1 Applied MFN tariff

3.13. In 2017, Malaysia's tariff schedule is based on HS 2017 nomenclature, comprising 11,690 lines at the 10-digit level. Almost all rates (99%) are ad valorem; duty-free lines account for 56.2% of all tariff lines, while ad valorem rates higher than 0% account for 42.8% (Table 3.2). Among the 116 tariff lines with non-ad valorem rates, 64 lines carry specific rates, 50 lines carry compound rates, and 2 lines carry alternate rates.

Table 3.2 Malaysia's tariff structure, 2013 and 2017

MFN applied 2013 2017 Simple average rate (%) 5.6 7.5 HS 01-24 2.5 2.7 HS 25-97 6.2 8.3 WTO agricultural products 2.9 3.3 WTO non-agricultural products 6.0 8.0 Duty-free tariff lines (% of all tariff lines) 64.6 56.2 Simple average of dutiable lines only 15.9 17.2 Tariff quotas (% of all tariff lines) 0.2 0.2 Non-ad valorem tariffs (% of all tariff lines) 0.9 1.0 Domestic tariff "peaks" (% of all tariff lines)a 16.8 13.9 International tariff "peaks" (% of all tariff lines)b 16.8 20.7 Nuisance applied rates (% of all tariff lines)c 0.1 0.03 Standard deviation 9.5 10.9 Total number of tariff lines 9,417 11,690 Ad valorem rates (> than 0%) 3,255 5,001 Duty-free rates 6,079 6,573 Specific rates 41 64 Compound rates 40 50 Alternate rates 2 2 a Domestic tariff peaks are defined as those exceeding three times the overall simple average applied rate. b International tariff peaks are defined as those exceeding 15%. c Nuisance rates are those greater than zero, but less than or equal to 2%. Note: Calculations exclude in-quota rates and specific rates and include the ad valorem part of compound and alternate rates. The 2013 tariff is based on HS 12 and the 2017 tariff is based on HS 17 nomenclature. Source: WTO Secretariat calculations, based on data provided by the authorities.

3.14. The simple average applied MFN rate went up from 5.6% in 2013 to 7.5% in 2017; it went up for both agricultural (WTO definition) and non-agricultural products, from 2.9% to 3.3%, and from 6% to 8%, respectively. These changes reflect both the nomenclature change, and changes in the tariff structure as a large number of duty-free lines were merged into other tariff lines during the tariff transposition process (from HS 2012 to HS 2017) (Table A3. 1, and Chart 3.1). In particular:

7 For details of tariff bindings, see WTO document WT/TPR/S/292/Rev.2, 8 April 2014.

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 the number of tariff lines under chapter 44 (wood and articles of wood) was reduced from 1,477 in 2013, to 405 in 2017, and the simple average rate of tariffs for these products rose from 1.1% to 4.3%; and

 the number of tariff lines under chapter 87 (vehicles and parts thereof) was increased from 356 in 2013, to 1,245 in 2017, and the simple average tariff rate for these lines went up from 19.9% to 23%.

ChartChart 3. 3 .Average1 Average applied applied MFN tariff MFN rates, tariff by HSrates, section, by 2013HS section, and 2017 2013 and 2017

25%

20% MFN 2013 MFN 2017

15%

10%

5%

0% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Total

01 Live animals & products 07 Plastic & rubber 13 Articles of stones 19 Arms & ammunition 02 Vegetable products 08 Hides & skins 14 Precious stones, etc. 20 Miscellaneous manufacturing 03 Fats & oils 09 Wood & articles 15 Base metals & products 21 Works of art, etc. 04 Prepared food, beverages 10 Pulp, paper, etc. 16 Machinery 05 Mineral products 11 Textiles & articles 17 Transport equipment 06 Chemicals & products 12 Footwear, headgear 18 Precision instrument Note: 2013 tariff is based on HS12 nomenclature; 2017 tariff is based on HS17. Calculations exclude Note: 2013 tariff is based on HS12 nomenclature; 2017 tariff is based on HS17. Excluding in-quota and specific rates. Includingin-quota the ad valoremand specific part of ratescompound and and include alternate the rate. ad valorem part of compound and alternate rates.

Source:Source: WTOWTO Secretariat Secretariat calculations, calculations, based on online based data on provided online bydata the providedauthorities. by the authorities.

3.15. The number of different tariff rates changed from 19 in 2013 to 25 in 2017. Ad valorem tariff rates range from zero to 60% (ceramic glazed wall tiles) for industrial products and 90% (round cabbage) for agricultural products (Chart 3.2). Rates of over 30% now apply to 0.9% of tariff items (up from 0.6% in 2013). Average tariffs are highest for transport equipment (simple average tariff rate of 21.5% in 2017), and articles of stone (17.8%) (Chart 3.1).

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Chart 3.2 Distribution of MFN tariff rates, 2013 and 2017 Chart 3.2 Distribution of MNF tariff rates, 2013 and 2017

Number of tariff lines

7,000 (56.2%) MFN 2013 MFN 2017 (64.6%) Total number of lines: 9,417 Total number of lines: 11,690 6,000

5,000

4,000

3,000

2,000

(10.6%) (10.1%) (9.0%) (8.6%) 1,000 (5.9%) (6.7%) (6.0%) (5.1%) (3.0%) (4.7%) (2.8%) (2.1%) (0.9%) (0.5%) (1.0%) (0.8%) (0.6%) (0.4%) 0 Duty free 5% >5%<10% 10% 15% 20% 25% 30% >30%-90% Specific rates

Note:Note: For 2013For and 2013 2017, and respectively 2017 respectiv 0.1% andely, 0.2 0.1%% of total and lines 0.2% are notof totalshown lines as they are correspond not shown to sporadic as they rates correspond falling in to betweensporadic the main rates tariff fallingrates (eg. in 3%,between 17%, 22%).the main 2013 tariff tariff rates is based (e.g. on HS12 3%, nomenclature;17%, 22%). 2017 2013 tariff tariff is based is based on HS17. on ExcludingHS12 in- quotanomenclature; and specific rates.2017 Includingtariff is thebased ad valorem on HS17. part ofCalculations compound and exclude alternate in rate.-quota Figures and in sp bracecifickets ratesrefer to the percentageand include of total the lines. ad valorem part of compound and alternate rates. Figures in brackets refer to the Source: WTOpercentage Secretariat calculations, of total lines. based on online data provided by the authorities. Source: WTO Secretariat calculations, based on online data provided by the authorities.

3.16. Non-ad valorem duties, mainly applied to agricultural products, may conceal high tariff protection. According to WTO Secretariat calculations, in 2017 the calculable ad valorem equivalentsChart 3.[1] (AVEs)Tariff distribution of the non by- adtype valorem of duty, duties2017 in general fall in the range from 0.2% (clove cigarettes) to 465% (certain manufactured tobacco) (Chart 3.3).

Chart 3.3 Tariff distribution by type of duty, 2017

Ad valorem duty 42.8%

Specific duty 0.5% 64 tariff lines: 1 = pineapples 58 = alcoholic beverages 5 = cigarettes and cigars

Non-ad valorem duty 1.0%

Compound duty 0.4% 50 tariff lines: 20 = edible fruit 29 = tobacco products Duty free 1 = remelting scrap ingots 56.2% Alternate duty 0.02% 2 lines: 1certain paper 1certain fans Source:Source: WTOWTO Secretariat Secretariat calculations, calculations based based on ondata data provided provided by the by authorities.the authorities.

3.17. The dispersion of MFN tariff rates, as reflected by the standard deviation, increased slightly from 9.5% in 2013 to 10.9% in 2017. As a proportion of all tariffs, "domestic tariff peaks", defined as those exceeding three times the overall simple average applied rate, declined. During the same period, the proportion of tariffs exceeding 15% increased. The number of lines with a tariff rate at 30% accounted for 10.1% of all tariff lines in 2017, up from 4.7% in 2013 (Chart 3.2).

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3.18. Malaysia's tariff quotas continue to be applied to 27 tariff lines at the HS 10-digit level; according to the authorities, this is to meet the requests of domestic small producers. The type of products is the same as in 2013, although the number of lines increased from 20 to 27, due to nomenclature change and splitting of lines. The products covered include live swine and poultry, poultry and pork meat, liquid milk and cream, and round cabbage. In-quota rates range from zero (round cabbages) to 25% (pork), while out-of-quota rates range from 20% to 90% (round cabbages). Quotas are allocated on a first-come-first-served basis to importers. Based on MA2 notification in 2015, the quota filling rate ranged from 0% to 278% (Section 4.1).

3.1.3.2 Duty concessions/exemptions

3.19. Import duty exemptions continue to be applied to manufacturing companies on raw materials and components used in the manufacture of goods for export, and for machinery and equipment not available in Malaysia but used directly in the manufacturing process.

3.20. The authorities indicated that in 2016, revenue forgone from import duty and GST relief was US$5.2 billion, equivalent to 22% of total tariff revenue.

3.1.3.3 Tariff preferences

3.21. Malaysia's preferential tariffs for intra-ASEAN trade remain under the ASEAN Harmonized Tariff Nomenclature (AHTN) 2017 classification system, which consists of 11,690 ten-digit lines. Malaysia transposed ATIGA into HS 2017, and is undertaking a transposition exercise for its preferential tariff commitments under all ASEAN regional RTAs and MAFTA from HS2012 to HS2017.

3.22. The simple average rates under all preferential arrangements are lower than the simple average MFN rate, although the averages among arrangements are different, ranging from 0.1% to 7.4% (Table 3.3).

Table 3.3 Summary analysis of Malaysia's preferential tariffs, 2017

WTO non- Total WTO agriculture agriculture Duty- Duty- Duty- Average Range free Average free Average free (%) (%) rates (%) rates (%) rates (%) (%) (%) MFN 7.5 0-90 56.2 3.3 67.6 8.0 54.6 ASEAN Trade in Goods 0.1 0-30 98.7 0.4 91.4 0.04 99.7 Agreement (ATIGAa - HS17) ASEAN - Australia New Zealand 0.8 0-40 87.3 0.9 86.6 0.8 87.4 FTA (AANZFTA - HS12) ASEAN - China FTA (ACFTA - 2.3 0-40 87.4 0.4 92.6 2.6 86.6 HS12) ASEAN - India FTA (AIFTA - 3.6 0-90 76.4 1.4 87.9 3.9 74.8 HS07) ASEAN - Japan (AJCEPA - HS07) 1.8 0-90 85.1 1.4 88.8 1.8 84.6 ASEAN - Korea, Rep. of FTA 2.1 0-90 83.4 1.0 89.2 2.2 82.5 (AKFTA - HS12) Malaysia - Australia FTA (MAFTA - 0.1 0-40 98.5 0.7 91.1 0.1 99.6 HS12) Malaysia - Chile FTA (MCFTA - 0.7 0-90 88.7 1.4 88.9 0.7 88.7 HS07) Malaysia - India CECA (MICECA - 3.3 0-90 76.5 1.2 88.0 3.6 74.9 HS07) Malaysia - Japan EPA (MJEPA - 0.2 0-50 98.2 1.2 90.6 0.1 99.2 HS07) Malaysia - New Zealand FTA 0.1 0-40 98.7 0.7 91.3 0.05 99.7 (MNZFTA - HS07) Malaysia - Pakistan CEPA 4.9 0-60 70.8 0.9 89.0 5.5 68.2 (MPCEPA - HS07) Malaysia - Turkey FTA (MTFTA - 3.4 0-90 63.3 1.4 77.8 3.7 61.3 HS12) PTA-D8b (HS12) 7.4 0-90 56.2 3.3 67.6 7.9 54.6

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3.1.4 Other charges affecting imports

3.23. The authorities stated that no fees are imposed by Customs for customs procedures.

3.1.5 Import prohibitions, restrictions, and licensing

3.24. Import prohibitions and licensing requirements are regulated under the Customs (Prohibition of Imports) Order 2017, which came into force in April 2017, while the Customs (Prohibition of Imports) Order 2012 was revoked at the same time.8 The order contains four schedules, according to which, some goods are absolutely prohibited while some are prohibited from importation except under an import licence (Table 3.4).

Table 3.4 Import prohibition and licensing schedules

Schedule Description First schedule Goods absolutely prohibited from importation Second schedule Part I Conditional prohibition except under import licence Part II Conditional prohibition except under import licence, and does not apply to specified free zones Part III Conditional prohibition except under import licence, and shall not apply to Labuan, Langkawi, Tioman and specified free zones Third schedule Part I Conditional prohibition except in the manner provided for Part II Conditional prohibition except in the manner provided for, and shall not apply to the free commercial zone Part III Conditional prohibition, except in the manner provided for, for goods controlled under the International Trade in Endangered Species Act 2008 Fourth schedule Part I Conditional prohibition except conforming to the Malaysian standards or other standards approved by the Malaysian authorities and in the manner provided for Part II Conditional prohibition except conforming to the Malaysian standards or other standards approved by the Malaysian authorities and in the manner provided for, and does not apply to the free commercial zones

Source: Customs (Prohibition of Imports) Order 2017.

3.25. Import permits cannot be changed or amended, and cannot be re-used.

3.26. In January 2014, the Government decided that the "approved permits" (AP) system governing the importation and distribution of foreign-built or assembled cars, trucks, and motorcycles, which forms part of the National Automotive Policy (NAP), was to be continued with some additions: i.e. opening to more entrepreneurs to venture into this business. The policy for franchise APs, as guided under the NAP, remains.9

8 Customs (Prohibition of Imports) Order 2017 (P.U. (A) 103), 1 April 2017. Viewed at: http://www.aseanlip.com/malaysia/tax/legislation/customs-prohibition-of-imports-order-2017/AL14612 [20/06/17]. 9 WTO document, WT/TPR/S/292/Rev.1, 8 April 2014.

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3.1.5.1 Prohibitions (first schedule)

3.27. Malaysia prohibits imports of a number of products, on religious, security, health, and environmental protection and safety grounds. It prohibits the importation of logs, wood in the rough, wood roughly squared or half squared but not further manufactured, and baulks, from Indonesia. Another 14 major product categories are absolutely prohibited from importation from all countries. These include: some broadcast receivers; comb or comb chunk (the authorities stated that the pest risk analysis conducted on this product revealed high risks of infestation pests with adverse effects); lightening arresters containing radioactive material; liquid-filled type electric heating bags, cushions, pillows, pouches or pads using alternating current (AC) or AC and direct current (AC/DC); new pneumatic snow tyres and new retreaded snow tyres for all types of vehicles; poisonous chemicals and minerals; certain animal feed; sodium arsenite; and substances covered under the Montreal Protocol.

3.1.5.2 Import licensing (second, third, and fourth schedules)

3.1.5.2.1 Second schedule

3.28. According to the Customs (Prohibition of Imports) Order 2017, part I of the second schedule lists products that are prohibited from importation except under an import licence. All goods originating from (and exporting to) Israel are subject to import (and export) licensing requirements. Imports of 16 product categories from all countries require an import licence (Table 3.5).

Table 3.5 Import licensing

Automatic Ministry/Department/Statu Description of product licensing tory Body issuing licence All goods from Israel No MITI Sugar (including cane and beet sugar, chemically pure Yes Ministry of Domestic Trade, sucrose, fructose and glucose) Cooperatives and Consumerism Radar apparatus, radio navigational aid apparatus, including Yes SIRIM Berhad other parts and accessories; parabolic antenna including other parts and accessories Chassis fitted with engines, for motor vehicles of heading Yes MITI 87.02, 87.03, 87.04, or 87.05 Chassis not fitted with engines, for motor vehicles of heading Yes MITI 87.02, 87.03, 87.04, or 87.05 Bodies (including cabs) for motor vehicles falling within Yes MITI headings 87.02, 87.03, 87.04, or 87.05 Motor-cycles, auto-cycles (including mopeds), electric Yes MITI powered motorcycles, motorised bicycles and cycles fitted with an auxiliary motor (excluding side cars) Road tractors for semi-trailers (including prime movers), Yes MITI completely built-up, old Special purpose motor vehicles, other than those principally Yes MITI designed for the transport of persons or goods (for example breakdown lorries, crane lorries, concrete-mixer lorries, road sweeper lorries, spraying lorries, mobile workshops, mobile radiological units), excluding fire fighting vehicles Used brakes and servo-brakes including used brake pad, and No MITI brake lining, for motor vehicles of headings 87.01, 87.02, 87.03, 87.04, 87.05, 87.09, and 87.11; All kinds of reusable batteries (accumulators) for motor vehicles of headings 87.01, 87.02, 87.03, 87.04, 87.05, 87.09, and 87.11 Unmanufactured tobacco; tobacco refuse No National Kenaf, Tobacco Board, and Department of Agriculture (Peninsular Malaysia, Labuan, Sabah and Sarawak)

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Automatic Ministry/Department/Statu Description of product licensing tory Body issuing licence Trichloroethane (Mythyl chloroform) Yes MITI Optical disc mastering and replicating machines and parts No Ministry of Domestic Trade, thereof Cooperatives and Consumerism Toxic chemicals and their precursors covered under the Yes MITI Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction 1993 (CWC) Substances structurally derived from Phenethylamine and No Pharmaceutical Services their salts Division, Ministry of Health Hydrochlorofluorocarbons (HCFCs) covered under the Yes Department of Environment Montreal protocol, Annex C- Group 1 Flat-rolled products of other alloy steel, of a width of 600 mm Yes MITI or more

Source: Customs (Prohibition of Imports) Order 2017. Viewed at: http://www.aseanlip.com/assets/uploads/aseanlic-62216-pua_20170331_P.U.(A)103_Import.pdf [20/06/17]. And information provided by the authorities.

3.29. Part II of the second schedule lists products under "conditional prohibition except under import licence, and does not apply to specified free zones". Currently, this list is identical to the list under Part I.

3.30. According to Part III of the second schedule, some iron and steel products are prohibited from importation except under an import licence; these do not apply to Labuan, Langkawi, Tioman, and specified free zones. Import licences for these products are issued by MITI. Malaysia notified that, effective from 1 August 2017, import licence requirements for 181 tariff lines of iron and steel products had been abolished.10

3.1.5.2.2 Third schedule

3.31. Part I of the third schedule lists products prohibited from import except in the manner provided for in this schedule. These products are mainly subject to licensing requirements on SPS grounds. The products are animals and animal products, plant and plant products, as well as agricultural products such as pasta, rice, flour, vegetables, coffee, soil including earth, food products, solid waste, logs and wood in the rough from all countries (except Indonesia), wood and articles of wood, radioactive materials and irradiating apparatus, baby feeding bottles, ceramic tableware and kitchenware, tobacco and manufactured tobacco, alcohol, stones, and water.

3.32. Licences may be issued by the Malaysian Quarantine and Inspection Services (MAQIS), Department of Agriculture (DOA), Department of Wildlife and National Park, Food Safety and Quality Division of the Ministry of Health, Department of National Solid Waste Management, Ministry of Home Affairs, Pesticide Board under the DOA, and Atomic Energy Licensing Board. On a number of products, inspection is required before an import licence is issued.

3.33. At the federal level, relevant legislation refers to: Malaysian Quarantine and Inspection Services Act 2011, Plant Quarantine Regulations 1981, Wildlife Conservation Act 2010, Atomic Energy Licensing Act 1984, Radiation Protection (Licensing) Regulations 1986, and Atomic Energy Licensing (Exemption) (Low Activity Radioactive Material) Order 2002, among others. For importation into Sabah and Sarawak, import permits are issued by the relevant authorities, and inspections and approvals granted by relevant authorities there.

3.34. This schedule also lists a number of products, the importation of which requires licences issued by various agencies for different reasons:

a. bullet-proof suits, pepper spray, arms and ammunition, fireworks; their importation must be accompanied by an import permit or an approval letter issued by the Chief Police Officer;

10 WTO document, G/LIC/N/2/MYS/8, 18 August 2017.

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b. toxic and hazardous waste; their importation requires approval from the Director General of Environmental Quality;

c. amusement machines are imported with a letter of approval from the Ministry of Finance;

d. rough diamonds must be imported with a Kimberley Process Certificate issued by the exporting party; and

e. substances covered under the Rotterdam Convention are imported with a letter of consent issued by the Department of Environment.

3.35. In addition, the importation of second-hand materials, such as used pneumatic tyres and used retreaded pneumatic tyres of rubber, requires a letter of approval from SIRIM Berhad. Used household electronics including televisions, washing machines, cloth dryers, refrigerators, air conditioners, and personal computers, must be accompanied by a letter of approval from Environmental Quality, and must be inspected by a competent authority or certification body or any other relevant agency.

3.36. Part II of the third schedule lists goods that may not be imported into Malaysia except in the manner provided for; however, these requirements do not apply to free commercial zones. These products include: cigarettes that must meet packaging requirements to contain health information; apparatus or equipment for the brewing of beer at home, which must be accompanied by a letter of approval; beer, wine, vermouth and other wine of grapes, other fermented beverages, ethyl alcohol, spirits and liqueurs, etc., for which every bottle, can, keg or other container of the goods must be affixed with a tax stamp.

3.37. Part III of the third schedule applies to goods in transit controlled under the International Trade in Endangered Species Act 2008. They include: any terrestrial animal; any marine animal; any terrestrial plant excluding timber species; and any timber species, as specified in the appendices of the International Trade in Endangered Species Act 2008. Goods in transit must be accompanied by a valid export or re-export permit/licence/certificate, or a written permission in accordance with the CITES, issued by the competent authority of the country of export or re-export. Where required by the country of import, these goods must obtain a valid import permit/licence/certificate or a written permission, in accordance with the CITES, issued by the competent authority of the country of destination.

3.1.5.2.3 Fourth schedule

3.38. Under part I of the fourth schedule, goods may not be imported into Malaysia except those conforming to the Malaysian standards or other standards approved by the Malaysian authorities and in the manner provided for in the schedule. These include cement; ceramic products; and plastic flushing cisterns equipped with mechanism. Their importation must be accompanied by a certificate of approval, or a letter of exemption, issued by or on behalf of the Chief Executive of the Construction Industry Development Board (CIDB), certifying that the import conforms to the approved Malaysian standards.

3.39. Part II of the fourth schedule lists goods for which importation is subject to TBT requirements; these requirements do not apply to free commercial zones (Table 3.6).

Table 3.6 Imports subject to TBT requirements

Description of product Import requirement Iron and steel products Construction Industry Development Board (CIDB), or SIRIM Berhad (non- construction) Aluminium products Construction Industry Development Board (CIDB), or SIRIM Berhad (non-construction) Electrical apparatus or Suruhanjaya Tenaga, or the equivalent counterpart in the case of certain accessories states (Sarawak), certifying that the specified domestic electrical apparatus conforms to the Malaysian or IEC standards, or British standards, or any other

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Description of product Import requirement equivalent standards approved by the Suruhanjaya Tenaga New pneumatic tyres and new Must comply to the standards as prescribed under the Motor Vehicles retreaded pneumatic tyres, of (Construction and Use) Rules 1959; imports must be accompanied by: rubber - E-mark and certificate issued by the World Forum for Harmonization of Vehicles Regulation; or - DOT mark and certificate issued by the US National Highway Traffic Safety Administration; or - MS mark and certificate issued by a certification agency or testing agency which is recognized/accredited by the Department of Standards Malaysia. Toys, games and children's Importation must be accompanied by: bicycles - certificate of conformance (COC) issued under the Consumer Protection Act 1999; - notification form or a letter of clarification Apparatus or equipment to be A certificate of approval issued by SIRIM QAS International Sdn. Bhd. Import attached to or connected to a must be certified to the Malaysian standards, or international standards, or public communication technical codes, or technical declarations, subject to the Communications and network or system Multimedia Act 1998 Radio communication A certificate of approval issued by SIRIM QAS International Sdn. Bhd. Import apparatus or equipment in must be certified to the Malaysian standards, or international standards, or the frequency band up to technical codes, or technical declarations, subject to the Communications and 420 THz Multimedia Act 1998 Flowers, vegetables, A certificate of conformity of agricultural produce, issued by MAQIS, and coconuts, fruits, coffee, inspection and approval by MAQIS (SPS measures) spices, groundnuts, sugar cane Construction products A certificate of approval, or a letter of exemption, by the Chief Executive Officer of the Construction Industry Development Board (CIDB) Non-rechargeable cells and A certificate of conformance, a notification form, or a letter of clarification, primary batteries issued by the Controller of Consumer Affairs, under the Consumer Protection Act 1999 Apparatus or equipment A certificate of approval issued by SIRIM QAS International Sdn. Bhd. Import which are integrated with a must be certified to the Malaysian standards, or international standards, or communications module for technical codes, or technical declarations, subject to the Communications and connecting to a public Multimedia Act 1998 communications network or for radio communications utilizing the frequency band up to 420 THz Liquid-filled type electric A certificate of approval issued by the Suruhanjaya Tenaga or the equivalent heating bag, cushion, pillow, counterpart in Sarawak, certifying that the product conforms to the Malaysian punch or pad filled with liquid, standard, or IEC standard, MS IEC 60335-1 using 3-pin inlet alternating current (AC) or AC and direct current (AC/DC) Motorcyclists' safety helmets Comply to standard as prescribed under the Motor Vehicles (Construction and Use) Rules 1959, governed by the Road Transport Department, and the importation is accompanied by: E-Mark and certificate; or MS Mark and certificate, issued by relevant authorities Some wheat flour A letter of consent, by the Ministry of Domestic Trade, Cooperatives and Consumerism Gas discharge headlamp Comply to the standards under the Motor Vehicles (Construction and Use) including gas discharge bulb Rules 1959, and E-Mark and certificate for motor vehicles New brake lining or brake pad Comply to the standards under the Motor Vehicles (Construction and Use) Rules 1959, E-Mark and certificate, or MS mark and certificate Vehicle alarm system and Comply to the standards under the Motor Vehicles (Construction and Use) immobilizer for motor vehicles Rules 1959, E-Mark and certificate, or MS mark and certificate

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Description of product Import requirement New seat for motor vehicles Comply to the standards under the Motor Vehicles (Construction and Use) Rules 1959, and E-Mark and certificate Speed monitoring device for Comply to the standards under the Motor Vehicles (Construction and Use) motor vehicles Rules 1959, and E-Mark and certificate Wheat flour for human Certificate of approval issued by SIRIM QAS International Sdn. Bhd. consumption

Source: Customs (Prohibition of Imports) Order 2017. Viewed at: http://www.aseanlip.com/assets/uploads/aseanlic-62216-pua_20170331_P.U.(A)103_Import.pdf [20/06/17]. And information provided by the authorities.

3.1.6 Anti-dumping, countervailing, and safeguard measures

3.40. Anti-dumping (AD) and countervailing duties (CVD) continue to be regulated under the Countervailing and Anti-Dumping Duties Act 1993, and the Countervailing and Anti-Dumping Duties Regulations 1994, both of which have not been amended since the previous review in 2014. MITI is responsible for the administration of legislation on AD and CVD in Malaysia.

3.41. Since its last Review, Malaysia has submitted semi-annual reports on anti-dumping actions to the WTO (Table 3.7). According to the notifications, the number of investigation initiations reached its peak in 2015, while the number of definitive anti-dumping measures reached its peak in 2016. In 2014, seven measures were terminated, and in 2016, one measure was terminated.

Table 3.7 Anti-dumping investigations and measures imposed, 2014-17

2014_1 2014_2 2015_1 2015_2 2016_1 2016_2 2017_1 Investigation initiations 8 8 19 14 5 0 4 Reviews/other subsequent 7 7 0 0 2 2 0 proceedings Definitive anti-dumping 19 12 18 18 23 22 22 measures in force Refund request 0 0 0 0 0 0 0 Termination of measures 0 7 0 0 0 1 0

Source: WTO Secretariat, based on Malaysia's notifications to the WTO.

3.42. From 2014 to 30 June 2017, imports from nine Members were affected (Table 3.8). AD duties were applied mostly on biaxially oriented polypropylene film and steel wire rod, among others.

Table 3.8 Definitive anti-dumping measures in force, by country and product, 2014- 30 June 17

2014_1 2014_2 2015_1 2015_2 2016_1 2016_2 2017_1 Canada 1 0 0 0 0 0 0 China 4 2 5 5 7 7 7 Indonesia 3 2 4 4 4 4 4 Republic of Korea 3 2 3 3 4 4 4 Separate Customs Territory 2 2 2 2 2 2 2 of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei) Thailand 3 3 3 3 3 2 2 Viet Nam 1 1 1 1 3 3 3 Philippines 1 0 0 0 0 0 0 United States 1 0 0 0 0 0 0

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2014_1 2014_2 2015_1 2015_2 2016_1 2016_2 2017_1 Total: 19 12 18 18 23 22 22 Products: Steel wire rod 4 3 4 4 4 4 4 Biaxially oriented 5 5 5 5 5 5 5 polypropylene film Electrolytic tinplate 2 2 2 2 2 2 2 Polyethylene terephthalate 1 1 4 4 4 3 3 Hot rolled coil 0 0 2 2 2 2 2 Prepainted, painted or colour 0 0 0 0 2 2 2 coated steel coils Cold rolled coils of alloy and 0 0 0 0 3 3 3 non-alloy steel Cellulose fibre reinforced 0 0 0 0 1 1 1 cement flat and pattern sheets Fibre cement board 1 1 1 1 0 0 0 New print 5 0 0 0 0 0 0 Stranded wire 1 0 0 0 0 0 0 Total: 19 12 18 18 23 22 22

Source: WTO Secretariat, based on WTO notifications.

3.43. To date, Malaysia has not taken any countervailing measures.

3.44. Safeguards are regulated under the Safeguards Act of 2006, most recently amended in 2012, and the Safeguards Regulations 2007.

3.45. Malaysia notified to the WTO that during the review period (2014-17): four safeguard investigations were initiated, all concerning steel products; three provisional measures, and three definitive measures were applied; and one investigation was terminated (Table 3.9).

Table 3.9 Initiation of safeguard investigations, provisional measures, final measures, and termination 2014-17

Investigation initiations, provisional measures, final measures, and termination

Investigation initiations Products concerned Date of initiation Agency applied for safeguard investigation

Steel wire rod, deformed bar in coil 29 May 2016 Malaysia Steel Association

Steel concrete reinforcing bar 28 May 2016 Malaysia Steel Association

Hot rolled coils 11 September 2015 Megasteel Sdn. Bhd.

Hot rolled steel plate 18 August 2014 Ji Kang Dimensi Sdn. Bhd.

Provisional safeguard measures

Products concerned Provisional safeguard duty Exceptions

Hot rolled steel plates 23.93% of c.i.f. price for 200 Imports from developing countries that days, from 14 December 2014 are less than 3% individually are not subject to the provisional safeguard measures, except imports from China, Ukraine, the Republic of Korea, Indonesia, and Singapore

Steel concrete reinforcing bars 13.42% of c.i.f price for 200 Imports from developing countries that days, from 26 September are less than 3% individually are not 2016 subject to the provisional safeguard measures, except imports from China

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Investigation initiations, provisional measures, final measures, and termination

Steel wire rod and deformed bar in coil 13.90% of c.i.f price for 200 Imports from developing countries that days, from 27 September are less than 3% individually are not 2016 subject to the provisional safeguard measures, except imports from China, the Republic of Korea, and Singapore

Finding a serious injury or threat thereof caused by increased imports

Products concerned Definitive safeguard Applicable to: measures Steel wire rods and deformed bar in coils 15 April 2017-14 April 2018: Imports from all sources globally except 13.90% developing countries with imports less 15 April 2018-14 April 2019: than 3% individually and LDCs 12.90% 15 April 2019-14 April 2020: 11.90%

Steel concrete reinforcing bars 14 April 2017-13 April 2018: Imports from all sources globally except 13.42% developing countries with imports less 14 April 2018-13 April 2019: than 3% individually and LDCs 12.27% 14 April 2019-13 April 2020: 11.10%

Hot rolled steel plate 2 July 2015-1 July 2016: Imports from all sources globally except 17.40% developing countries with imports less 2 July 2016-1 July 2017: than 3% individually and LDCs 13.90% 2 July 2017-1 July 2018: 10.40%

Termination of investigation with no safeguard measures imposed

Products concerned Initiation and termination Reasons for termination of investigation

Hot rolled coils Investigation initiated in Imports of the product have not caused September 2014, terminated serious injury or threat of serious injury on 8 January 2016 to the domestic industry.

Source: WTO notifications.

3.2 Measures Directly Affecting Exports

3.2.1 Customs procedures and requirements

3.46. Since the previous Review in 2014, there has not been any significant change to export procedures in Malaysia. To export, it takes 48 hours and US$321 to conduct border compliance, and 10 hours and US$45 to conduct documentary compliance (Table 3.10). Documents required to export are: customs export declaration, commercial invoice, packing list, bill of lading, and certificate of origin.11 Export declarations may be made by the owner, exporter, consignor or an agent authorized and approved by Customs.

11 World Bank (2017), Doing Business 2017 – Malaysia. Viewed at: http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/mys.pdf [12/06/2017].

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Table 3.10 Export time and cost, 2017

Indicator Malaysia East Asia and Pacific Time to export: border compliance (hours) 48 57 Cost to export: border compliance (US$) 321 402 Time to export: documentary compliance (hours) 10 73 Cost to export: documentary compliance (US$) 45 132

Source: World Bank (2017), Doing Business 2017 – Malaysia. Viewed at: http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/mys.pdf [12/06/17].

3.47. Export proceeds must be repatriated to Malaysia in full as per the sales contract, within six months from the date of export. They may be received in foreign currencies (except for the currency of Israel) or in ringgit from an external account. Exporters may retain up to 25% of their export proceeds in foreign currency and may reconvert the remaining 75% to ringgit (at zero bid- offer spread if conversion is undertaken on the same day).12

3.2.2 Taxes, charges, and levies

3.48. A number of products remain subject to export duties. In 2017, out of 11,690 tariff lines at the HS 10-digit level, 217 lines are subject to export duties. Most of the rates are ad valorem, ranging from 4.5% to 20% (Section 4.1). Ten lines have specific rates (live plants, certain seeds, and rattans) (Table 3.11). The authorities stated that export taxes are levied to ensure sufficient supply of raw materials for domestic downstream industries, and for food security purposes. Export duties are applied on the f.o.b. value of the goods.

Table 3.11 Malaysia export duties, 2017

Number Export duty Description of products of lines rates 10 Specific rate Live plants, certain seeds, rattans 5 4.5-8.5% Crude palm oil 5% Palm nuts and kernels suitable for sowing 2 20% Palm nuts and kernels not suitable for sowing Wood in the rough (108 lines), and certain unwrought lead, and lead waste 110 15% and scrap Palm kernel oil; crude petroleum oil; ferrous waste and scrap; copper waste 21 10% and scrap; master alloys of copper; nickel mattes; nickel oxide sinters; not alloyed nickel; nickel alloys; aluminium waste and scrap Certain live animals; palm nuts, palm kernel oil (refined, bleached, 69 5% deodorized (RBD)); slag, ash and residues; silver; platinum; refined copper, unwrought; unwrought zinc

Source: Information provided by the authorities.

3.49. The number of products subject to export duties declined significantly, from 482 lines (HS 9-digit level) in 2014, to 217 lines (HS 10-digit level) in 2017. This was due partly to the merging of tariff lines during the transposition exercise. As the number of products subject to export duties was reduced, Malaysia's revenue from export duties fell from RM 1.968 billion in 2012 to RM 980 million in 2016.

3.50. In addition, a cess of 0.2% of the export value is charged to manufacturers of rubber products (Section 4.1).

3.2.3 Export prohibitions, restrictions, and licensing

3.51. Similar to import licensing requirements, export prohibitions and licensing requirements are regulated under the Customs (Prohibition of Exports) Order 2017, which came into force in April 2017, at which time the Customs (Prohibition of Exports) Order 2012 was revoked.13 This

12 BNM online information. Viewed at: http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4316&lang=en [29/09/17]. 13 Customs (Prohibition of Exports) Order 2017 (P.U. (A) 102), 31 March 2017. Viewed at: http://www.aseanlip.com/malaysia/tax/legislation/customs-prohibition-of-exports-order-2017/AL14609 [30/06/17].

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Table 3.12 Export prohibition and licensing schedules

Schedule Description First schedule Goods absolutely prohibited from exportation Second schedule Conditional prohibition except under export licence Third schedule Part I Conditional prohibition except in the manner provided for Part II Conditional prohibition, except in the manner provided for, for goods controlled under the International Trade in Endangered Species Act 2008

Source: Customs (Prohibition of Exports) Order 2017.

3.2.3.1 Export prohibitions (first schedule)

3.52. According to the first schedule, goods absolutely prohibited for exportation are: poisonous chemicals and minerals; and substances covered under the Montreal Protocol.

3.2.3.2 Export licensing (second and third schedules)

3.53. The second schedule lists goods that are prohibited for export except under an export licence (Table 3.13).

Table 3.13 Export licensing

Description of product Ministry/Department/Statutory Body issuing licence All goods to Israel Ministry of International Trade and Industry Unrooted cuttings, budwood, budded stumps, seedlings Ministry of Plantation Industries and and seeds, of rubber, for sowing or planting Commodities Oil palm living tissues/fruits/seeds or nuts/pollens Ministry of Plantation Industries and Commodities Oils and fats of palm oil Malaysian Palm Oil Board Pineapple slips Malaysian Pineapple Industries Board Pineapple, fresh, chilled and preserved by freezing Malaysian Pineapple Industries Board Bamboo, rattans, wood, logs, charcoal, timber, etc. Malaysian Timber Industry Board and corresponding agencies in Sabah and Sarawak Minerals, ores, coal, lignite, peat, coke, etc. Ministry of Natural Resources and Environment All kinds of natural sands Ministry of Natural Resources and Environment Slag and hardhead of tin Ministry of Natural Resources and Environment Military clothing, headgear, footwear, and other textile Ministry of Defence articles Ministry of International Trade and Industry Sugar Ministry of Domestic Trade, Cooperatives and Consumerism Cement clinker Ministry of Domestic Trade, Cooperatives and Consumerism Portland cement Ministry of Domestic Trade, Cooperatives and Consumerism Waste and scrap Ministry of International Trade and Industry Recovered (waste and scrap) paper or paperboard Ministry of International Trade and Industry Toxic chemicals and their precursors covered under the Ministry of International Trade and Industry Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction 1993 (CWC) Acetyl bromide Pharmaceutical Services Division, Ministry of Health Acetyl chloride Pharmaceutical Services Division, Ministry of Health Chemicals/substances covered under the 1988 United Pharmaceutical Services Division, Ministry of

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Description of product Ministry/Department/Statutory Body issuing licence Nations Convention Against Illicit Traffic in Narcotic Drugs Health and Psychotropic Substances Hydrochlorofluorocarbons (HCFCs) covered under the Department of Environment Montreal Protocol, Annex C – Group 1 Mercury (Hg) and mercury compounds covered under the Pharmaceutical Services Division, Ministry of Minamata Convention on Mercury Health

Source: Customs (Prohibition of Exports) Order 2017 (P.U. (A) 102), 31 March 2017. Viewed at: http://www.aseanlip.com/malaysia/tax/legislation/customs-prohibition-of-exports-order- 2017/AL14609 [30/06/17].

3.54. Part I of the third schedule lists products prohibited from export except in the manner provided for:

a. products subject to licensing requirements on SPS grounds, such as animals and animal products, plants and plant products, agricultural and food products including rice and flour;

b. arms and ammunition, antiquities or heritage items, toxic and/or hazardous waste, pesticides, radioactive chemical elements and others, rough diamonds, tributyltin compounds including preparations, diesel fuel, petrol, LPG; and

c. used household electronics such as TV sets, washing machines, cloth dryers, refrigerators, air conditioners, personal computers, hand phones and mobile phones.

3.55. In accordance with relevant legislation (Malaysian Quarantine and Inspection Services Act 2011, Wildlife Conservation Act 2010, Control of Supplies Act 1961, Arms Act 1960, National Heritage Act 2005), export permits are issued by: Malaysian Quarantine and Inspection Services (MAQIS); Department of Wildlife and National Parks; Ministry of Domestic Trade, Cooperatives and Consumerism; Chief Police Officer; Commissioner of Heritage; Pesticides Board under the Department of Agriculture; Director General of the Department of the Atomic Energy Licensing Board; among others. For importation into Sabah and Sarawak, export permits are issued by relevant authorities, and inspections and approvals granted by relevant authorities there.

3.56. Part II of the Third Schedule lists goods which may not be exported from Malaysia except in the manner provided for, as they are the goods controlled under the International Trade in Endangered Species Act 2008 (Act 686). These include any terrestrial animal, any marine animal, any terrestrial plant excluding timber species, and any timber species as specified in the appendices of the Third Schedule of the International Trade in Endangered Species Act 2008 (Act 686). For exportation from peninsula Malaysia and Labuan, an export permit is required. The permit is issued by: Department of Wildlife and National Parks Peninsular Malaysia, Department of Fisheries Malaysia, Department of Agriculture Malaysia, and the Malaysian Timber Industry Board, respectively.

3.2.4 Export support and promotion

3.2.4.1 Export support

3.57. Malaysia provided support in the form of statutory income tax exemption to exporters based on the value of increased exports:

a. Manufacturing companies or companies engaged in the production of fresh and dried fruits, fresh and dried flowers, ornamental plants, and ornamental fish benefited from a tax exemption on their statutory income equivalent to 10% of the value of increased exports.

b. Manufacturing companies were eligible for tax exemption on statutory income equivalent to 10% or 15% of the value of increased exports, provided that the goods exported attained at least 30% or 50% value-added, respectively.

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c. Locally owned manufacturing companies with Malaysian equity of at least 60% were eligible for tax exemption on statutory income equivalent to 30% of the value of increased exports, provided that the company achieved a significant increase in exports; this rate was raised to 50% in case the company succeeded in penetrating new markets, and to full tax exemption if it achieved the highest increase in export in its category.

d. Exemption on 70% of statutory income tax equivalent to 50% of the value of increased exports was given to companies in selected services sectors, i.e. legal, accounting, architecture, marketing, business consultancy, construction management, building management, office services, healthcare, education, plantation, management, publishing, information and communication technology, engineering, printing, and local franchise.

3.2.4.2 Tariff and tax concessions

3.58. As during the previous review period, tariff drawbacks were granted in respect of imports of raw materials and components used for the manufacture of approved products for export. Imported goods re-exported within 12 months of the day import tariffs were paid are granted a drawback of up to 100%, subject to the Customs Act 1967.

3.2.4.3 Free trade zones and other measures

3.59. In 2017, there were 21 free industrial zones (FIZs) and 18 free commercial zones (FCZs) in Malaysia. They were set up to facilitate operations of export-oriented companies.

3.60. For companies to be located in FIZs, and for them to benefit from import duty and other tax reductions or exemptions, they must fulfil the following requirements:

a. To be located in a FIZ, a company must export at least 80% of its output; a company may obtain approval from the National Investment Committee in MITI and Customs to reduce its export performance requirement to 60%.

b. FIZ companies benefit from import duty exemptions if they achieve 40% of local content value; when the local content value does not reach 40%, the company may still benefit from import duty exemptions if it can prove that the non-originating raw material had undergone substantive transformation in producing the end products.

3.61. Prior to 1 April 2015, any goods, from overseas or within Malaysia, and services of any description, except those prohibited by law, may be brought into, produced or provided in the zones without payment of any tariffs, excises, sales or service taxes. On 1 April 2015, GST was introduced, and is payable on the goods imported into a FIZ, although it is not chargeable on the supply and removal of goods made within and between free zones. Effective from 1 July 2017, the supply of prescribed services by a company operating in a free zone, directly in connection with goods for export, is exempted from GST if these services fall entirely within the business capacity and the goods are exported within 60 days upon completion of the services. The prescribed services include: manufacturing services; building construction and modification services to ships and aircrafts; maintenance, repair and overhaul activities of floating structure; services to install, repair, clean, restore, and modify the goods; blending homogenizing, heating, and other related activities in the oil and gas industry.

3.62. Exporters operating in licensed manufacturing warehouses (LMWs) may benefit from the same benefits as those operating within a FIZ. In 2017, 2,096 companies were operating in LMWs.

3.2.4.4 Export promotion

3.63. The agency responsible for export promotion activities remains the Malaysian External Trade Development Corporation (MATRADE) under MITI. Its core services include:

a. Exporter development – training programmes, Export Excellence Awards, and client services, to equip Malaysian companies with knowledge and skills to meet the challenges in global trade;

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b. Export promotion – participation in trade missions, specialized marketing missions, international trade fairs, and business matching programmes. Being the national agency for trade promotion, MATRADE is often the reference point for enquiries and visits by foreign importers. The agency's role is to match them with compatible local partners who can offer the products and services they seek;

c. Trade and market information – dissemination of timely and relevant information as well as market intelligence, to give Malaysian companies the competitive edge in international trade;

d. Trade advisory and support – providing general, market and product advisory services.14

3.64. MATRADE has been providing grants to exporters:

a. The Market Development Grant (MDG),15 a financial support facility, was suspended from 1 April 2017. The MDG provided up to RM 200,000 per company in the form of reimbursable grants, to assist small and medium-sized enterprises (SMEs), service providers, trade and industry associations, chambers of commerce and professional bodies, to undertake export promotion activities. According to its guidelines, companies with government equity and government-linked companies were excluded from this grant. To be eligible, SMEs must be incorporated in Malaysia and have at least 60% equity owned by Malaysians.

b. The Service Export Fund (SEF) provides assistance to Malaysian service providers to expand and venture into the international market. This assistance is in the form of a reimbursable grant and soft loans, and for the period 2015-20 amounts to up to RM 3 million per company (grant), and RM 5 million per company (soft loan).16 All services sectors are eligible to apply, except tourism and financial sectors. All companies incorporated in Malaysia under the Companies Act 1965 are eligible to apply for this fund if 60% or more of its equities are owned by Malaysians. Government-linked and majority owned companies are excluded from this assistance.

3.2.5 Export finance, insurance, and guarantees

3.65. Export-Import Bank of Malaysia Berhad (MEXIM), a development financial institution, is responsible for promoting investment and the export of goods and services from Malaysia as well as facilitating the entry of Malaysian companies into new markets, particularly to the non- traditional market. MEXIM is a wholly owned subsidiary of the Minister of Finance Incorporated. Current facilities offered by MEXIM include: conventional and Islamic banking facilities (cross-border financing, trade finance, and guarantees); insurance and takaful (short-/medium- /long-term insurance). Rates fixed to lending are subject to credit assessment, and mainly charged at cost of fund plus an added spread.

3.66. MEXIM's total assets were RM 15.9 billion in 2016, up by 8% from 2015. Total disbursement grew to RM 10.35 billion, up by 14.3% from 2015. Total gross loans and financing assets closed at RM 13.1 billion by the end of 2016, up by 7% from 2015.17

14 MARTRADE online information. Viewed at: http://www.matrade.gov.my/en/about-matrade/corporate- info/background/our-core-services [04/07/17]. 15 MARTRADE online information. Viewed at: http://www.matrade.gov.my/en/malaysian- exporters/services-for-exporters/exporters-development/market-development-grant-mdg [04/07/17]. 16 MARTRADE online information. Viewed at: http://www.matrade.gov.my/en/malaysian- exporters/services-for-exporters/exporters-development/services-export-fund-sef [04/07/17]. 17 MEXIM (2016), Annual Report 2016. Viewed at: http://www.exim.com.my/index.php/en/media- centre/annual-report [04/07/17].

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3.3 Measures Affecting Production and Trade

3.3.1 Taxation and incentives

3.3.1.1 Tax structure

3.67. Total tax reached RM 169.3 billion in 2016, equivalent to less than 14% of GDP (Table 3.14). More than 60% of Malaysia's tax revenues came from direct taxes, although their share dropped from 77% in 2013 to 65% in 2016. Among all direct taxes, the share of petroleum income tax to total tax revenue declined significantly, from 19% to 5%, reflecting falling oil prices internationally.

Table 3.14 Structure of direct and indirect tax revenue, 2013-16

2013 2014 2015 2016 Total tax revenue (RM million) 155,952.2 164,204.9 165,440.7 169,343.3 Share of GDP (%) 15.3 14.8 14.3 13.8 Direct taxes (% of total tax revenue) 77.3 77.2 67.6 64.7 Companies income tax 37.3 39.7 38.5 34.4 Petroleum income tax 19.1 16.4 7.0 5.0 Individuals income tax 14.8 14.9 15.9 19.5 Stamp duties 4.1 3.9 3.6 3.4 Other 2.0 2.2 2.6 2.5 Indirect taxes (% of total tax revenue) 22.7 22.8 32.4 35.3 Export duties 1.2 1.2 0.6 0.6 Import duties 1.6 1.6 1.7 1.7 Excise duties 7.8 7.9 7.2 6.9 GST n.a. n.a. 16.3 24.3 Sales tax 6.5 6.7 3.2 0.1 Services tax 3.8 3.8 1.8 0.1 Other 1.8 1.7 1.7 1.6 n.a. Not applicable. Source: Bank Negara Malaysia online information; and information provided by the authorities. 3.3.1.1.1 Indirect taxes

3.68. A significant change to Malaysia's tax structure was the implementation of a goods and services tax (GST) of 6% from 1 April 2015, to streamline the previous consumption taxes. The GST replaced the sales tax (levied mainly at 5% and 10% on both local products and imported items except those that were to be re-exported), and services tax (levied at 6% on services sold or provided by prescribed establishments).18

3.69. GST is levied and charged only if the business is GST-registered. It is mandatory for a company to register once it reaches the registration threshold of RM 500,000. A business is not liable to be registered if its annual turnover of taxable supplies does not reach a prescribed threshold, although it can apply to be registered voluntarily.

3.70. GST is zero rated on, inter alia, essential food items such as rice, sugar, meat, fish, chicken, vegetables, flour, cooking oil, eggs; livestock supplies such as cows, goats, poultry; medicaments and medical gases in the National Essential Medicines List (NEML); and reading materials such as exercise books, children books, and dictionaries. Additionally, the authorities stated that the supply of goods or services to be exported is subject to zero-rated GST.

3.71. GST is exempted on: land for residential or agricultural purposes or general use; buildings or premises used for residential purposes; investment in precious metals; financial services; education services; child care services; healthcare services; and transport services, among others.19

18 GST online information. Viewed at: http://www.gst.com.my/ [28/07/17]. 19 GST online information, Goods and Services Tax (Exempt Supply) Order 2014. Viewed at: http://www.gst.com.my/pdf/GOODS%20AND%20SERVICES%20TAX%20(EXEMPT%20SUPPLY)%20ORDER%2 02014.pdf [28/07/17].

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3.72. In the budget speech 2016, the Minister of Finance explained that, contributions from Petroliam Nasional Berhad (PETRONAS) vary considerably because of global crude oil prices. When crude oil prices averaged US$100 per barrel in 2014, revenue from PETRONAS dividend and petroleum tax revenue totalled RM 66.6 billion. When crude oil prices declined to around US$50 per barrel in 2015, the contribution from PETRONAS and oil-related sectors were RM 47.2 billion, and continued to fall to RM 31 billion in 2016. The collection from GST helped to cover a major portion of the shortfall. Based on the Government's calculation, if GST was not implemented and the Government had to rely on sales and services tax as before, government revenue would be lower by RM 21 billion, and the fiscal deficit would have increased to 4.8% (not the target of 3.1% in 2016).20

3.73. According to a study conducted by the OECD, the GST rate at 6% is low by international standards. Moreover, the number of exempt or zero-rated items is significant and increasing, which reduces compliance and creates distortions. The OECD suggested reducing the number of exempt or zero-rated items and strengthening tax enforcement to reduce tax leakage in the short term, and increasing the rate of GST over the medium term.21 The authorities stated that the Government has taken efforts to improve the policy and administration of GST since its implementation in 2015. One of the efforts taken is to establish cooperation among government agencies in information sharing, auditing, and enforcement. GST policy has also been improved to accommodate and facilitate businesses. The Government considers the GST structure in Malaysia is not much different from other countries, and benchmark studies were conducted before its implementation.

3.74. Excise duties apply to both imported and locally manufactured goods: motorcars, four-wheel drives, motorcycles, intoxicating liquor, and cigarettes:

a. 10%-105% for motorcars and electric cars;

b. 75%-105% for four-wheel-drive vehicles;

c. 10%-30% for motorcycles and electric motorcycles;

d. RM 22.50 per 100% volume per litre, and 15% ad valorem to RM 450 per 100% volume per litre for "intoxicating" liquor; and

e. RM 0.40 per stick for cigarettes.

3.75. Excise duty rates are the same for locally produced and imported goods.

3.76. As at the time of the previous Review, individual taxi owners (since 2012) and car-rental operators (since 2002) were exempt from excise duties on the purchase of locally produced "national cars" while tour operators benefited from a 50% reduction for purchases of locally assembled four-wheel-drive cars. The authorities indicated that the measure is partly aimed at reducing the cost of car rentals to tourists and reducing the cost of public transportation, so as to spur tourism activity.

3.77. The share of import tariffs to total tax revenue remained relatively stable during the review period, while the share of export taxes declined by half, from 1.2% in 2013 to 0.6% in 2016. This is in line with the drop in the number of products subject to export duties (Section 3.2.2).

3.3.1.1.2 Direct taxes

3.78. Direct taxes account for 65% of total tax revenue in Malaysia. More than half of direct taxes come from company income tax, which is a tax on profits of companies. Companies with paid-up capital of up to RM 2.5 million are subject to a company income tax of 18% on taxable income up

20 BNM online information, 2016 Budget. Viewed at: http://www.bnm.gov.my/files/Budget_Speech_2016.pdf [05/07/17]. 21 OECD (2016), OECD Economic Surveys – Malaysia, p. 46.

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- 59 - to RM 500,000, with the excess taxed at 24%. All other companies (resident and non-resident) are subject to a company income tax at a rate of 24%.22

3.79. About one-fourth of direct tax comes from personal income tax. Resident individuals with chargeable income (after deduction of personal reliefs) of more than RM 5,000 per year are subject to personal income tax with rates ranging from 1% to 28%. Both resident individuals with chargeable income of more than RM 1 million, and non-resident individuals, are subject to a personal income tax at a rate of 28%. The top marginal tax rate for very-high-income earners – 28%, remains well below top rates of between 45% and 55% in high-income countries; the OECD considers that this provides scope for a further increase to raise revenue while maintaining the country's attractiveness to investors and skilled workers.23

3.80. The tax on income from upstream petroleum activities (petroleum income tax) applies at a rate of 38% (Section 4.3). The share of petroleum income tax to total tax revenue has been declining, and accounted for about 5% of total tax revenue in 2016.

3.3.1.2 Tax incentives

3.81. Malaysia continues to provide tax incentives, both direct and indirect, under the Promotion of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Excise Act 1976, and Free Zones Act 1990.24 Direct tax incentives grant partial or total relief from income tax for a specified period, and incentives on indirect taxes are in the form of exemptions from import tariffs, and excise duties. GST relief has been given to certain goods under the GST Relief Order 2014.

3.3.1.2.1 Main incentives

3.82. Tax incentives continued to be implemented mainly through the pioneer status and investment tax allowance (ITA) schemes. Eligibility for pioneer status and the ITA is based on: level of value-added, technology used, and industrial linkages. Companies engaging in activities listed as "promoted activities & products",25 which cover agricultural, manufacturing, hotel and tourism, or other industrial or commercial sectors, may be granted "pioneer status", or "ITA" incentives (Table 3.15). Applications are dealt with by the Malaysian Investment Development Authority (MIDA).

3.83. In 2015 and 2016, pioneer status was granted to 271 company projects involving investments of RM 14.7 billion, down from 434 company projects involving investment of RM 32.9 billion in 2011 and 2012. The Government granted ITAs to 47 projects involving investments of RM 49.1 billion in 2015 and 2016, compared to 50 projects involving investment of RM 11.8 billion in 2011 and 2012.

Table 3.15 Tax incentives

Tax incentives Note Pioneer status 5-year partial exemption from company Unabsorbed capital allowances and income tax: the company pays tax on 30% of accumulated losses incurred during the its statutory income, with the exemption pioneer status period may be carried forward period commencing from its production day and deducted from the post-pioneer income of the company ITA – investment A company granted ITA is entitled to an The company can offset this allowance against tax allowance allowance of 60% on its qualifying capital 70% of its statutory income. Any unutilized expenditure (factory, plant, machinery or allowance can be carried forward to other equipment used for the approved subsequent years until fully utilized. The project) incurred within five years from the remaining 30% of its statutory income is date the first qualifying capital expenditure taxed at the prevailing company tax rate. occurred.

Source: MIDA online information.

22 MIDA online information. Viewed at: http://www.mida.gov.my/home/taxation/posts/ [06/07/17]. 23 OECD (2016), OECD Economic Surveys – Malaysia, p. 47. 24 MIDA online information, "Invest in Malaysia". Viewed at: http://www.mida.gov.my/home/incentives- in-manufacturing-sector/posts/ [07/07/17]. 25 MIDA online information, "List of promoted activities and products which are eligible for consideration of pioneer status and investment tax allowance under the Promotion of Investment Act 1986". Viewed at: http://www.mida.gov.my/env3/uploads/images/invest/invest-pdf/APP1_02032012.pdf [07/07/17].

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3.84. In 2017, Malaysia notified its pioneer status and investment tax allowance programmes to the WTO Committee on Subsidies and Countervailing Measures, covering a period between 2014 and 2017.26

3.3.1.2.2 More favourable incentives

3.85. More favourable tax reliefs may be granted to companies engaged in the following manufacturing activities: strategic projects of national importance, e.g. heavy capital investment, and high-tech projects; specialized machinery and equipment; automotive industry; and utilization of oil palm biomass (Table 3.16). SMEs and small-scale companies may also obtain more favourable incentives. Eligibility criteria include: local R&D expenditure, level of technology as measured by a managerial, technical and supervisory (MTS) index, and the level of skill development.

Table 3.16 More favourable tax incentives - manufacturing

Tax incentives Eligibility criteria High Pioneer status with income tax exemption Proposed product/activity must be listed in technology of 100% of the statutory income for five the Promoted Products/Activities for High companies years; or Technology Companies ITA of 60% of the qualifying expenditure. The percentage of local R&D expenditure to The allowance can be utilized to offset gross sales is at least 1% on an annual against 100% of the statutory income basis. Scientific and technical staff having degrees or diplomas with a minimum five years' experience in related fields must comprise at least 15% of the company's total workforce. Value-added must be at least 40%. Strategic Pioneer status with income tax exemption Products or activities of national projects of 100% of the statutory income for 10 importance. Generally involve heavy capital years; or investment with long gestation periods, ITA of 100% of the qualifying expenditure. having high level of technology, generating The allowance can be utilized to offset extensive linkages, having significant against 100% of the statutory income impact on the economy. SMEs A reduced company income tax of 20% on Companies resident in Malaysia with a paid chargeable income of up to RM 500,000 up capital of ordinary shares of RM 2.5 million or less, and such companies cannot be controlled by another company with a paid up capital exceeding RM 2.5 million. Small-scale Pioneer status with income tax exemption Companies incorporated in Malaysia with companies of 100% of the statutory income for five shareholders' fund not exceeding RM 2.5 years; or million, and having 60% - 100% Malaysian ITA of 60% of the qualifying expenditure. equity. The allowance can be utilized to offset against 100% of the statutory income Specialized Pioneer status with income tax exemption Value added must be at least 40%; and machinery and of 100% of the statutory income for 10 percentage of managerial, technical and equipment years; or supervisory staff (MTS Index) to total ITA of 100% of the qualifying expenditure. workforce must be at least 25%. The allowance can be utilized to offset against 100% of the statutory income Automotive industry - Critical and high Pioneer status with income tax exemption Companies manufacturing transmission value-added of 100% of the statutory income for 10 systems, brake systems, airbag systems, parts and years; or and steering systems. components and ITA of 100% of the qualifying expenditure production for 5 years. The allowance can be utilized to offset against 100% of the statutory income - Hybrid and 100% ITA or pioneer status for 10 years; electric vehicles Customized training and R&D grants in and related addition to the existing grants; infrastructure 50% exemption on excise duty for locally assembled/manufactured vehicles or

26 WTO documents, G/SCM/N/315/MYS, G/SCM/N/284/MYS, 9 October 2017.

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Tax incentives Eligibility criteria provision of grant under the Industrial Adjustment Fund; 100% pioneer status for 10 years or ITA of 100% for 5 years, for the manufacturing of selected critical components supporting hybrid and electric vehicles Utilization of oil Pioneer status with income tax exemption Value added must be at least 60%; MTS palm biomass of 100% of the statutory income for 10 staff ratio must be at least 25%. years; or ITA of 100% of the qualifying expenditure. The allowance can be utilized to offset against 100% of the statutory income

Source: MIDA online information, "Invest in Malaysia". Viewed at: http://www.mida.gov.my/home/manufacturing-sector/posts/ [07/07/17].

3.86. Similarly, more favourable incentives are given to companies engaged in certain services activities, such as: the hotel and tourism projects; Mines Wellness City (MWC) developers/managers/operators; environmental management; establishment of waste eco parks; research and development; training; promotion of healthcare travel; integrated logistics services; cold chain facilities; gas and radiation sterilization services; principal hubs; industrial design services; and industrial area management. Companies providing services in less developed areas are also eligible for these more favourable incentives.27

3.3.1.2.3 Incentives on indirect taxes

3.87. In addition to direct tax incentives such as company income tax reductions or exemptions, incentives on indirect taxes may take the form of reductions or exemptions from import tariffs, and excise duties.

3.88. Import tariff exemptions may be considered for raw materials/components, regardless of whether the finished products are meant for the export or domestic market. If the finished products are for the domestic market, full exemption from import duty on raw materials and components that are not produced locally may be considered. Import duty exemption is given to medical devices that are imported for the purpose of kitting or producing complete procedural sets, provided that these medical devices are not manufactured locally. Import tariff exemption is also given to machinery and equipment used directly in the manufacturing process and not produced locally.

3.89. Companies in manufacturing, agriculture and listed services activities may be considered for import duty exemption for raw materials, components, and machinery and equipment. Aerospace companies undertaking maintenance, repair and overhaul activities (MRO) are eligible for import duty exemption on raw materials, components, machinery and equipment, spares and consumables. Effective 1 January 2016, a company undertaking aerospace MRO activities, once approved under the Approved Trade Scheme (ATS), is entitled to GST relief.

3.3.1.3 Other support measures, and SMEs

3.90. Support in various forms has been provided at the sectoral level to, inter alia, agriculture, energy, manufacturing, and services (Section 4). In 2014, the Government removed the fuel subsidies (i.e. petrol and diesel), as well as subsidies on sugar. However, subsidies for liquefied petroleum gas (LPG) and diesel for fisheries and public transport sectors were maintained (Section 4.3).

3.91. Malaysia has been providing funds to encourage R&D, promote SMEs, and boost the production and use of green technology, among others. The Domestic Investment Strategic Fund aims at leveraging outsourcing activities and acquisition of technology by companies in certain priority sectors (e.g. aerospace, medical devices, pharmaceuticals, advanced electronics, machinery and equipment, renewable energy, and related services); these companies must be at

27 MIDA online information, Incentives for the Services Sector. Viewed at: http://www.mida.gov.my/home/incentives-in-services-sector/posts/ [31/07/17].

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- 62 - least 60% Malaysian owned. The Strategic Investment Fund and the High Impact Project Fund have been providing grants and soft loans to the manufacturing sector.

3.92. The Green Technology Financing Scheme, whose application period was extended to the end of 2017 and funding increased to RM 3.5 billion, provided soft loans to boost the production and use of green technology. The Government subsidized 2% of the interest rate under this scheme, and provided a guarantee of 60% on the amount of financing. The objective is to support green- technology-based projects in obtaining financial assistance from the financial institutions.

3.93. Based on the 2016 Economic Census, SMEs accounted for 98.5% of total business establishments in Malaysia. The SME Masterplan 2012-2020 aimed at raising SMEs' contribution to GDP from 32.7% in 2012 to 41% by 2020, their share of employment from 59% in 2010 to 65% in 2020, and their share in total exports from 19% to 23% during the same period. In 2016, their contribution to GDP was 36.6%, share of employment reached 65.3%, and exports accounted for 18.6% of total exports.

3.94. Various forms of support have been provided to SMEs, to facilitate their access to financing, develop human capital, improve infrastructure, promote innovation and technology adoption, and increase market access. In addition to tax incentives, export support has been provided to SMEs (Section 3.2.4.4), and they have been permitted to deduct their patent and trademark registration costs from company income tax (Section 3.3.7). SMEs are also eligible for different forms of funds, and soft loans:

a. The Central Bank's Fund for Small and Medium Industries 2 (FSMI2), and the New Entrepreneur Fund 2 (NEF2). Both funds were channelled through financial institutions to SMEs as soft loans at rates ranging from 4% to 6%.

b. Financing provided by SME Bank to micro enterprises through various financing programmes, including through loans to SMEs at interest rates (or profit margins for Islamic products) ranging from 4% to 8.85%.

c. A RM 10 billion fund under the Working Capital Guarantee Scheme for SMEs, to facilitate their access to working capital: the scheme guarantees up to a maximum of 70% of the loan. As the cap of the loan is RM 5 million, the scheme guarantees up to RM 3.5 million to qualified companies.

3.95. Other funding allocations are:

a. Special funding allocations for seed capital if they are at least 51% Malaysian owned; and

b. The Global Technology Fund (GTF), which aims at building local technology champions, promoting foreign investment and improving the digital innovation eco-system, offers up to 50% funding to total costs of a project, or RM 2 million, whichever is lower.

3.3.2 Standards and other technical requirements

3.96. Since the previous Review in 2014, there has not been any major change to the institutional and legislative framework regarding standards. The Standards of Malaysia Act 1996 (Act 549), most recently amended in 2012, is the law governing matters relating to standardization and accreditation activities in Malaysia. The Act established the Department of Standards Malaysia (Standards Malaysia, or DSM), under the Ministry of Science, Technology and Innovation, as Malaysia's national standardization and accreditation body. Standards Malaysia is responsible for implementing the standards component of the Strategic Reform Initiatives – Competition Standards & Liberalization (SRI – CSL) under the Economic Transformation Programme, to enhance the quality of Malaysian products and services.28

28 The Competition, Standards and Liberalization (CSL) Strategic Reform Initiative (SRI) seeks to develop an efficient and competitive business environment and culture that support Malaysia’s goal of becoming a high-income nation by 2020.

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3.97. The Act additionally established a Standards and Accreditation Council (MSAC) as the advisory body on standardization and accreditation to the Minister of Science, Technology and Innovation. The Council established four advisory committees on standardization and accreditation: the National Standards Committee (MyNSC), the National IEC Committee (MyENC), the National Accreditation Committee (NAC), and the National Good Laboratory Practice Committee (My GLPC). Standards Malaysia also established sector-based industry standards committees (ISC) to oversee the technical work related to standardization for the specific sectors.

3.98. Standards Malaysia has appointed SIRIM Berhad, a wholly state-owned company, to coordinate standards development activities in Malaysia, and to represent Malaysia in international standardization activities. Amendment of Act 549 allowed Standards Malaysia to appoint more standards development agencies (SDAs), apart from SIRIM Berhad, to expedite the development of Malaysian Standards.

3.99. Except those referred to in legislation, Malaysian standards (MS) are voluntary. By 30 June 2017, there were 5,284 MS (6,381 in 2012) in place. The authorities stated that this reflected its effort to focus on establishing standards with high impact on the public including Malaysian industries, rather than focusing on the number of standards. The main product categories were chemicals and materials (12.3%); power generation, transmission and distribution (8.4%); electrical and electronics equipment and accessories (6.9%); food and food products (6.7%); buildings, construction and civil engineering (6.6%); and medical devices and facilities for healthcare (6.2%).29

3.100. The Government continues to make efforts to align Malaysian standards with international standards. As of 30 June 2017, 60% of MS were aligned with international standards (59.8% in 2014), and 54% were identical (57.5% in 2014). The highest levels of alignment were in electrical and electronics equipment and accessories; power generation, transmission and distribution; medical devices and facilities for healthcare; and chemicals and materials.

3.101. As of February 2017, 510 or 9.7% (6.5% at end 2012) of all MS were compulsory.30 The main categories of products with compulsory standards are electrical products, building and construction materials.

3.102. The Government aims to make Malaysia a hub for halal food products. All meat, processed meat products, poultry, and egg products, domestically produced or imported, must receive halal certification from the Department of Islamic Development Malaysia (JAKIM) or any foreign halal certification body recognized by JAKIM prior to importation and distribution in Malaysia. Other than swine, the slaughtering of animals and production of animal-based products for export to Malaysia must be conducted according to halal requirements. The Department of Veterinary Services (DVS), in collaboration with JAKIM, inspects slaughterhouses and processing plants overseas periodically, to ensure compliance with Malaysia's import requirements.

3.103. Standards Malaysia remains Malaysia's only national accreditation body. It gives official recognition in the form of accreditation to organizations with established competence to provide conformity assessment services for the certification of management systems (e.g. certification of quality management systems according to ISO 9001 and certification of environmental management systems according to ISO 14001), product certification, testing, calibration, and inspection. It operates four categories of accreditation schemes, as well as the Good Laboratory Practice Compliance Programme based on the OECD principles (Table 3.17). According to Standards Malaysia's online information, its accreditation system is in accordance with international standards – MS ISO/IEC 17011 – to ensure that the accreditation services provided are impartial, non-discriminatory, and credible.31

29 Standards Malaysia online information, Standards – MS status. Viewed at: http://www.jsm.gov.my/ms-status#.WWNQEIR94dU [10/07/17]. 30 Standards Malaysia online information, Summary of MS Mandatory as of Feb 2017. Viewed at: http://www.jsm.gov.my/ms-implementation#.WWNSaIR94dU [10/07/17). 31 Standards Malaysia online information, Accreditation Overview. Viewed at: http://www.jsm.gov.my/accreditation-overview#.WWONbIR94dU [10/07/17].

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Table 3.17 Accreditation

Laboratory Accreditation Scheme of Malaysia Accreditation scheme of both testing and calibration (SAMM) laboratories Accreditation of Certification Bodies (ACB) Accreditation scheme for certification bodies operating Management System Certification and Product Certification (including Halal products certification) Malaysia Inspection Bodies Accreditation A unified national inspection bodies accreditation scheme, Scheme (MIBAS) multi-disciplinary in its scope Malaysia Proficiency Testing Accreditation Accreditation scheme for proficiency testing providers Scheme (MyPTP) Good Laboratory Practice Compliance A compliance programme for Good Laboratory Practice Programme (GLP CP) based on OECD GLP

Source: Information provided by the authorities.

3.104. Malaysia participates in the activities of the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC).32 Malaysia, through Standards Malaysia, is a signatory to various regional and international arrangements: such as the Asia Pacific Laboratory Accreditation Cooperation MRA (APLAC MRA), the Pacific Accreditation Cooperation MRA (PAC MRA), the International Laboratory Accreditation Cooperation MRA (ILAC MRA), and the International Accreditation Forum MRA (IAF MRA). There are a number of accreditation schemes, including the Accreditation of Certification Bodies Scheme; Malaysia Inspection Bodies Accreditation Scheme; the Good Laboratory Practice Compliance Programme; and the Laboratory Accreditation Scheme of Malaysia.

3.105. The procedure for developing standards remains the same as at the time of the previous Review. Foreign interests are considered in the adoption of new or revised standards through the "public comment" procedures on draft standards, which are accessible on the Standards Malaysia and SIRIM Berhad websites.

3.106. Malaysia made 44 notifications of technical regulations to the WTO between January 2014 and 12 October 2017.33 The agencies with the largest number of notifications were: the Food Safety and Quality Division under the Ministry of Health (19 notifications), Ministry of Domestic Trade, Cooperatives and Consumerism (6), Malaysian Communications and Multimedia Commission (8), Energy Commission (3), Ministry of Transport (3), MITI (2), National Pharmaceutical Control Bureau (2), and the Ministry of Plantation Industries and Commodities (1).

3.107. Products notified cover: food; alcoholic beverages and liquor; communications equipment; electronic products; pharmaceutical products; parts and accessories of vehicles; iron, steel and aluminium products; wood; salt; toys; pre-packaged products; and generic products. In almost all notifications, the period for comment was 60 days.34

3.3.3 Sanitary and phytosanitary requirements

3.108. Both the legislative and institutional framework on SPS measures has remained largely unchanged since the previous Review in 2014.35 The relevant laws and regulations include: the Malaysian Quarantine and Inspection Services Act 2011 (effective in 2012); the Plant Quarantine Act 1976; the Plant Quarantine Regulations 1981; the Animal Act 1953 (Revised 2006); the Fisheries Act 1985; the Biosafety Act 2007; the Food Act 1983; the Food Regulations 1985; and the Food Hygiene Regulations 2009. In particular, the Food Regulations 1985 were amended a few times, to harmonize the food additive provisions with the Codex Standard, and to reflect probiotic cultures.

32 Malaysia participates in the Council, Technical Management Board, and various technical committees and sub-committees of ISO, and various technical committees and sub-committees of the IEC. 33 WTO documents G/TBT/N/MYS/37-77, G/TBT/N/MYS/15/Rev.2–Rev.3, G/TBT/N/MYS/36/Rev.1, excluding notifications contained in documents with the symbols "Add" and/or "Corr". 34 In one notification made in 2014 regarding toys, the comment period was defined as 90 days (G/TBT/N/MYS/15/Rev.2). 35 WTO document, WT/TPR/S/292/Rev.2, 8 April 2014.

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3.109. Since 2014, there have not been any changes to SPS-related matters concerning the importation of animals and animal products, plants and plant products, food, LMOs and GMOs, among others. Their importers must obtain an import licence or permit on SPS grounds (Section 3.1.5.2.2). Relevant agencies issue import licences or permits in accordance with the relevant legislation. The Ministry of Agriculture and Agro-Based Industry's (MOA) Department of Agriculture (DOA), Department of Veterinary Services (DVS), and Department of Fisheries (DOF) are responsible for matters relating to plants, animals and animal products, and fisheries, respectively. The Ministry of Health (MOH), through its Food Safety and Quality Division, is responsible for food safety matters including inspection and enforcement related matters. The Malaysian Quarantine and Inspection Services (MAQIS), which operates as a one-stop centre, provides quarantine services and certification for imports and exports, as well as inspection of and enforcement relating to food and relevant matters.

3.110. Between January 2014 and 12 October 2017, 14 notifications were submitted under the WTO Agreement on Sanitary and Phytosanitary Measures. Most notifications (9) were submitted by the Food Safety and Quality Division under the MOH, covering inter alia food, pesticide residues, flour, infant formula for medical purposes, fish, and raw cleaned edible birdnest. Four notifications were made by the Plant Biosecurity Division under the Department of Agriculture. Products concerned were: plants and plant products, including fresh fruits of mangosteen, betel leaves, chilies, and durian.36 The objectives of these SPS measures were food safety or plant protection related. One notification was made by the Department of Fisheries, concerning temporary emergency measures for the importation of live tilapia fish (from 24 July 2017 for a period of six months).

3.111. In the context of the WTO Committee on Sanitary and Phytosanitary Measures, during the review period (2014-17), there was one concern raised by Brazil on Malaysia's import restrictions related to the approval of poultry meat export plants.37 In July 2015, Brazil raised its concern regarding Malaysia's delay in approving Brazilian poultry meat export plants, and the lack of definition of the applicable international sanitary certification. Malaysia replied that, following an inspection result, one export plant was approved while the other three were rejected as they failed to comply with the Malaysian halal standard.

3.112. Malaysia is a member of the Codex Alimentarius Commission, the World Organisation for Animal Health (OIE), and a contracting party to the International Plant Protection Convention (IPPC).

3.113. In accordance with the Biosafety Act 2007, the National Biosafety Board (NBB) evaluates and approves living modified organisms (LMOs) and issues approval certificates before releasing them to the market. The Genetic Modification Advisory Committee (GMAC) provides advice to the NBB. Currently, most of the approved applications by the NBB are for LMO in or for food, feed and processing (FFP). Importers must obtain approval from the Ministry of Agriculture and Agro-Based Industry for imported seeds regardless of whether they are conventional or GM seeds.

3.114. Mandatory labelling requirements for food and food ingredients obtained through modern biotechnology were stipulated in the Food Regulations 1985 which were gazetted in 2010. A four-year grace period was given, and it was enforced on 9 July 2014.

3.3.4 Competition policy and price controls

3.3.4.1 Competition policy

3.3.4.1.1 Legal framework

3.115. Malaysia's Competition Act was introduced in 2010 and came into force on 1 January 2012. Its competition authority, the Malaysia Competition Commission (MyCC), was established in 2011. Since the previous TPR of Malaysia in 2014, there have been no major changes to the legal and institutional framework governing competition policy except the publication of several new implementation guidelines issued by the MyCC.

36 WTO documents, G/SPS/N/MYS/27–40. 37 WTO online information. Viewed at: http://spsims.wto.org/en/SpecificTradeConcerns/View/391 [13//07/17].

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3.116. The Competition Act 2010 addresses two types of competition issues: anti-competitive agreements, and the abuse of dominant market positions. It covers all commercial activities, both within and outside Malaysia, that have negative or anti-competitive effects in relevant markets in Malaysia. It prohibits any anti-competitive agreements, either horizontal or vertical, in particular hard-core cartels, such as agreements for price fixing, sharing markets, controlling production and bid rigging. The Act also sets out examples of conduct that may amount to an abuse of dominance and are therefore prohibited: price discrimination, predatory behaviour such as using below cost pricing to eliminate competition, refusing to supply, tied selling, and buying up scarce goods or resources required by a competitor but not needed for its own use.

3.117. Malaysia is the only country in ASEAN with a competition law that does not provide for merger and acquisition control. An economic survey conducted by the OECD in 2016 therefore suggests that the coverage of the Act should broaden to include merger control.38 Currently, Malaysia has no plans to introduce any amendments to the Act.

3.118. The Act does not apply to activities that involve an exercise of governmental authority or are carried out pursuant to the principle of "solidarity" or to the purchase of goods or services not intended for resale or resupply. The principle of solidarity covers activities for purely social objectives, e.g. the provision of medical care by the Government. The Act also exempts certain sectors from the scope of its application, noticeably the communications and multimedia sectors, the electricity and piped gas industries, and the aviation sector, which are governed by separate sectoral regulations respectively39 However, the lack of consistency on key concepts of competition between the Competition Act and relevant sectoral acts, and the lack of any evidence of enforcement of competition policy by sectoral regulators have constrained the effectiveness of the competition policy regime in the country.40 Efforts are under way to improve collaboration and consistency. For example, the MyCC holds a Special Committee Meeting on Competition with sector regulators twice a year to discuss and review competition issues with a view to ensuring that their policies are consistent with the Act.41 Since 11 May 2017, the MyCC has also been conducting an online consultation on the Proposed Block Exemption for Vessel Sharing Agreements and Voluntary Discussion Agreements in Respect of Liner Shipping Services.

3.119. The Act also sets out exceptions for many types of hard-core cartels for SMEs, even if they are competitors. Specifically, it stipulates that when the combined market share of relevant SMEs is below 20%, their agreements would be exempted from investigation as they are unlikely to have an anti-competitive effect. These types of agreements may include joint purchasing, exclusive distribution or tying. These agreements are not permitted if they are between a large enterprise and an SME since the effect on the market may be greater.

3.3.4.1.2 Institutional framework and enforcement

3.120. The MyCC is the only authority empowered to implement and enforce the provisions of the Competition Act 2010, carrying out functions such as: investigating alleged infringements; issuing guidelines on the enforcement of the Act; acting as advocate for competition matters; conducting general studies on competition-related issues or studies on particular sectors of the Malaysian economy; and informing and educating the public regarding the ways in which competition may benefit consumers.

3.121. Since the entry into force of the Competition Act in 2012, the MyCC has issued six Guidelines, namely, Guidelines on Complaints Procedures (2 May 2012), on Market Definition (2 May 2012), on Anti-competitive Agreements (2 May 2012), on Abuse of Dominant Position

38 OECD, OECD Economic Surveys: Malaysia 2016. Viewed at: https://www.oecd.org/eco/surveys/Malaysia-2016-OECD-economic-survey-overview.pdf. 39 The communications and multimedia sectors are governed by the Communications and Multimedia Act 1998, the energy sector by the Energy Commission Act 2001, and the aviation industry by the Civil Aviation (Amendment) Act 2015, respectively. 40 OECD, OECD Economic Surveys: Malaysia 2016. Viewed at: https://www.oecd.org/eco/surveys/Malaysia-2016-OECD-economic-survey-overview.pdf. 41 The sector regulators involved are: (i) Central Bank of Malaysia (BNM); (ii) Malaysia Communications and Multimedia Commission (MCMC); (iii) Land and Public Transport Commission (SPAD); (iv) Securities Commission Malaysia (SC); (v) Energy Commission (EC); (vi) National Water Services Commission (SPAN); (vii) Malaysian Aviation Commission (MAVCOM); and (viii) Intellectual Property Corporation of Malaysia (MyIPO).

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(26 July 2012), on Financial Penalties (14 October 2014), and on the Leniency Regime (14 October 2014). The Guidelines on the Abuse of Dominant Position stipulate that a market share of above 60% is a strong indicator, although not the only indicator, that the business holds a dominant position. It is currently drafting the Guidelines on the Treatment of Intellectual Property and plans to conduct a series of public consultations on the draft with stakeholders and through the MyCC's website in early 2018.42

3.122. The increasing number of complaints received by the MyCC reflects the rising awareness of the Competition Act among consumers and the business community. The total number of complaints received grew from 8 in 2012 to 75 in 2015, and 51 in 2016. Of these, 48 related to anti-competitive agreements, and 20 to the abuse of market dominant positions. The sectors concerned were: petroleum sales and services, medical services, government services, government procurement, public transportation, auto accessories, livestock, information technology, tourism and insurance. The MyCC has concluded a total of 19 anti-competitive investigations, among which, five infringements were found (Table 3.18). The infringements mainly concerned anti-competitive agreements in the form of price fixing.

Table 3.18 Number of complaints, investigations and findings, 2014-16

2014 2015 2016 Number of complaints 80 75 51 Number of investigations 3 10 6 Number of infringements 1 2 2 Number of non-infringements 0 6 1

Source: Information provided by the authorities.

3.123. The Competition Appeal Tribunal was established in 2012 to hear appeals against decisions made by the MyCC. For instance, in 2014, one decision made by the MyCC concerning the Malaysian Airline System and AirAsia was brought to the Competition Appeal Tribunal. The Tribunal found that the relevant companies' conduct had not infringed the Competition Act. Three appeals have been made since 2014.

3.124. Any enterprise found infringing the Act will face a potential fine of up to 10% of its worldwide turnover. A leniency regime is available for cases where an enterprise has admitted its involvement in an infringement of any prohibition of horizontal agreement and provided information or another form of cooperation to the MyCC (as recommended by various international organizations). This can significantly assist the investigation. The leniency regime would lead to a reduction of up to a maximum of 100% of any penalties which would otherwise have been imposed, but does not include any other legal consequences of civil proceedings.

3.125. In addition to infringement investigation, competition advocacy and capacity-building were also the focus of the MyCC's work in the past few years. It organized 31, 48 and 28 advocacy programmes, in 2014, 2015 and 2016, respectively, involving private and public sectors nationwide.

3.126. Nonetheless, there continues to be doubts about the effectiveness of the regime. The autonomy and independence of MyCC and the role and involvement of Ministry of Domestic Trade, Cooperatives and Consumerism, which determines the MyCC's budget, are a concern for the OECD, which has pointed out that the MyCC has less than desirable expertise and employs too few experienced economists. 43 It recommends that the MyCC intensify its enforcement activities to achieve effective deterrence, increase awareness and build stakeholder confidence.

3.3.4.1.3 International cooperation

3.127. Some bilateral/regional free trade agreements, such as the Japan–Malaysia Economic Partnership Agreement, the ASEAN–Australia–New Zealand Free Trade Agreement, the Malaysia-New Zealand FTA, and the Malaysia–Australia FTA, include provisions on competition.44

42 The Malaysia Competition Commission's website is: www.mycc.gov.my. 43 OECD, OECD Economic Surveys: Malaysia 2016. Viewed at: https://www.oecd.org/eco/surveys/Malaysia-2016-OECD-economic-survey-overview.pdf. 44 The Trans-Pacific Partnership (TPP) also contains provisions on competition.

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The MyCC became a member of the International Competition Network (ICN) in June 2011 and participates in its events regularly. At the regional level, Malaysia participates in the ASEAN Experts Group on Competition (AEGC) and the annual ASEAN Competition Conference (ACC), which aim to develop capacity and a forum for discussion on competition policies in the region. It successfully hosted the 7th ASEAN Competition Conference on 8 and 9 March 2017.

3.3.4.2 Price and supply controls

3.128. In accordance with the Control of Supplies Act 1961, general purpose flour and cooking oil are subsidized and subject to ceiling prices set by the Government.45 The authorities indicated that liquefied petroleum gas (LPG) is also a subsidy product.

3.129. Under the Price Control and Anti-Profiteering Act 2011, the MDTCC (Ministry of Domestic Trade, Cooperatives and Consumerism) set maximum prices for manufacturing, producing, wholesaling or retailing certain goods and services including essential goods, which are basic necessities for daily consumption. Once specific goods are declared as price-controlled goods with a fixed maximum price, any person who sells these goods at a higher price commits an offence under the Price Control and Anti-Profiteering Act. There are two types of price controls: price controls throughout the year (on petrol, diesel, LPG, face masks, and sugar); and seasonal price controls (on chicken, eggs, fish, prawns, onions and vegetables, before/during/after a festival).

3.3.5 State trading, government-linked enterprises, and privatization

3.3.5.1 State trading

3.130. Malaysia notified to the WTO that within the meaning of Article XVII:4(a) of GATT 1994, Padiberas Nasional Berhad (BERNAS) acts as a state trading enterprise for rice importation.46

3.131. BERNAS carries out non-commercial activities on behalf of the Government, such as:

a. conserving, maintaining and managing the national paddy/rice stockpile;

b. purchasing paddy from paddy farmers at the guaranteed minimum price as determined by the Government from time to time;

c. acting as the buyer of last resort for paddy farmers;

d. managing the disbursement of subsidies to paddy farmers under the Paddy Price Subsidy Scheme; and

e. managing the Bumiputera Rice Millers Schemes.

3.132. BERNAS also conducts commercial activities, such as paddy seed production, paddy farming, paddy procurement and rice processing, distribution and trading of rice and its products, and rice importation.

3.133. Through its privatization agreement, BERNAS is the only company permitted to import rice into Malaysia. The distribution of imported rice in the country is by direct sales to wholesalers which in turn distribute rice to retailers. Its exclusive right on rice importation was extended until 10 January 2021.

3.3.5.2 Government-linked companies (GLCs)

3.134. GLCs are controlled by government-linked investment companies (GLICs) such as Khazanah Nasional (the Government's sovereign wealth fund), Permodalan Nasional Berhad (PNB), or the Employees Provident Fund (EPF). GLCs and GLICs remain a significant part of the economy. They accounted for an estimated 5% of the national workforce and were the main service

45 MDTCC online information. Viewed at: http://www.kpdnkk.gov.my/kpdnkk/barang-barang-kawalan- yang-diberikan-subsidi-oleh-kerajaan/?lang=en [03/08/17]. 46 WTO document, G/STR/N/16/MYS, 17 October 2016.

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- 69 - providers in key strategic industries and services, including electricity, telecommunications, postal services, airlines, airports, public transport, banking and financial services.47 GLCs have delivered large-scale infrastructure projects as well. Furthermore, public trust funds (via EPF and PNB) were invested in many GLCs and are therefore reliant on their performance.

3.135. A 10-year GLC Transformation Programme (2005-15) was launched in 2004/05, to turn GLCs into stronger and more resilient and competitive companies. The programme covered five federal-owned GLICs (EPF, Khazanah, LTAT (Armed Forces Fund Board), LTH (Lembaga Tabung Haji), and PNB), as well as the larger GLCs termed as G-20.48 Under the programme, GLCs increased their collaboration with the private sector, and divested non-core and non-competitive assets. The Programme also made efforts to dilute the role of the "Government" in these Government-linked companies, and push for the set-up of a good regulatory environment. Regarding procurement, the Procurement Guidelines and Best Practices aimed to minimize rent seeking behaviours in procurement policies; for example, one amendment eliminated the requirement of obtaining approval from the Ministry of Finance for GLC procurement contracts larger than RM 100 million, thus reducing bureaucracy and potential rent seeking.49

3.136. GLCs and GLICs "graduated" from their transformative process when the Programme was completed in July 2015. The Putrajaya Committee on GLC High Performance (PCG) stated that GLCs show a strong 10-year track record in delivering financial performance, catalysing nation-building, and benefiting all stakeholders. In particular, from FY2004 to FY2014:

a. G-20's market capitalization grew almost three times, with total shareholder return growing 11.1% per annum;

b. G-20 net profit grew at a compounded annual rate of 10.2%;

c. G-20 made RM 153.9 billion worth of domestic investment, and employed 225,050 Malaysians in 2014; and

d. G-20 contributed RM 108.3 billion in dividends and RM 63.5 billion in taxes.

3.3.5.3 Privatization

3.137. The privatization programme stipulates that bumiputeras should hold at least 30% equity of a privatized entity. Foreign participation is limited to 25% of total equity, although up to 49% may be permitted on a case-by-case basis. All privatized projects are subject to Malaysia's development policies and the Privatization Master Plan with regards to foreign participation.

3.138. The authorities stated that public-private-partnership (PPP) has been pivotal in Malaysia's growth and economic development since the early 1980s. To date, Malaysia has implemented 852 PPP projects in various sectors, and the Government has saved a total of RM 208.5 billion.

3.139. The UKAS (Public Private Partnership Unit under the Prime Minister's Office) functions as the central agency in coordinating PPP in Malaysia. It has developed several guidelines pertaining to PPP and privatization. PPP arrangements are reviewed and revised regularly by the Government to improve their implementation.50

47 PCG (2015), GLC Transformation Programme Graduation Report. Viewed at: http://www.pcg.gov.my/media/1118/glctp-vol1-graduation-report.pdf [21 July 2017]. 48 The G-20 list comprises 17 GLCs due to various mergers, demergers and other corporate exercises over the years. A list of these 17 companies is available at the Khazanah website (http://www.khazanah.com.my/khazanah/files/44/442dca19-b472-4394-aea2-5de0154be943.pdf). 49 PCG (2015), GLC Transformation Programme Graduation Report. Viewed at: http://www.pcg.gov.my/media/1118/glctp-vol1-graduation-report.pdf [21 July 2017]. 50 UKAS online information. Viewed at: http://www.ukas.gov.my/en/garis-panduan [03/10/17].

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3.3.6 Government procurement

3.3.6.1 Overview

3.140. Government procurement plays a significant role in the country's socio-economic development. According to the authorities' estimate, the size of Malaysia's government procurement (acquisition of goods, services and works by the federal, state and local governments and statutory bodies, not including purchases by government-linked companies) remained stable during the period under review, with the annual amount reaching RM 92.8 billion in 2016 (Table 3.19), representing 12.6% of Malaysia's GDP in 2016. Malaysia's government procurement took place mostly at the federal government level. In 2016, 80.5% of the annual procurement contract value was conducted by federal entities. In terms of categories, development expenditure was the main area, which accounted for 68% of the total government procurement value in 2016. These figures do not include procurement by government-linked companies (GLCs), which, in Malaysia, are not governed by the same set of rules and regulations as government agencies and statutory bodies.

Table 3.19 Government procurement value by public sector, 2014-16 (RM million) Types of procurement 2014 2015 2016a Federal government a) goods and services expenditure 34,259 36,373 29,702 b) development expenditure 39,503 40,768 45,000 State government development expenditure 7,826 8,094 10,354 Local government development expenditure 1,511 1,603 1,732 Statutory bodies' development expenditure 8,479 7,306 5,983 Total 91,578 94,144 92,771 a Estimate. Source: The Malaysian authorities' estimates, based on the Ministry of Finance, Economic Report 2016/2017, Statistical Tables 6.1, 6.3, 6.10, 6.11 and 6.12, published on 21 October 2016 (document can be accessed at: www.treasury.gov.my).

3.141. Its government procurement regime remains a decentralized system. Due to the decentralized nature, no data on annual purchases by procurement method and origin are available from the authorities. Foreign suppliers are not allowed to participate in domestic tenders; international tenders are called if there are no domestically produced supplies or services available.

3.142. Government procurement is considered by the authorities as an important tool to support Malaysia's National Development Policy and Vision 2020, i.e. bringing the country towards being a high-income nation by 2020. Malaysia became an observer of the WTO Committee on Government Procurement in 2012. The authorities are of the view that Malaysia is unlikely to join the WTO GPA in the near future due to domestic policy considerations.51

3.3.6.2 The legal framework and government procurement system

3.143. Malaysia maintains a decentralized government procurement system whereby procurement exercises are delegated to procurement entities at different levels of government. The Ministry of Finance has the main responsibility for government procurement at the central government level, while at the local government levels, the responsibility falls under Chief Ministers in respective states.

3.144. The Financial Procedure Act 1957 (Revised 1972) remains Malaysia's main legal instrument for financial matters including government procurement, and the Treasury Instructions detail financial and accounting procedures. Other relevant legislation includes the Government Contract

51 Malaysia participated in the Trans-Pacific Partnership (TPP) negotiations and offered related commitments on government procurement at the central government level (the TPP government procurement text is modelled largely on the revised WTO Agreement on Government Procurement (GPA)).

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Act 1949 (Revised 1973), the Ministerial Functions Act 1969, the Delegation of Powers Act 1956, and the 1 Treasury Circular (1Pekeliling Perbendaharaan or 1PP).52

3.145. Government procurement has traditionally been used as a tool to support Malaysia's socio-economic and development objectives, including: (i) promoting the growth of local industries by encouraging the maximum utilization of local materials and resources; (ii) encouraging and supporting greater participation of the bumiputera in the national economy; (iii) enhancing the capabilities of local industries via technology transfers; (iv) creating opportunities for local service- oriented industries such as freight and insurance; and (v) achieving other socio-economic and development objectives.

3.146. To ensure that all procurement principles, policies, rules and procedures are strictly adhered to, Malaysia has established procurement boards in all federal ministries to consider and decide on tenders above RM 500,000. For goods and services above RM 50 million and works above RM 100 million for ministries and departments, and for tenders above RM 100 million for statutory bodies, final decisions are made by the Ministry of Finance.

3.147. Government procurement is divided into domestic tenders and international tenders. In domestic tenders, preferences are provided for bumiputera suppliers. The margin of preference for bumiputera supplies has remained unchanged since 2014. For goods and services contracts between RM 100,000 and RM 15 million, bumiputera suppliers receive a margin of preference between 2.5% and 10% which is inversely proportional to value. For purchases exceeding RM 15 million, no price preferences apply. Furthermore, preferential treatment is given to bumiputera manufacturers for locally produced goods; the margin is up to 10% for contracts valued below RM 10 million, up to 5% for contracts valued at between RM 10 million and RM 100 million, and up to 3% for contracts valued above RM 100 million.

3.148. Foreign suppliers are not allowed to participate in domestic tenders. International tenders will be invited for goods and services if there are no domestically produced supplies or services available. For specific works, if domestic contractors do not have the expertise and capability, tenders may be called on a joint-venture basis between domestic and foreign contractors to encourage the transfer of technology. When a joint venture is not possible, international tenders for works may be called.

3.149. Malaysia has been implementing an offset policy for strategic procurement since 1980s. The offset policy, known as the Industrial Collaboration Programme (ICP), was reviewed in December 2014. The revised policy consists of three categories: (i) the Economic Enhancement Programme (EEP), which is applied to procurement from local companies as the prime contractor for contracts above RM 100 million; (ii) offset applied to procurement from foreign suppliers for contracts above RM 50 million; and (iii) counter trade applied to procurement from foreign suppliers for contracts above RM 50 million.

3.150. The objective of ICP is to enhance the country's industrial, technological and overall economic capability with the aim of further increasing national competitiveness and supporting the high-income society agenda. Specific ICP programmes are also guided by Vision 2020, the Five-Year Development Plans, the National Policy on Science, Technology and Innovation, and other related government policies. Malaysia aims to make the ICP a mandatory requirement for strategic and high-value procurement. Currently, ICP programmes have been implemented in the aerospace, rail, automotive, energy, weaponry, maritime and ICT sectors.

3.151. The Malaysia ICP Executive Committee was established at the Ministry of Finance in 2014 as a platform to oversee, provide strategic directions and approvals, and integrate various programmes planned, initiated and implemented in Malaysia.53 The Ministry of Finance also established a Technology Depository Agency (TDA) as the ICP authority to manage and coordinate all ICP implementation in Malaysia. An ICP Committee must be formed at the agency level upon initiation of an ICP. In parallel with the submission of tenders, the bidders are required to submit ICP proposals in responding to relevant requirements. The proposals will be evaluated by the ICP Committee and considered as one of the main criteria in selecting the winner of contract. The

52 The 1PP can be accessed at: http://1pp.treasury.gov.my/. 53 The ICP can be accessed at: http://1pp.treasury.gov.my/.

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- 72 - selected contractors are required to sign the procurement contract and the ICP agreement simultaneously.

3.152. An ICP may take place in the form of helping the recipients: develop their capacity; manufacture products related to the procured equipment; jointly develop and enjoy new technology and know-how; use local products; access the global market via the offset provider's network; and attract FDI.

3.153. The Government is also committed to venture into green procurement as one of the mechanisms to minimize the impact on the environment. The Green Government Procurement (GGP) initiative has been implemented in stages since 2014 under the Short-Term Action Plan.54 The initiative is monitored by the GGP Steering Committee and the Working Committee and is co chaired by the Ministry of Energy, Green Technology and Water and the Ministry of Finance. The 11th MP stated a target of 20% green government procurement by 2020. The implementation of GGP at 12 ministries and their agencies in 2016 has resulted in a cumulative value of green procurement totalling RM 482 million. Furthermore, 20 product groups were approved by the GGP Steering Committee in 2016.

3.154. The GGP Long-Term Action Plan is being finalized to replace the Short-Term Action Plan. In 2017, GGP implementation was expanded to all government agencies with the requirement for each ministry to incorporate green specification into the procurement of GGP product groups.

3.155. Malaysia maintains a supplier registration system. Any suppliers intending to participate in government procurement of goods and services must register with the Ministry of Finance. For construction works, they must register with the Contractors and Entrepreneurs Development Division (Bahagian Pembangunan Kontraktor dan Usahawan – BPKU) of the Ministry of Works and the Construction Industry Development Board Malaysia (CIDB). While the former is authorized to issue the Bumiputera status certification for qualified contractors, the latter's role is to ensure that suppliers and contractors are bona fide and possess the capability to provide goods or services, or to carry out works. The authorities believe that the system enables the government to take disciplinary action and impose penalties on contractors who do not perform according to contract.

3.156. Procurement policies of GLCs are approved by their respective Board of Directors and based on best practices. However, GLCs are encouraged to procure from local sources with a view to supporting local and national economic development.

3.3.6.3 Procurement methods and the use of e-procurement

3.157. Procurement methods to be used in individual procurement vary, depending on the contract value. The three most commonly used methods are direct purchase, quotation, and open tendering:

a. For procurement of supplies and services up to RM 20,000, procuring entities are allowed to purchase directly from any known supplier consistently supplying goods and services at acceptable quality and reasonable prices. The registration requirement is exempted. For procurement of works up to RM 20,000, procuring entities are allowed to purchase directly from a contractor who is registered with the Contractor Service Centre and the CIDB.

b. For procurement of supplies and services above RM 20,000 and up to RM 500,000, procuring entities are required to invite quotations (minimum number five).

c. For procurement of works, supplies and services above RM 500,000, open tendering processes are used. Open tenders must be advertised in the MyProcurement portal with an option to advertise in local newspapers.

3.158. In addition, selective tendering is used to address specific concerns such as security, or when the number of registered companies is very limited. Limited tendering, as an exception to

54 Information on the GGP initiative can be accessed at: (i) http://www.scpmalaysia.gov.my/en/node/4; (ii) http://1pp.treasury.gov.my/; and (iii) https://www.myhijau.my/green-procurement/.

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- 73 - the Government Procurement Regulations and subject to Ministry of Finance approval, may be applied based on strict criteria (i.e. security, uniformity, urgency and sole-sourcing).

3.159. Despite the overall decentralized nature, products for common use, such as office equipment, furniture and computer software, are centrally purchased. Suppliers for Central Contracts or Panel Contracts are selected through open tenders or negotiated tenders with the participation of domestic suppliers only. The Federal Central Contract and Panel Contract lists are published. When a Federal Central Contract or Panel Contract has been made for a particular item, all procuring entities, either at the federal level or state level, are required to purchase from these contracts. The Central Contracts aim at promoting domestic products and developing local vendors.

3.160. Malaysia's e-procurement system was established in 1999. According to the authorities, it has greatly enhanced transparency and efficiency in procurement. The MyProcurement portal information centre is the main platform allowing for public access to information related to the government procurement regime including rules and regulations, tender advertisements, and results of recent tenders of each ministry. During the period under review, the MyProcurement portal was upgraded to allow for the publication of the results of direct negotiation deals and other government procurement details. Quotations and tender-related documents are available to the public in the interest of transparency.

3.161. A new ePerolehan (eP) system, an online transaction and reporting platform for federal government users and registered suppliers, is to be implemented from 2017.55 Purchase orders or contract orders can be issued through this platform for all types of procurement methods, whether direct purchase, quotation or tendering. The e-Catalogue in the eP system enables suppliers to promote their goods and services in the form of an electronic catalogue which may be accessed from any device with Internet access. Based on the statistics published on the e-P portal, more than 110,000 suppliers were registered with the Ministry of Finance in June 2017. In 2016, government agencies fulfilled more than 1.365 million procurements, with a total value of RM 17.883 billion, through the system.

3.3.6.4 Integrity and bid challenges review mechanism

3.162. Public accountability, transparency, value for money, open and fair competition and fair dealing are the general principles pursued by Malaysia's government procurement system to achieve good governance. Efforts were taken by the Government to promote transparency and integrity in government procurement. The Governance and Integrity Committee initiated the establishment of the Integrity Units in all federal and state government agencies to promote greater transparency in government procurement. Heads of Integrity Units are appointed certified officers trained by the Malaysian Anti-Corruption Academy.

3.163. In addition, the Ministry of Finance introduced its Guidelines for the Implementation of the Integrity Pact in Government Procurement in 2010. Under the Guidelines, both procuring entities and bidders are required to sign an Integrity Pact. By signing this Pact, both parties undertake not to pay, offer, demand or accept bribes; collude with competitors to obtain the contract; or engage in such abuses while carrying out the contract. The Government is entitled to terminate a contract at any time when corruption or illegal activities are found.

3.164. The Auditor General is given the authority under project agreements to conduct an oversight review in order to give audit opinions or reports to the respective executive committees or steering committees. This oversight review function is performed concurrently with project implementation. Such projects include the Mass Rapid Transit and the Pan-Borneo Highway. Any project worth RM 100 million and above will be given priority to be audited.

3.165. Malaysia offers bidders a number of channels for complaint. A failed bidder may complain to the procuring agency, which may cancel a tender if it finds any irregularities. The bidder may also complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, or the Public Accounts Committee. In addition, the Compliance and Accreditation Section under the

55 Malaysia's Bogor Goals Progress Report (as at 30 September 2016). Viewed at: https://www.apec.org/About-Us/About-APEC/Achievements%20and%20Benefits/2016-Bogor-Goals [03/08/17].

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Government Procurement Division of the Ministry of Finance monitors adherence to procurement rules, and may also set up special task forces to investigate complaints, when necessary. Remedial actions are also available through civil proceedings provided by the Civil Law Act (1956) and the Government Proceeding Act (1956). The authorities indicate that they are planning to establish an independent bid challenge review mechanism in the coming years.

3.3.7 Intellectual property rights

3.3.7.1 Overview

3.166. The principal agency responsible for IPR policy development and administration remains the Intellectual Property Corporation of Malaysia (MyIPO). It handles both industrial property and copyright protection. MyIPO examines and registers industrial property (patents, trademarks, industrial designs, and geographical indications), provides advisory services, provides information on IP and statistical data, provides training programmes, conducts patent agent examinations, and organizes awareness programmes.

3.167. In 2014, MyIPO introduced an IP Renewal One-Stop Centre – the Renewal Lounge – to provide information on procedures and fees of IP renewal. In June 2014, an initial IPR Marketplace Portal was launched to enable IP owners to conduct potential transactions such as IP sale licensing, merchandising and/or franchising of their IP rights. MyIPO also collaborates with Universiti Malaysia Sarawak to introduce IP courses for undergraduate students.

3.168. In September 2015, Malaysia launched its IP Monetization Roadmap 2015-2020, aiming to cultivate a mindset of viewing IP as an asset with financial value and returns. The Roadmap underlines three strategies: transforming IP into financial assets; mobilizing IP assets; and enhancing IP Marketplace to become a trading hub for IP. The Government allocated RM 200 million in 2013 to an IP financing scheme under Malaysian Debt Ventures. To date, it has provided financing for 12 companies.

3.169. Since the previous Review in 2014, there has not been any significant change to Malaysia's legislative framework on IPR protection. The Government is reviewing the Patent Act 1983, Trade Marks Act 1976, and the Copyright Act 1987. The main IP laws remain:

a. Copyright Act 1987, most recently amended in 2012;

b. Patents Act 1983, most recently amended in 2006, and the Patents Regulations, most recently amended in 2011;

c. Trade Marks Act 1976, most recently amended in 2002, and the Trade Marks Regulations, most recently amended in 2011;

d. Geographical Indications Act 2000, most recently amended in 2002, and the Geographical Indications Regulations, most recently amended in 2013;

e. Industrial Designs Act 1996, most recently amended in 2013;

f. Trade Descriptions Act 2011;

g. Protection of New Plant Varieties Act 2004; and

h. Layout-Designs of Integrated Circuits Act 2000.56

3.170. Malaysia is a member of a number of WIPO-administered treaties (Table 3.20). The Government is considering acceding to the Madrid Protocol concerning the international registration of marks, and the Budapest Treaty regarding the international recognition of the deposit of microorganisms for patent procedures. The authorities stated that, as acceding to international treaties requires amendment to the relevant acts and regulations, Malaysia is in the

56 WIPO online information. Viewed at: http://www.wipo.int/wipolex/en/profile.jsp?code=MY [24/07/17].

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- 75 - midst of amending the Trade Marks Act 1976 and the Patents Act 1983, to include provisions relating to the Madrid Protocol and the Budapest Treaty respectively.

3.171. Malaysia ratified the Protocol Amending the TRIPS Agreement on Public Health in December 2015. Also in 2015, MyIPO and WIPO signed a Service Level Agreement, aiming at strengthening strategic cooperation to set up a Technology and Innovation Support Centre (TISC), which will host a Patent Library in Malaysia. MyIPO signed a MOU to establish TISC Host Institutions with 12 higher learning institutions (universities or polytechnics) and one research institution. The programme aims to provide easy access to innovation and technological information, as well as to disseminate best practices and experiences among TISC Host Institutions, through various workshops and training programmes.

Table 3.20 WIPO-administered treaties

Entry into force date for WIPO-administered treaties Malaysia WIPO Copyright Treaty December 2012 WIPO Performance and Phonograms Treaty December 2012 Nice Agreement Concerning the Intellectual Classification of Goods and September 2007 Services for the Purposes of the Registration of Marks Vienna Agreement Establishing an International Classification of the Figurative September 2007 Elements of Marks Patent Co-operation Treaty August 2006 Berne Convention for the Protection of Literary and Artistic Works October 1990 Convention Establishing the World Intellectual Property Organization January 1989 Paris Convention for the Protection of Industrial Property January 1989

Source: WIPO online information. Viewed at: http://www.wipo.int/wipolex/en/profile.jsp?code=MY#a6 [24/07/17].

3.172. Malaysia also signed some IP-relevant bilateral treaties:

a. Comprehensive Economic Cooperation Agreement between India and Malaysia, entered into force in 2011;

b. Agreement on Comprehensive Economic Partnership among Japan and Member States of the Association of Southeast Asian Nations, entered into force in 2009;

c. Agreement between Japan and Malaysia for an Economic Partnership, entered into force in 2006;

d. Agreement between Malaysia and Chile on the Promotion and Protection of Investment, entered into force in 1995;57 and

e. As well as other agreements such as the Malaysia-Pakistan Closer Economic Partnership Agreement; the Malaysia–New Zealand FTA; the ASEAN–Australia–New Zealand FTA; the Malaysia–Chile FTA; the Malaysia–Australia FTA; and the Malaysia–Turkey FTA.

3.173. Malaysia has been providing incentives for domestic companies to acquire industrial property rights: when computing income tax, resident companies may deduct the costs of acquiring IP rights from foreigners (patents, designs, models, plans, trademarks, or brands, and other similar rights).

3.174. Compulsory licensing provisions are applied to patents, layout designs of integrated circuits, and copyrights and related rights. There have been no changes to provisions on compulsory licensing, and no compulsory licences have been granted since 2014.

3.175. Under the Patents Act 1983, parallel imports are allowed. There are no provisions restricting parallel imports that relate to copyrights. With regards to trademarks, in general, the Trade Marks Act and its Regulations do not prohibit parallel importation. However, in practice, it seems that only the registered proprietor of a mark in Malaysia has the right to import goods

57 WIPO online information. Viewed at: http://www.wipo.int/wipolex/en/profile.jsp?code=MY#a6 [24/07/17].

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- 76 - carrying that registered mark, unless it can be proven that the parallel good bearing the same mark has a connection or association with the registered proprietor in Malaysia.

3.176. For industrial property rights, the duration of protection remains the same as at the time of the previous Review:

a. 20 years from the date of filing for patents, and 10 years (renewable for two further five-year consecutive terms) from the date of filing for utility models;

b. 10 years upon registration for trademarks, renewable indefinitely for ten-year periods;

c. 10 years of protection from the date of filing for registered geographical indications (GIs), renewable indefinitely for ten-year periods;58

d. 20 years or 25 years (for trees and vines/perennial plants) from the filing date of the application for a plant variety that is new, distinct, uniform, and stable;

e. 15 years from the date of application for a plant variety that is bred or discovered and developed by a local community or indigenous people, if it is new, distinct, and identifiable;

f. 25 years for industrial designs;

g. 10 years for a layout-design of an integrated circuit, from the date the layout-design is first commercially exploited in Malaysia or elsewhere; and

h. 15 years after the date the layout-design is created, notwithstanding the commercial exploitation.

3.177. Under the Trade Marks Act, a proprietor of a well-known trademark may take action in court to prevent third parties using their well-known marks in Malaysia without their consent. The Registrar may also prevent the registration of a mark that is identical or nearly resembles the well- known mark.

3.178. The legislation on trade secrets remains the same as described in the previous Review: there is no formal registration process for trade secrets or confidential information.59 The Ministry of Health stipulated that data for pharmaceuticals containing new chemical entities are protected for five years, and second indications are protected for three years. For a new drug product containing a new chemical entity, the period of test data protection is calculated from the date the product is first registered or granted marketing authorization and data exclusivity/test data protection in the country of origin, or in any country recognized and deemed appropriate by the Director of Pharmaceutical Services. For a second indication of a registered drug product, the period of test data protection is calculated from the date the second indication is first approved and granted data exclusivity/test data protection in the country of origin, or in any country recognized and deemed appropriate by the Director of Pharmaceutical Services.

3.179. In 2017, the pendency period was 26 months for patents and 8 months for trademarks. Following the introduction of expedited examination in 2011, it takes 20 months (from the date of filing a request) for a patent to be granted under the expedited procedures, and 6 months 3 weeks for a trademark to be granted under the expedited procedures. Non-residents made many more applications for patents, trademarks, and industrial designs, while residents in general made more applications for utility models (Table 3.21).

58 GIs are protected regardless of whether or not they are registered. 59 For details of trade secrets protection, please see WTO document, WT/TPR/S/292/Rev.2, 8 April 2014.

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Table 3.21 IPR data

Residentsa Non-residentsa Abroada Patent applications 2013 1,199 6,006 1,100 2014 1,353 6,267 1,308 2015 1,272 6,455 1,027 2016 1,279 6,176 .. Patent grants 2013 288 2,372 432 2014 344 2,361 512 2015 344 2,533 565 2016 373 2,980 .. Utility model applications 2013 70 75 22 2014 86 54 35 2015 103 77 33 2016 ...... Trademark applications 2013 14,705 17,520 5,513 2014 15,400 19,171 5,074 2015 15,940 19,983 4,297 2016 18,527 20,580 .. Trademark registrations 2013 9,777 17,202 3,516 2014 10,467 16,961 4,682 2015 10,529 18,271 3,241 2016 12,686 20,120 .. Industrial design applications 2013 679 1,374 356 2014 827 1,055 308 2015 627 1,135 249 2016 701 929 .. Industrial design registrations 2013 698 1,303 398 2014 532 1,359 377 2015 418 883 225 2016 641 1,259 .. .. Not available. a A resident filing refers to an application filed in Malaysia by a Malaysian resident; a non-resident filing refers to an application filed by a foreign applicant; an abroad filing refers to an application filed by a Malaysian resident at a foreign office. Source: WIPO Statistical Country Profiles – Malaysia. Viewed at: http://www.wipo.int/ipstats/en/statistics/country_profile/profile.jsp?code=MY [24/07/17].

3.180. Registration is not required for a copyright to be protected. Copyright owners may voluntarily notify and deposit a copy of the work eligible for copyright with MyIPO. The period of protection for literary, musical or artistic works is the life of the author plus 50 years.

3.3.7.2 Enforcement

3.181. Fines and penalties on IPR infringing cases remain unchanged since 2014.60 IPR enforcement in Malaysia is mainly the responsibility of the MDTCC (Ministry of Domestic Trade, Cooperatives and Consumerism). Goods detained at the border by Customs are handed over to the MDTCC for further action. At the border, Customs officers have an ex officio duty to detain or suspend the release of goods that are deemed to be infringing IPRs on copyrights and trademarks. The Customs Intelligence Centre collects data on seizures by the Enforcement Division of Customs. Main categories of goods confiscated at the border are: clothes, leather goods, liquor and beer, and mobile phones and accessories.

3.182. IPR-related cases are handled by the Intellectual Property Court, and the Copyright Tribunal. Since the previous review in 2014, no cases have been brought to the Copyright Tribunal.

60 For details of fines and penalties, please refer to WTO document, WT/TPR/S/292/Rev.2, 8 April 2014.

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3.183. The MDTCC has been making efforts to combat the distribution of counterfeit goods, by: establishing working relationships with overseas enforcement agencies including Interpol; establishing and strengthening cooperation between MDTCC and trademark owners; strengthening and mobilizing the Special Taskforce Combating Counterfeit Goods, which involves various government agencies and trademark owners; increasing the monitoring of business-related websites and social media; strengthening cooperation with Customs to increase enforcement action at the border.

3.184. MyIPO has also been making efforts to improve IPR enforcement. For example, in 2015, the 2nd Global IP Valuation Conference was held in Malaysia as a platform to enhance understanding on IP valuation among stakeholders; in March 2016, the Government introduced an IP Filing Fund under the 11th MP, which aims at encouraging and assisting youth, students and local communities to file IPs. MyIPO also provides various training programmes such as the IP summer camp, IP Funtastic Programme, and other IP awareness programmes.

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4 TRADE POLICIES BY SECTOR

4.1 Agriculture, Forestry, and Fisheries

4.1.1 Agriculture

4.1.1.1 Features

4.1. In 2016, agriculture (including rubber), forestry, and fishing contributed 8.1% to GDP, a decline from 10.2% in 2011. The value of agricultural, forestry and fishing production fluctuated over the 2010 to 2016 period, between RM 83 billion in 2010 and RM 106 billion in 2016.1 The importance of agriculture varies considerably from one state to another, being over 20% of GDP in Kelantan, Pahang, Perlis, and Sabah, less than 2% in Selangor and the Federal Territory of Labuan, and negligible in Kuala Lumpur and Putrajaya.2

4.2. In 2015, agriculture accounted for 11.4% of employment with 1.61 million people employed in the sector down from 1.75 million in 2011. Of the 1.61 million people employed in agriculture, 646,400 are non-citizens most of whom work in the palm and rubber plantations.3

4.3. About 43% of the total contribution to GDP from agriculture, rubber, forestry, and fishing is from palm oil, about 14% from fruits and vegetables, 13% from livestock, and 12% from fishing (Chart 4.1).

Chart 4.1 Contribution to GDP from agriculture, rubber, forestry, and fishing, 2010-16 Chart 4.1 Contribution to GDP from agriculture, rubber, forestry, and fishing (RM million) (RM million)

120,000

100,000 Forestry and logging Fishing

80,000 Other livestock Poultry

60,000 Other crops Paddy

Fruit and vegetables 40,000 Rubber

Oil palm 20,000

0 2010 2011 2012 2013 2014 2015 2016 Note:Note: 20152015 figures figures are are estimates; estimaste;2016 2016 figures figures are provisional.are provisional.

Source:Source: DepartmentDepartment of ofStatistics Statistics Malaysia. Malaysia.

4.4. Malaysia is a major producer of several products. According to the FAO, in 2013, Malaysia was the second biggest producer of palm oil, palm fruit and palm kernels, the sixth biggest for natural rubber, the seventh for pepper (piper spp), and the tenth for coconuts.4

4.5. The structure of agricultural production in Malaysia can be divided into two categories: estates and individual small holdings. The estates are owned by corporations or public land development agencies with holdings of not less than 100 acres (40.47 ha) and are involved in the production of industrial crops such as palm oil, rubber, or cocoa. The estates account for most of the palm oil and a significant proportion of rubber and cocoa. The average farm size for small

1 Department of Statistics, Malaysia (2017), National Accounts - Gross Domestic Product 2016, 19 May. Viewed at: https://www.dosm.gov.my/v1/ [October 2017]. 2 Department of Statistics, Malaysia (2016), Selected Agricultural Indicators 2016, December. Viewed at: https://www.dosm.gov.my/v1/ [October 2017]. 3 Department of Statistics, Malaysia (2016), Selected Agricultural Indicators 2016, December. Viewed at: https://www.dosm.gov.my/v1/ [October 2017]. 4 FAOStat online database. Viewed at: http://www.fao.org/faostat/en/#home [October 2017].

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- 80 - holders is about 1.5 ha. Small holders account for nearly all food production, while many are also involved in industrial crops.5

4.1.1.2 Agriculture trade

4.6. In 2016, Malaysia had a surplus in trade in agricultural products6 with exports of US$22.4 billion and imports of US$14.5 billion. In addition, exports of rubber and articles thereof7 were US$5.8 billion and imports were US$2.9 billion. The principal agricultural exports are palm oil (40% of agricultural exports in 2016), animal and vegetables fats and oils (8%), and coconut oil (4%). Imports are more diversified: in 2016, sugar, the biggest import, accounted for 6% of agricultural imports followed by maize, food preparations n.e.s., and cocoa beans (5% each) (Table 4.1).

Table 4.1 Exports and imports of agricultural products and rubber, 2013-16 (US$ million) Exports 2013 2014 2015 2016 Top 4 partners 228,316 234,135 200,211 189,414 Singapore, China, TOTAL United States, Japan Total agricultural exports 25,450 26,234 22,017 22,383 of which 1511 Palm oil and its fractions, not 12,289 11,995 9,501 9,064 India, China, chemically modified Netherlands, Pakistan 1516 Animal or vegetable fats and oils 1,942 1,946 1,553 1,735 China, United States, and their fractions, not further Turkey, Netherlands prepared 1513 Coconut (copra), palm kernel or 843 1,048 844 987 Netherlands, China, babassu oil, not chemically modified United States, Turkey 1905 Communion wafers, empty cachets 470 539 579 657 Singapore, China, of a kind suitable for pharmaceutical Thailand, Indonesia use, sealing wafers, rice paper and similar products 2106 Miscellaneous edible preparations // 584 703 636 651 Australia, Indonesia, Food preparations n.e.s. China, Singapore 1804 Cocoa butter, fat and oil 379 625 557 500 Japan, United States, Germany, Canada 1901 Food preparations … containing less 662 694 521 491 Philippines, Brunei than 5 % by weight of cocoa, n.e.s. Darussalam, Indonesia, Singapore 2101 Roasted chicory and other roasted 427 427 432 439 China, Thailand, coffee substitutes, and extracts, Singapore, Indonesia essences and concentrates thereof 2202 Waters, containing added sugar or 335 348 313 327 Singapore, Indonesia, other sweetening matter or Papua New Guinea, flavoured, and other non-alcoholic China beverages, not including fruit or vegetable juices of heading 20.09 1517 Margarine; edible mixtures fractions 307 363 293 318 Australia, Thailand, of different fats or oils of this Iraq, Singapore Chapter, other than of heading 15.16 Rubber exports 40 Rubber 8,285 6,942 6,237 5,761 United States, China, Germany, Japan 4015 Rubber articles of apparel 3,391 3,312 3,384 3,209 United States, Germany, Japan, Brazil 4001 Natural rubber in primary forms 2,228 1,398 1,034 871 China, Germany, Iran, United States 4002 Synthetic rubber in primary form 196 204 351 660 China, Thailand, Indonesia, Sri Lanka

5 Ministry of Agriculture and Agro-Based Industry (2009), Overview of the Agriculture Sector in Malaysia, presentation. 6 For the purposes of this section of the report, agricultural products are those set out in Annex I of the Agreement on Agriculture where fish and fish products are under HS 2012 headings 02840, 03, 050800, 050900, 051191, 121229, 1504, 1603, 1604, 1605, and 230120. Trade in fisheries products is addressed in Section 4.2.2. 7 HS heading 40.

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Imports 2013 2014 2015 2016 Top 4 partners TOTAL 205,814 208,823 176,175 168,375 China, Singapore, Japan, United States Total agricultural imports 15,706 16,352 15,264 14,466 of which 1701 Sugar and chemically pure 936 995 711 814 Brazil, Australia, sucrose, in solid form Thailand, Guatemala 1005 Maize (corn) 995 961 772 711 Argentina, Brazil, United States, Pakistan 2106 Food preparations n.e.s. 673 666 625 661 Singapore, United States, Indonesia, China 1801 Cocoa beans 765 917 692 654 Ghana, Cõte d'Ivoire, Papua New Guinea, Indonesia 1513 Coconut (copra), palm kernel or 321 491 548 478 Indonesia, Thailand, babassu oil, not chemically Philippines, Papua New modified Guinea 0202 Meat of bovine animals, frozen 471 493 535 475 India, Australia, New Zealand, Brazil 2304 Oil-cake and other solid residues, 748 787 577 458 Argentina, China, resulting from the extraction of United States, India soyabean oil 1901 Food preparations containing less 484 525 489 430 Singapore, Thailand, than 5 % by weight of cocoa, Philippines, Netherlands n.e.s. 0703 Onions, shallots, garlic, leeks and 304 230 340 406 China, India, other alliaceous vegetables, fresh Netherlands, Pakistan or chilled 2208 Undenatured ethyl alcohol of an 487 428 409 400 France, United alcoholic strength by volume of Kingdom, Singapore, less than 80 % vol. China Rubber imports 40 Rubber 4,745 3,586 3,096 2,881 Thailand, Rep. of Korea, Japan, Viet Nam 4001 Natural rubber in primary forms 2,482 1,873 1,307 1,164 Thailand, Côte d'Ivoire, Viet Nam, Philippines 4002 Synthetic rubber in primary form 767 755 768 766 Rep. of Korea, Other Asia (n.e.s.), Japan, United States 4011 New pneumatic tyres of rubber 490 488 484 467 Thailand, Indonesia, China, Viet Nam

Source: UNSD Comtrade.

4.1.1.3 Domestic policies

4.7. Responsibility for agricultural policy is divided between a number of ministries and government agencies including:

 The Ministry of Agriculture and Agro-based Industry (MOA) is the principal ministry responsible for the development of the agro-food and agro-business sectors. Under, or within, the Ministry there are eight agencies and four departments. In addition, there are several statutory bodies mandated to provide specific services relating to research and development, and improving efficiency;

 The Ministry of Plantation Industries and Commodities is responsible for policies relating to palm oil, rubber, cocoa, pepper, kenaf, tobacco, and timber and timber products. Under the Ministry are a number of agencies responsible for implementing policy and providing services to each product, such as the Malaysian Palm Oil Board (MPOB), the Malaysian Palm Oil Certification Council (MPOCC), and the Malaysian Palm Oil Council (MPOC);

 The Ministry of Natural Resources and Environment; and

 The Ministry of Regional and Rural Development.

4.8. The government-owned Agro Bank, which was corporatized in 2008 under the Bank Pertanian Malaysia Berhad Act No. 158 of 2008, continues to provide financial services to agriculture while expanding its operations beyond farming to cover upstream and downstream activities including processing, storage, marketing, and services (Table 4.2). The bank's strategic plan aims to reduce

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- 82 - its dependence on government funds and the target ratio for government funds to depositors' funds was 24:76 by 2016 compared to 26:74 in 2014.8 In addition to general banking services, the bank also provides low-profit rate financing to customers under a number of government schemes (Section 4.1.1.4 ).

Table 4.2 Agrobank financing for agriculture, 2013-16 (RM million) Sector 2013 2014 2015 2016 Oil palm 1,005.54 1,135.48 1,434.60 1,704.78 Rubber 178.34 194.9 207.14 234.38 Other crops 1,261.41 1,413.90 1,532.84 1,945.31 Fishery 435.52 461.41 445.20 400.35 Forestry 34.547 55.85 20.54 12.74 Livestock 700.81 741.78 742.79 804.82 Other ago-based processing 123.99 255.88 347.51 543.36 Support sector 2,653.17 2,343.32 2,753.14 3,085.20 Total 6,393.33 6,602.52 7,483.76 8,730.94

Source: Malaysian authorities.

4.9. Agricultural policy is set out in several documents, including the Economic Transformation Programme, the National Agrofood Policy 2011-2020 (NAP), the National Commodity Policy 2011- 2020 (NCP), and the 11th Malaysia Plan (11MP) for 2016-2020.

4.10. Under the Economic Transformation Programme, the Agriculture National Key Economic Area (NKEA) focusses on selected sub-sectors with high-growth potential (aquaculture, seaweed farming, edible birds' nests, herbal products, fruits and vegetables, and premium processed foods) along with the paddy rice and livestock sub-sectors. In addition, palm oil and rubber are addressed separately. The Programme sets out 14 Entry Point Programmes for agriculture which focus on transforming a traditionally small-scale production-based sector into a large-scale agribusiness industry. Another 12 Entry Point Programmes have been established for palm oil and rubber with targets for job creation and value of output.

4.11. The NAP follows the three National Agricultural Plans that covered the period 1984 to 2010 and covers the sectors MOA is responsible for and the associated processing industry. The objectives of the NAP are (i) to ensure food safety and food security, (ii) to develop the agrofood industry into a competitive and sustainable industry, and (iii) to increase incomes of producers and entrepreneurs. Among the strategic directions to achieve these objectives are self-sufficiency targets for crops, livestock, and fish where self-sufficiency is defined as domestic production as a percentage of production + exports – imports +/- changes in stocks (Table 4.3). Table 4.3 Self-sufficiency forecasts in NAP 2010-2020 and actual levels (%) 2010 2015 2020 Projection Actual Projection Actual Projection Crops Rice 71.4 63.1 71.5 72.3 69.8 Fruits 65.8 83.7 70.7 80.8 76.3 Vegetables 41.2 49.6 54.0 56.7 67.6 Livestock Beef 29.6 30.1 30.5 23.5 32.7 Mutton 10.6 12.1 16.0 11.46 30.9 Poultry 127.9 105.6 129.3 104.5 131.6 Pork 101.7 95.3 95.6 94.6 93.0 Eggs 115.4 114.6 117.8 113.6 119.1 Milk 4.9 8.5 5.5 7.0 6.3 Fish for food 101.7 94.6 102.1 91.0 110.4

Source: National Agrofood Policy 2011-2020 (Table 2-14), MP11, Malaysian authorities.

8 Cambridge IF Analytica (2016), Agrobank – Charting a New Path to Sustainable Growth. Viewed at: http://www.google.ch/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwjM4Kn3_9PUAhVPbVAKH XrKB-AQFggiMAA&url=http%3A%2F%2Fwww.cambridge-ifa.net%2Fcases%2Fagrobank- study.pdf&usg=AFQjCNFNKPdgjE6XNgTdIwhZspYLtuJLow [October 2017].

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4.12. The National Commodity Policy 2011-2020 covers the products under the responsibility of the Ministry of Plantation Industries and Commodities and provides a strategic direction for the development of these sub-sectors. Like the NAP, the NCP sets out a number of strategic directions which include: strengthening and modernizing the commodities industries; modernization of production and processing; diversification to higher value-added products; generation of new sources of revenue; enhancing competitiveness and market expansion; accelerating the development of smallholders and entrepreneurs; and improving human capital.

4.13. The modernization of agriculture is part of the sixth Strategic Thrust under 11MP (Re-engineering economic growth for greater prosperity). The strategies set out in the Plan include improving productivity and incomes for farmers, fishers, and small holders; promoting training and encouraging young agricultural entrepreneurs; improving institutional support and extension services; building capacity of cooperatives and farmers' associations; improving market access and logistics support; improving access to finance; and improving performance-based incentives and certification programmes. Under the strategy of intensifying performance-based incentives, the Plan states that existing input-based subsidies will be gradually replaced by performance-based incentives to encourage compliance of farmers and smallholders with the Malaysian Good Agricultural Practices (MyGAP) certification and other certifications such as the Malaysian Sustainable Palm Oil (MSPO) and the Malaysian Timber Certification Scheme.9

4.1.1.3.1 Selected sub-sectors

Palm oil

4.14. Oil palm is the biggest agricultural product in Malaysia in terms of value of production, almost equal to the total value of all other agriculture, forestry, and fishing products put together and contributing about 3.5% to GDP in 2016 (compared to 8.1% for agriculture, rubber, forestry, and fishing in total). The area under cultivation and the total production of fresh fruit bunches increased steadily up to 2015 but fell in 2016. Of the 5.7 million ha under cultivation, 84% was in estates and the remainder in small holdings (Table 4.4). Palm oil is processed into a wide range of food and feed, and non-food products from crude palm oil, to stearin and olein, to bio-fuels (both as biomass and biodiesel), and RBDPO used in cleaning products.

4.15. A number of companies (25) account for a large part (24%) of the area under cultivation and most of the processing sector. These companies are vertically integrated enterprises with international operations and some are part of larger diversified companies. They include Sime Darby Plantation (part of the Sime Darby Group), Felda Global Ventures Holdings (which was initially the commercial arm of the Federal Land Development Authority), IOI Corporation Berhad (part of the IOI Group), Glenealy Plantations Sdn Berhad (part of the Samling Group), Genting Plantations Berhad, and Kuala Lumpur Kepong Berhad.

Table 4.4 Oil palm, selected indicators, 2010-16

2010 2011 2012 2013 2014 2015 2016 Value of crude palm 45,900 60,876 51,922 45,562 46,876 42,987 45,948 oil production (RM million) Quantity produced 83,918 93,815 93,265 95,729 96,067 98,344 86,325 (000 tonnes fresh fruit bunches) Area under cultivation 4,854 5,000 5,077 5,230 5,392 5,643 5,738 (000 ha) of which Estates (000 ha) 4,203 4,302 4,385 4,482 4,585 4,760 4,804 Small holdings (000 651 698 692 748 807 883 934 ha) Employment ...... 442,094 451,507 437,495 429,351

.. Not available. Source: Department of Statistics Malaysia and Malaysia authorities.

9 Prime Minister's Department (2015), Eleventh Malaysia Plan 2016-2020 – Anchoring Growth on People, pp. 8-24 to 8-26.

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4.16. In addition to, or as part of the Ministry of Plantation Industries and Commodities, there are a number of public agencies responsible for policy development and implementation for palm oil including the Malaysian Palm Oil Board (MPOB), the Malaysian Palm Oil Council (MPOC), and the Malaysian Palm Oil Certification Council (MPOCC).

4.17. MPOB was established in 2000 under the Malaysian Palm Oil Board Act No. 582 of 1998 and is the principal government agency responsible for developing and promoting national objectives and policies for the oil palm industry, including research and development, training, and regulation.10

4.18. The Malaysian Palm Oil Council (MPOC), incorporated in 1990, is responsible for promoting palm oil and its derivatives, including trade opportunities.

4.19. The Malaysian Palm Oil Certification Council (MPOCC) began operations in 2014 as an independent non-profit organization established to develop the Malaysian Sustainable Palm Oil (MSPO) Certification Scheme. The MPOCC is responsible for setting standards, developing certification systems, and other processes relating to sustainable production and processing of palm oil. Two types of certificates are issued by accredited certification bodies that conduct third- party verification audits: oil palm management certification for responsible management of palm oil plantations, small holdings and palm oil processing facilities; and supply chain certification for entities that process, trade or manufacture palm oil from certified oil management units. At July 2017, total certified planted area was 245,079 ha.11

4.20. In addition to general taxes such as corporation tax and the goods and services tax, plantations may be liable for a windfall profit levy, collected by the Malaysian Royal Customs Department, which replaced a cess on production. The windfall profit levy rate is charged whenever the average monthly crude palm oil price is greater than RM 2,500 in Peninsular Malaysia or RM 3,000 in Sabah and Sarawak:  In Peninsular Malaysia, the tax is 3% of the average monthly crude palm oil price in excess of RM 2,500 multiplied by the monthly production of fresh fruit bunches in tonnes.

 In Sabah and Sarawak, the tax is 1.5% of the average monthly crude palm oil price in excess of RM 3,000 multiplied by the monthly production of fresh fruit bunches in tonnes.

4.21. In addition, an export duty is applied which is set each month based on the average market price for crude palm oil (Table 4.5). For September 2017, the crude palm oil price for the purposes of setting the export duty rate was RM 2,677.91 per tonne; therefore, the export duty was 5.5% for that month.

Table 4.5 Export duty rate (after partial duty exemption)

Crude palm oil market price Export duty RM per tonne % Less than 2,250 0 2,250 - 2,400 4.5 2,401 - 2,550 5.0 2,551 - 2,700 5.5 2,701 - 2,850 6.0 2,851 - 3,000 6.5 3,001 – 3,150 7.0 3,151 - 3,300 7.5 3,301 - 3,450 8.0 Greater than 3,450 8.5

Source: MPOB online information. Viewed at: http://bepi.mpob.gov.my/index.php/en/statistics/export- duties.html [October 2017].

4.22. There are about 644,522 oil palm small holders (less than 40.47 ha) in Malaysia who may qualify for a number of incentive schemes including the Replanting Subsidy for Oil Palm

10 Malaysian Palm Oil Board online information. Viewed at: http://www.mpob.gov.my/ [October 2017]. 11 Malaysian Palm Oil Certification Council online information. Viewed at: https://www.mpocc.org.my/ [October 2017].

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- 85 - smallholders (TSSPK), Oil Palm Smallholders New Planting Scheme (TBSPK), Smallholding Maintenance Assistance (CPC) and Cantas Discount Scheme (SKIDIC). Under the replanting and new planting schemes, small holders can receive about RM 7,500 per ha in peninsular Malaysia or RM 9,000 in Sabah and Sarawak. From 2011-2016 (the period under the 10th Malaysia Plan): 56,910 small holders with a total of 132,829 ha received planting assistance; 918 small holders with less than 2.5 ha received about RM 500 per month under the CPC; and 2,772 small holders received a discount of RM 1,000 for harvesting machines (called cantas). The 2017 budget allocation for replanting of oil palm was RM 40 million.12

4.23. The National Biofuel Policy of 2006 aims to promote sustainable energy sources, to reduce dependency on fossil fuels, and to improve palm oil prices. Biofuels, using crude palm oil as the feedstock, are to be used for transport, industry, and for export. Under the Biofuel Industry Act of 2007, MPIC introduced a requirement to blend diesel with 5% biodiesel (B5) starting in 2011 in some regions and extended to the whole country by end-2014. In 2015, the B7 blend was implemented throughout Malaysia and B10 is to be implemented in 2017. About 360,000 tonnes of crude palm oil were used to produce 525 million litres of biodiesel for blending with petroleum diesel in 2015.13 There are no specific direct incentives to consumers or the industry under the programme.

Rubber

4.24. Although the value of production, quantity produced, and area under rubber cultivation are lower than in the mid-2000s, partly due to a shift to oil palm cultivation, rubber still represents over 7% of the GDP of agriculture, forestry and fishing, and the manufacturing of rubber products in Malaysia is an important source of employment. Small holdings represent over 90% of the area under rubber trees (Table 4.6).

Table 4.6 Rubber, selected indicators, 2010-16

2010 2011 2012 2013 2014 2015 2016 Cultivation Quantity produced (000 tonnes) 939 996 923 826 669 722 674 Area under cultivation (000 ha) 1,020 1,027 1,041 1,057 1,066 1,079 1,072 of which Estates (000 ha) 64 64 66 77 80 77 77 Small holdings (000 ha) 956 963 975 980 986 998 996 Employment 10,805 10,885 12,456 12,046 12,360 11,636 10,264 Manufactured locally produced rubber products Sales value (RM million) 12,965 14,614 16,145 16,449 15,779 16,948 17,123 of which Tyres, inner tubes (RM million) 1,893 1,883 1,948 1,823 1,845 1,924 1,891 Retreaded tyres (RM million) 160 261 258 222 217 198 205 Rubber gloves (RM million) 7,785 8,483 9,831 10,001 9,693 10,369 10,493 Other rubber goods (RM million) 3,727 3,986 4,108 4,414 4,114 4,457 4,534 Employment 61,278 60,694 66,880 70,049 70,216 71,206 75,366

Source: Department of Statistics Malaysia, Malaysian Rubber Board Statistics 2016.

4.25. Over the same period of mid-2000s to 2015, imports of natural rubber increased and then stabilized at about 0.9 to 1 million tonnes reflecting the continuing growth of the processing industry and the use of imported raw materials (Table 4.1). In 2015, there were about 300 companies in Malaysia making a wide variety of rubber products, although over 80% of rubber consumption went into making latex products, mostly rubber gloves. The total sales value of locally manufactured rubber goods was about RM 17 billion, of which RM 10.4 billion was rubber gloves and RM 2 billion tyres and inner tubes.14

4.26. The Ministry of Plantation Industries and Commodities is responsible for policy development for the rubber industry, and the Malaysian Rubber Board, established in 1998, is responsible for assisting in policy development and implementing policy from the cultivation of trees, to the

12 EY (2016), Budget 2017 – Malaysia, Volume 4 – Issue 3 – 24 October. 13 USDA (2016), Malaysia – Biofuels Annual – 2016, GAIN Report Number MY6004, 27 July. Viewed at: https://gain.fas.usda.gov/Pages/Default.aspx [October 2017]. 14 Malaysian Rubber Board (2016), Natural Rubber Statistics 2016. Viewed at: http://www.lgm.gov.my/nrstat/nrstats.pdf [October 2017].

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- 86 - extraction and processing of its raw rubber, to the manufacture of rubber products and the marketing of rubber and rubber products. A number of institutions operate under the MRB including the Rubber Research Institute of Malaysia, the Malaysian Rubber Research and Development Board, the Malaysian Rubber Exchange and Licensing Board, and the Malaysian Rubber Export Promotion Council.

4.27. The policy objectives under the Economic Transformation Programme are set out in four Entry Point Projects: to increase productivity; encourage replanting; increase global market share for latex gloves to 65% by 2020; and ensure the commercialization of Ekoprena and Pureprena (Green Rubber) as raw materials for the production of high-end rubber products, such as eco-friendly green tyres.15

4.28. Under the Rubber Production Incentive (RPI) scheme, registered small holders are compensated whenever the average monthly price falls below a threshold. The compensation equals the difference between the average price and the threshold, up to a maximum amount. In 2015, RM 100 million was allocated to the scheme, RM 200 million in 2016, and RM 250 million in 2017 (Table 4.7).16

Table 4.7 Rubber production incentive, 2015, 2016 and 2017

2015 2016 2017 Threshold SMR 20 (RM per kg f.o.b.) 4.60 5.50 5.50 Farm gate (RM per kg cup lump) 1.75 2.20 2.20 Incentive (RM per kg cup lump) Min Max Min Max Min Max Peninsular 0.10 0.10 0.10 0.50 0.00 0.00 Sabah 0.20 0.40 0.20 0.90 0.05 0.20 Sarawak 0.10 0.30 0.10 0.60 0.20 0.30 Total budget allocation (RM million) 100 200 250

Source: Malaysian Rubber Board, Rubber Journal Asia, and EY (2016), Budget 2017 – Malaysia, Volume 4 – Issue 3–24 October, and Malaysian authorities.

4.29. In addition to the Rubber Production Incentive scheme, grants for replanting and new planting by small holders of RM 9,000 to RM 14,000 per ha are available with a total budget allocation, in 2015, of RM 97 million for replanting and RM 110 million for new planting.17

4.30. A cess on exports of 0.2% of the export value is charged to the manufacturer of rubber products (except rubber-based shoes, tyres, and inner tubes). In addition, a cess of RM 0.04 per kg is charged on natural rubber sold to manufacturers in Peninsular Malaysia, and on natural rubber (inclusive of unvulcanised compounded rubber and unvulcanised rubber in other forms (HS Headings 4005 and 4006 respectively)) exported or transferred out of Peninsular Malaysia.18

Livestock

4.31. The value of livestock production has increased steadily over the past few years reaching RM 18,528 million in 2015, partly due to increasing production but also to rising prices. Most ruminant production is based in small holder farms, sometimes mixed with rubber and palm planting (Table 4.8).

4.32. The non-ruminant subsector (chickens and pigs) is more developed in terms of production capacity and scale, and is operated by larger enterprises using feedstuffs. The feedstuffs include locally available products, such as palm kernel cake and other palm by-products, but most are

15 Ministry of Trade and Industry online information. Viewed at: http://www.miti.gov.my/index.php/pages/view/2476 [October 2017]. 16 Malaysian Rubber Board online information. Viewed at: http://www.lgm.gov.my/whatsnew/IPG_BI.pdf [October 2017]; Rubber Journal Asia (2016), Malaysia launches rubber production incentive scheme this month, 25 July. Viewed at: http://rubberjournalasia.com/malaysia- launches-rubber-production-incentive-scheme-this-month/ [October 2017]; EY (2016), Budget 2017 – Malaysia, Volume 4 – Issue 3 – 24 October. 17 Performance Management and Delivery Unit (PEMANDU) (Department of the Prime Minister) (2015), Economic Transformation Programme - Annual Report 2014, p. 109. Viewed at: https://www.pemandu.gov.my/download-centre/ [October 2017]. 18 Malaysian Rubber Board (Cess) Order 2009, PU(A) 317.

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- 87 - imported. From 2012-2016, imports of animal feeds (not including unmilled cereals)19, have ranged from 1.7 to 2.1 million tonnes, and imports of soy beans20 (most of which are used for poultry feed21) from 0.6 to 0.8 million tonnes (Table 4.1).22

Table 4.8 Livestock indicators, 2008-15

2008 2009 2010 2011 2012 2013 2014 2015 Value of production (RM million) Total 9,853 10,368 11,262 11,610 13,446 14,788 16,8223 18,528 of which Poultry 5,183 5,359 5,776 5,950 6,868 7,414 8,499 9,534 Beef 697 768 847 889 1,032 1,142 1,265 1,412 Pork 1,729 1,826 2,074 2,047 1,969 2,049 2,402 2,526 Eggs 2,092 2,225 2,359 2,614 3,275 3,873 4,350 4,752 Milk 30 43 49 46 54 58 68 80 Quantity of production (000 tonnes – unless otherwise stated) Poultry meat 1,163 1,202 1,296 1,290 1,374 1,458 1,584 1,633 Beef 38 42 47 49 51 52 53 51 Mutton 2 2 2 3 5 5 5 4 Pork 195 206 234 214 218 217 218 223 Eggs 523 556 590 621 644 684 728 793 Milk (million 20 24 27 25 27 29 34 37 litres)

Note: Milk production data are for milk for human consumption only. Source: Department of Veterinary Services. Viewed at: http://www.dvs.gov.my/index.php/pages/view/1498 [October 2017].

4.33. The MOA is responsible for developing policy and legislation for the livestock industry. In addition, a number of government agencies are also responsible for implementing policy in specific areas, such as the Department of Veterinary Services for animal health and production.

4.34. Under the National Agrofood Policy 2011-2020, policy is focused on improving efficiency and increasing production, including production of feedstuffs. This includes disease control objectives to achieve foot and mouth disease free status through a vaccination programme and brucellosis and bovine tuberculosis free status through a culling programme, as well as measures to maintain disease free status for avian influenza and nipah virus and containment of Newcastle disease. Small-scale slaughtering is to be phased out and central slaughtering plants established to ensure halal requirements are adhered to, as well as for health, sanitary, and environmental protection reasons.23

Rice

4.35. Rice production, yield per hectare, and the area under cultivation increased steadily each year from 2008 to 2014, with a slight decline in 2015 (Table 4.9), as the Government has continued to prioritize the subsector under the NAP. Rice production is carried out by small holders operating average plots of about 2 ha24 mostly in the "granary areas" established under earlier agricultural plans.

19 SITC Rev.4 heading 081. 20 SITC Rev.4 heading 2222. 21 USDA (2017), Malaysia – Oilseeds and Products Annual – 2017, GAIN Report Number MY7003, 29 March. Viewed at: https://gain.fas.usda.gov/Pages/Default.aspx [October 2017]. 22 UNSD Comtrade online database. Viewed at: https://comtrade.un.org/data/ [October 2017]. 23 Ministry of Agriculture and Agro-Based Industry (2011), National Agrofood Policy 2011-2020, p. 58-62. 24 Performance Management and Delivery Unit (PEMANDU) (Department of the Prime Minister) (2010), Economic Transformation Programme , p. 519.

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Table 4.9 Rice, selected indicators, 2008-15

2008 2009 2010 2011 2012 2013 2014 2015 Cultivation Value of production (RM million) 1,765 1,883 1,849 1,934 1,950 1,953 2,136 2,042 Quantity produced (000 tonnes) 2,353 2,511 2,465 2,579 2,599 2,604 2,849 2,723 Planted area (000 ha) 657 675 678 688 685 672 679 681

Source: Department of Statistics Malaysia, FAOStat, and Malaysian authorities.

4.36. Policy formulation and preparation of legislation relating to rice are the responsibility of the MOA. Under the MOA, there are several agencies responsible for the development of rice, including the Department of Agriculture, MARDI, and the Farmers Organization Authority. In addition, there are a number of agencies responsible for overseeing the granary areas: Muda Agriculture Development Authority (MADA); Kemubu Agricultural Development Authority (KADA); Northwest Selangor Integrated Agricultural Development Project (PBLS); Integrated Agricultural Development Project (IADA) Seberang Perak; IADA Penang; IADA KETARA; IADA KERIAN; IADA Kemasin Semerak; IADA Rompin; IADA Pekan; IADA Batang Lupar: and IADA Kota Belud.

4.37. Policy under the NAP is focused on increasing productivity and quality of paddy rice, effective mechanization, and use of by-products, as well as improving management of the national stockpile, restructuring incentives and subsidies for paddy and rice and strengthening management of paddy and rice institutions.25

4.38. Under a privatization agreement in 1996, the formerly state-owned company, the National Paddy and Rice Ltd Company (BERNAS) agreed with the Government to a set of duties and obligations which include: the management of the national rice stockpile; the purchase of paddy from paddy farmers at the guaranteed minimum price; acting as buyer of last resort for paddy farmers; managing the disbursement of the subsidies to all registered paddy farmers; managing bumiputera rice millers' schemes; and promoting consumer interests to achieve a fair and stable price and ensure sufficient supply of rice.26 The agreement also gives BERNAS the sole right to import and distribute rice for the Malaysian market. According to the authorities, the existing agreement will be maintained until January 2021. BERNAS has been notified to the WTO as a state trading enterprise under Article XVII of GATT 1994 and the Understanding on the Interpretation of Article XVII.27

4.39. The stockpile operated by BERNAS for the Government was set at 292,000 tonnes in 2008.28 According to the authorities, with effect from 1 August 2016, the Government has set the stockpile operated by BERNAS at 150,000 tonnes.

4.40. In addition to the Guaranteed Minimum Price of RM 1,200 per tonne (increased from RM 750 per tonne in 2014), a range of support measures are available for rice producers including direct payments for each tonne produced, a number of input subsidies, and a rice millers subsidy (Table 4.10).29 In 2016, the total cost of the rice subsidy programmes was reported to be

25 Ministry of Agriculture and Agro-Based Industry (2011), National Agrofood Policy 2011-2020, p. 47-49. 26 BERNAS (2017), Notice of Extraordinary General Meeting, 2 March, p. i. Viewed at: https://www.sc.com.my/wp-content/uploads/eng/html/tom_site/circularstatement_Bernas_02032017.pdf [October 2017]. 27 WTO document G/SR/N/16/MYS, 17 October 2016. 28 OECD (2017), Building Food Security and Managing Risk in Southeast Asia, OECD Publishing, Paris. p.111. Viewed at: http://dx.doi.org/10.1787/9789264272392-en [October 2017]; and Caballero-Anthony M, Teng P, Lassa J, Nair T, Shrestha M, Public Stockpiling of Rice in Asia Pacific, Nanyan Technological University, NTS Report 2016, p. 38. Viewed at: https://www.rsis.edu.sg/wp-content/uploads/2016/04/NTS-Report-No-3- 11April2016.pdf [October 2017]. 29 MARDI (2015), Policies and Economic Development of Rice Production in Malaysia, 17 March. Viewed at: http://ap.fftc.agnet.org/ap_db.php?id=393 [October 2017]. Vengedasalam D, Harris M, MacAulay G (2011), Malaysian Rice Trade and Government Interventions, paper presented to the 55th Annual Conference of the Australian Agricultural and Resource Economics Society, 8-11 February 2011. Viewed at: http://ageconsearch.umn.edu/bitstream/100726/2/Vengedasalam.pdf [October 2017].

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- 89 - approximately RM 1 billion per year30 and RM 1.3 billion was allocated in 2017, which was 46% of the total allocation to agriculture (Table 4.11).31

Table 4.10 Incentives for rice production 2009, 2014, and 2016

2009 2014 2016 Budget Budget Budget allocation allocation allocation RM million RM million RM million Price subsidy RM 248.1/tonne 448 RM 248.1/tonne 480 RM 300/tonne 507 Fertilizer subsidy 275 465 400 NPK mixed 240 kg/ha 240 kg/ha 240 kg/ha Organic 80 kg/ha 80 kg/ha 80 kg/ha Yield increase RM 650/tonne 40 RM 650/tonne 80 0 0 incentive increase increase Paddy production 150 150 120 incentive Ploughing RM 100/ha RM 100/ha RM 100/ha Fertilizer RM 140/ha RM 140/ha RM 140/ha Additional fertilizer 150 kg/ha 250 150 kg/ha 253 150 kg/ha 240 Pesticides/herbicides RM 200/ha 173 RM 200/ha 140 RM 200/ha 130 Rice Millers Subsidy 250 528 0 Peninsular Malaysia RM 750/tonne RM 750/tonne 0 Sabah & Sarawak RM 600/tonne RM 600/tonne 0 Sabah & Sarawak 150a 0 0 RM 950.90/ha 70b subsidy

Note: a: Difference between wholesale price and purchase cost of rice imports. b: Hill paddy fertilizer in Sabah and Sawarak. Source: Malaysian authorities, MARDI (2015) and Vengedasalam D, et al.

4.1.1.4 Trade policy

4.41. On average, tariffs on agricultural tariff lines (WTO definition), with a simple average of 3.3%, are lower than on non-agricultural tariff lines (simple average 8.0%). Furthermore, over two-thirds of agricultural tariff lines are duty free and the range of tariffs (the standard deviation is 8.2) is less than on non-agricultural tariff lines. However, these figures exclude 64 tariff lines with specific duties (58 of which are alcoholic beverages, 5 cigarettes and cigars, and one for pineapples). The ad valorem equivalents of these tariff rates vary from 0.2% (clove cigarettes) to 465% (certain manufactured tobacco) (Section 3.1.3.1).

4.42. Malaysia has reserved the right to use the special agricultural safeguard for 71 tariff lines but the SSG has never been invoked.32

4.43. Malaysia has commitments relating to 19 tariff quotas for a range of meat and animal products as well as cabbages, unroasted coffee beans, wheat flour, sugar, and tobacco. The most recent notification for imports under tariff quotas was for calendar years 2014 and 2015, and the previous one for 1999-2013.33 For 1999-2007, an applied tariff regime operated where the quotas were not opened and the applied tariff on all imports did not exceed the in-quota tariff. From 2008 to 2015, nine quotas were applied (10 in 2011) one of which was a combination of three scheduled quotas for poultry meat and offal. In some cases, a quota was opened for more than the scheduled quantity. Actual imports within tariff quotas varied from one product to another and from one year to another, for example:  For live poultry chickens (HS 010594190);

30 Caballero-Anthony M, Teng P, Lassa J, Nair T, Shrestha M, Public Stockpiling of Rice in Asia Pacific, Nanyan Technological University, NTS Report 2016, p. 40. Viewed at: https://www.rsis.edu.sg/wp- content/uploads/2016/04/NTS-Report-No-3-11April2016.pdf [October 2017]. 31 EY (2016), Budget 2017 – Malaysia, Volume 4 – Issue 3–24 October. 32 WTO documents G/AG/N/MYS/3, 16 April 1996; G/AG/N/MYS/9, 10 December 1997; G/AG/N/MYS/15, 14 September 2000; G/AG/N/MYS/16, 19 July 2005; G/AG/N/MYS/17, 20 January 2006; G/AG/N/MYS/21, 19 November 2008; G/AG/N/MYS/23, 20 March 2009; G/AG/N/MYS/27, 16 March 2010; G/AG/N/MYS/28, 27 March 2012; G/AG/N/MYS/31, 16 July 2014; G/AG/N/MYS/33, 24 March 2015; and G/AG/N/MYS/37, 5 October 2016. 33 WTO document G/AG/N/MYS/39, 13 July 2017; G/AG/N/MYS/34, 27 March 2015; G/AG/N/MYS/34/Corr.1, 28 September 2015; and G/AG/N/MYS/39, 13 July 2017.

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 the scheduled quota is 1,943,125 animals;  the actual quota opened varied from 1,943,128 in 2008 to 2,195,275 in 2015; and  in-quota imports varied from zero in 2008, 2009, and 2012 to 53,645 in 2015; and  For milk and cream (HS 040110110, 040120100, and 040140100);

 the scheduled quota is 1,000,000 litres;  the actual quotas opened varied from 6,620,000 litres in 2008 to 8,922,473 in 2015; and  in-quota imports varied from 341,983.15 in 2014 to 8,110,007 litres in 2009.34

4.44. According to the authorities, quota allocation is on a first-come-first-served basis.

4.1.1.5 Support levels

4.45. The total budgetary outlay for agriculture in 2017 was about RM 2.8 billion under a variety of programmes (Table 4.11). However, this includes research but does not include the value of border measures, such as tariffs, and does not take account of the taxes and fees paid for production and/or export of some commodities.

Table 4.11 Budget outlay for agriculture, 2017 (RM million) 2017 Rice subsidies 1,300 Production of palm oil, rubber, cocoa, pepper 286 Rubber small holders – rainy season subsidy 260 Rubber small holders – production incentive 250 Fishers – living allowance 250 Food distribution 140 Palm oil – quality, replanting, roads 100 Young agricultural entrepreneurs 100 Palm oil – research 50 Palm oil small holders – replanting 30 Palm oil small holders – upgrading roads 20

Source: EY (2016), Budget 2017 – Malaysia, Volume 4 – Issue 3–24 October.

4.46. The last notification of agricultural support to the WTO was in 2014 for calendar years 2008 to 2011. According to these notifications, all support measures are in the Green Box category or are input subsidies to resource-poor farmers as provided for under Article 6.2 of the Agreement on Agriculture. Most support is for the price stabilization and guaranteed minimum price schemes for paddy farmers and drainage and irrigation facilities. The fertilizer subsidy scheme notified as a measure that meets the criteria of Article 6.2 is only for paddy farmers. The value of support under different measures varies from one year to another, particularly in 2009 when support for the price stabilization and guaranteed minimum price schemes, and drainage and irrigation, increased compared to earlier years before declining in 2010 (Chart 4.2).

34 WTO documents G/AG/N/MYS/34, 27 March 2015; and G/AG/N/MYS/34/Corr.1, 28 September 2015.

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Chart 4.[] domestic support in Malaysia, 2004-16 Chart 4.2 Domestic support in Malaysia, 2004-16

Article 6.2 Investment and input support Green Box (RM million) (RM million) 450 1,400

400 1,200 Price stabilization and guaranteed minimum 350 price 1,000 Extension services 300

250 800 Marketing 200 600

150 Research and development 400 100 Drainage and irrigation 50 200 facilities

0 0

Source:Source: WTOWTO notifications. notifications.

4.47. A number of Government programmes are operated by Agrobank to provide finance to the agriculture and fishing sectors. The profit rates charged by Agrobank for the loans to farmers under mandated programmes is 3.75%, which tends to be significantly lower than the profit rates charged by commercial banks (Table 4.12).

Table 4.12 Financing scheme funds operated by Agrobank, 2013-16 (RM million) Fund Note 2013 2014 2015 2016 Fund for Food To enhance food production and reduce dependency 1,003.0 234.8 232.3 209.1 (3F) on imports; Merged with DPUP 1 in May 2014 Oil Palm Replanting Replanting oil plantations 13.0 12.0 11.0 10.0 Micro Enterprise Fund Micro financing for selected eligible micro 94.6 83.5 51.2 301.1 entrepreneurs Commercial To finance the commercial agro-based industry n.a. 162.7 170.3 178.2 Agriculture Fund Agriculture To enhance food production and reduce dependency n.a. 886.7 925.5 961.6 Entrepreneur Fund 1 on imports (DPUP 1) Agriculture To stimulate growth of farming activities involving n.a. 103.3 107.6 111.7 Entrepreneur Fund 2 up and downstream activities (DPUP 2) Agriculture To stimulate growth of farming activities involving n.a. n.a. 101.7 105.3 Entrepreneur Fund 3 up and downstream activities (DPUP 3) Special Relief Facility For farmers affected by flooding in December 2014 n.a. n.a. 11.8 10.6 Bumiputera Financing facilities to Bumiputera entrepreneurs, 51.1 n.a. n.a. n.a. Commercial and farmers, fishers and other related institutions; Industrial Community Merged with DPUP 1 in May 2014 Scheme Paddy Credit Scheme To encourage the paddy industry; Merged with DPUP 76.7 n.a. n.a. n.a. 1 in May 2014 Food Production Merged with DPUP 1 in May 2014 74.6 n.a. n.a. n.a. Credit Scheme Fishery Boat Financing To modernize facilities with the fishery industry, 140.0 n.a. n.a. n.a. Scheme promote deep sea and high sea fishing industry; Merged with DPUP 1 in May 2014 Entrepreneur Scheme To encourage the involvement of graduates in the 6.0 n.a. n.a. n.a. for Graduates agriculture sector; Merged with DPUP 1 in May 2014 Financing for Small To encourage investment in the agricultural 73.0 n.a. n.a. n.a. and Medium Size industry; Merged with DPUP 1 in May 2014 Industries Non-Food Production To enhance primary and tertiary agricultural 22.6 n.a. n.a. n.a. Credit Scheme activities; Merged with DPUP 1 in May 2014 Total 1,555.6 1,482.9 1,611.4 1,887.6 n.a. Not applicable. Source: Malaysian authorities, and Agrobank annual reports 2015 and 2016. Viewed at: http://www.agrobank.com.my/home/corporate-info/annual-reports/ [October 2017].

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4.1.2 Fisheries

4.1.2.1 Features

4.48. Although fisheries contributed only about 1% to GDP in 2016, seafood products are an important source of food with consumption over 50 kg per person per year. There were about 132,305 people working on licensed fishing vessels in 2016, of which about 27% were non- Malaysian (Table 4.13).35

Table 4.13 Selected indicators, 2010-16

2010 2011 2012 2013 2014 2015 2016 Contribution to GDP (RM million) Fishing 9,036 9,687 10,893 11,367 12,312 12,181 12,654 Marine 5,997 6,441 6,989 7,505 8,105 8,007 8,545 Aquaculture 3,039 3,246 3,904 3,862 4,207 4,175 4,109 Employment Working on licensed 129,622 134,110 136,514 144,019 143,421 140,949 132,305 vessels Aquaculture n.a. n.a 52,273 47,689 47,174 44,857 n.a. n.a. Not available. Source: Department of Statistics Malaysia, Department of Fisheries.

4.49. In quantity terms, marine capture has been relatively stable over 2010 to 2015. Aquaculture has declined, although it remained considerably higher than in the early years of the 21st century. Inland capture has also remained fairly stable, although it is very small compared to marine capture or aquaculture (Table 4.14).36

Table 4.14 Marine and inland capture fishing and aquaculture, 2007-15

2007 2008 2009 2010 2011 2012 2013 2014 2015 000 tonnes Inland capture 4.3 4.4 4.5 4.5 5.7 5.0 5.6 5.5 5.9 Marine capture 1,386 1,398 1,397 1,433 1,377 1,476 1,487 1,462 1,490 of which Not identified 442.9 402.6 367.8 392.3 342.4 354.9 324.4 306.5 296.6 Indian mackerels 156.7 170.3 185.5 186.2 183.6 187.2 190.9 181.4 190.1 n.e.i. Indian scad 90.0 96.9 92.0 82.8 76.8 102.8 107.8 102.6 117.2 Shrimps, prawns 71.7 81.0 90.3 116.0 109.2 120.3 108.0 107.6 114.9 Tunas, bonitos, 67.1 82.6 70.0 81.2 77.3 82.6 87.2 86.2 80.1 billfishes Molluscs 90.3 88.1 105.1 77.8 79.6 91.2 83.5 97.1 79.2 Aquaculture 268.5 354.6 472.5 581.2 526.7 634.9 530.7 521.0 507.0 of which Whiteleg shrimp - - 52.9 69.1 60.3 49.0 45.5 57.2 48.3 Barramundi 5.7 11.7 14.2 20.0 17.6 20.1 17.0 30.4 29.1 Tilapias and other 32.0 34.6 35.1 38.6 42.8 51.6 42.8 35.3 35.4 cichlids Groupers n.e.i. - 4.4 3.8 4.6 6.3 6.0 5.4 7.8 8.0 Mangrove red 4.5 3.4 4.7 5.0 5.2 4.3 5.3 10.3 10.4 snapper Torpedo-shaped 21.9 41.5 83.7 63.2 46.8 46.5 50.5 46.1 50.7 catfishes n.e.i. US$ million Aquaculturea 373.7 571.6 684.6 856.6 779.9 887.0 708.6 1,023.7 850.2 of which Whiteleg shrimp - - 165.5 238.5 241.0 232.9 137.5 331.1 262.3 Barramundi 21.0 46.3 52.4 80.8 80.7 97.4 70.6 126.8 112.2 Tilapias and other 41.7 57.4 59.6 72.9 90.9 121.8 98.0 79.7 76.2 cichlids Groupers n.e.i. - 36.2 28.2 37.9 61.1 57.2 47.6 81.1 73.7 Mangrove red 37.1 17.0 18.7 23.2 32.0 26.7 32.3 62.5 59.5 snapper Torpedo-shaped 16.1 52.7 98.9 76.0 62.1 74.6 81.9 73.9 57.4 catfishes n.e.i. a FAO FishStat does not have data for the value of marine catch. Source: FAO FishStat online database. Viewed at: http://www.fao.org/figis [October 2017].

35 Department of Fisheries (2017), Annual Fisheries Statistics 2015, Table 1.1. 36 FAO FishStat online database. Viewed at: http://www.fao.org/figis [October 2017].

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4.50. In 2015, there were 56,211 registered fishing vessels in Malaysia, of which nearly 3,000 were small unpowered vessels, 36,425 were powered by outboard motors and 16,740 by inboard motors. The majority of vessels are quite small, less than 39 horsepower (Table 4.15). The most common type of fishing gear for outboard powered vessels is gill/drift nets, followed by hooks and lines. For inboard powered vessels, the most common type of gear is trawl nets, followed by gill/drift nets.37

Table 4.15 Malaysia's fishing fleet, 2015

Horsepower Inboard Outboard Unpowered 3,046 Less than 4.9 175 767 5 to 9.9 624 3,479 10 to 19.9 1,212 12,124 20 to 39.9 1,878 8,775 40 to 59.9 748 7,284 60 to 99.9 846 3,521 100 to 149.9 3,398 475 (150 hp plus) 150 to 249.9 3,418 250 to 299.9 1,530 300 to 349.9 858 350 plus 2,053 Total 16,740 39,471

Source: Department of Fisheries (2017), Annual Fisheries Statistics 2015, Tables 2.2 and 2.3.1.

4.1.2.2 Trade

4.51. According to UNSD Comtrade, in 2016 Malaysia had a deficit for trade in fish and fish products38 with imports of US$916 million and exports of US$662 million. Both imports and exports declined in US dollar terms since 2013 when they were US$1,037 million and US$772 million respectively. Exports of crustaceans (mostly shrimps), preparations from fish eggs, and frozen fish other than frozen fillets, and molluscs (mostly cuttlefish) represented more than three-quarters of exports of fish and fish products. Imports of frozen fish (other than frozen fillets), fresh fish (other and fish fillets), molluscs (mostly cuttlefish), and fish fillets represented 68% of imports (Table 4.16).

Table 4.16 Exports and imports of fish and fish products, 2013-16 (US$ million) 2013 2014 2015 2016 Top 4 partners Exports Total exports of fish and fish products 772 833 645 662 of which 0306 Crustaceans, fit for human 353 418 257 212 Singapore; consumption Viet Nam; Australia; China 1604 Caviar and caviar substitutes 91 103 102 107 Singapore; prepared from fish eggs Australia; Hong Kong, China, Indonesia 0303 Fish, frozen, excluding fish fillets 60 53 64 100 Viet Nam, and other fish meat of heading Thailand, China, 03.04. Indonesia 0307 Molluscs, fit for human 78 75 72 89 Viet Nam; Japan; consumption Singapore; Korea, Rep. of 0304 Fish fillets and other fish meat 36 40 37 37 Japan; United States; Singapore; Australia

37 Department of Fisheries (2017), Annual Fisheries Statistics 2015, Tables 2.2 and 2.3.1. Viewed at: http://www.dof.gov.my/index.php/pages/view/2614 [October 2017]. 38 For the purposes of this paragraph, fish and fish products are those under HS 2012 headings 02840, 03, 050800, 050900, 051191, 121229, 1504, 1603, 1604, 1605, and 230120.

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2013 2014 2015 2016 Top 4 partners Imports Total imports of fish and fish products 1,037 1,102 923 916 of which 0303 Fish, frozen, excluding heading 254 235 203 227 China; Viet Nam; 0304 Indonesia; Japan 0302 Fish, fresh or chilled, excluding 202 194 175 146 Indonesia; heading 0304 Norway; Thailand; Japan 0307 Molluscs, fit for human 77 84 162 130 China; Indonesia; consumption Japan; Viet Nam 0306 Crustaceans, fit for human 215 306 101 120 Indonesia; China; consumption India; Myanmar 0304 Fish fillets and other fish meat 90 98 100 102 Viet Nam; Indonesia; China; United States

Source: UNSD Comtrade.

4.1.2.3 Policy

4.52. The Department of Fisheries in the MOA is responsible for development and implementation of policy and legislation, including management of fisheries and related matters. The Department also provides technical support for marine and freshwater fisheries and aquaculture. In addition, there are several agencies responsible for specific aspects of fisheries and aquaculture:  Under the Department, the Fisheries Research Institute of Malaysia is responsible for research;  The Fisheries Development Authority of Malaysia is responsible for promoting and developing fishery enterprises and marketing along with the Fishermen's Associations and Fisheries Cooperatives;  The Malaysia Maritime Enforcement Agency is responsible for the protection of the Malaysian Maritime Zone including air and coastal surveillance, management of maritime training institutions, and maritime search and rescue; and  For Sabah, the Department of Fisheries Sabah is responsible for developing policies for the state.

4.53. The principal legislation on fisheries is the Fisheries Act No. 317 of 1985 and accompanying regulations. Under the Act, a licence from the Department of Fisheries is required for all fishing activity and marine water-based aquaculture projects.

4.54. Under the Fisheries Act, the Minister of Agriculture and Agro-based Industry may make regulations relating to the management and development of fisheries resources, including: licensing of vessels; specifications for vessels; fishing gear licensing; prohibited fishing methods, areas, and species; closed seasons; etc. Fishing areas are defined by zones defined by distance from shore with fishing in each zone restricted by size and type of vessel (Table 4.17). In-land aquaculture regulations are issued by the authorities of the states.

4.55. The general policies and strategies for fisheries are set out in the Economic Transformation Programme, the National Agrofood Policy 2011-2020 (NAP), and the 11th Malaysia Plan (11MP) for 2016-2020 (Section 4.1.1.3). In addition, specific policies for the subsector are set out in the Strategic Plan of the Department of Fisheries 2011-2020, the National Plan of Action (NPOA) for the Management of Fishing Capacity 2015-2020, and the NPOA to Prevent, Deter and Eliminate Illegal Unreported and Unregulated Fishing.

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Table 4.17 Fishing zones in Malaysia

Up to 1 June 2014 A B C C2 C3 Distance from Nautical 0-5 5-12 12-30 30 to EEZ High seas shore miles Vessel size GRT Less than 40 Less than 40 40-70 70 plus 70 plus Vessel type Traditional Trawlers/ Trawlers/ Trawlers/ Purse gear purse seiner purse seiner purse seiner seiners/tuna long line From 1 June 2014 for west Refugiaa A B C C3 coast Peninsular Malaysia Distance from Nautical 0-1 1-8 8-15 15+ High seas shore miles Vessel size GRT Less than 40 Less than 40 40 plus 70 plus Vessel type Aquaculture Traditional Trawlers/ Trawlers/purse Purse gear/ purse seiners seiners/tuna anchovy seiners long line purse seine a Kedah, Pulau Pinang, Perak, and Selangor only. Source: Department of Fisheries online information. Viewed at: http://www.dof.gov.my/index.php/pages/view/42 [October 2017]; Department of Fisheries (2015), National Plan of Action for the Management of Fishing Capacity in Malaysia (Plan 2), p. 31, and Presentation to the Stakeholders Consultation on Regional Cooperation in Sustainable Fisheries Development Towards the ASEAN Economic Community 1 March 2016, Bangkok.

4.56. Among the strategies for modernizing agriculture in 11MP, is the statement that fishers' associations will be given incentives, through special schemes, to assist their members in buying deep-sea vessels.39 The NAP includes a section on sustainable modernization and transformation of the capture fisheries industry which projects an increase in marine catch to 1.76 million tonnes by 2020, of which 620,000 tonnes would be from deep sea fishing. The NAP also emphasises the sustainable development of capture fisheries through effort and gear restrictions and compliance with international measures such as the FAO Code of Conduct for Responsible Fisheries 1995, Agreement on Port States Measures to Prevent, Deter and Eliminate Illegal, Unreported and Unregulated Fishing (IUU Fishing) and EC Regulation 1005/2008.40

4.57. The fishing capacity plan is the second such plan and highlights a number of strategies to improve sustainable management of fisheries by addressing current problems including:  overcapacity is to be addressed through a moratorium on new licences for vessels and gear in the coast zone, regular assessment of fishing capacity and resources, adjustment of effort to match the maximum sustainable yield, and cancellation of licences for non-performing vessels;  overfished resources are to be managed through the establishment of fish refuges, closed seasons for specified areas, a revised zoning system (Table 4.18), and an individual quota system based on total allowable catches;  gear specifications are to be developed, the impact of management measures assessed, data collection and dissemination improved, regulations on foreign fishers working on local vessels strengthened;  monitoring and surveillance are to be improved, including measures to prevent fishing in prohibited zones, and foreign vessels in the EEZ; and  public awareness of the need for conservation and management is to be improved, including stakeholder participation in resource management activities.41

4.58. According to the authorities, the Plan to Prevent, Deter and Eliminate IUU Fishing was developed in accordance with the International Plan of Action to Prevent, Deter, and Eliminate

39 Prime Minister's Department (2015), Eleventh Malaysia Plan 2016-2020 – Anchoring Growth on People, p. 8-25. 40 Ministry of Agriculture and Agro-Based Industry (2011), National Agrofood Policy 2011-2020, pp. 52-55. 41 Department of Fisheries (2015), National Plan of Action for the Management of Fishing Capacity in Malaysia (Plan 2).

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Illegal, Unreported and Unregulated Fishing (IPOAIUU) which was adopted by the Committee on Fisheries and endorsed by the FAO in 2001. The Plan notes that Malaysia currently applies a vessel monitoring system (VMS), applies reporting requirements for catch and effort, monitors fish landings, and conducts vessel and gear inspections. Furthermore, catch and effort reports are compared to the VMS as well as landing and trade data to confirm accuracy. As all vessels and fishing gear must be licensed and all vessels must carry identification markings, inspections can confirm compliance with the terms of the licences. All foreign fishing vessels are required to notify the Malaysian authorities before entering Malaysian waters and may only fish or undertake fishing-related activities if authorized to do so under an international fishery agreement between Malaysia and the government of the other country, or between Malaysia and the international organization to which such a vessel belongs to or to which such vessel is registered, and under a permit issued by the Director-General of Fisheries.

4.59. From 2006 to 2015, on average, 800 cases per year were taken to the courts for offences committed by domestic fishing vessels under the Fisheries Act. In addition, a small number of cases were taken to the courts against foreign vessels (two were detained or prosecuted in 2015), one of which resulted in a fine of RM 1.595 million and seizure of the cargo, which was auctioned for RM 5 million.

4.60. The Government provides a number of supports to the fisheries sector including fuel subsidies, living allowances, and catch incentives:  The living allowances were increased in 2015 from RM 200 per month: to RM 300 for fishers fishing in Zone A; and to RM 250 for Zones B and C;  The catch incentives for fishers vary with the Zone and exclude by-catch;  Zone A (petrol): RM 0.10 per kg up to RM 150 per month;  Zone A (diesel): RM 0.10 per kg up to RM 350 per month;  Zone B: RM 0.10 per kg up to RM 750 per month;  Zone C: RM 0.10 per kg up to RM 1,500 per month; and  Zone C2: RM 0.20 per kg up to RM 5,000 per month.

Table 4.18 Government spending on fisheries, 2011-16 (RM million) 2011 2012 2013 2014 2015 2016 Fuel subsidy 523.4 559.2 534.4 374.9 41.8 16.0 Living allowances 37.4 38.9 41.3 37.4 50.7 39.3 Catch incentives 22.9 27.5 30.6 27.6 9.8 4.8 Other support programmes 24.7 7.6 13.0 8.2 5.6 7.9

Source: Malaysian Authorities.

4.61. According to one report, the value of the subsidies varies depending on the type of fishing and the zone of operation. For Zone A fishers, 38% of an average total income of RM 2,118 per month is from subsidies (18% of income is from the fuel subsidy). For Zone C fishers, 28% of the average total income of RM 20,881 is from subsidies (24% of income is from the fuel subsidy).42 The authorities also pointed out that the fuel subsidy is only available to eligible fishers in Zones A, B, and C and that larger commercial vessels are not eligible.

4.62. For aquaculture, state governments designate Aquaculture Industrial Zones (both on land and in water) for commercial-scale aquaculture projects, including seaweed. In 2015, there were 49 sites covering more than 28,000 ha. The Federal Government's role is focused on general planning and technical support.

42 Ali J, Abdullah H, Noor MSZ, Viswanathan KK, Islam GN (2017), The Contribution of subsidies on the Welfare of Fishing Communities in Malaysia, International Journal of Economics and Financial Issues 7(2), p. 641-648. Viewed at: http://www.econjournals.com/index.php/ijefi/article/view/4292 [October 2017].

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4.2 Mining and Energy

4.2.1 Mining and quarrying

4.63. According to the Department of Mineral and Geoscience Malaysia, minerals and mining (not including petroleum and natural gas) represented about 0.5% of GDP, or RM 5,389 million, in 2016, having increased steadily since 2010 (RM 3,653 million). However, it remains small compared to crude oil and natural gas which were close to RM 100 billion in 2016. In 2016, there were 11,081 people engaged in the mineral mining and quarrying subsectors, with 5,029 in the mineral mining subsector and the others in quarrying. Among minerals, bauxite was biggest in 2015 but declined sharply in 2016, reportedly as a result of a government moratorium which was first imposed in January 2016 for three months and extended several times, most recently in June 2017 for a further six months. The moratorium was not a total ban on bauxite-related activities as transport to ports and export from bauxite stockpiles was permitted (Table 4.19).

Table 4.19 Mining and quarrying production, 2010-16

2010 2011 2012 2013 2014 2015 2016 Contribution to GDP Other mining & RM million 4,000 6,257 5,762 6,928 7,375 7,191 5,389 quarrying and supporting services Minerals Bauxite 000 tonnes 124 188 122 209 963 7,165 343 RM million 16 19 10 17 77 832 35 Gold kg 3,766 4,219 4,625 3,823 4,308 4,732 2,249 RM million 397 650 740 535 555 781 389 Tin tonnes 2,668 3,340 3,725 3,697 3,777 4,125 4,158 RM million 168 234 242 259 257 285 262 Iron ore 000 tonnes 3,558 8,006 12,144 12,134 9,615 1,625 1,914 RM million 424 1,616 1,822 1,699 2,253 246 289 Energy minerals Coal 000 tonnes 2,397 2,916 2,951 2,907 2,688 2,559 1,333 RM million 262 347 441 523 400 307 316 Quarrying Aggregates 000 tonnes 101,809 118,510 110,339 153,173 136,162 158,744 133,073 RM million 1,637 2,011 1,863 2,528 2,440 2,766 2,263 Limestone 000 tonnes 22,431 21,832 23,534 18,069 23,948 24,164 25,431 RM million 188 203 236 315 351 378 249 Sand & gravel 000 tonnes 30,698 37,339 28,592 35,577 29,862 40,578 45,820 RM million 449 619 460 553 495 729 833 Silica sand 000 tonnes 932 1,340 932 1,244 1,923 9,003 5,408 RM million 36 66 62 53 100 395 249

Source: Malaysian authorities; and Malaysianminerals.com. Viewed at: http://malaysianminerals.com/index.php?option=com_content&task=blogcategory&id=1&Itemid=11 6 [October 2017].

4.64. In trade terms, exports of non-energy minerals and coal (HS headings 25, 26, and 2701-2708) tend to vary considerably from one year to another as exports of bauxite (HS 2606) were US$2 million in 2013, US$707 million in 2015, and US$151 million in 2016. In addition, some products are imported and exported in similar quantities and values, such as copper ores and concentrates and iron ores and concentrates (Table 4.20).

Table 4.20 Imports and exports of non-petroleum minerals, 2013-16 (US$ million) HS Imports 2013 2014 2015 2016 heading 2701 Coal, briquettes 1,855 1,568 1,313 1,433 2601 Iron ores and concentrates, including roasted iron 345 486 576 756 pyrites 2609 Tin ores and concentrates 362 410 290 296 2707 Products from distillation of coal tar, mostly aromatic 122 204 562 208 constituents 2616 Precious metal ores and concentrates 122 12 71 128 2523 Portland cement, aluminous cement, slag cement, 224 223 181 95 supersulphate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers

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HS Imports 2013 2014 2015 2016 heading 2704 Coke and semi-coke 58 64 110 89 2603 Copper ores and concentrates 113 50 204 87 HS Exports 2013 2014 2015 2016 heading 2601 Iron ores and concentrates, including roasted iron 464 425 514 814 pyrites 2707 Products from distillation of coal tar, mostly aromatic 126 293 814 527 constituents 2616 Precious metal ores and concentrates 43 50 31 177 2606 Aluminium ores and concentrates 2 106 707 151 2603 Copper ores and concentrates 46 62 110 83 2523 Portland cement, aluminous cement, slag cement, 160 138 75 77 supersulphate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers 2517 Pebbles, gravel, broken or crushed stone 46 37 44 53 2521 Limestone used for the manufacture of lime or 35 45 46 48 cement

Source: UNSD Comtrade.

4.65. The Ministry of Natural Resources and Environment is responsible for general policy, and for preparing and implementing legislation relating to mining and quarrying. In 2009, the National Mineral Council and the National Forestry Council were disbanded and the National Land Council took over their responsibilities to oversee development of the sector and coordinate policy among central and state authorities. Policy is set out in the National Mineral Policy of January 2009 which aims for the expansion of the sector through a conducive business climate for exploration and extraction while emphasizing sustainable development and environmental protection.43 The Eleventh Malaysia Plan also emphasizes the sustainable development of minerals.44

4.66. The principal laws relating to minerals are the Mineral Development Act No. 525 of 1994 (where "mineral" does not include petroleum or rock material), the Petroleum Mining Act No. 95 of 1966 (covering petroleum) and the National Land Code Act No. 56 of 196545 (covering rock material). In addition, each state has its own legislation relating to mining activities.

4.67. One of the objectives of the National Mineral Policy is the efficient, effective and transparent implementation of harmonized state mineral laws and the application by the states of a model mineral agreement between the state and the investor. All the states in Malaysia, except Sarawak, have promulgated new mineral laws based primarily on the template, the content of which was approved by the National Land Council. In Sarawak, the existing law was amended to bring it into line with the National Minerals Policy. Under these state laws, each state may grant licences for prospecting, exploration, and mining.

4.68. Exploration licences may be granted for areas between 400 and 20,000 ha for a maximum of 10 years with a possible extension of 5 years. Prospecting licences may be granted for periods of up to 2 years with a possible extension of 2 years. Mining licences may be granted for the expected life of the mine or 21 years, whichever is shorter, with the possibility of renewal. An environmental impact assessment is required for mines of 250 ha or more (Table 4.21). There are no restrictions on foreign companies participating either in their own right, through equity in a local company, or through joint ventures with a local company or companies.

43 Ministry of Natural Resources and Environment (2009), National Mineral Policy 2 – Towards Sustainable Mining. 44 Prime Minister's Department (2015), Eleventh Malaysia Plan 2016-2020 – Anchoring Growth on People, p. 6-21. 45 Under the National Land Code, rock material is defined as: "any rock, stone, gravel, common sand, common earth, common laterite, loam, common clay, soil, mud, turf, peat, coral, shell, and any other rock materials within or upon any land, and includes processed materials therefrom, other than minerals defined under any written law relating to mining which is for the time being in force".

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Table 4.21 Mineral licences issued, 2013-16

Proprietary Exploration Prospecting Mining lease mining 2013 2 40 246 134 2014 4 47 232 111 2015 0 1 333 250 2016 3 8 233 113

Source: Malaysian authorities.

4.69. Under the states' mineral laws there are no provisions relating to appeals if the state authority has refused an application for an exploration, prospecting or mining licence; a new application is required. For renewal of a mining lease, the applicant may appeal to the state authority if dissatisfied with the authority's decision. In all cases, an appeal to the courts is possible.

4.70. The annual revenue tax rate imposed on mining corporations having a paid-up capital of more than RM 2.5 million is 24% (with effect from year of assessment 2016). As for corporations having a paid-up capital of less than RM 2.5 million, the revenue tax rate is 18% (with effect from year of assessment 2017) for the first RM 500,000 and 24% for the remaining balance (with effect from year of assessment 2016). Generally, mining operators are required to pay 5% of the value of the mineral extracted to the relevant states on a monthly basis. However, such rates may vary according to the type, weight and volume of the minerals extracted, as assessed by the state.46

4.2.2 Energy

4.71. Energy supply and consumption have continued to increase over the 2010 to 2016 period both in total and per capita. The main source of energy supply is natural gas, followed by petroleum and coal. Supply from renewable sources (including biodiesel and hydropower) did increase during this period and accounted for 4.7% of total supply in 2016. Transport is the main energy consumer, accounting for about 45% of total consumption (Table 4.22).

Table 4.22 Primary energy supply and consumption, 2010-16 (Thousand tonnes oil equivalent (ktoe)) 2010 2011 2012 2013 2014 2015 2016a Total primary supply Natural gas 35,447 35,740 38,648 39,973 40,113 39,364 40,702 Petroleum 25,008 26,903 29,502 32,474 33,422 29,165 30,157 Coal and coke 14,777 14,772 15,882 15,067 15,357 17,406 17,998 Biodiesel 0 24 115 188 300 389 402 Hydropower 1,577 1850 2,150 2,688 3,038 3,582 3,704 Biomass 0 0 183 297 181 189 195 Biogas 0 0 4 6 12 18 19 Solar 0 0 11 38 63 75 78 Total 76,809 79,289 86,495 90,731 92,486 90,188 93,254 Final energy consumption by fuel type Natural gas 6,254 8,515 10,206 10,076 9,641 9,566 9,910 Petroleum products 24,403 23,922 27214 29,191 29,517 28,699 29,732 Coal and coke 1,826 1,759 1,744 1,539 1,709 1,778 1,842 Biodiesel 0 24 115 188 300 389 403 Electricity 8993 9,235 10,011 10,590 11,042 11,375 11,785 Total 41,476 43,455 49,290 51,584 52,209 51,807 53,672 Final energy consumption by sector Industrial 12,928 12,100 13919 13,496 13,162 13,989 14,493 Transport 16,828 17,070 19,757 22,357 24,327 23,435 24,279 Residential and commercial 6,951 6,993 7,065 7,403 7,459 7,560 7,832 Non-energy use 3,696 6,377 7,497 7,277 6,217 5,928 6,141 Agriculture 1,074 916 1,053 1,051 1,045 895 927

Note: a: Estimate. Source: Malaysian authorities.

46 Athsani RAA (undated), Legal framework of mining industry in Malaysia, AZMI & Associates. Viewed at: http://www.inhousecommunity.com/wp-content/uploads/2016/07/v10i4_JURIS_Malaysia.pdf [October 2017]. Malaysianminerals.com online information. Viewed at: http://malaysianminerals.com/index.php?option=com_content&task=view&id=247&Itemid=180 [October 2017].

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4.72. Energy policy relating to upstream oil and gas is the responsibility of the Economic Planning Unit (EPU) and PETRONAS. The Malaysia Petroleum Resources Corporation, created in 2011 under the Prime Minister's Office, was set up to assist investment by domestic and international oil and gas companies with the objective of making Malaysia the principal oil hub for the Asia-Pacific region.

4.73. Other aspects of energy policy are the responsibility of the Ministry of Energy, Green Technology and Water. The Energy Commission of Malaysia, which reports to the Ministry and the EPU, is responsible for regulating the electricity supply and piped gas supply industries in Peninsular Malaysia and Sabah and the State Electrical Inspectorate is responsible for regulating the electricity sector in Sarawak.

4.74. Under the Economic Transformation Plan, a number of Entry Point Projects (EPPs) have been identified which aim to increase the value of the oil, gas, and energy sector against a forecast decline of 2% per year in oil and gas production as resources are exhausted. The EPPs are:  sustaining oil and gas production through rejuvenation of existing fields, development of small fields, and by intensifying exploration;  enhancing downstream growth by building a regional storage and trading hub and increasing demand in Peninsular Malaysia for gas, and increasing petrochemical output;  making Malaysia a hub for oil field services by attracting multinational oil companies to set up in Malaysia and make it their regional base for operations, promoting export by domestic companies, and developing technological capabilities and capacity through strategic partnerships and joint ventures; and  building a sustainable energy platform for growth through improved energy efficiency and the development of alternative energy sources by increasing solar, nuclear, and hydroelectric power capacity.47

4.75. The Eleventh Malaysia Plan (MP11) emphasizes energy efficiency, the development of renewable energy sources, more efficient recovery of gas and oil, and improvement in infrastructure. It also states that piped gas and compressed natural gas subsidies are to be reduced while petrol and diesel prices will continue to be regulated. The National Energy Efficiency Action Plan (NEEAP) 2016-2025 was approved by the Government in January 2016 with several initiatives, including:  promotion of 5-star rated appliances;  Minimum Energy Performance Standards (MEPS);  energy audits and energy management in buildings and industries;  Promotion of cogeneration facilities; and  energy efficiency building design.

4.2.2.1 Petroleum and gas

4.76. Petroleum and gas remain very important to the economy of Malaysia, as crude oil and condensate, natural gas, and refined petroleum products contributed about 10.5% to GDP and about 14% to government revenues in 2016 (down from 12.7% and 30% respectively in 2014).48 New discoveries and improved extraction mean reserves of crude oil are keeping pace with production and proved reserves were estimated to be 5.8 billion bbl at end-2014 compared to 6.1 billion bbl in 1993. Gas reserves, on the other hand, have continued to increase, reaching

47 PEMNDU (2010), Economic Transformation Programme – A Roadmap For Malaysia, pp 175-178. 48 Department of Statistics Malaysia (2017), Annual Gross Domestic Product 2010-2016, 19 May. Fitch Ratings (2016), Malaysia Budget Signals Stability Despite Low Oil Revenue, [Press Release] 25 October. Viewed at: https://www.fitchratings.com/site/pr/1013668 [October 2017].

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52 trillion standard cubic feet (scf) in 2014 even though production has continued to increase (Table 4.23).49

Table 4.23 Oil and gas production and use, 2010-16

2010 2011 2012 2013 2014 2015 2016 Oil Contribution to GDP (RM million) Crude and condensate 46,171 51,299 52,654 51,429 51,906 46,853 46,367 Refined petroleum products 28,022 33,881 37,325 36,468 38,156 34,151 32,288 Reserves (billion bbl) 5.799 5.858 5.954 5.850 5.792 5.907 n.a. Production (bbl per day) 638 570 586 576 603 654 667 Consumption (bbl per day) 690 726 760 803 802 814 829 Gas Contribution to GDP (RM million) 39,969 40,596 44,001 46,658 51,102 49,561 50,248 Reserves (trillion scf) 41.7 42.9 43.1 50.1 52.0 n.a. n.a. Production (billion cubic m) 5,930 5,931 6,007 6,271 6,331 6,136 6,536 Consumption (billion cubic m) 29.6 34.8 35.5 40.3 42.2 41.8 43.0 n.a. Not available. Note: bbl – barrel. scf – standard cubic feet. Source: Malaysian authorities; Energy Commission (2017), Malaysia Energy Statistics Handbook 2016; and BP (2017), BP Statistical Review of World Energy – June 2017.

4.77. Malaysia has a trade surplus in gas and petroleum products, although it has considerable imports, some of which are refined in Malaysia and exported. Over the period 2013-2016, the total value of exports of petroleum and petroleum products, and natural gas50 declined from US$51 billion to US$26 billion, while the value of imports declined from US$31 billion to US$16 billion. However, import and export quantities increased over this period (Chart 4.3) as the fall in prices for oil and gas drove the decline in trade values. In 2016, the main destinations for exports of petroleum, petroleum products and natural gas were Singapore, Japan, China, and Australia.

49 Energy Commission (2017), Malaysia Energy Statistics Handbook 2016. BP (2017), BP Statistical Review of World Energy – June 2017. 50 HS 2012 headings 270900 to 271500.

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Chart 4.3 Exports and imports of petroleum and petroleum productions, and natural gas, 2013-16 (US$ million, 000 tonnes)

Note: HS 270900 Crude oil. HS 271012 Petroleum oils, light oils and preparations. HS 271019 Petroleum oils, other. HS 271111 Natural gas. Other – all other tariff lines under HS headings 270900 to 271500. Source: UNSD Comtrade.

4.78. Under the objective to make Malaysia the principal hub for oil and gas in the Asia Pacific, the Johor Petroleum Development Corporation (JPDC) was established in 2012 as a wholly owned subsidiary of the Malaysian Petroleum Resources Corporation (MPRC). The JPDC is responsible for planning and coordinating oil and gas development in the state of Johor which includes the development of a site for the oil refineries, naphtha crackers, and petrochemical plants as well as

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- 103 - liquefied natural gas (LNG) import terminals and a regasification plant. Pengerang Deepwater Terminal for petroleum, which provides tankage facilities for handling, storing, blending and distribution of crude oil, petroleum and LNG products, is a joint venture between the DIALOG Group of Malaysia, Royal Vopak of the Netherlands, and Johor state. In addition, two other locations have been identified in Johor for storage of petroleum and petroleum products: Tanjung Bin for 3 million m3 and Tanjung Langsat for 2 million m3.51

4.79. Petroliam Nasional Berhad (PETRONAS) is a state-owned enterprise founded in 1974 under the Malaysian Companies Act of 1965. PETRONAS is a vertically integrated oil company with operations in many countries. In FY2016, its total revenue was RM 195.1 billion, of which RM 68.9 billion was from international operations, RM 71.5 billion from exports, and RM 54.7 billion from domestic operations. These were lower than in 2015 when total revenues were RM 247.7 billion. PETRONAS's contribution to federal and state governments in Malaysia totalled RM 36.9 billion in 2016, made up of dividends, taxes, cash payments and export duties, all of which declined relative to 2015 when the total contribution was RM 52.7 billion (Chart 4.4). In 2016, dividend pay-outs to the Government were more than 100% of earnings after tax and non-controlling interest. In addition, revenue foregone resulting from regulated prices for gas was RM 3.1 billion in 2016.52

Chart 4.4 PETRONAS' contribution to government and state revenues, 2012-16 (RMContribution billion) to Government and states revenues

90 80 70 60 50 40 30 20 10 0 2012 2013 2014 2015 2016

Dividends Taxes Cash payments Export duties

Source: PETRONAS Annual Report 2016.

4.80. Under the Petroleum Development Act, PETRONAS is vested with the entire ownership in, and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether onshore or offshore Malaysia. Exploration and exploitation of petroleum and gas takes place through Petroleum Arrangement Contracts (PACs), that is, Production Sharing Contracts (PSCs) or Risk Service Contracts (RSCs). The PSCs set out the arrangements for cooperation between PETRONAS's subsidiary, PETRONAS Carigali Sdn Berhad (PCSB), and the oil company which acts as a contractor for the exploration, development and production of petroleum resources in the contract area for the duration of the contract. PCSB has at least 15% equity participation in each PSC depending on the assets offered. At July 2017, PETRONAS had over 92 PSCs and 4 RSCs in operation. Investment in downstream oil processing is not subject to such contracts and 100% foreign equity is permitted. Another subsidiary of PETRONAS is MISC Bhd (62.67% holding) which has a large fleet of energy transport vessels (Section 4.3.4).

51 JPDC online information. Viewed at: http://www.jpdc.gov.my/ [October 2017] and Oxford Business Group (2016), The Report – Malaysia 2016, p. 117. 52 PETRONAS (2017), Annual Report 2016 – Building Strength through Adversities, p. 28. Note: In June 2017, PETRONAS Group changed its accounting policy with respect to revenue reporting and inventory valuation for gas trading activities. Therefore, the numbers above may differ from those of the Annual Report 2016.

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4.81. Under the Petroleum Income Tax Act 1967, upstream petroleum and gas companies are subject to 38% tax on income from the sale of crude oil and natural gas extracted from Malaysia. In addition, a royalty rate of 10% is charged on oil production and an export duty of 10% is charged on exports of crude oil. A reduced rate of income tax of 25% and a waiver from the export duty applies to marginal fields, along with other incentives such as accelerated capital allowances.53 With effect from 30 November 2010, tax incentives are also available to promote upstream development and boost the commercialization of hard-to-reach oil fields:  reduced tax rate of 25% from 38% for marginal oil fields;

 accelerated capital allowances of up to five years for marginal oil fields;

 export duty exemption on oil produced from marginal fields;

 investment allowance for capital-intensive projects; and

 Qualifying Exploration Expenditure transfer between non-contiguous petroleum agreements.

4.82. Income derived from downstream petroleum activities, such as the refining of petroleum or the processing of petroleum products, is taxed at the statutory rate of 24%, with effect from year of assessment 2016.

4.83. While PETRONAS is the regulator for upstream oil and gas, the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC), the Ministry of International Trade and Industry (MITI), and the Energy Commission are responsible for regulating downstream activities. MDTCC issues permits for marketing and distribution of petroleum and petroleum products, MITI issues licences for the processing and refining of petroleum and the manufacture of petrochemical products, and the Energy Commission regulates the electricity sector and downstream activities of the gas industry.

4.84. At end-2014, subsidies for liquid fuels, which applied to petrol and diesel were removed, but the subsidy for liquefied petroleum gas was maintained. As noted in the last Review, in 2012 the subsidy was the equivalent of 51% of actual price for LPG, 28% for RON95 petrol, and 32% for diesel.54 Regulated prices are still used based on the Automatic Pricing System (APM) described in the last Review55 but without the subsidy element. However, the Government still sets prices based on the components of the APM, which are product cost, operation cost as well as profit margins for oil companies and petrol stations. Since 30 March 2017, retail prices for petrol and diesel have been set on a weekly rather than monthly basis.

4.85. The Gas Supply (Amendment) Act 2016 came into effect on 16 January 2017. Under the Act, the Energy Commission, with the approval of the Minister, may determine:  service prices for regasification, transportation or distribution licensees in respect of the utilization of their facilities for regasification, transportation or distribution of gas; and  sale prices for retail licensees in respect of the sale or use of gas through the retail licensee's piping system to the premises of a consumer.

4.86. Through the Economic Transformation Programme, regulated gas prices to the power sector and to Gas Malaysia Bhd (GMB) are being increased by RM 1.50 per mmBtu every six months until the regulated gas prices reach their "reference market price". The authorities stated that the "reference market price" refers to the gas price derived from the LNG indexed formula as agreed by relevant stakeholders and is considered as Peninsular Malaysia's wholesale market price in the absence of competition (para 4.91. ). Sale prices and service prices are posted on the Energy Commission's website. At August 2017, PETRONAS was the sole importer of natural gas to Peninsular Malaysia, although interested parties may apply for the necessary licences to participate in the market.

53 Ministry of Finance (2015), Petroleum Fiscal Regime – Malaysia’s experience, presentation to Conference on Natural Resource Taxation in the Asia-Pacific Region, 11-13 August, Jakarta. Viewed at: http://www.imf.org/external/np/seminars/eng/2015/natrestax/ [October 2017]. 54 WTO document WT/TPR/S/292/Rev.2, 8 April 2014, Section 4.5.1. 55 WTO document WT/TPR/S/292/Rev.2, 8 April 2014, paragraphs 4.45.

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4.2.2.2 Electricity

4.87. Electricity generation has continued to increase steadily rising from 118,933 GWh in 2010 to 148,776 GWh in 2015. In 2016, coal replaced gas as the main contributor to the electricity generation mix (Table 4.24). Furthermore, consumption of gas for electricity generation is expected to decline while coal consumption should increase: in Peninsular Malaysia gas for electricity could decline by 12% over 10 years and coal consumption increase from 25.4 million tonnes per year in 2016 to over 30 million tonnes.56

Table 4.24 Electricity generation mix, 2010-16 (GWh) Year Gas Coal Hydro Diesel Fuel oil Other Total 2010 61,342 49,401 6,361 726 933 170 118,933 2011 55,732 52,302 8,056 5,108 4,295 1,576 127,069 2012 60,992 55,615 9,251 4,344 2,279 1,596 134,077 2013 71,174 53,663 11,799 1,741 1,571 1,318 141,266 2014 74,466 53,693 13,540 756 376 995 143,827 2015 66,919 59,335 15,524 1,516 45 1,226 144,565 2016a 62,328 65,009 19,163 1,528 27 721 148,776 a Provisional. Source: Malaysian authorities, and Energy Commission (2017), Malaysia Energy Statistics Handbook 2016.

4.88. There are three electricity networks in Malaysia, each with its own government-linked monopoly transmission company:  Peninsular Malaysia accounts for 90% of electricity demand and 87% of generating capacity. Peak demand is about 17,788 MW and total capacity is about 22,919 MW. The transmission company is Tenaga Nasional Berhad (TNB) which owns and controls the grid. The Peninsular Malaysia grid is connected with Thailand (one HVDC 300 MW and one AC 123 kV 80 MW), and Singapore (two HVAC 250 MW connectors)57;

 In Sabah, peak demand is about 945 MW and generation capacity is 1,286 MW. The transmission company is Sabah Electricity Sendirian Berhad (SESB) which owns and controls the grid; and

 In Sarawak, Sarawak Electricity Berhad (SEB) is the generating, transmission, and distribution company. Peak demand is 2,819 MW, and generating capacity is 2,244 MW.

4.89. The Ministry of Energy, Green Technology and Water is responsible for public policy and preparing legislation while the regulator is the Energy Commission. The Sustainable Energy Development Authority Malaysia (SEDA) was established under the Sustainable Energy Development Authority Act No. 726 of 2011 to administer and manage the feed-in tariff mechanism as required by the Renewable Energy Act No. 725 of 2011.

4.90. As the owner and operator of the grid in Peninsular Malaysia, TNB buys from independent power producers (IPPs) (some of which it partly owns), as well as taking electricity from generating plants owned by its subsidiary TNB Generation. The electricity is then sold to licensed distributors or direct to some users, such as steel mills. Relations between the parties to the system are based on the Malaysian Grid Code and the Malaysian Distribution Code which are mandatory under the electricity Supply (Amendment) Act of 2015. Purchases from IPPs are under power purchase agreements (PPAs) and, from TNB Generation, under service level agreements (SLAs). In October 2015, a New Enhanced Dispatch Arrangement (NEDA) was introduced for generators with PPAs and SLAs and, from first quarter 2016, for non-PPA generators. The NEDA is part of a transition to daily competitive bidding for electricity and allows sale to TNB at lower variable prices compared to those set out in the PPA or SLA. On 17 April 2017, Guidelines for NEDA were approved to provide rules and information for the Single Buyer Department, System Operator Department and power generator on the NEDA mechanism.

56 Energy Commission (2017), Peninsular Malaysia – Electricity Supply Outlook 2017, p. 17. 57 Energy Commission (2017), Peninsular Malaysia – Electricity Supply Outlook 2017, p. 35.

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4.91. Sales of gas to the power sector by PETRONAS are regulated by the Energy Commission. At end-June 2017, gas for the power sector was RM 21.20 per mmBtu while gas for the non-power sector (Gas Malaysia Bhd) was RM 23.05 per mmBtu. However, both have been increased by RM 1.50 per mmBtu every six months (see above) since January 2014 and the subsidy level reduced when compared to international benchmark prices (Table 4.25).

Table 4.25 Regulated prices for natural gas in Malaysia, January 2014-June 2017 (Prices per mmBtu) Other Power GMB Russia in Indonesia GMB industrial sector customers Germany in Japan customers Regulated prices in RM Jan-Apr 2014 15.2 14.05 16.07 18.35 May-Oct 2014 15.2 15.55 19.32 19.85 Nov 2014-Jun 2015 15.2 17.05 19.77 21.35 Jul-Dec 2015 16.7 18.55 21.8 22.85 Jan-Jun 2016 18.2 20.05 25.53 24.35 Jul-Dec 2016 19.7 21.55 27.05 25.85 Jan-Jun 2017 21.2 23.05 26.31 27.35 Jul-Dec 2017 22.7 24.55 26.46 28.85 US$ equivalent Jan-Apr 2014 4.62 4.27 4.89 5.58 10.80 17.80 May-Oct 2014 4.73 4.84 6.01 6.17 10.29 16.63 Nov 2014-Jun 2015 4.24 4.76 5.52 5.96 8.84 13.14 Jul-Dec 2015 4.01 4.45 5.23 5.49 6.25 9.90 Jan-Jun 2016 4.44 4.89 6.22 5.94 4.34 7.51 Jul-Dec 2016 4.71 5.15 6.46 6.17 4.37 7.37 Jan-Jun 2017 4.83 5.25 5.99 6.23 5.40 6.51

Note: Regulated gas prices were increased in July 2017 but data were not available for international comparisons. Source: Secretariat estimates based on:

Energy Commission online information. Viewed at: http://www.st.gov.my/images/article/industry/2017/TPA/okt/1._Regulated_piped_gas_prices_as_of _Sep_2017.pdf [October 2017]; IMF Primary Commodity Prices (Russian natural gas border price in Germany and Indonesian LNG in Japan – simple average monthly prices for the periods). Viewed at: http://www.imf.org/external/np/res/commod/index.aspx [October 2017]; and OANDA average exchange rates – RM to US$ simple monthly averages. (Viewed at: https://www.oanda.com/currency/average [October 2017].

4.92. For electricity from renewable sources, SEDA sets the feed-in tariffs for electricity from solar photovoltaic (PV), biogas, biomass, small-scale hydro plants, and geothermal sources. The feed-in tariff varies depending on the source of electricity and the installed capacity, from RM 0.7424 per kWh for small solar PV installations to RM 0.24 per kWh for hydro plants with installed capacity of 10-30 MW. For solar PV, biogas, and biomass plants, the basic feed-in tariff may be adjusted to take account of various factors. These factors include the use of locally produced equipment when the adjustment is an additional RM 0.05 per kWh.58

4.3 Services

4.3.1 General

4.93. Private services contributed 51.7% to GDP in 2016, with wholesale and retail trade the largest subsector (15.9%) followed by information and communication (5.5%) and transport and storage (3.5%).59 In terms of employment, wholesale trade, retail trade, and repair of motor

58 SEDA online information. Viewed at: http://seda.gov.my/ [October 2017]. 59 Department of Statistics, Malaysia (2017), National Accounts - Gross Domestic Product 2016, 19 May. Viewed at: https://www.dosm.gov.my/v1/ [October 2017].

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- 107 - vehicles was the most important with 17.4% of the labour force, followed by accommodation and food and beverage service activities with 8.7% (Table 4.26).60

Table 4.26 Services contribution to GDP, 2010-16 (RM million) 2010 2011 2012 2013 2014 2015 2016 Private Services 420,382 459,182 501,830 536,186 585,518 623,857 668,739 Utilities 22,173 23,676 25,699 27,443 30,940 31,441 33,208 Electricity and gas 17,701 18,911 20,703 22,160 25,358 25,521 26,687 Water, sewerage and waste 4,472 4,765 4,996 5,283 5,582 5,920 6,521 management Wholesale and retail trade 112,771 127,030 135,439 146,447 166,243 182,072 196,151 Wholesale trade 49,457 58,451 61,702 65,885 75,008 81,751 87,881 Retail trade 46,503 51,238 55,245 61,279 70,438 78,084 86,201 Motor vehicles 16,811 17,342 18,492 19,284 20,797 22,236 22,068 Food & beverage and 21,863 23,970 25,954 28,317 31,342 34,663 38,486 accommodation Food and beverage 16,309 18,140 19,844 21,890 24,481 27,336 30,656 Accommodation 5,555 5,829 6,110 6,428 6,861 7,328 7,830 Transportation and storage 28,998 31,034 32,953 34,876 37,194 39,942 42,942 Land transport 6,675 7,106 7,550 7,977 8,620 9,366 10,184 Water transport 4,816 5,102 5,268 5,403 5,303 5,430 5,540 Air transport 4,220 4,383 4,552 4,833 5,085 5,298 5,532 Port and airport operation 3,896 4,269 4,689 5,033 5,531 6,067 6,652 Highway operation 4,603 5,035 5,486 5,888 6,458 7,075 7,777 Support activities for 3,527 3,735 3,983 4,230 4,571 4,947 5,351 transportation Postal and courier 1,261 1,404 1,424 1,512 1,626 1,758 1,907 Information and 39,513 42,667 46,666 51,097 56,425 62,107 67,598 communication Information 5,423 5,417 5,828 6,347 6,967 7,332 7,704 Communication 26,231 28,782 31,816 35,072 38,734 42,881 47,168 Computer services 7,859 8,469 9,022 9,679 10,723 11,893 12,725 Finance 47,685 49,114 52,229 54,017 56,079 56,885 58,149 Monetary intermediation 43,420 44,464 47,065 48,478 50,101 50,860 52,138 Other financial 4,265 4,650 5,164 5,539 5,977 6,025 6,012 intermediation and activities auxiliary to finance Insurance 13,893 15,227 17,824 18,373 19,301 19,264 20,638 Insurance and pension 13,509 14,800 17,365 17,878 18,802 18,748 20,104 funding Activities auxiliary to 384 428 459 494 499 516 534 insurance Real estate 11,797 12,537 13,464 14,497 15,764 17,093 18,480 Business services 20,564 22,239 24,528 27,106 29,894 32,760 35,906 Professional, scientific and 13,679 14,815 16,556 18,368 20,049 21,825 23,892 technical Administrative and support 6,885 7,424 7,971 8,739 9,845 10,935 12,014 services Owner occupied dwelling 16,034 16,624 17,044 17,684 18,486 19,488 20,565 Community, social and 19,686 21,583 23,317 25,319 27,158 29,380 31,556 personal services Private health services 5,263 5,705 6,201 6,720 7,310 8,004 8,759 Private education services 5,906 6,457 7,046 7,623 8,282 9,031 9,813 Other private services 8,517 9,420 10,070 10,976 11,567 12,345 12,984

Source: Malaysia Department of Statistics.

4.94. As noted in the previous Review, Malaysia had been in the process of autonomously liberalizing foreign equity restrictions in several services sectors. During the 2012-2017 period, several of the measures foreseen in the last Review were implemented. According to the Eleventh Malaysia Plan, in 2012, 18 services subsectors were liberalized and up to 100% foreign equity participation is now allowed for wholesale and retail trade, healthcare, professional services, environmental services, courier, and education subsectors. However some limits remain for other sectors, including telecommunications, financial services, and transport.

4.95. The Malaysia Services Development Council (MSDC) provides guidance and direction for a coordinated approach towards the development of the services industry. The MSDC is chaired by the Minister of International Trade and Industry and comprises representatives from the relevant government ministries, PEMUDAH, PEMANDU, and the private sector.

60 Department of Statistics, Malaysia (2017), Labour Force Survey Report – 2016, April. Viewed at: https://www.dosm.gov.my/ [October 2017].

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4.96. As part of ASEAN, Malaysia is a party to several trade agreements with services commitments including with Australia and New Zealand, China, India, and the Republic of Korea. In addition, Malaysia has signed bilateral trade agreements with services chapters with Japan, Pakistan, New Zealand, India, and Australia.

4.3.2 Financial services

4.97. The financial sector in Malaysia comprises the banking system, the insurance sector and capital markets. During the period under review, the sector's contribution to GDP declined slightly from 7.1% of GDP in 2013 to 6.4% of GDP in 2016, while its share of employment stayed steady at around 2.4% of total employment during the same period. In terms of assets, banks continue to dominate, accounting for over 50% of the sector's assets in 2016. The sector's total assets exceeded 200% of GDP in 2016.

4.98. The central bank, the Bank Negara Malaysia (BNM), is responsible for supervising both conventional and Islamic banking institutions, the major development financial institutions (DFIs), insurance companies, and takaful (Islamic insurance) operators. The Securities Commission Malaysia (SCM) supervises and regulates capital market intermediaries, which include fund management companies, broker-dealers, and the securities and derivatives market. Investment banks are supervised and regulated by the BNM and the SCM. The Labuan International Business and Financial Centre is supervised by the Labuan Financial Services Authority (LFSA).

Banking sector

4.99. The banking sector in Malaysia consists of both conventional and Islamic institutions.61 At the end of 2016, the conventional banking sector consisted of 54 institutions. According to the IMF, strong regulatory oversight coupled with restructuring of the sector has resulted in strong growth. Total assets rose from RM 2,036 billion in December 2013 to over RM 2,519 billion at the end of July 2017, while bank deposits increased from RM 1,525 billion to RM 1,725 billion over the same period.62

4.100. Furthermore, during the review period, lending also rose to RM 1,549 billion in July 2017, fuelled mainly by increased lending to the household sector, while net-impaired loans (NIL) as a proportion of total loans declined to 1.2% in December 2016 from 1.3% in December 2013. However, provisioning for NILs declined to 86.5% in December 2016 compared with 99.6% in December 2013. The aggregate net profit of the banking sector was around RM 32 billion in 2016. Furthermore, net return on assets (ROA) and net return on equity (ROE) remained steady during the review period (Table 4.27). According to BNM, recent bank sector profits have been driven by treasury operations and strong financing growth from Islamic banking operations. Banks in Malaysia continue to be well capitalized, with a common equity tier 1 capital ratio of 13.1%, tier 1 capital ratio of 14% and total capital ratio of 16.5% in December 2016. These ratios are considerably higher than the regulatory requirements under Basel III63 and the minimum requirements in Malaysia.64

Table 4.27 Financial sector indicators, 2013-16

2013 2014 2015 2016 % (or otherwise stated) Banking system Total capital ratioa 14.9 15.9 16.6 16.5 Tier 1 capital ratioa 13.5 14 14.2 14 Common equity tier 1 capital ratioa 12.6 13.3 13.3 13.1 Return on assets 1.5 1.5 1.3 1.3 Return on equity 15.9 15.2 12.3 12.5

61 The banking sector in Malaysia consists of conventional commercial banks, Islamic banks and investment banks. 62 Bank Negara Malaysia; and information provided by the authorities. 63 Bank Negara Malaysia, Financial Stability and Payment Systems Report 2016. 64 The minimum capital adequacy ratios applicable to banking institutions in Malaysia are a common equity tier 1 capital ratio of 4.5%, tier 1 capital ratio of 6.0% and total capital ratio of 8.0% (ratios are as a percentage of risk-weighted assets).

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2013 2014 2015 2016 Liquid assets to total assetsb 11.6 13.3 Liquid assets to short-term liabilitiesb 36.5 42.6 Liquidity coverage ratioc 125.1 124.3 Net impaired loans ratio 1.3 1.2 1.2 1.2 Insurance and takaful sector Capital adequacy ratio (conventional only) 246.1 251.9 251.6 248.2 Life insurance and family takaful Excess income over outgo (RM billion) 13.2 13.8 12 13.3 New business premiums/contributions (RM Billion) 12.1 12.9 13.2 14.2 Capital adequacy ratio (conventional only) 260.9 259.2 260.6 245.0 General insurance and general takaful Underwriting profit (RM billion) 1.8 1.8 1.3 1.8 Operating profit (RM billion) 3.2 3.2 2.7 3.4 Gross direct premiums/contributions (RM Billion) 17.8 19.1 19.5 19.7 Claims ratio 57.1 57.5 60.2 56 Capital adequacy ratio (conventional only) 231.7 279.7 263.3 269.1 a Beginning January 2013, capital components are reported based on the Basel III Capital Adequacy Framework. b Beginning January 2012, the computation of liquid assets excludes interbank deposits. c The Basel III liquidity coverage ratio took effect on 1 June 2015 and superseded the guidelines on liquidity framework and liquidity framework-I issued on 1 July 1998. Source: BNM.

Regulation

4.101. During the period under review, there has been no significant change to the legislation governing the banking sector. Banks (both conventional and Islamic) are governed under the Financial Services Act (FSA) 2013, the Islamic Financial Services Act (IFSA) 2013, Development Financial Institutions Act 2002 (as amended in 2016), and the Central Bank of Malaysia Act of 2009 (as amended in 2013). These Laws provide a coherent framework for financial sector regulation and give the BNM the necessary powers to act effectively in a more complex financial landscape. The legislation focuses on:

 providing greater clarity and transparency in the implementation and administration of the law;

 ensuring Sharia compliance and governance in the Islamic financial sector;

 provisions for differentiated regulatory requirements that reflect the nature of financial intermediation activities and their risks to the overall financial system;

 provisions to regulate financial holding companies and non-regulated entities;

 strengthened business conduct and consumer protection requirements; and

 strengthened provisions for effective and early enforcement and supervisory intervention.

4.102. Furthermore, as legislated in the FSA and IFSA, policy on investment in the financial sector (encompassing the banking, insurance, and takaful sectors) is based on prudential and the best interest of Malaysia criteria. Under the provisions of these laws, the factors to be considered in determining whether an application is in the best interest of Malaysia are:

a. the effect of the investment on the level and nature of economic activity in Malaysia, including the effect on productivity, efficiency, and quality of financial services;

b. the contribution towards enhancing international trade and investment linkages between Malaysia and other countries;

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c. the effect of the investment on the stability of the financial system, including on conduct and behaviour that could pose a risk to the financial system; and

d. the degree and significance of participation of Malaysians in the financial sector.65

4.103. All banking licences are granted by the Minister of Finance, based upon recommendations made by the BNM. As already mentioned, licences granted to all banks are subject to prudential and best interest of Malaysia criteria. All banking institutions must be locally incorporated in Malaysia. The requirement also applies to Islamic banks, with the exception of international Islamic banks (which may be established either as a locally incorporated company or a branch). Locally incorporated foreign-owned commercial banks are allowed to establish up to eight branches and ten microfinance branches.

4.104. To further improve the operational efficiency and resilience of the development financial institutions (DFIs), amendments to the Development Financial Institutions Act 2002 were made and came into effect in January 2016. According to the authorities, the enhanced legislation will ensure that DFIs will continue to provide financing support to strategic sectors, in particular SMEs and micro businesses, so that these are able to contribute further to the next phase of Malaysia's socio-economic developments. The amendments aim to further strengthen DFIs' risk management and governance practices. In an effort to ensure comprehensive regulatory frameworks are in place, the amendments also include new requirements on Shariah governance, the necessary enforcement framework, in addition to business conduct and consumer protection.

4.105. Additionally, the Malaysia Deposit Insurance Corporation Act of 2011 provides a financial safety net that includes a deposit insurance coverage of RM 250,000 per depositor per member institution, and a takaful and insurance benefit protection system. Furthermore, under the provisions of the Act, the Minister of Finance has powers to extend protection coverage beyond the scope of normal protection for deposits as well as takaful and insurance benefits, for the purpose of safeguarding the stability of the financial system.

Islamic Banking

4.106. Malaysia is at the forefront of the global Islamic finance industry and has one of the most developed Islamic finance sectors. Islamic financial institutions operate in parallel with conventional financial institutions, both offering a full range of financial products and services and often using the same infrastructure (Box 4.1). The Islamic finance industry in Malaysia is dominated by the Islamic banking sector, which accounts for approximately 47% of industry assets, followed by the sukuk market, which accounts for around 42%. The balance is accounted for by a broad range of financial segments, including Islamic funds, takaful industry, and other institutions, such as mortgage companies and micro-finance institutions. Additionally, there are well developed Islamic money markets and nearly 74% of listed securities on the Malaysia stock exchange are Shariah compliant.66

Box 4.1 Islamic banking and finance

Islamic banking entails a financial system that is consistent with Shariah (Islamic Law). Under Shariah, the collection and payment of interest are prohibited, as are trading in financial risk (perceived as a form of gambling) and investment in businesses considered haram (forbidden) such as those involving alcohol and pork. However, Islamic banking does allow gains on capital, and banking activity is guided by four basic principles:  risk-sharing: the terms of financial transactions must reflect a symmetrical risk/return distribution that each participant to the transaction may face;  materiality: a financial transaction must have a "material finality", i.e. it must be directly or indirectly linked to a real economic transaction;  no exploitation: a financial transaction should not lead to the exploitation of any party to the transaction; and  no financing of haram activities. Islamic financial instruments take the form of contracts between providers and users of funds to manage risk. In order to ensure compliance with Shariah law, Islamic banks, Islamic finance companies and banking

65 FSA (Schedule 6, Part 1), and IFSA (Schedule 6, Part 1). 66 IMF Country Report No. 17/145.

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institutions that offer Islamic financial products and services are required to establish Shariah advisory committees/consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. The main Shariah-compliant financial instruments prevalent today are those described below:  Mudarabah (profit sharing) is a contract with one party providing 100% of the capital and the other party providing its specialized knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. If there is a loss, the first partner ("rabb-ul-mal") will lose his capital, and the other party ("mudarib") will lose the time and effort invested in the project.  Murabaḥah refers to the sale of goods (such as real estate, commodities, or a vehicle) where the purchase and selling price, other costs, and the profit margin are clearly stated at the time of the sale agreement. Murabahah has become "the most prevalent" Islamic financing mechanism. Murabahah works as finance when the lender/buyer pays the bank/seller for the good over a period of time, compensating the bank/seller for the time value of its money in the form of "profit" not interest. With a fixed rate of profit determined by the profit margin for the purchase of a real asset, this is a fixed- income loan. The bank is not compensated for the time value of money outside of the contracted term (i.e. the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled.  Istisna (manufacturing finance) is a process where payments are made in stages to facilitate the work of manufacturing/processing/construction. An instalment of Istisna, for example, may enable a construction company to finance construction of sections of a building or help manufacturers pay for an order of raw materials.  Ijarah means lease, rent or wage. Generally, the ijarah concept refers to selling the benefit of use or service for a fixed price or wage. Under this concept, the bank makes available to the customer the use or service of assets/equipment such as plant, office automation, motor vehicles for a fixed period and price.  Musharakah (joint venture) is a relationship between two or more parties that contribute capital to a business and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assesses an imputed rent and will share it as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).  Wakalah is as agency contract where the customer (principal) appoints the bank as an agent (Wakil) to carry out business on their behalf.  Sukuk (Islamic bonds) – a major difference between conventional bonds and sukuk is that the structure of sukuk removes interest-based elements which are replaced by an asset-based income structure using most typically ijarah or wakalah contracts. Total outstanding sukuk as of the end of 2016 was US$325 billion. As of 2016, Islamic banking assets were in excess of US$1.5 trillion, which is more than 1% of global banking assets. Furthermore, Islamic banking has been growing much faster than conventional banking, although from a much lower base. Between 2009 and 2013, Islamic banking assets grew at an average annual rate of 18% and were expected to grow at an average annual rate of 20% between 2014 and 2020.

Source: BNM, Islamic Financial Services Board, and WTO Secretariat.

4.107. Since the establishment of the first Islamic bank in 1983, the Islamic banking sector has grown considerably. Malaysia now has 16 full-fledged Islamic banks, of which six are foreign owned. In addition, 12 commercial banks offer Islamic financial products through windows. Although conventional banks continue to dominate the banking sector, the Islamic banking sector has grown considerably more rapidly. Consequently, the market share of Islamic Banks has more than doubled in the last decade from around 12% in 2007 to 28% by end-2016 (Table 4.28).

Table 4.28 Islamic banking system, 2013-16

2013 2014 2015 2016 RM million (or otherwise stated) Total assetsa,b 558,295 615,190 684,906.2 741,964.8 % of total assets of entire banking systema,b 25 25.5 26.8 28 Total financinga,b 370,673.8 427,887.8 495,005.9 549,503.9 % of total loans/financing of entire banking systema,b 27.5 29.2 31.3 33 Total deposits and investment accountsa,c 550,275.1 602,204.1 Total deposits 436,327.6 494,738.3 503,127.8 528,527.1 Total investment accounts 47,147.3 73,677.1 % of total deposits and investment accounts of entire banking 26.7 28.2 30 31.8 systema,c

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2013 2014 2015 2016 % Total capital ratiod 15.1 16.2 16.1 16.6 Tier 1 capital ratiod 12.8 12.9 12.3 13 Common equity tier 1 capital ratiod 12.8 12.8 12.3 13 Return on assets 1.2 1.1 1 1 Net impaired financing ratio 1 0.9 0.9 1 a Including DFIs under the DFI Act of 2002. b Beginning 1 July 2015, includes assets/financing funded by investment accounts which are recognized on and off-balance sheet. c Beginning 1 July 2015, Islamic deposits and investment accounts are required to be designated separately. Investment account figures include those which are recognized on and off-balance sheet. d Beginning January 2013, capital components are reported based on Basel III Capital Adequacy Framework. Source: BNM.

4.108. The development of a comprehensive Islamic finance ecosystem in Malaysia was guided by two roadmaps. The first, the Financial Sector Masterplan (2001-2010), focused on three areas: enhancing institutional capacity to achieve significant competitive edge; promoting healthy competition among the Islamic banking and takaful players; and strengthening the regulatory framework for Islamic finance to ensure effective functioning in parallel with conventional banking and insurance.

4.109. Under the second roadmap, the Financial Sector Blueprint (2011-2020), Malaysia aims to position itself as the premier global Islamic finance marketplace. This is a continuation of the Malaysia International Islamic Financial Centre (MIFC) initiative launched in 2006 to promote Malaysia as a platform for cross-border Islamic financial activities, particularly for international business. Malaysia has also taken the lead in strengthening the Islamic finance landscape, being one of the founding members of the Islamic Financial Services Board (IFSB) that develops international prudential standards and regulatory frameworks for Islamic finance, as well as the International Islamic Liquidity Management Corporation (IILM) that facilitates efficient liquidity management in the international Islamic financial system. In addition, in 2008 Malaysia further strengthened ISRA, which is a premier International research agency on Islamic Finance and Shariah that promotes greater harmonization and mutual recognition of Shariah.

4.110. Islamic banks are well capitalized with good asset quality. At the end of 2015, the sector's total capital ratio was 16.6% and tier 1 capital ratio was 13.0%, which compares to 13.8% and 12.8% respectively for conventional banks. Furthermore, the net impaired financing ratio for Islamic banks was 1% at the end of 2016 compared to 1.2% for conventional banks.

4.111. On the other hand, return on assets within Islamic banks (1%) is lower than at conventional banks (1.3%).67 The comparatively lower profitability is partly explained by a higher growth rate and the higher yield expected by customers who are attracted to Islamic products because of the profit-sharing value proposition. Lower profitability could also be attributed to the higher overhead cost-to-revenue ratios due to start-up costs of foreign full-fledged IBs. The cost structure of some standalone IBs is slightly higher relative to IBs within groups, as the latter reap the benefits of shared platforms.

Regulation

4.112. The Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) combined six pre-existing statutes, to provide a more cohesive and integrated legal framework that delivers a consistent and comprehensive treatment of similar risks, thus minimizing the prospect for regulatory arbitrage and gaps. As such, the regulatory framework for Islamic banks leverages on the framework for conventional banks. Regulations governing corporate governance, risk management, prudential limits for related party transactions, non-performing financing classification and provisioning and liquidity management are similar for both conventional and Islamic banks. Regulations specific to Islamic banking include:

67 Bank Negara Malaysia, The Financial Stability and Payment Systems Report 2016.

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 Islamic banks are required to comply with a tailored Capital Adequacy Framework (capital component and RWAs) which is in line with the Basel Committee on Banking Supervision (BCBS) and the IFSB. Furthermore, investment accounts are prohibited from any form of principal and profit guarantees by the Islamic banks;

 Islamic banks are allowed to undertake investment or acquisition of completed properties or land for the purpose of Islamic bank business activities, which includes for the purpose of onward sale or lease. However, in the case of conventional banks, the acquisition of immovable properties is allowed primarily for the purpose of providing housing or other amenities for the staff, satisfaction of debts (i.e. foreclosed properties) or premises for conducting business operations; and

 Islamic finance institutions, Islamic banks and takaful operators are required to observe Shariah principles. In this regard, they are required to comply with additional requirements including a Shariah Governance Framework, while ensuring that their businesses are carried out in compliance with Shariah Standards for the respective contracts.

4.113. Furthermore, under the provisions of IFSA, Islamic banks are required to provide customers with information on alternative IFSA-compliant deposit products that they can continue to maintain their funds in, or an option to participate in investment accounts.68 The migration of accounts was completed within the mandated two-year period (2015). The exercise entailed the segregation of investment accounts (structured on Shariah contracts of Musharakah, Mudarabah and Wakalah) from deposit accounts, with the former being prohibited from any form of principal and profit guarantees by the banks. To complement the operationalization of investment accounts, the Investment Account Platform (IAP) was launched by the industry in February 2016. The IAP serves as an online marketplace that matches investors with viable ventures that suit their risk appetites.

4.114. The National Shariah Advisory Council on Islamic Banking and Takaful (NSAC) was established in 1997 by the BNM and it is the highest Shariah authority on Islamic banks. All licensed Islamic financial institutions are required to have an in-house Shariah committee, appointments to which are subject to regulatory approval. Although the decisions of the Shariah Advisory Council are binding on IFIs, the financial regulator does not get involved in dictating what operational Shariah preferences must be adopted by the market. Under the provisions of IFSA, it is an offence for Islamic financial institutions to carry on Shariah non-compliant activities; breaches are subject to penalties.69 Under IFSA, the BNM has wide powers to assess, intervene, direct and penalize IFIs in relation to offences and breaches of IFSA provisions. In line with these developments relating to prudential regulation of IFIs, a Risk Based Supervisory (RBS) Framework has been applied to all FIs (including IFIs) to ensure consistent supervisory risk assessment. Adoption of the RBS framework has provided a more comprehensive and holistic assessment, capturing emerging risks of significant business activities of IFIs as well as assessments of quality of risk management of the financial institutions. These include the assessment of Shariah review, Shariah audit and Shariah risk management functions in the IFIs. Under RBS regime, integration of macro surveillance, regulation and supervision functions have also provided supervisors with updated developments of emerging risks within the Islamic banking system for effective supervision of IFIs. Supervisors leverage the technical capabilities of specialised risk experts, in particular experts on Shariah risk for IFIs, on any complex risk assessments. Supervisors are also guided by internal supervisory manuals and guidance to help them assess the IFIs in accordance with the RBS framework.

68 Investment accounts are risk-absorbing and hence the IBs are not required to hold regulatory capital against assets funded by them. 69 For any Islamic FI undertaking Shariah non-compliant activities, breaches are subject to penalties as per the IFSA Section 28 "Duty of institution to ensure compliance with Shariah", which states that: Any person who contravenes subsection (1) or (3) commits an offence and shall, on conviction, be liable to imprisonment for a term of not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both.

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Future direction

4.115. The future direction of the financial sector is guided by the Financial Sector Blueprint 2011-20. Under the plan, the financial sector is envisaged as a key driver of economic growth, with its growth being anchored in that of the real economy. The plan foresees a more competitive, dynamic, inclusive, and integrated financial system, offering a more diverse range of products and services to cater for the requirements of businesses operating in more integrated regional and global markets as well as to meet the needs of a more knowledge- and innovation-intensive domestic economy, and the more advanced and differentiated needs of Malaysian households.

4.116. The Blueprint identifies nine focus areas:  effective intermediation for a high-value-added and high-income economy;  developing deep and dynamic financial markets;  financial inclusion for greater shared prosperity;  strengthening regional and international financial integration;  internationalization of Islamic finance;  a regulatory and supervisory regime to safeguard the stability of the financial system;  electronic payments for greater economic efficiency;  empowering consumers; and  talent development to support a more dynamic financial sector.

4.117. The Blueprint sets out 69 recommendations and over 200 initiatives to be implemented progressively by 2020. According to the BNM, significant progress has been made in accomplishing these. As of end-2016, 41% of the identified initiatives had been fully implemented, while another 44% were progressing as planned. Collectively, these initiatives covered most of the high-impact initiatives across all nine key objectives of the Blueprint. In particular, measures to safeguard the stability of the financial system and strengthen key enablers for financial development have helped cultivate the necessary environment for greater innovation and growth of the financial sector.70

Insurance

4.118. In 2016, the sector consisted of 10 life insurers, 19 general insurers, 4 composite insurers, 3 family takaful operators, 7 composite takaful operators, a life reinsurer, 5 general reinsurers, a composite reinsurer and 5 takaful reinsurance operators. In addition, there are 56 approved insurance and takaful brokers and financial advisors, as well as 45 loss adjusters that are registered under the FSA.

4.119. The insurance and takaful (Islamic insurance) segment showed robust growth during the review period, with premiums rising from RM 53 billion in 2013 to over RM 61 billion in 2016, while assets increased from RM 234 billion to RM 277 billion over the same period. The sector is dominated by the life insurance sector which accounted for over 85% of premiums and 90% of assets in 2016. Furthermore, within the life insurance and family takaful sector, the growth of takaful contributions has been notable, accounting for nearly 27.8% of new premiums and contributions. As a result, takaful contributions now represent 13.3% of total industry premiums and contributions (Table 4.29).

Table 4.29 Takaful sector, 2013-16

2013 2014 2015 2016 RM million (or otherwise stated) Takaful fund assets 20,934.2 22,746.3 24,711 26,870.8 Family 17,952.2 19,619.3 21,389.1 23,278.8 General 2,982 3,127 3,321.9 3,592 % of insurance and takaful industry 9.2 9.4 9.7 10 Net contributions income 6,207.9 6,330.6 6,815.6 7,532.7 Family 4,807.4 4,787.2 5,104.3 5,742

70 Bank Negara Malaysia, The Financial Stability and Payment Systems Report 2016.

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2013 2014 2015 2016 General 1,400.5 1,543.4 1,711.3 1,790.7 % of insurance and takaful industry 14.1 13.4 13.8 14.6 Family takaful New business contributions 3,563.5 3,500.3 3,638.4 3,951.1 General takaful Gross direct contributions 1,908.8 2,163.7 2,295.9 2,401.7 Claims ratio (%) 53.6 47.8 51.9 49

Source: BNM.

4.120. Growth has also been supported by strong overall capitalization. The industry's aggregate capital adequacy ratio (CAR) stood at 243.9% as at end-2016, with surplus capital above the regulatory minimum of 130% increasing to RM 37.9 billion in 2016 (Table 4.29). Profitability improved for the year. In the life insurance and family takaful sector, excess income over outgoings increased by over 10% to reach RM 13.3 billion in 2016. This was mainly driven by higher growth in premium and contribution income.

4.121. Drivers of growth are different for the life insurance and family takaful sectors. In the life insurance sector, new business growth has been mainly supported by higher growth in regular premium endowment policies that combine protection with savings and investments. In contrast, new business in the family takaful sector remains largely driven by group term policies, including credit-related term policies, which provide relatively higher protection benefits but do not include any savings or investment components. The share of medical and health insurance/takaful business has increased, mainly reflecting higher group employee benefits.

4.122. The insurance penetration rate, measured by the ratio of the total number of life insurance and family takaful policies in force to the total population, has remained fairly static within the range of 54% to 56% over the review period, compared to the 75% target set under the Economic Transformation Programme.

Regulation

4.123. Insurance companies (insurers) and takaful operators are governed by the FSA and IFSA. Under these laws, composite insurers and takaful operators that carry out both life and general businesses or family and general businesses are required to operate under separate entities or single licences with effect from 1 July 2018. This requirement aims to allow greater focus on the core areas of the business of insurers and takaful operators. Towards this end, one (out of 12 composite insurers and takaful operators) has successfully converted its existing composite licence into a single licence, while four have obtained approval in principle on their applications. All takaful operators need to continue to ensure their aims and operations are in compliance with Shariah at all times, and when there is a conflict of interest between shareholders and takaful participants, the Board of directors of takaful operators must give priority to the latter.

4.124. To operate in Malaysia, an insurance company must obtain a licence from the Ministry of Finance, which is granted upon recommendation from the BNM. The issuance of new licences in the insurance and takaful industry, like in the banking sector, is guided by prudential criteria and the best interest of Malaysia criteria (as per the FSA and IFSA). All foreign insurance companies must be incorporated in Malaysia. However, flexibility is accorded to foreign professional reinsurers, retakaful operators, and international takaful operators to operate through a branch office in Malaysia. There have been no insurance licences issued during the review period. Currently, 20 of 32 direct insurers are foreign-owned, 5 of 7 reinsurers are foreign-owned (of which 4 out of 5 are set up as branches, and 1 is locally incorporated).

4.125. With a view to supporting growth and profitability in the motor and fire insurance segments, BNM has implemented its phased tariff liberalization plan, which will move the industry towards risk-based pricing. Under Phase I, which commenced on July 1 2016, new motor and fire insurance products may be offered at market-based prices while existing motor and fire insurance products under the old tariff plan continue to be available to the public at prevailing rates. Under Phase II, which commenced on 1 July 2017, tariffs will be removed for all existing motor products, except for motor third party products for which tariff rates will be gradually adjusted. Further liberalization of the tariff for motor third party products will be reviewed in 2019, taking into account market developments observed under Phases I and II.

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Capital markets

4.126. Malaysia has one of the most developed and active capital markets in the region. The market encompasses equities, debt instruments and derivatives. At the end of 2016, the size of the market was approximately RM 2.9 trillion. Bursa Malaysia had a market capitalization of nearly RM 1.7 trillion, while outstanding debt issuances accounted for RM 1.2 trillion. During the period under review, the Kuala Lumpur Composite Index (KLCI) decreased from 1,866.96 at the end of 2013 to 1,773.16 in August 2017 (Chart 4.5).

ChartChart 4.4. 5KLCI KLCI and and market market capitalization, capitalization, 2013- 172013-17

Points RM billion 1,900 2,000

1,800 1,850 Market Capitalization (RM billion) 1,600 Outstanding debt issuances (RM billion) 1,800 1,400 KLCI (points) 1,750 1,200

1,700 1,000

800 1,650 600 1,600 400 1,550 200

1,500 0 2013 2014 2015 2016 Aug-17

Source:Source: Information provided by the authorities based on Bloomberg SC Icube.

4.127. The market is dominated by Shariah compliant equities and instruments. As a whole, the Islamic capital market accounts for approximately 60% of the total capital market in terms of market capitalization and outstanding debt issues. Furthermore, nearly 74% of the listed securities are Shariah compliant. Malaysia accounted for nearly 50% of the world's sukuk (Islamic bonds) issuances as well as 52.6% of outstanding sukuk globally and the country has become a global multi-currency sukuk hub. By end-2015, 32 foreign currency sukuks by both domestic and foreign issuers, arranged by Malaysian banks, worth USD 21.3 billion had been issued in USD, SGD, JPY and CNY. Innovative sukuk structures have also been introduced, such as the sustainable and responsible investment sukuk that helps finance green technology and other ethical investments.71

4.128. In addition to sukuk and equities, Malaysia also has a well-developed fund management industry comprising 74 licensed fund management companies with assets under management (AUM) totalling RM 696.3 billion as at the end of 2016. The industry registered a CAGR of 12% over a seven-year period from 2009 to 2016. Furthermore, Malaysia is the only country in the world with a licensing framework dedicated to Islamic fund management companies. As at the end of 2016, 20 out of the 74 fund management companies in Malaysia are full-fledged Islamic fund managers operating under the framework while 31 other fund managers operate Islamic windows with a combined Islamic AUM of RM 149.6 billion, compared to RM 37.6 billion in 2009, reflecting a CAGR of 21.8%. Additionally, continuous efforts have been undertaken to ensure the Islamic capital market serves the needs of both investors and issuers. Recent initiatives include the launch of the Islamic Fund and Wealth Management Blueprint in 2017, as well as the introduction of the first-ever Sustainable and Responsible Investment (SRI) Sukuk Framework in August 2014 which intends to facilitate sustainable and responsible investing.

Regulation

4.129. Capital markets continue to be governed by the Securities Commission Malaysia Act of 1993 (SCA 1993), the Capital Markets and Services Act of 2007; the Securities Industry (Depository) Act of 1991; and the subsequent amendments to each piece of legislation. The

71 OECD, Malaysia's Economic Success Story and Challenges, January 2017.

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Securities Commission of Malaysia (SCM), which was established under the SCA 1993, is the regulator of the securities and derivatives markets. Under the provisions of the laws, the SCM is mandated, inter alia:

 to advise the Finance Minister on all matters relating to the capital market;

 to regulate all matters relating to the capital market, including supervising and monitoring the activities of Bursa Malaysia and the exchanges it operates, licensing or registering and supervising all persons engaged in regulated activities approving the issuance of capital market products72, regulating takeovers and mergers, and managing systemic risk;

 to register or recognize all auditors of public interest entities and schedule funds;

 to set, implement, and monitor standards and qualifications for both securities and derivatives markets; and

 as a member of the International Organization of Securities Commissions, the SCM also ensures that international standards and best practices are maintained.

4.130. Recent regulatory changes include: the establishment of the regulatory framework for the introduction of alternative trading platforms such as equity crowdfunding platforms and peer-to- peer financing platforms; and increasing the regulatory powers of the SCM with respect to audit and examination. In 2015, the SCM also launched the "Lodge and Launch" framework for unlisted capital market products that are to be offered or marketed to sophisticated investors (i.e. the wholesale market).

4.131. The future direction and growth of capital markets in Malaysia is articulated in the Capital Markets Masterplan 2 (CMP2), which was released in 2011. Themed Growth with Governance, CMP2 tackles the challenges for Malaysia's capital market in expanding its role in invigorating national economic growth while addressing concerns about the efficacy of markets in the aftermath of the global financial crisis. It focuses on utilizing domestic savings for capital formation so as to foster entrepreneurship and innovation.

4.132. The main strategies under the plan are: promoting capital formation for economic growth; increasing the efficiency of savings intermediation; deepening secondary market liquidity; facilitating the internationalization of key segments; and building capacity and strengthening information infrastructure to support transition to an electronic environment. In this regard, the expansion of capital market intermediaries will be facilitated to enable the offering of a wide range of domestic and international products and services to a broader group of investors. The SCM will also facilitate and work with intermediaries to help them evolve their business models through allowing decoupling and further outsourcing, for specialized activities.

4.133. Under the plan, foreign equity restrictions in unit trust management companies were lifted in 2014; boutique fund management licences were introduced in 2015; and licensing requirements were relaxed to enable establishment of niche fund managers. As of January 2017, full foreign ownership in credit rating agencies was permitted. Mandatory credit ratings were also removed to enable corporations to issue bonds without a rating and at a lower cost, broadening and diversifying the corporate bond market, and allowing investors to select from a wider set of risk profiles. In addition, the SCM embarked on efforts to facilitate wider access to market-based financing avenues and the leveraging of technology to enable greater investor participation. This led to the introduction of an equity-based crowdfunding (ECF) framework in February 2015, peer-to-peer financing (P2P) framework in April 2016, and digital investment management (DIM) framework in May 2017.

4.134. Malaysia is recognized as one of the largest sukuk issuers in the world. According to the authorities, the close alignment between socially responsible investment principles and the principles of Islamic finance led to the launch of the Sustainable and Responsible Investment

72 Capital market product is defined in Section 2 of the Capital Markets and Services Act 2007 as securities; derivatives; a private retirement scheme; a unit trust scheme; any product or arrangement which is based on securities or derivatives or any combination thereof; and any product which the Minister may prescribe as a capital market product.

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Sukuk Framework in 2014, leveraging on the existing strength in the sukuk market to provide opportunities for greater alignment between these two segments. To further strengthen the global positioning of Malaysia's Islamic Capital Market, the SCM also launched a five-year Islamic Fund and Wealth Management Blueprint in January 2017.

4.135. The SCM also introduced a series of measures to further improve existing market segments. In the equity market, efforts were focused on driving greater investments in small and mid-cap companies. In the bond market, work was centred on driving greater retail participation and improving secondary trading. A greater variety of ETF and derivatives products were also introduced.

4.3.3 Telecommunications

4.136. In 2015, the gross value of output for telecommunication services was RM 72.3 billion and 51,510 people were engaged in the sector, an increase since 2010 when gross output was RM 53.4 billion and 41,814 people were engaged. The main centre of activity in terms of value, employment, and investment is Kuala Lumpur. Non-Malaysian residents account for 2% of gross output and fixed assets, and 4.6% of persons engaged.73

4.137. The fixed line and broadband service markets are dominated by Telekom Malaysia which is majority state-owned and has about 95% market share. TIME dotCom Bhd (wholly owned by the Government) provides wholesale bandwidth and operates the Cross Peninsular Cable System. There are four major mobile service providers Maxis, Digi, Celcom and U Mobile (Table 4.30). In terms of total subscribers, Digi is the market leader but in terms of service revenue, Maxis has more market share.

Table 4.30 Mobile service providers, 2016

Maxis Digi Celcom U Mobile Total subscribers (million)a 11.96 12.30 10.55 .. Prepaid 8.96 10.20 7.60 .. Postpaid 2.97 2.10 2.96 .. Service revenue 8.46 6.23 6.03 .. (RM billion)a Prepaid 4.02 4.27 2.73 .. Postpaid 3.93 1.96 2.77 .. Capital expenditure 1.19 0.78 1.30 .. (RM billion)a Ownershipb 64.91% owned 49% owned Part of the Axiata Group Main by BGSM Equity by Telenor which is 36.61% owned shareholders Holdings Sdn Asia Pte Ltd by Khazanah Nasional are ST Bhd Berhad, the Malaysian Telemedia, and sovereign wealth fund U Telemdia

.. Not available. a Eu, GT (2017), Telco battleground 2016, Digital News Asia, 1 March. Viewed at: https://www.digitalnewsasia.com/mobility/telco-battleground-2016-good-year-maxis-and-digi-not- so-celcom?page=0%2C0 [October 2017]. b Axiata (2017), Annual Report 2016, p. 258; Maxis (2017), Annual Report 2016, p. 205; Digi (2017), Inspiring Your Digital Life, Annual Report 2016, p. 25; and U Mobile online information. Viewed at: http://www.u.com.my/about-us/our-company/about-umobile [October 2017]. Source: Department of Statistics, Malaysia.

4.138. The number of fixed line subscribers appears to have stabilized, although the downward trend in the number of fixed line subscriptions per 100 inhabitants has continued. It also appears that the number of mobile phone subscriptions has started to decline from a peak in 2014 both in total number and as a proportion of the population (Table 4.31).

73 Department of Statistics, Malaysia (2017), Economic Census 2016 – Information and Communication Services, July. Viewed at: https://www.dosm.gov.my/v1/ [October 2017].

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Table 4.31 Selected telecommunication indicators, 2012-16

2012 2013 2014 2015 2016 Fixed telephone subscriptions (million) 4.59 4.54 4.41 4.49 4.51 Fixed telephone subscriptions per 100 15.69 15.26 14.61 14.65 14.50 inhabitants Mobile cellular subscriptions (million) 41.23 43.00 44.93 44.10 43.91 Mobile subscriptions per 100 inhabitants 141.33 144.72 148.83 143.89 141.17 Percentage using the internet (%) 65.8 57.1 63.7 71.1 78.8 Fixed broadband subscriptions (million) 2.92 2.94 3.06 3.06 2.72

Source: ITU statistics. Viewed at: http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx [October 2017].

4.139. The principle legislation on telecommunications remains the Communications and Multimedia Act (CMA) No. 588 of 1998 and the Communications and Multimedia Commission Act No. 589 of 1998. The Ministry of Communications and Multimedia (MCMM) is responsible for developing policies for the telecommunications industry. The regulator is the Malaysian Communications and Multimedia Commission (MCMC) which is answerable to the Minister of Communications and Multimedia. The MCMC is also responsible for advising the Minister on policies relating to telecommunications, and for recommendations on granting and cancelling licences. In addition to mobile, fixed, and broadband services, the MCMC is the regulator for postal and courier services, and digital signatures under the Services Act No. 741 of 2012 and the Digital Signature Act No. 562 of 1997.

4.140. The Eleventh Malaysia Plan emphases the importance of digital infrastructure generally and the need to keep pace with technological developments while improving affordability and consumer protection and extending broadband to 95% of populated areas. The infrastructure projects to support these objectives include High-speed Broadband 2, Suburban Broadband, and Digital Terrestrial Television.

4.141. The four strategies in 11MP specifically directed at the digital infrastructure include:  expanding and upgrading broadband infrastructure including through the legal requirement that communications installations be treated as essential services in all new housing and commercial developments, improving the capacity of connections, and improving inter-agency coordination for infrastructure planning;

 increasing affordability and protection through improvements to the Access Pricing Framework for broadband, and setting standards and guidelines for better consumer protection;

 migrating to Digital Terrestrial Television through the second phase of the DTT service, and introduction of new DTT services; and

 strengthening digital infrastructure and applications in urban areas to improve other services such as transport, utilities and waste management, and to improve energy efficiency.74

4.142. The licence categories for telecommunications services are set out in Table 4.32. Either individual or class licences are required for telecommunications activities. There are no foreign equity restrictions on class licences while applications for individual licences are assessed on a case-by-case basis. Under the Communications and Multimedia Act, the Minister may decide to grant a licence based on the MCMC's recommendations. In evaluating an application for no foreign equity restriction for a network facility or network service provider licence, the factors the MCMC would take into account would usually include:  investments made in Malaysia by the applicant and its impact on investment and the economy;

 employment of local Malaysians (number of Malaysians employed and significant/key positions held) and job opportunities created;

74 Prime Minister's Department (2015), Eleventh Malaysia Plan 2016-2020 – Anchoring Growth on People, pp 7.2 -7.31.

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 transfer of technology and skills;

 unique or exclusive nature of business; and

 contribution to the socio-economic development of Malaysia.

4.143. In general, a network facility or network service provider licensee is allowed to hold up to 49% foreign equity and must have 30% bumiputera equity. However, equity restrictions do not apply if the licence holder is a public listed company, although they do apply when the licensee is a private limited company (Sendirian Berhad) held by a public limited company (Berhad).

Table 4.32 Telecommunications licensing regime, 2017

Licensing category Individual licence Class licence Network Facilities Provider (NFP) Earth stations; fixed links and cables; Niche or limited purpose network For owners/providers of network radio communications transmitters facilities facilities infrastructure and links; satellite hubs; satellite control stations; space stations; submarine cable landing centres; and towers, poles ducts, and pits used in conjunction with other network facilities Network Service Provider (NSP) Bandwidth services; broadcasting Niche customer access; niche Providers of the basic connectivity distribution services; cellular mobile connection services and bandwidth, enabling connectivity services; access applications between different networks services; space services; switching services; and gateway services Application Service Provider n.a. PSTN telephony; public cellular (ASP) services; IP telephony; public Provision of services to end-users, payphone services; public switched such as voice services, data services, data services; audiotext hosting and internet access services provided on an opt-in basis; directory services; internet access services; and messaging services Content Application Service Satellite broadcasting; subscription Content applications service limited Provider (CASP) broadcasting; terrestrial free to air in its availability to: Subset of ASP such as television and TV; terrestrial radio broadcasting; or i. vehicles, vessels, railway or aircraft radio broadcast services, and such other content applications used for hire or reward or for any services such as the provisioning of services which are not exempt under other valuable consideration; information services the CMA or not subject to a class ii. a single commercial or residential licence under Part IV of the Licensing building; or Regulations iii. a restricted geographical area

Content applications service of limited appeal or which is targeted to a special interest group and available through subscription by persons using equipment specifically designed for receiving the said service; content applications service where the content is remotely generated and distributed through a network service and displayed on a screen; content applications service for distance learning purpose; or content applications service linked or associated specifically to a sporting, cultural or other one-off event n.a. Not applicable. Source: MCMC (2017), Licensing Guidebook, 31 August. Viewed at: https://www.mcmc.gov.my/skmmgovmy/media/General/pdf/SKMM_Guidelines_V2_2017.pdf [October 2017].

4.144. Individual licences are granted to applicants to provide a specific type of service and applications are subject to detailed examination by the MCMC pursuant to Regulation 7 of the Licensing Regulations of 2000. An applicant for an individual licence must make an application to the MCMC, provide supporting documentation and pay an application fee of RM 10,000 per individual licence. The MCMC then has 60 days to evaluate the application and make a recommendation to the Minister who has 30 days to approve it. No approval means the application

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4.145. Class licences, on the other hand, are granted through a process of registration with the MCMC and are subject to a lower degree of regulation. Applications from eligible applicants for class licences must be made to the MCMC, with supporting documentation and a fee of RM 2,500. The MCMC checks, processes and registers the application.

4.146. Over the period 2012 to 2016, there has been a steady increase in the number of Individual licences issued while the number of class licences has decreased (Table 4.33).

Table 4.33 Telecommunications licences issued, 2012-16

Individual licences NFP NSP CASP Total 2012 123 119 38 280 2013 134 131 39 304 2014 150 143 38 331 2015 156 144 38 338 2016 176 156 48 380 Class licences NFP NSP CASP ASP Total 2012 22 24 26 941 1,013 2013 20 22 27 541 610 2014 20 21 27 505 573 2015 16 16 22 492 546 2016 15 15 12 456 498

Source: Malaysian authorities.

4.147. Appeals to MCMC decisions may be made to an appeals tribunal, which is established on an ad hoc basis by the Minister. At 31 August 2017, there had been no appeals and no appeals tribunal had been established

4.148. Under the CMA, all network service and facilities service providers have access to services and facilities on the Access List75 on reasonable terms and conditions and on an equitable and non-discriminatory basis. Service providers seeking access are required to make a written request to the access provider. The MCMC has prepared a Mandatory Standard on Access which sets out the non-pricing terms and conditions. This Standard was reviewed in 2016. The Mandatory Standard on Access Pricing was reviewed in 2012 and a new determination was issued by the MCMC with effect from 1 January 2013.76

4.149. Universal service is a principal objective of telecommunications policy, the CMAT, and the USP Regulations of 2002, and is one of the factors behind several infrastructure initiatives. The priorities are to provide access in underserved areas or localities for both telephony and internet services through infrastructure funded by the Universal Service Provider Fund (USP Fund). Licence holders with total net revenue of more than RM 2 million from the designated services listed in the regulations are required to contribute 6% of their weighted net revenue from these services to the USP Fund.

75 MCMC (2005), Commission Determination on Access List, Determination No. 1 of 2005, and MCMC (2009), Variation to Commission Determination on Access List (Determination No. 1 of 2005), Determination No. 1 of 2009. Viewed at: https://www.mcmc.gov.my/resources/reports/access-list [October 2017]. 76 MCMC (2013), Commission Determination on the Mandatory Standard on Access Pricing – Determination No. 1 of 2012. Viewed at: https://www.mcmc.gov.my/skmmgovmy/media/General/pdf/Commission-Determination-on-MSAP-2012.pdf [October 2017].

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4.3.4 Transport

4.3.4.1 Air transport

4.150. The Department of Civil Aviation (DCA) in the Ministry of Transport (MOT) is responsible for policy relating to air services and representing Malaysia in international organizations and negotiations.

4.151. The principal changes to legislation on air transport during the review period were the enactment of the Malaysian Aviation Commission Act No. 771 of 2015, and the introduction of the Civil Aviation Regulations in 2016. The Act provides the legal basis for the establishment of the Malaysian Aviation Commission (MAVCOM) which took over some of the responsibilities of the MOT. MAVCOM is an autonomous body established to regulate and oversee economic and commercial issues and act as an independent advisor to the MOT. The DCA will continue to be the regulator for technical issues with responsibilities for overseeing safety, maintenance, and security (Table 4.34).

Table 4.34 Functions of the Department of Civil Aviation and the Malaysian Aviation Commission

Department of Civil Aviation Malaysian Aviation Commission  Exercise regulatory functions in respect of civil  Regulate economic matters relating to the civil aviation aviation and airport and aviation services including industry the establishment of standards and their enforcement  Provide a mechanism for the protection of consumers  Represent the government of Malaysia in respect of  Provide a mechanism for dispute resolution between civil aviation matters and to do all things necessary the providers of aviation services for this purpose  Administer, allocate and manage air traffic rights  Ensure the safe and orderly growth of civil aviation  Monitor slot allocation for airlines or other aircraft throughout Malaysia operators  Encourage the development of airways and airport  Administer and manage public service obligations and air navigation facilities for civil aviation;  Facilitate and coordinate matters of interest to the  Promote the provision of efficient airport and aviation Malaysian civil aviation services and government services by licensees agencies, locally and internationally  Promote the interests of users of airport and aviation  Issuing and renewing air service licences and permits, services in Malaysia in respect of the prices charged ground handling licences and aerodrome operator for, and the quality and variety of, services provided licences by licensees  Perform any other functions that are incidental or consequential to any of its functions under the MACA

Source: Civil Aviation Act, Article 2B; and Malaysian Aviation Commission Act, Article 17.

4.152. In addition to the Civil Aviation Regulations of 2016 and the Malaysian Aviation Commission Act, other legislation relating to sector includes: the Civil Aviation Act No. 3 of 1969; the Carriage by Air Act No. 148 of 1974; the Aviation Offences Act No. 307 of 1984; the Airport and Aviation Services (Operating Company) Act No. 467 of 1991; and the International Interest in Mobile Equipment (Aircraft) Act No. 659 of 2006.

4.153. Malaysia has been a member of the International Civil Aviation Organization (ICAO) since 1958 and is a signatory to the ICAO conventions. Malaysia Airlines and Malindo Air are members of the International Air Transport Association (IATA).

4.154. Under 11MP, the principal strategy affecting air transport is to upgrade air navigation and airport infrastructure through a new Kuala Lumpur Air Traffic Control Centre at KLIA to replace the National Control Centre at Subang and upgrade the communication, navigation and surveillance as well as air traffic management systems. In addition, some airports are to be upgraded, including Langkawi International Airport (Kedah), and the Sultan Ismail Petra Airport (Kelantan), to cater for an expected increase in passenger numbers.

4.155. Air transport services contributed RM 5.5 billion to GDP in 2016 and, in 2015, engaged 32,293 persons. There are six international airports77 and about 16 domestic airports serving domestic flights as well as a large number of landing strips for small aircraft. In 2016, in terms of passenger numbers (not including transit), the biggest airport by far is KLIA which handled 52.4 million passengers, of a total of 91.0 million for Malaysia as a whole. The next biggest are

77 KLIA, Johor, Pulau Pinang, Langkawi, Kuching, and Kota Kinabala.

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Kota Kinabalu (7.3 million), Pulau Pinang (6.7 million), and Kuching (4.9 million). In terms of cargo, KLIA is also the biggest with 642,558 tonnes out of a total of 873,434 tonnes (Table 4.35).

Table 4.35 Air transport, selected indicators, 2011-16

2011 2012 2013 2014 2015 2016 Total passengers million 64.7 68.0 81.0 85.1 85.9 91.5 (excluding transit) KLIA 37.3 39.5 47.1 48.6 48.6 52.4 Subang 1.3 1.4 1.9 2.8 3.1 2.8 Pulau Pinang 4.6 4.8 5.5 6.0 6.3 6.7 Kota Kinabalu 5.8 5.8 6.9 6.8 6.6 7.3 Kuching 4.2 4.2 4.8 4.8 4.8 4.9 Langkawi 1.5 1.6 1.9 2.2 2.3 2.7 Johor Bharu 1.3 1.4 2.0 2.3 2.6 2.8 Miri 1.8 2.0 2.2 2.4 2.2 2.2 Total cargo 000 tonnes 894 880 897 987 959 873 (excluding transit) KLIA 670 673 681 754 726 642 Subang 20 23 26 28 31 36 Pulau Pinang 122 114 112 119 113 113 Kota Kinabalu 28 23 22 24 25 29 Kuching 25 16 22 28 29 22 Langkawi 1 1 1 1 1 1 Johor Bharu 5 3 3 5 5 6 Miri 3 10 10 8 7 7 Aircraft movements 000 645 659 776 835 857 854 KLIA 268 282 326 340 353 355 Subang 31 33 42 57 63 61 Pulau Pinang 51 50 57 63 65 64 Kota Kinabalu 60 58 68 69 67 69 Kuching 50 44 53 51 51 49 Langkawi 15 15 18 22 22 24 Johor Bharu 13 13 38 43 42 43 Miri 41 42 45 47 45 43

Source: Ministry of Transport (2016), Transport Statistics Malaysia 2016.

4.156. All airports in Malaysia are owned by the State, except for Tanjung Manis Airport and Kerteh Airport.78 The government-linked company, Malaysia Airports Holdings Berhad (MAHB), manages five of the six international airports, plus the 16 domestic airports and 18 of the short take-off and landing airports (STOLPorts). In addition to operations in Malaysia, MAHB also has investments abroad: Istanbul Sabiha Gokcen International Airport in Turkey; and Rajiv Gandhi International Airport serving Hyderabad in India. MAHB continued investment in Malaysia over the review period with the opening of KLIA2 in 2014 with a capacity of 45 million passengers per year at a total cost of RM 4 billion. With the opening of KLIA2, the Low-Cost Carrier Terminal (LCCT) ceased operations on 9 May 2014 and low-cost airlines now operate out of KLIA2.

4.157. Among the state-owned airports, Senai International Airport (in Johor Bharu) is the only airport not managed by MAHB. It is managed by Senai Airports Terminal Services Sdn Bhd under a concession agreement with the Federal Government. The concession agreement is for 50 years, starting in 2003.

4.158. MAVCOM is responsible for processing and allocating air service licences for the transport of passengers, mail, or cargo to or from Malaysia on scheduled services, air service permits for unscheduled services, ground handling licenses, and aerodrome operator licences. An applicant for one of these licences must have an air operator's certificate from the DCA. MAVCOM is also responsible for processing and allocating licences for aerodrome operations and ground handling.

4.159. Among the requirements for a licence or permit, the applicant must be a company incorporated in Malaysia which is directly or indirectly controlled by a Malaysian person:

 for an air service licence under Article 35 of the Malaysian Aviation Commission Act, the applicant must be more than 50% owned by a Malaysian person;

78 Tanjung Manis Airport is owned by Tg Manis Development Sdn Bhd (TMDSB) and Kerteh Airport is owned by Sanzbury Stead Sdn Bhd.

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 for a publicly-listed company applying for an air service permit (Article 36), a ground handling licence (Article 37), or aerodrome operator licence (Article 38) a Malaysian person must hold a minimum of 33% of the applicant's shares; and

 for a non-publicly-listed company applying for an air service permit (Article 36), a ground handling licence (Article 37), or aerodrome operator licence (Article 38) the Malaysian person must own more than 50% of the applicant's shares.

 in all cases the Malaysian person must:

 have the power to elect, appoint, remove or prevent from election, appointment or removal or cause to be elected, appointed, removed or prevented from being elected, appointed or removed, a majority of the directors in the applicant; or

 have the power to make or cause to be made, decisions in respect of the business or administration of the other person, and to give effect to such decisions or cause them to be given effect to; or

 be a person in accordance with whose directions, instructions or wishes the directors, chief executive officer or senior officers of the other person are accustomed or under obligation, whether formally or informally, to act.

4.160. At July 2017, Malaysia was a party to 105 bilateral air service agreements of which 20 were open skies arrangements. New agreements were reached with Uzbekistan (3 October 2015), Serbia (20 October 2015), and Belize (8 May 2017).

4.161. In August 2017, seven airlines had air service licences, including Malaysia Airlines (the flag carrier) and its subsidiaries (MASwings and FlyFirefly); AirAsia and its long-haul sister airline AirAsia X; Malindo Airways; and Raya Airways.79 In 2016, Rayani Air's licence was revoked by MAVCOM as it "had breached the conditions of its ASL and lacks the financial and management capacity to continue operating as a commercial airline".80 In addition, 22 airlines had air service permits.

4.3.4.2 Maritime transport

4.162. The Marine Department of Malaysia in the Ministry of Transport is responsible for policy and regulation of marine transport and related issues. The Department was established in 2011 from the integration of three independent departments which had been responsible for policy and regulation for Peninsular Malaysia, Sabah, and Sarawak. The main functions of the Department include: ensuring safe navigation of merchant vessels; providing services for merchant vessels such as inspection, certification, registration, and licensing; providing navigation services in Malaysian waters and ports; and supervising the examinations for seafarers.81

4.163. The Maritime Institute of Malaysia (MIMA) is a policy research institute established by the Government under the Companies Act. Under the Federal Government Ministers' Order No. 2 of 2013, MIMA is to provide consultancy services to stakeholders through policy research, training, education and public awareness programmes. MIMA specializes in research into maritime safety and security, ocean law, and maritime industries, and has a centre dedicated to the Straits of Malacca.82

4.164. The legal framework for maritime transport and related activities has not changed since the last review and the principal laws relating to shipping include:

79 MAVCOM online information. Viewed at: http://www.mavcom.my/en/resources/licensing-and- permits/ [October 2017]. 80 MAVCOM news release, 13 June 2016, Malaysian Aviation Commission revokes Rayani Air's Air Service Licence. Viewed at: http://www.mavcom.my/en/2016/06/13/malaysian-aviation-commission-revokes- rayani-airs-air-service-licence/?hilite=%22RAYANI%22 [October 2017]. 81 Marine Department Malaysia online information. Viewed at: http://www.marine.gov.my/jlmeng/index.asp#.WaQrYNKg8-U [October 2017]. 82 Maritime Institute of Malaysia online information. Viewed at: http://www.mima.gov.my/index.php [October 2017].

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 the Carriage of Goods by Sea Act No. 527 of 1950 for maritime goods transport;

 the Merchant Shipping Ordinance of 1952 for shipping, which was amended by the Merchant Shipping Ordinance (Amendment) Act No. 28 of 2017 (the amendment revises the ship registration and licensing framework to rationalize the ship registries);

 for ports: the Port Authorities Act No. 487 of 1963; the Penang Port Commission Act No 138 of 1955; the Bintulu Port Authority Act No. 243 of 1981; and the Ports (Privatization) Act No. 422 of 1990;83 and

 Ports in Sabah and Sarawak are regulated by state ordinances.

4.165. Malaysia is a member of the International Maritime Organization and has ratified many of its international conventions, including the Convention on the International Maritime Organization, the Convention for the Safety of Life at Sea (SOLAS), the Convention for the Prevention of Pollution from Ships (MARPOL), and the Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW), among others.84

4.166. In 2015, there were about 993 enterprises involved in water transport, with gross output valued at RM 16.5 billion.85

4.167. The Malaysian Shipping Master Plan 2017-2022, which was launched on 6 September 2017, sets out the challenges facing the shipping industry, with a reduction in tonnage, increased reliance on foreign ships, and reflagging of Malaysian ships to other jurisdictions. The Plan focuses on a number of areas including, promoting employment of Malaysian ships and seafarers, facilitating access to capital and financing, improving Malaysia's attractiveness to shipping businesses, and promoting innovation and sustainable growth of maritime ancillary services.86

Shipping

4.168. In 2016, there were 5,477 ships registered in Malaysia for a total gross register tonnage (GRT) of 11.9 million, a slight increase compared to 2011 when there were 5,145 ships and GRT of 11.5 million. Vessels may be registered with the Malaysian Ship Registry or the Malaysian International Ship Registry; parallel registration is not allowed. Vessels registered with the Malaysian Ship Registry (Table 4.36) must be owned by a Malaysian citizen or an enterprise with at least 51% Malaysian shareholding; the vessel owner must be incorporated and have an office in Malaysia; and the ship manager must be a Malaysian citizen or corporation.

Table 4.36 Total vessels registered in the Malaysian Ship Registry by type, 2011-16

2011 2012 2013 2014 2015 2016 Oil tanker Number 209 215 206 201 209 250 000 GRT 2,387 2,419 2,027 2,013 2,075 2,137 LNG, LPG carrier Number 43 41 40 40 38 40 000 GRT 2,534 2,373 2,371 2,371 2,211 2,594 Chemical/Petroleum tanker Number 66 63 53 49 47 46 000 GRT 905 822 571 453 391 369 Bulk grain, ore, log carrier Number 17 15 14 13 13 15 000 GRT 239 193 192 164 206 377 General cargo, semi container Number 527 491 577 575 489 491 000 GRT 578 579 580 578 575 565 Passenger Number 442 322 431 428 360 352 000 GRT 63 47 55 57 61 72 Roll on – roll off Number 12 10 00 10 12 11 000 GRT 101 130 195 157 229 190

83 Ministry of Transport online information. Viewed at: http://www.mot.gov.my/en/maritime/act- ordinance-warta-maritime [October 2017]. 84 International Maritime Organization online information. Viewed at: http://www.imo.org/en/About/Conventions/StatusOfConventions/Pages/Default.aspx [October 2017]. 85 Department of Statistics Malaysia (2016), Economic Census 2016 - Transportation and Storage Services. 86 Ministry of Transport (2017), Malaysia Shipping Master Plan 2017 to 2022. Viewed at: http://www.mima.gov.my/index.php/news-list/204-malaysia-shipping-master-plan-2017-2022 [October 2017].

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2011 2012 2013 2014 2015 2016 Full container Number 53 33 29 27 27 32 000 GRT 710 218 190 182 195 288 Offshore support vessel Number 251 249 256 263 276 290 000 GRT 237 218 244 273 316 328 Barge Number 1,455 1,455 1,378 1,417 1,431 1,489 000 GRT 1,406 1,400 1,378 1,399 1,493 1,585 Other Number 2,070 2,136 2,104 2,116 2,232 2,461 000 GRT 2,335 2,618 2,451 2,691 2,906 3,434 Total Number 5,145 5,030 5,148 5,139 5,134 5,477 000 GRT 11,496 11,017 10,253 10,338 10,658 11,939

Source: Department of Statistics Malaysia (2016), Economic Census 2016 - Transportation and Storage Services.

4.169. Vessels registered with the Malaysian International Ship Registry (MISR), which is located in Labuan, must be owned by companies registered in Malaysia. However, there are no limits to foreign equity participation, although the ship manager must be a Malaysian citizen or corporation (Table 4.37).

Table 4.37 Total vessels registered in the Malaysian International Ship Registry by type, 2011-16

2011 2012 2013 2014 2015 2016 Anchor Handling, Standby, Number - 3 2 4 10 7 Supply GRT - 7,844 5,116 14,874 26,480 19,182 Barge Number - - - - 2 - GRT - - - - 37,221 - Other Number 1 2 - 2 3 5 GT 19,902 11,288 - 62,003 10,084 14,187 Total Number 1 5 2 6 15 12 GRT 19,902 19,132 5,116 76,877 73,785 33,369

Source: Malaysian authorities.

4.170. Under the Merchant Shipping Ordinance, domestic shipping is reserved for Malaysian flagged vessels holding a domestic shipping licence where domestic shipping is defined as services, other than fishing, in the EEZ; or shipment of goods or carriage of passengers from one place to another in the EEZ.87 The criteria for a domestic shipping licence include the requirements that the vessel be owned by a Malaysian citizen or an enterprise with minimum 51% Malaysian ownership, the board of directors and the workforce must be at least 30% bumiputra, and at least 75% of the crew must be Malaysian. A temporary domestic shipping licence may be granted to a foreign registered vessel by the Domestic Shipping Licensing Board if it can be demonstrated that there is no Malaysian registered vessel available for a particular cargo and industry.

4.171. As noted in the last report, transhipment of containers by foreign vessels has been permitted on certain routes (a) between Penang and Port Klang; (b) Port Klang and Port of Pasir Gudang; (c) Port of Klang and Port of Tanjung Pelepas to Port of Sepangar, Port of Bintulu and Port of Kuching; (d) Port Klang and Tanjung Pelepas Port; and (e) Port of Penang and Tanjung Pelepas Port.88 In addition, effective 1 June 2017, the transport of cargo services (including container) by foreign vessels are permitted on the following routes: (i) between Peninsular Malaysia to any port in Sabah, Sarawak, Labuan; (ii) within Sabah; and (iii) within Sarawak

4.172. The principal business of the government-linked company MISC Bhd (62.67% owned by PETRONAS) comprises energy shipping and its related activities, owning and operating offshore floating solutions, marine repair and conversion, engineering and construction works, and port and terminal services. MISC also runs the Malaysian Maritime Academy (ALAM) to provide education and training for seamen and maritime personnel. As at December 2016, MISC owns and operates more than 110 vessels. The fleet comprises 91 petroleum and petroleum products tankers, 2 LNG Floating Storage Units, and 26 LNG vessels (which delivered 21.64 million tonnes of LNG in 2016 – representing 8% of total world LNG trade). Additionally, under the Offshore Segment, MISC owns and operates 14 floating facilities.89

87 Merchant Shipping Ordinance, Part II B, Section 65A. 88 WTO document WT/TPR/S/292/Rev.2, para 4.118 89 MISC (2017), Annual Report 2016 – Dynamic Resilient Synergistic, p. 61.

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4.173. International maritime transport is open to competition: traders are free to choose domestic or internationally registered shipping lines.

4.174. There are several government incentives for shipping including:

 exemption from tax for income from transporting cargo and passengers on vessels registered in the Malaysian Ship Registry; and

 exemption from personal income tax for those working on Malaysian registered ships and dividends from profits from these activities.

4.175. In addition, the Global Maritime Ventures Bhd (GMVB), a subsidiary of the government- owned Malaysia Development Bank, manages the RM 500 million Government's Shipping Ventures Fund (SVF). In 2016, following several years of losses, GMVB reported that: "The Group is in the midst of divesting itself of all of its existing investments by selling our assets and companies."90 GMVB's role is to develop the national shipping business sector through building strategic alliances with local partners to jointly acquire vessels for domestic and international operations.

4.176. The Malaysia Development Bank is responsible for the Maritime Fund and the Maritime Development Fund. Under the RM 4.5 billion Maritime Fund and the RM 3.0 billion Maritime Development Fund, loans may be provided to Malaysian-owned (at least 51%) enterprises for: the acquisition of vessels; the acquisition of land, construction, and machinery for shipping and port- related infrastructure; to finance oil and gas related activities and services; and/or to part finance working capital requirements. The maximum tenure of the loans is 12 years. The annual interest rates on loans from the Maritime Development Fund are 4% to 6%, and on loans from the Maritime Fund interest rates are 4.0% to 5.5%.91

Ports

4.177. Federal ports are owned and regulated by the Ministry of Transport or by the states, while the ports in Sabah and Sarawak (except for Bintulu Port) are under the jurisdiction of the state governments. Federal ports are administered by specific port authorities such as Port Kelang Authority (PKA), Penang Port Commission (PPC), Johor Port Authority (JPA), Kuantan Port Authority (KPA) and Bintulu Port Authority (BPA). State ports are normally administered by the state governments such as Lumut Port, Sabah Port Authority (SPA), Rajang Port Authority (RPA) and Miri Port Authority (MPA).

4.178. Port operations have been extensively privatized through concession agreements to the private sector, with the exception of Sarawak's three ports (which are owned and operated by state statutory corporations). The latest concession agreements for the ports include the 2016 agreement to operate the Port of Tanjung Bruas, Malacca. At September 2017, the maximum foreign ownership in port operators is 40%.

4.179. Klang is the biggest port in Malaysia and is operated by two private entities: Northport (M) Bhd and Westports (M) Sdn Bhd. Port Klang also has significant transhipment traffic of containers. Port of Tanjung Pelepas, which is regulated by Johor Port Authority, is mainly dedicated to transhipment of containers (Table 4.38). In 2016, according to the World Shipping Council, Port Klang and Tanjung Pelepas were the 12th the 17th busiest container ports in the world.92

4.180. Some ports in Malaysia are relatively specialized such as Bintulu for LNG, petroleum, and palm oil; and Port Dickson for petroleum and fuel oil. In 2016, out of a total of 38 million tonnes of freight loaded in Bintulu, 25 million tonnes were LNG.

90 Global Maritime Ventures (2016), Annual Report 2015, p. 14. Viewed at: http://www.gmv.com.my/documents/32228/368636/GMV+Annual+Report+2015.pdf/a8653fbb-a51f-4df6- 896e-a4f0f3669fc3 [October 2017]. 91 Malaysia Development Bank online information. Viewed at: http://www.bpmb.com.my/maritime- development-fund1 and http://www.bpmb.com.my/maritime-fund1 [October 2017]. 92 World Shipping Council online information. Viewed at: http://www.worldshipping.org/about-the- industry/global-trade/top-50-world-container-ports [October 2017].

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Table 4.38 Main ports and activities, 2011-16

2011 2012 2013 2014 2015 2016 Klang Export, total cargo 000 t freight 89,517 90,551 90,423 95,559 100,644 113,709 Import, total cargo 000 t freight 104,651 107,356 109,855 121,730 119,142 131,748 Transit, total cargo 000 t freight Export, containers 000 TEU 1,721 1,822 1,861 1,943 1,980 2,064 Import, containers 000 TEU 1,795 1,873 1,907 1,962 1,976 2,039 Transit, containers 000 TEU 6,089 6,307 6,582 7,041 7,931 9,107 Tanjung Pelepas Export, total cargo 000 t freight 4,727 5,187 5,178 5,393 5,484 5,547 Import, total cargo 000 t freight 1,259 1,412 1,584 1,823 1,988 2,134 Transit, total cargo 000 t freight 106,803 109,658 113,286 124,314 128,807 119,5200 Export, containers 000 TEU 285 309 311 323 326 327 Import, containers 000 TEU 132 139 132 144 148 157 Transit, containers 000 TEU 6,885 7,046 6,974 7,765 8,325 7,545 Bintulu Export, total cargo 000 t freight 36,138 35,134 37,652 38,149 37,463 38,310 Import, total cargo 000 t freight 4,252 4,888 4,824 5,644 5,824 6,310 Transit, total cargo 000 t freight 1,313 1,136 1,329 1,602 1,450 1,379 Export, containers 000 TEU 71 85 90 94 87 100 Import, containers 000 TEU 78 88 91 95 85 103 Transit, containers 000 TEU 67 58 70 81 72 74 Total Export, total cargo 000 t freight 198,290 197,878 203,063 210,295 235,657 232,219 Import, total cargo 000 t freight 187,997 188,656 189,868 202,260 201,686 213,182 Transit, total cargo 000 t freight 108,736 111,309 115,265 126,677 130,871 121,579 Export, containers 000 TEU 3,385 3,538 3,611 3,719 3,773 3,941 Import, containers 000 TEU 3,310 3,411 3,497 3,579 3,639 3,804 Transit, containers 000 TEU 13,283 13,608 13,769 15,076 16,464 16,851

Source: Malaysian authorities and Department of Statistics Malaysia (2016), Economic Census 2016 - Transportation and Storage Services.

4.181. Malaysia's GATS commitments include limitations on market access through commercial presence such that services may only be provided through a representative office, regional office or locally incorporated joint-venture corporation (JVC) with Malaysian individuals or Malaysian-controlled corporations. JVCs are generally either subject to maximum thresholds for foreign equity participation or minimum bumiputera shareholding requirements. However, additional commitments in the GATS Schedule state that: "The following services at the port are made available to international maritime transport suppliers on reasonable and non-discriminatory terms and conditions: (1) Pilotage; (2) Towing and tug assistance; (3) Provisioning, fuelling and Watering; (4) Garbage collection and ballast waste disposal; (5) Port Captain's services; (6) Navigation aids; (7) Shore-based operational services essential to ship operations, including communications, water and electrical supplies; (8) Emergency repair facilities; and (9) Anchorage, berth and berthing Services".

4.182. Since 2009, full foreign equity participation is allowed for the following maritime transport- related services:  rental/leasing services of ships that excludes cabotage and offshore trades (CPC 83103);

 rental of cargo vessels without crew (Bareboat Charter) for international shipping (CPC 83103);

 maritime agency services (CPC 7454); and

 vessel salvage and refloating services (CPC 7454).

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4.3.5 Tourism

4.183. Tourism is important to Malaysia's economy, contributing 14.8% to GDP in 2016, compared to 12.8% in 2012. Out of a total of 27.8 million arrivals in 2016, nearly half were from Singapore, and most of the remainder were from other Asian countries (Table 4.39). In 2016, tourism provided about 3.2 million jobs compared to 2.6 million in 2012.

Table 4.39 Tourism indicators, 2012 to 2016

2012 2013 2014 2015 2016 Receipts RM billion 60.6 65.4 72.0 69.1 82.1

Arrivals million 25.03 25.72 27.44 25.72 26.76 of which Singapore 13.01 13.18 13.93 12.93 13.27 Indonesia 2.40 2.55 2.83 2.79 3.05 China 1.56 1.79 1.61 1.68 2.12 Thailand 1.26 1.16 1.30 1.34 1.78 Brunei Darussalam 1.26 1.24 1.21 1.13 1.39 India 0.69 0.65 0.77 0.72 0.64

Number of hotels 2,724 3,094 4,072 4,799 4,961 Number of hotel rooms 195,445 209,527 262,021 304,721 321,972

Source: Tourism Malaysia. Viewed at: http://www.tourism.gov.my/statistics [August 2017].

4.184. Healthcare travel grew rapidly to total revenue of RM 690 million and 770,000 foreign patients compared with RM 379 million and 393,000 foreign patients in 2010.93 Healthcare visitors entered Malaysia mainly for cardiology treatments followed by oncology, IVF, orthopaedic, and general screening. The main sources of healthcare visitors included Indonesia, China, India, and Japan.

4.185. In May 2013, the Ministry of Tourism was renamed the Ministry of Tourism and Culture and is responsible for policy development and regulation of the tourism sector and licensing of tourism service providers. The Malaysian Tourism Promotion Board (MTPB), established under the Tourism Promotion Board Act No. 481 of 1992, is responsible for promoting Malaysia as a tourism destination and assisting tourism service providers. The Malaysia Healthcare Travel Council (MHTC) was established in 2009 under the Ministry of Health to promote healthcare travel, help cooperation between the public and private sector, and develop strategies for the sector.

4.186. Under the 11th Malaysia Plan, the importance of tourism for regional development is highlighted, and ecotourism and healthcare travel are among the services sectors identified as having strong potential for growth.94 Under the Malaysia Tourism Transformation Plan, the target for 2020 is 36 million tourists and RM 168 billion in receipts. Tourism is also one of the twelve national key economic areas with twelve entry point projects identified for development.

4.187. Under the Tourism Industry Act, tourism service providers are required to register and/or obtain a licence before starting a tourism-related business activity. These include licensing of tour operating business & travel agencies, tourist guides, tourism training institutes, excursion buses & hire drive cars (Sabah, Sarawak and Labuan only).95

4.188. Foreign equity participation in several tourism-related activities is limited. Full foreign ownership is permitted for inbound travel services by travel agents and tour operator services; and some large-scale or high-end tourism services (Table 4.40).

93 Prime Minister's Department (2015), Eleventh Malaysia Plan 2016-2020 – Anchoring Growth on People, Box 8-1. 94 Prime Minister's Department (2015), Eleventh Malaysia Plan 2016-2020 – Anchoring Growth on People, pp 8-20 and 8-39. 95 Ministry of Tourism and Culture Malaysia online information. Viewed at: http://www.motac.gov.my/en/download/category/18-pelesenan [October 2017].

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Table 4.40 Foreign equity limits for tourism

Investment Foreign equity limits Hotels 1-2 star 0 3 star 70% (since 2015) 4.5 star 100% Projects Theme parks 100% Convention centres Less than 5,000 seating capacity 0 More than 5,000 seating capacity 100% Healthcare 100% Tour operator/travel agents Inbound and ticketing Singapore and Cambodia 70% Other ASEAN 51% Non-ASEAN 30% Inbound 100% Outbound 0

Source: Ministry of Tourism (2012), Policies, Guidelines and Potential Tourism Opportunities in Sabah, Tharsis C, Director, Strategic Planning & International Affairs Division.

4.189. Under the Promotion of Investments Act No. 327 of 1986, incentives are available for a variety of tourism-related investments including establishment of budget hotels (1-3 star); establishment of 4-5 star hotels (to expire on 31 December 2018); expansion/modernization/ renovation of existing hotels (1-5 star); establishment of tourist projects and theme parks; expansion/modernization of tourist projects and theme parks; establishment of recreational camps; and establishment of convention centres (with a hall of at least 3,000 seating capacity). There has been no change to most of these incentives since the last review although some have been extended (Table 4.41).96

Table 4.41 Fiscal incentives for hotels and tourism projects, 2017

Scheme Eligibility Incentives offered Pioneer Status Companies undertaking new Five-year partial exemption from income tax payments. investments in 1-5 star Requirement to pay tax on only 30% of statutory hotels income, commencing from day of production. Possibility to carry forward unabsorbed capital allowances and accumulated losses Investment Tax Companies undertaking new Alternative to Pioneer Status. Allowance of 60% on the Allowance (ITA) investments in 1-5 star qualifying capital expenditure incurred within five years hotels from date of expenditure. Companies may offset this allowance against 70% of statutory income in the first year of assessment. Carry forward of unutilized allowances Enhanced incentives Companies undertaking new Pioneer Status with income tax exemption of 100% for for undertaking new investments in 4 & 5 star 5 years. Possibility to carry forward unabsorbed capital investment in hotel hotels in Sabah and allowances and accumulated losses; or and tourism projects Sarawak (deadline for ITA of 100% on qualifying capital expenditure incurred applications extended to within 5 years. The allowance can be offset against end-2018) 100% of statutory income in year. Carry forward of unutilized allowances Incentives for Companies that reinvest in Pioneer Status with income tax exemption of 70% for reinvestments in expanding/modernizing 1-5 5 years. Possibility to carry forward unabsorbed capital hotels and tourism star hotels allowances and accumulated losses; or projects ITA of 60% on qualifying capital expenditure incurred within 5 years. The allowance can be offset against 70% of statutory income each year. Carry forward of unutilized allowances

96 WTO document WT/TPR/S/292/Rev.2, 8 April 2014, Section 4.7.6

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Scheme Eligibility Incentives offered Incentive for Investment in construction ITA of 100% on qualifying capital expenditure within healthcare travel of new private hospitals or 5 years. The allowance can be offset against 100% of expansion renovation of statutory income each year. Carry forward of unutilized existing ones. Hospitals allowances must be MOH-licensed and MHTC-registered (deadline for applications extended to end-2017) Healthcare travel: Private hospitals incurring Double deduction on expenses incurred in obtaining double deduction for expenses in obtaining domestic or internationally recognized accreditation. accreditation domestic/international The accreditation body must be MOF-approved expenses accreditation Incentives for the Companies constructing Pioneer status with income tax exemption of 70% for 5 luxury yacht industry luxury yachts years. Unabsorbed capital allowances and accumulated losses may be carried forward

Companies carrying out Income tax exemption of 100% for 5 years repair and maintenance services for luxury yachts in Langkawi

Companies providing luxury Income tax exemption of 100% for 5 years yacht charter services Double deduction on Hotels and tour operators Double deduction on qualifying expenditure incurred for overseas promotion various promotional activities overseas and for and trade fairs participation in approved international trade fairs in Malaysia Tax exemption for Tour operators licenced by Tour operators who bring in at least 750 foreign tour operators Ministry of Tourism and tourists in groups in a year are exempt from income Culture tax related to the income derived from operating such tours Tour operators organizing domestic tour packages within Malaysia involving the participation of least 1,500 local tourists per year are exempt from income tax related to the income derived from operating such tours Tax exemption for Companies promoting/ Tax exemption on income earned from bringing at least organizing/ organizing international 500 foreign participants into the country (applies to promoting conferences in Malaysia local companies promoting conferences only). Tax international exemption for income earned from organizing approved conferences and international trade exhibitions, whereby the organizers trade exhibitions bring in at least 500 foreign visitors per year (applies to both local and foreign companies) Deduction on cultural Companies promoting and Single deduction for expenditure. Ceiling for deductions performances managing musical/cultural for local performances is RM 500,000 per year. Ceiling groups and sponsoring for deductions for foreign performances is RM 200,000 approved cultural per year performances Incentive for car Car rental operators and Car rental operators may receive a full excise duty rental operators tour operators exemption on purchase of national cars. Tour operators are eligible for a 50% excise duty exemption on locally assembled four-wheel-drive vehicles Tax exemptions on Healthcare services offered Tax exemption of 100% on the value of increased the value of to foreign clientsa exports subject to 70% of the income for each year of increased exports assessment a Foreign clients are defined as: (a) a non-Malaysian citizen that participates in the "Malaysia My Second Home" programme and his/her dependants; (b) a non-Malaysian citizen holding a Malaysian student pass and his/her dependents; (c) a non-Malaysian citizen holding a Malaysian work permit and his/her dependents; or (d) a Malaysian citizen who is non-resident and his/her dependents. Source: Malaysian authorities and WTO document WT/TPR/S/292/Rev.2, 8 April 2014.

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5 APPENDIX TABLES

Table A1. 1 Merchandise exports by group of products, 2013-16

2013 2014 2015 2016 Total exports (US$ billion) 228.3 234.1 200.2 189.4 % of total exports Total primary products 38.7 37.8 33.1 31.3 Agriculture 13.2 12.9 12.7 13.5 Food 11.0 11.1 10.8 11.5 4222 - Palm oil and its fractions 5.4 5.1 4.7 4.8 4312 - Animal or vegetable fats and oils and their fractions, partly 0.9 0.8 0.8 0.9 or wholly hydrogenated (…) Agricultural raw material 2.2 1.8 1.8 1.9 Mining 25.6 25.0 20.4 17.9 Ores and other minerals 0.5 0.5 0.9 0.9 Non-ferrous metals 2.8 2.4 3.1 2.9 6841 - Aluminium and aluminium alloys, unwrought 0.4 0.5 0.5 0.9 Fuels 22.3 22.1 16.5 14.0 334 - Petroleum oils and oils obtained from bituminous minerals, 8.5 7.9 5.3 5.9 other than crude 3431 - Natural gas, liquefied 8.3 8.4 6.0 4.1 3330 - Petroleum oils and oils obtained from bituminous minerals, 4.5 4.5 3.4 3.0 crude Manufactures 60.6 61.6 66.4 68.0 Iron and steel 1.0 1.2 1.1 0.9 Chemicals 6.6 6.8 7.2 7.6 5121 - Acyclic monohydric alcohols 0.6 0.6 0.6 0.7 Other semi-manufactures 4.8 4.4 4.6 4.2 Machinery and transport equipment 38.1 38.8 41.9 43.2 Power generating machines 0.2 0.2 0.3 0.3 Other non-electrical machinery 3.5 3.6 4.3 4.5 Agricultural machinery and tractors 0.1 0.1 0.1 0.1 Office machines & telecommunication equipment 27.7 28.1 29.6 30.4 7764 - Electronic integrated circuits and microassemblies 10.9 12.1 12.4 12.8 7763 - Diodes, transistors and similar semiconductor devices; 2.6 2.5 3.0 3.4 photosensitive semiconductor devices (...) 7768 - Piezoelectric crystals, mounted; parts, n.e.s., of the 2.0 2.0 2.2 2.2 electronic components of group 776 7599 - Parts and accessories (...) suitable for use solely or 2.4 1.9 1.9 1.6 principally with the machines of subgroups 751.1, 751.2, 751.9 and group 752 7527 - Storage units, whether or not presented with the rest of a 1.9 1.7 1.6 1.6 system 7529 - Data-processing equipment, n.e.s. 1.4 1.3 1.4 1.5 7611 - Television receivers, colour (including video monitors and 1.6 1.4 1.2 1.0 video projectors) 7649 - Parts and accessories suitable for use solely or principally 1.0 1.0 0.9 0.9 with the apparatus of division 76 Other electrical machines 5.2 5.3 6.0 6.1 7725 - Electrical apparatus for switching or protecting electrical 0.7 0.7 0.7 0.8 circuits (...) for a voltage not exceeding 1,000 Automotive products 0.7 0.7 0.8 0.8 Other transport equipment 0.8 0.9 1.0 1.1 Textiles 0.8 0.8 0.8 0.9 Clothing 2.0 2.0 2.4 2.4 8482 - Articles of apparel and clothing accessories, of plastics or of 1.5 1.4 1.7 1.7 vulcanized rubber (other than hard rubber) Other consumer goods 7.3 7.5 8.4 8.8 8747 - Oscilloscopes, spectrum analyzers and other instruments 0.9 1.0 1.1 1.3 and apparatus for measuring or checking electrical quantities (...) 8973 - Jewellery of gold, silver or platinum group metals (except 1.0 0.8 0.9 0.8 watches and watch-cases) and goldsmiths' or silversmiths' wares (including set gems) 8215 - Furniture, n.e.s., of wood 0.7 0.7 0.8 0.8 Other 0.6 0.6 0.5 0.6

Source: UNSD, Comtrade database (SITC Rev.3).

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Table A1. 2 Merchandise imports by group of products, 2013-16

2013 2014 2015 2016 Total imports (US$ billion) 205.8 208.8 176.2 168.4 % of total imports Total primary products 31.9 32.1 28.5 25.7 Agriculture 9.7 9.7 10.5 10.4 Food 7.6 7.9 8.7 8.7 0989 - Food preparations, n.e.s. 0.6 0.6 0.7 0.7 Agricultural raw material 2.1 1.7 1.7 1.7 Mining 22.2 22.5 18.1 15.3 Ores and other minerals 1.4 1.3 1.3 1.6 Non-ferrous metals 4.6 4.4 4.4 3.4 6821 - Copper, refined and unrefined; copper anodes for 1.9 0.9 1.2 1.0 electrolytic refining; copper alloys, unwrought Fuels 16.2 16.8 12.4 10.3 334 - Petroleum oils and oils obtained from bituminous minerals, 10.7 10.9 8.4 7.1 other than crude 3330 - Petroleum oils and oils obtained from bituminous minerals, 3.5 3.7 1.9 1.7 crude 3212 - Other coal 0.9 0.7 0.7 0.8 Manufactures 65.9 65.8 69.3 72.5 Iron and steel 3.6 3.5 3.1 3.2 Chemicals 9.0 9.4 10.0 10.2 Other semi-manufactures 4.2 4.2 4.6 4.9 Machinery and transport equipment 42.6 41.9 43.4 45.3 Power generating machines 1.2 1.2 1.2 1.5 Other non-electrical machinery 6.7 6.7 7.0 7.3 7284 - Machinery and mechanical appliances specialized for 0.7 0.8 0.8 0.8 particular industries, n.e.s. Agricultural machinery and tractors 0.1 0.1 0.1 0.1 Office machines & telecommunication equipment 21.9 22.5 23.4 23.9 7764 - Electronic integrated circuits and microassemblies 7.6 8.8 8.8 9.6 7768 - Piezoelectric crystals, mounted; parts, n.e.s., of the 6.1 6.1 6.2 6.1 electronic components of group 776 7599 - Parts and accessories (...) suitable for use solely or 1.8 1.5 1.5 1.4 principally with the machines of subgroups 751.1, 751.2, 751.9 and group 752 7763 - Diodes, transistors and similar semiconductor devices; 1.1 1.2 1.4 1.3 photosensitive semiconductor devices (...); light-emitting diodes 7643 - Transmission apparatus for radio-telephony, radio- 1.3 1.1 1.3 1.0 telegraphy, radio-broadcasting or television 7649 - Parts and accessories suitable for use solely or principally 1.2 1.0 1.0 1.0 with the apparatus of division 76 Other electrical machines 5.7 5.3 5.8 6.0 7722 - Printed circuits 0.9 0.8 0.9 1.1 7725 - Electrical apparatus for switching or protecting electrical 0.8 0.7 0.9 1.0 circuits, (...) for a voltage not exceeding 1,000 Automotive products 3.5 3.2 3.6 3.6 7843 - Other parts and accessories of the motor vehicles of groups 1.0 1.1 1.4 1.3 722, 781, 782 and 783 7812 - Motor vehicles for the transport of persons, n.e.s. 1.3 1.0 1.1 1.1 Other transport equipment 3.7 3.0 2.4 3.1 7929 - Parts, n.e.s. (not including tyres, engines and electrical 0.6 0.7 0.8 0.9 parts), of the goods of group 792 7924 - Aeroplanes and other aircraft, mechanically-propelled (other 1.9 1.4 0.6 0.8 than helicopters), of an unladen weight exceeding 15,000 kg Textiles 0.7 0.7 0.9 1.0 Clothing 0.5 0.5 1.1 1.2 Other consumer goods 5.2 5.6 6.2 6.6 8747 - Oscilloscopes, spectrum analyzers and other instruments 0.4 0.5 0.7 0.7 and apparatus for measuring or checking electrical quantities (...) Other 2.2 2.1 2.1 1.8 9710 - Gold, non-monetary (excluding gold ores and concentrates) 1.7 1.6 1.7 1.4

Source: UNSD, Comtrade database (SITC Rev.3).

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Table A1. 3 Merchandise exports by destination, 2013-16

2013 2014 2015 2016 Total exports (US$ billion) 228.3 234.1 200.2 189.4 % of total exports Americas 10.1 10.4 11.6 12.5 United States 8.1 8.4 9.5 10.2 Other America 2.0 2.0 2.2 2.3 Mexico 0.6 0.7 0.8 1.0 Europe 9.6 10.2 10.9 11.5 EU-28 9.1 9.5 10.1 10.2 Germany 2.3 2.3 2.5 2.8 Netherlands 2.9 3.1 3.0 2.8 United Kingdom 1.0 1.0 1.2 1.1 France 0.8 0.7 0.7 0.7 Belgium 0.3 0.4 0.5 0.5 EFTA 0.2 0.3 0.3 0.4 Other Europe 0.4 0.3 0.5 0.9 Turkey 0.4 0.3 0.5 0.9 Commonwealth of Independent States (CIS) 0.5 0.5 0.5 0.4 Africa 2.4 2.5 2.6 2.4 Middle East 3.4 3.0 2.8 2.9 United Arab Emirates 1.8 1.5 1.5 1.6 Asia 73.9 73.4 71.5 70.2 China 13.5 12.1 13.0 12.5 Japan 11.0 10.8 9.5 8.1 Other Asia 49.4 50.5 49.0 49.6 Singapore 13.9 14.2 13.9 14.6 Thailand 5.5 5.3 5.7 5.6 Hong Kong, China 4.3 4.8 4.7 4.8 India 3.6 4.2 4.1 4.1 Indonesia 4.6 4.1 3.7 3.5 Australia 4.1 4.3 3.6 3.4 Viet Nam 1.9 1.9 2.2 3.0 Korea, Republic of 3.6 3.7 3.2 2.9 Chinese Taipei 3.0 3.2 3.0 2.7 Philippines 1.3 1.6 1.7 1.7 Bangladesh 0.7 0.5 0.5 0.7 Pakistan 0.7 0.5 0.5 0.6 Other 0.0 0.0 0.0 0.0 Memorandum: ASEAN 28.0 27.9 28.1 29.4

Source: UNSD, Comtrade database.

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Table A1. 4 Merchandise imports by origin, 2013-16

2013 2014 2015 2016 Total imports (US$ billion) 205.8 208.8 176.2 168.4 % of total imports Americas 11.8 12.2 10.9 10.8 United States 7.8 7.7 8.1 8.0 Other America 4.0 4.5 2.8 2.8 Brazil 0.9 0.9 1.0 1.2 Europe 12.1 11.8 11.9 11.3 EU-28 10.8 10.4 10.1 9.9 Germany 3.5 3.4 3.4 3.4 France 2.1 1.8 1.3 1.4 Netherlands 0.8 1.2 1.3 1.0 United Kingdom 1.1 1.0 1.0 0.9 Italy 0.9 0.9 0.8 0.8 EFTA 1.1 1.3 1.5 1.2 Switzerland 0.9 1.1 1.2 1.0 Other Europe 0.1 0.1 0.3 0.2 Commonwealth of Independent States (CIS) 0.7 1.1 0.6 0.7 Africa 1.4 1.4 1.4 1.0 Middle East 4.6 5.2 4.0 3.9 Saudi Arabia, Kingdom of 1.0 1.4 1.1 1.5 United Arab Emirates 2.3 2.3 1.8 1.4 Asia 68.8 67.5 70.4 71.6 China 16.4 16.9 18.9 20.4 Japan 8.7 8.0 7.8 8.2 Other Asia 43.7 42.6 43.7 43.1 Singapore 12.4 12.5 12.0 10.4 Thailand 6.0 5.8 6.1 6.1 Chinese Taipei 4.9 5.0 5.3 6.0 Korea, Republic of 4.7 4.6 4.5 5.2 Indonesia 4.3 4.1 4.5 4.2 Viet Nam 2.9 2.2 2.7 2.7 India 2.5 2.0 2.2 2.4 Australia 2.5 3.0 2.5 2.2 Hong Kong, China 1.6 1.6 1.7 1.8 Philippines 0.7 0.8 1.0 0.9 Other 0.7 0.6 0.9 0.8 Memorandum: ASEAN 26.7 25.7 26.6 24.6

Source: UNSD, Comtrade database.

Table A3. 1 Summary analysis of Malaysia's MFN tariff, 2013 and 2017

2013 2017 Duty Range Average Range Duty free No. of linesa Average (%) S.D. free No. of linesa S.D. (%) (%) (%) (%) (%) Total 9,417 (41) 5.6 0-90 9.5 64.6 11,690 (64) 7.5 0-90 10.9 56.2 HS 01-24 1,526 (41) 2.4 0-90 7.0 74.7 1,789 (64) 2.7 0-90 7.4 73.1 HS 25-97 7.891 6.2 0-60 9.8 62.6 9,892 8.3 0-60 11.2 53.2 By WTO category WTO agricultural products 1,255 (41) 2.9 0-90 7.6 70.9 1,441 (64) 3.3 0-90 8.2 67.6 Animals and products thereof 176 2.5 0-50 8.6 89.8 176 3.5 0-50 10.3 86.9 Dairy products 38 4.5 0-50 13.4 81.6 46 3.7 0-50 12.3 84.8 Fruit, vegetables, and plants 346 (1) 2.2 0-90 6.4 73.1 365 (1) 2.0 0-90 6.2 75.3 Coffee and tea 29 6.2 0-15 6.0 41.4 43 5.5 0-15 5.8 44.2 Cereals and preparations 161 6.3 0-50 12.4 60.9 202 7.8 0-50 13.1 55.9 Oils seeds, fats, oil and their products 213 2.2 0-20 3.3 63.4 250 2.3 0-20 3.1 59.2

WT/TPR/S/366/Rev.1Malaysia • Sugars and confectionary 22 2.3 0-15 4.9 81.8 31 3.1 0-15 5.8 77.4 Beverages, spirits and tobacco 110 (40) 3.7 0-20 5.6 34.5 127 (63) 6.6 0-20 6.8 13.4 Cotton 5 0.0 0-0 0.0 100.0 5 0.0 0-0 0.0 100.0 Other agricultural products, n.e.s. 155 0.8 0-25 3.6 91.6 196 0.7 0-25 3.3 92.3 WTO non-agricultural products 8,162 6.0 0-60 9.6 63.6 10,249 8.0 0-60 11.1 54.6 Fish and fishery products 349 0.9 0-20 2.9 88.8 439 0.7 0-20 2.5 91.8

Minerals and metals 1,235 8.7 0-60 10.6 44.3 1,619 8.9 0-60 10.4 38.5 -

Chemicals and photographic supplies 1,261 4.4 0-50 8.3 73.0 1,625 4.2 0-50 8.1 74.9 136

Wood, pulp, paper and furniture 1,833 2.7 0-40 6.9 84.4 801 7.0 0-40 9.5 58.4

Textiles 810 8.9 0-30 7.2 30.9 857 9.2 0-30 7.6 33.0

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Clothing 248 0.2 0-20 1.6 98.8 351 0.1 0-20 1.4 99.1 Leather, rubber, footwear and travel 319 11.4 0-40 13.5 48.6 345 11.1 0-40 13.2 46.4 goods Non-electric machinery 709 5.0 0-35 9.4 69.4 1,340 4.9 0-35 9.3 67.5 Electric machinery 381 6.2 0-30 9.5 62.7 739 5.8 0-30 8.8 61.4 Transport equipment 410 17.6 0-50 13.3 22.9 1,332 21.6 0-50 12.2 14.4 Non-agricultural products, n.e.s. 575 5.6 0-50 9.6 63.5 757 5.3 0-50 9.5 66.7 Petroleum 32 0.5 0-5 1.5 90.6 44 0.3 0-5 1.3 93.2 By ISIC Rev.2 sector ISIC 1 - Agriculture, hunting and fishing 1,305 (1) 1.1 0-90 5.7 92.0 807 (1) 1.9 0-90 7.6 85.7 ISIC 2 - Mining 116 0.9 0-30 3.6 90.5 123 1.0 0-30 3.7 88.6 ISIC 3 - Manufacturing 7,995 (40) 6.4 0-60 9.8 59.7 10,759 (63) 8.0 0-60 11.0 53.6 Manufacturing excluding food processing 6,936 7.0 0-60 10.1 57.7 9,583 8.6 0-60 11.2 51.9 ISIC 4 - Electrical energy 1 0.0 0-0 0.0 100.0 1 0.0 0-0 0.0 100.0 By stage of processing First stage of processing 1,695 (1) 1.3 0-90 6.1 91.6 1,259 (1) 2.0 0-90 7.5 87.0 Semi-processed products 3,118 5.5 0-50 8.3 61.0 3.102 6.3 0-50 8.3 55.0 Fully processed products 4,604 (40) 7.2 0-60 10.7 57.1 7,329 (63) 9.0 0-60 11.9 51.5 By HS section 01 Live animals and products 478 2.1 0-50 8.6 89.1 609 2.1 0-50 8.7 90.8 02 Vegetable products 399 (1) 2.5 0-90 7.8 74.9 499 (1) 2.2 0-90 7.6 79.4 03 Fats and oils 171 2.6 0-20 3.6 58.5 203 2.7 0-20 3.4 53.2 04 Prepared food, beverages and tobacco 478 (40) 2.6 0-20 4.9 65.9 487 (63) 4.1 0-20 6.2 52.8 05 Mineral products 202 1.4 0-50 5.3 87.6 220 1.5 0-50 5.5 87.7 06 Chemicals and products thereof 1,025 2.0 0-50 6.3 86.6 1,335 2.0 0-50 6.3 86.7

2013 2017 Duty Range Average Range Duty free No. of linesa Average (%) S.D. free No. of linesa S.D. (%) (%) (%) (%) (%) 07 Plastics, rubber, and articles thereof 563 13.4 0-40 11.3 28.6 634 13.1 0-40 11.1 28.4 08 Raw hides and skins, leather, and its 82 0.4 0-10 1.9 96.3 92 0.3 0-10 1.8 96.7 products 09 Wood and articles of wood 1,511 1.4 0-40 5.3 91.9 440 5.2 0-40 9.1 69.5 10 Pulp of wood, paper and paperboard 294 10.4 0-25 9.6 38.8 330 10.5 0-25 9.4 36.1 11 Textiles and textile articles 1,025 6.4 0-30 7.0 48.5 1,176 6.2 0-30 7.4 53.6 12 Footwear, headgear, etc. 71 6.3 0-30 9.4 60.6 85 5.1 0-30 8.7 67.1 13 Articles of stone, plaster, cement 188 17.3 0-60 13.5 26.1 258 17.8 0-60 14.8 25.6 14 Precious stones and metals, pearls 58 0.4 0-10 1.7 93.1 86 0.6 0-10 2.1 90.7 15 Base metals and articles thereof 823 9.3 0-30 9.4 33.3 1,089 9.0 0-30 8.4 27.6 16 Machinery, electrical equipment, etc. 1,140 5.0 0-35 9.2 69.3 2,163 4.9 0-35 9.0 67.3 17 Transport equipment 422 17.3 0-50 13.3 23.7 1,346 21.5 0-50 12.3 14.9 18 Precision equipment 244 0.8 0-35 3.9 92.2 328 0.6 0-35 3.3 94.5

19 Arms and ammunition 22 13.6 0-30 12.4 9.1 30 14.3 0-30 12.9 13.3 WT/TPR/S/366/Rev.1Malaysia • 20 Miscellaneous manufactured articles 213 9.5 0-50 11.3 44.6 272 10.3 0-50 11.2 39.3 21 Works of art, etc. 8 1.3 0-5 2.2 75.0 8 0.6 0-5 1.7 87.5

S.D. Standard deviation. a Number in brackets refers to tariff lines with a specific rate that have been excluded from the calculations.

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Note: Calculations exclude in-quota rates and specific rates and include the ad valorem part of compound and alternate rates. The 2013 tariff is based on HS12 and the 2017 137

tariff is based on HS17 nomenclature.

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Source: WTO Secretariat calculations, based on data received by the authorities.

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