Transforming the economic structure to become one that is more diversified, resilient and sustainable Over the past few decades, the finance and oil and gas sectors have been the main economic contributors to the island’s economy, representing more than half (51%) of the economy. However, the decline of oil prices since 2015 have revealed the vulnerabilities of Labuan’s economy to the volatilities in the external environment. As observed, businesses across the board declined by at least 40%, with significant repercussions on the livelihood of the local community. The focus on only these two sectors has unwittingly elevated the concentration risk on the island’s economy and the associated employment. A deeper assessment on the performance of the financial sector indicates that the intended outcomes have not fully materialised. Comparing against other international financial centres, there is still a significant gap in Labuan’s achievement from its counterparts. A case in point is the Mauritius International Financial Centre, which was established around the same time as the IBFC in the 1990s. Based on available data, the contribution to GDP of the Mauritius financial sector was 10.4% with an employment and tax revenue share of 4.5% and 6.5%, respectively. Other financial centres which entered the foray much later, such as Shanghai, have moved even further ahead in terms of tax revenue generated, as well as job creation.3 The 2017 Global Financial Centres Index ranks Shanghai at 13th with Mauritius at the 73rd position, while Labuan is currently not even ranked in the Index.

In addition to that, work has commenced on reviewing respective jurisdictions’ preferential tax regimes against the standards outlined, to combat harmful tax practices. The standar4, which forms one of the four BEPS minimum standards, will require authorities to step up on transparency and substance rules for geographically-mobile activities, such as financial services. It seeks, for one, to prohibit the shifting away of income into preferential tax regimes where businesses have little or no economic activity. Such international developments will directly influence IBFC’s business model going forward. The world that we live in, since the creation of offshore Labuan in the 1990s, has drastically changed. What was relevant then is no more relevant now. We have no choice but to change with it. It is an opportune time for us to review of the current tax framework for Labuan. The purpose of this review is not only to ensure alignment with international best practices, but to confirm the continued relevance of such incentives in catalysing new growth areas. Tax incentives for businesses which have become irrelevant should be rationalised. The allocation of any preferential tax treatment must be supported by clear value propositions that are systematically measured across the qualifying period. Businesses that enjoy tax incentives will be benchmarked against the performance indicators that quantify economics and financial benefits. This is not meant to be onerous. It is a necessary tool to ensure that the economy grows in an inclusive and sustainable way and the public policies implemented bear the intended benefits.