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Comparative Politics Vol 2: Ease of Doing Business. Malaysia vs Italy

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Malaysia ranks 6 in the World Bank’s Ease of Doing Business Report 2014.

Source: The World Bank

Source: The World Bank

 

One of the key variables to make sure to become the location of choice of foreign investors is the ease of doing business. As you can see, one of the indicators in the table above is “Paying Taxes.” So let’s take tax incentives and regulations for instance, as I’ve had the opportunity to interview the CEO of the Malaysian Inland Revenue Board, Tan Sri Shukor.

In Malaysia it is possible to file taxes online, through an e-filing system. The e-filing system not only guarantees efficiency for the government and companies in terms of cost and time savings but it also ensures fair treatment to the public (for instance you can get tax returns within 30 days).

Moreover, in line with the government strategy to develop strategic economic activities (e.g. biotechnology industries, operational headquarters, international procurement centers, regional distribution centers, real estate investment trusts, treasury management centers, 4 and 5 Star Hotels in Peninsular Malaysia, private and international schools, provider of industrial design services in Malaysia, child care centers and pre-school education), international investors allocating resources in specific geographical areas or sectors enjoy tax holidays and don’t have to pay income tax for a certain number of years. Dividends are tax-free and companies willing to re-invest in R&D in Malaysia may be eligible to double-deduction.

Companies that are recognized with the Pioneer Status are eligible to a tax exemption ranging from 70 to 100%. In alternative, another tax incentive is the Investment Tax Allowance (ITA) for projects that imply long-term large capital investments.

The government has created a conducive ecosystem for business to thrive and the private sector aligns profit-making with innovation and socio-economic development. All the ingredients are there to make Malaysia an economic case study of excellence.

Italy ranks 65, after all European countries except for Greece, Romania, Czech Republic, and Malta.

 

If we don’t want to get stuck in this recession for decades this is definitely an area that we must reform. We need to simplify procedures and digitalize systems. This is also a way to cut public spending. Let’s get rid of red-tapes and reduce excessive costs (e.g. notary fees); a good idea could be to create a one-stop center for opening up a business where you take care of all paperwork/procedures at the same place. Should there be a need to communicate with different offices, this should be done internally and electronically.

 

Italy

Source: The World Bank

 

Malaysia

Source: The World Bank

Source: The World Bank

 

Let’s compare the “Paying Taxes” indicator. Besides the fact that our tax rate is equal to 65.8% of profits, while in Malaysia is 36.3%; the time and labor tax and contributions are 2/3 times higher in Italy than the average in OECD countries and Malaysia.

In Italy it takes 269 hours per year to pay taxes against 175 as an average of OECD countries and 133 in Malaysia. Labor tax and contributions stand as high as 43.4% in Italy. It’s 23.1% in OECD countries and 15.6% in Malaysia. How can we expect our unemployment rate to go down? It’s simply impossible for many companies to hire more workers with these labor costs.

 

Italy

Source: The World Bank

Source: The World Bank

 

Malaysia

Source: The World Bank

Source: The World Bank

 

In order to be more competitive in the global market we need to increase significantly what here is referred to as “ease of doing business.” Regulations must be simplified; procedures must be streamlined; and systems must be digitalized. A reform in this direction will not only attract foreign investors, but also help us cutting public spending.

Oh, and I almost forgot… English…Because nobody else speaks Italian besides us.

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