Four years and even a change in the President and this trade conflict between the United States and China continue because taxes on Chinese products continue to be imposed, causing strain to supply chains. The pandemic is adding to the strain. Many US companies that have a China presence have increased their diversification plans by offshoring certain aspects of their business to other countries, whether within Southeast Asia, such as Malaysia, Vietnam, etc. Thailand, or closer to Mexico.
Exports from Mexican manufactured goods have increased steadily since the trade war between China and the US started, rising from US$278 billion during 2018 to US$320 billion by the end of 2019. Mexico is currently one of the US’s three top trading partners after China and Canada, and Canada, with more than 600 billion dollars of annual two-way trade in goods and services.
The electronics industry in Malaysia witnessed a rise in investment between 2019 and 2020 when firms operating within China were seeking to get rid of tariffs and profit from Malaysia’s established electronics industry. Malaysia’s state Penang witnessed 12 billion Ringgit (US$2.1 billion) of investment in the initial ten months of 2019- which is an increase of 453 percent from the prior year.
Both Mexico and Malaysia have proved to be great investments for US businesses, even if for different industries, and based on the business plan.
With more than 17 million Mexican tourists visiting the US every year, Mexican producers are directly acquainted with American brands. With supply chains linking the two countries becoming more interconnected, production sharing is becoming widespread. Furthermore, Mexico’s geographical position makes it able to function as a natural conduit to trade goods and services across North and South America.
However, the Malaysian market is a source for US businesses access to the ASEAN market that includes over 600 million people and is expected to become the fourth-largest in the world by 2030.
The article below will look at important factors that impact US investors looking for ways to expand supply chains to Mexican and Malaysian markets.
Stability in the economy and willingness to foreign investment
Mexico began to liberalize sectors of the economy in the late 1980s as rising oil prices and interest rates exposed the vulnerability to economic instability. Reforms were made to place the private sector on an axis of growth. This included opening up Mexico’s domestic market to foreign investors by concluding the North American Free Trade Agreement (NAFTA) in 1994, privatizing state-owned enterprises, and liberalizing financial markets. Mexico’s GDP has grown to around US$1.1 trillion, and it is a G20 member.
The US was among Mexico’s biggest investors in foreign direct investments (FDI) in 2019. In general, Mexico’s favorable access to the US market, low-cost labor force, and a large domestic market draw US investment.
The following actions are only carried out only by government officials of the Mexican government:
- Nuclear power generation;
- Currency issue
- Exploration in hydrocarbons;
- Control and planning of the national electric system;
- Surveillance and supervision of airports and ports; and
- Radioactive substances.
- Furthermore, these actions are reserved for Mexican companies and Mexicans.
- Freight and tourist transport in the domestic market via the land;
- Development banking and
- Professional rendering.
According to the Foreign Investment Law, the Foreign Investment Commission must authorize the following actions:
- Foreign investors who hold greater than 49% of shares of:
- Port services (towing barging, mooring, towing);
- Shipping companies that specialize in shipping high-seas;
- Legal services;
Railway construction and operation as well as
Foreign investors who directly or indirectly own greater than 50% of the capital of the Mexican company whose total assets are valued at 20 million Mexican dollars (US$1 million).
Malaysia has always favored FDI in particular because the government considers foreign investments crucial to the country’s development. This has led to an increase in FDI that has enhanced Malaysia’s growth strategy based on exports.
As a country that relies heavily on trade and commerce, Malaysia actively seeks to draw investments diverted from China. The China Special Channel initiative was created in 2020 to draw the kind of investment.
The biggest US investment is in Malaysia’s oil and gas industry manufacturing financial services.
Foreign investors can generally hold 100% equity in investments in new projects in the majority. Still, for every sector, there are specific regulations that are enforced by the authorities that oversee the respective sectors. Participation of foreign investors in Malaysia typically takes the form of board representation or equity ownership limitations. The requirements for participation in Malaysia are:
A limitation on equity ownership from foreign countries by requiring a minimum or majority equity ownership owned by an individual who is Malaysian or Bumiputera (the indigenous Malay ethnic group) as well as
The requirement that a Malaysian or Bumiputera be appointed director.
Security and political concerns
Organized crime remains the main threat to Mexico’s security since almost all of the US drug market gets its supply from Mexico. Drug cartels influence the political scene, security forces, businesses, and public sector.
To combat this, Leftist political figure Andres Manuel Lopez Obrador was elected popularly in 2018 to be President of Mexico. But, his administration has been struggling to transform its campaign slogans to cut down on the corruption of Mexico, reduce violent crime and address the underlying inequality.
Additionally, corruption is prevalent throughout Mexico at both the sub-national and federal levels, with the mining, healthcare, and energy sectors the most susceptible to corruption. Based on Transparency International, Mexico ranks at 124/179 on the corrupt perception score.
Malaysia has been undergoing an unrest in the political scene since 2018, owing to the aftermath of the 1Malaysia Development scandal in which the then Prime Minister Najib Razak was found guilty of stealing about 700 million dollars in cash from 1Malaysia Development Berhad (1MDB), which is a state-owned development firm that was created to develop strategies for the long-term development of Malaysia’s economy. Razak was sentenced to 12 years of prison.
In the end, the Barisan Nasional (BN) coalition that was ruling since its creation in 1963 lost the elections of 2018. The coalition that was formed in 2018 is Pakatan Harapan (PH), comprised of four political parties namely Parti Keadilan Rakyat (PKR), Parti Pribumi Bersatu Malaysia (BERSATU), Parti Amanah Negara (AMANAH) as well as the Democratic Action Party (DAP) was appointed by the former PM Mahathir Mohamad to the post of PM.
But, PH had only been able to be in power for two years, and it was announced that BERSATU declared its decision to withdraw from the coalition. This caused PH to be unable to hold its majority in the parliament.
Mahathir was forced to resign in protest over BERSATU pulling out of the coalition. Muhyiddin Yassin, President of BERSATU, was named Premier Minister following the formation of the coalition known as Perikatan Nasional. Muhyiddin’s term was less than 18 months, primarily because of his inadequate management of the pandemic and the looming economic crisis leading to the coalition being unable to win a majority of the parliament. After weeks of pressure mounting, the Prime Minister submitted his resignation. Ismail Sabri Yaakob, Vice President of the United Malays National Organization (UMNO), was named the new Prime Minister. UMNO is the founding part of BN, and all Malaysian Prime Ministers were apart from the party.
Despite all the political turmoil and wrangling, Malaysia’s crime index has shown a decline through 2020. Violent crimes fell by 19.5 percent to 13279 cases, whereas property crime fell by 21 percent to 52,344 instances.
Malaysia also has relatively less corruption than the other countries in East Asia, ranking at 57/179 as per Transparency International. The most prevalent sector susceptible to corruption concerns public procurement since numerous Malaysian businesses are often preferred over foreign firms during public tenders, especially those with political connections.
Free trade agreements
Free trade agreements in Mexico drive its economy. Mexico has 13 FTAs with more than 50 nations, including the USMCA and FTAs that are with European Union and European Free Trade Area. Additionally, it is a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This means that Mexico enjoys trade-friendly access to more than 60 percent of global GDP.
The US-Mexico-Canada agreement is the most significant one, as approximately eighty percent of Mexico’s exports to the US and more than 300 billion dollars annually and about 5.4 percent are sent to Canada with a value of more than 22 billion dollars.
Under the USMCA, the sale of digital goods is now exempt from taxes, and companies must take steps to ensure that workers have the right to collective bargaining. By 2023, 40 – 45 percent of the automobile components must be manufactured by employees earning a minimum of $16 per hour.
Additionally, the USMCA offers better protection to small and medium-sized companies. An information-sharing tool for businesses to facilitate cross-border logistical operations will be developed.
FTAs also have helped the economy of Malaysia become more competitive, especially since the country has a smaller market.
Malaysia has signed 16 FTAs with nations like Australia, Chile, India, Pakistan, Japan, Turkey, Japan, India, the ASEAN Free Trade Zone, and China. Similar to Mexico, Malaysia is also an official signatory to the CPTPP. Furthermore, Malaysia is also a participant in the Regional Comprehensive Economic Partnership (RCEP), accounting for around 30 percent of the world’s GDP and covering more than one-third of the population.
Most US investors opt for an LLC because it meets the US check-the-box regulations that allow US investors to establish companies in foreign jurisdictions.
Mexican legal entities must pay tax on income earned from their global income, and corporate taxes are the same for all entities, regardless of their organization. Corporate tax is currently 30 percent, and the tax on value-added is 16 percent.
A business entity is liable to tax if it’s one of the following:
- Mexican tax resident
- A resident of another country with an established permanent residence in Mexico or
- A non-native with a Mexican source of income.
- Non-tax-resident companies must pay a 30 percent tax on income net earnings if they own an established permanent presence in Mexico. If the tax-resident company doesn’t have a permanent location in Mexico and earns income from Mexican sources can be taxed as high as 30 percent, based on the income.
- Taxes on personal income (PIT) percentage for residents range between 1.92 percent to 35 percent.
- The tax withholding (WHT) for residents is 10 percent. There is no tax for resident businesses. There is a rate of 20 percent on interest rates for resident businesses. No WHT for royalty rates for resident companies. However, a 10% rate is available to resident residents.
Corporate tax is levied for residents and non-resident businesses for income earned in Malaysia. Both companies are taxed at 24 percent. A resident company that has a paid-up capital of 2.5 million ringgit (US$590,000) and a net income below 50 million rings (US$11.8 million) is taxed at a 17-percent rate for the first 600,000 Ringgit (US$143,800).
Foreign-sourced earnings are exempt from tax.
From the year 2022, Malaysia implemented the wealth tax. Companies with a chargeable income of greater than 100 million Ringgit (US$24 million) have to pay an additional 9 percent CIT.
Malaysia changed its tax on services and goods by introducing the sales and services tax in 2018. Tax on sales is 10 percent, and the service tax is 6 percent. Businesses that fall under the tax on services include advertising, hotel electrical, accounting services, and employment agencies.
The WHT tax rate is only applicable to non-residents or those who earned a profit from Malaysia.
There is no WHT for dividends and a tax rate of 10 percent on royalties and 15 percent on interest (which is reduced by an agreement on taxation).
Forming a company in Mexico takes between two and one weeks, starting when you file and collect all the necessary documents.
Limited liability companies are among the most popular forms of foreign investment in Mexico. The entity may be 100 % owned by foreign investors, and the shareholders are held accountable for their contributions to the business.
The next step of the incorporation process is selecting the company’s name and registering the name with an official from the Ministry of Economics. The process could take anywhere from three and seven business days.
If foreign shareholders own the Mexican company, they will need to notarize documents that will support the incorporation. This is done by an official publicly notary within Mexico. Public notaries are seasoned lawyers appointed by the Governor in the state.
There aren’t any capital requirements for minimum capital.
Forming a private limited corporation locally referred to in the local community as Sendirian Berhad – Sdn Bhd is the most commonly used business entity for foreign investors.
This type of entity is capable of being 100% of the ownership is owned by foreign investment and qualified for a variety of incentives, both financial and non-financial.
Private limited companies are recognized as legal entities distinct from their shareholders. The company’s shareholders are responsible only for the debts incurred by the company based on the amount they put into.
To begin the process, applicants must submit the following documents:
- Company name;
- The constitution of the company
- Statement of conformity to the Companies Act;
- Principal business activities;
- Information about directors and shareholders
- Address in Malaysia;
- The minimum capital to be paid up;
Percentage of shares held by each shareholder.
A statement by the directors that they haven’t been found guilty of any crime and are not discharged bankrupts.
The incorporation of a business does not require a minimum amount of capital. But, a company that is 100% owned by foreigners is required to pay the equivalent of 500,000 Ringgit (US$119,000) to employ foreign workers.
Additionally to this, there is an extra amount that is based on the sector:
Consulting and advisory businesses that cost 500 Ringgit (US$119,000);
Import trade, export, and restaurant business 1 million Ringgit (US$238,380);
Joint partnership with a Malaysian associate (with at least 50 % shares) $350,000 in ringgit (US$83,433) in capital investment and 500 ringgit (US$119,190) as well as
Industries that are not export-oriented 100 Ringgit (US$23,838) and a minimal, with total sales of at least 2 million rings (US$476,460).
Incentives for investment by foreign companies
Manufacturing is responsible for approximately 25-30% of the nation’s GDP, and, as such, there are plenty of lucrative investment incentives in this area.
The Impex program
The Mexican Immex program, officially known by its official name, the IMMEX maquiladora program, permits foreign companies the ability to bring raw material into Mexico with the conditions of ensuring that 100% of the final products are exported within a mandated government timeframe. Additionally, these components and raw materials are free of tax and duty.
A maquiladora, or factory, is one located in Mexico which is 100% foreign-owned, producing items within Mexico and exporting these overseas.
The program exploded in 1994 when Mexico was a signatory to NAFTA and opened trade lines of free trade to both the US and Canada. Since then, industrially-produced products comprise around 90% of Mexico’s exports by value and will reach more than USD 440 billion by 2021. More than $380 million worth of exported goods went to the US in this amount.
IMMEX businesses can apply for VAT credits. Transactions between IMMEX companies are VAT-free.
The Malaysian government, via its Malaysian Investment Development Authority (MIDA), offers a variety of business incentives that can help attract foreign firms.
The primary hub (PH) program offers incentives to businesses that use Malaysia as a hub to manage their regional operations.
The incentives include incentives that include a CIT rate of 5 and 0 percent for new companies and a 10% CIT rate for companies already in existence. Additionally, there is a tax-free income for certain types of activities.
A company that is a principal hub has no local equity/ownership restrictions and can purchase fixed assets.
Global Trading Center incentive
The Global Trading Center (GTC) program offers incentives for businesses that use Malaysia to serve as an international commerce platform for the purchase and distribution of raw materials and finished goods.
Eligible companies can benefit from a CIT rate of 10% for five consecutive years. The rate can be extended by an additional five years.
In the last decade, the Mexican manufacturing industry has experienced an explosion of growth. To counter this, the government has taken crucial measures to speed up infrastructure development. The President has a plan to increase the construction budget and spend approximately 4.1 percent of the GDP.
In 2014, government officials released a report, titled”The National Infrastructure Program, which laid out plans to improve communications, energy, and transportation infrastructure. The plan is to have an estimated 600 billion dollars. This will help make the supply chain more effective.
To draw more US investment, the US government declared in February 2022 that it was working on an infrastructure plan worth multi-billion dollars, including ports, new highways, and energy ventures.
Malaysia is among the most developed nations within Asia, with a government that has continually expanded the nation’s airports, highways, seaports, and railroads.
The roads in Malaysia are extensive, covering nearly 250,000 km. This includes more than 1500km of expressways. Malaysia is also connected via more than 1,800 km of railways and more than 62 airports. The largest airport in the country is Kuala Lumpur recorded over 44 million passengers before the outbreak.
Additionally, being a country strategically situated at an area strategically situated in the Straits of Malacca, Malaysia has a well-developed port infrastructure and seaports that can handle greater than 11.3 million equivalent units of twenty-foot (TEUs) ton of goods.