Structure of Malaysia's legal framework for investors

International trade is a vital contributor to Malaysia’s economic growth and development. In an effort to enhance the nation’s international trade, the government of Malaysia has decided to enter into the TPPA. The TPPA was signed in Auckland, New Zealand on February 4, 2016 by 12 Pacific Rim countries, namely Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, US, Vietnam and Japan, on the condition that all the contracting states ratify the agreement in their respective domestic laws.

Malaysia became the ninth member to enter into negotiations for the TPPA in October 2010. The 12 countries have a total market of close to 800m people, with a combined GDP of $27.5trn. Membership in the TPPA is voluntary but is open only to Asia-Pacific Economic Cooperation (APEC) member economies. Malaysia was the first country to approve the notion in parliament and sign the TPPA on January 28, 2016.

The TPPA aims to meet two key objectives: to establish new, market-oriented rules in a host of rapidly changing areas of international commerce and to reduce trade and investment barriers among TPP countries to yield considerable gains within and between the contracting states.

Overview

The TPPA is an initiative designed to establish a comprehensive free trade agreement (FTA). The TPPA originates from the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP) signed in 2005 by the Pacific Four countries: New Zealand, Singapore, Chile and Brunei. The TPSEP was then expanded and TPPA negotiations began with the entry of the US, Australia, Peru and Vietnam in March 2010. The scope of issues for negotiation has been expanded to include a number of new topics, in order to achieve the goal of developing a more comprehensive and broader agreement.

The TPPA negotiations were based on the proposals tabled by the participating countries, and participating countries were free to table proposals on various issues of concern, such as agriculture, intellectual property, and services and investments. For Malaysia, 21 working groups were established and led by the relevant ministries and federal agencies, according to the various areas of concern. The Ministry of International Trade and Industry of Malaysia (MITI) acted as the chief negotiator and was assisted by the other ministries and agencies.

The aim of the negotiations was to find a common ground that meets the goals of all contracting states. The TPPA negotiations were concluded in Atlanta on October 5, 2015 after five years of intensive negotiations, and the full text agreement was made public on November 5, 2015.

Generally, the TPPA comprises 30 chapters, covering trade and trade-related issues. While it updates traditional approaches to the issues, as covered by previous FTAs, the TPPA also features new and emerging trade issues and cross-cutting ones, such as those related to the internet and the digital economy, the participation of state-owned enterprises (SOEs) in international trade and investment, the ability of small and medium sized-enterprises (SMEs) to take advantage of trade agreements, and intellectual property rights in and among contracting states, among others.

Goals

The TPPA seeks to (i) continue the trade and investment liberalisation efforts being undertaken through the World Trade Organisation (WTO) and the FTA initiatives of each of the TPPA member countries in the region; (ii) develop transparent and predictable rules and disciplines, with adequate recourse in the event of any disputes; (iii) develop a more transparent and inclusive regulatory environment that allows all relevant parties to engage in a meaningful and constructive manner on matters of significant economic impact.

Key Components & Its Implementation In Malaysia

In setting new standards for international trade while addressing concerns pertaining to the future generation, there are five salient features of the TPPA:

  • To provide comprehensive market access to all participants by eliminating or reducing tariff or other barriers on trade in goods and services to create opportunities and benefits for businesses, workers and consumers;
  • To facilitate cross-border integration and the opening of domestic markets by way of a regional approach to commitments;
  • To address new trade challenges by promoting innovation, productivity and competitiveness as well as defining the role of SOEs in the global economy;
  • To ensure that economies at all levels of development and businesses of all sizes benefit from the expansion of the market;
  • To be the platform for regional economic integration across the Asia-Pacific region.

Key Principles Of The TPPA

The significant key principles of the TPPA include the principles of national treatment and market access for goods and services, where contracting states agree to eliminate or reduce tariffs and non-tariff barriers and other restrictive policies on industrial and agricultural goods.

The majority of tariff eliminations on industrial goods will be implemented immediately, although tariffs on certain products will be eliminated over longer timeframes, as agreed between the contracting states.

The contracting states also agreed upon a standardised framework on SOEs. Contracting states agree to ensure that their SOEs carry out commercial purchases and sales on the basis of commercial considerations, although this would sometimes contradict the mandate of the SOE to deliver public value.

Therefore, the contracting states agree to not cause adverse effects to the interests of other contracting states in providing non-commercial assistance to SOEs. However, there are some exceptions from the obligations outlined in the chapter. For example, when there is a national or global economy emergency, as well as country-specific exceptions.

It should be noted that the contracting states have agreed on a single set of rules of origin that define whether a particular good is “originating” from a contracting state and is, therefore, eligible to receive preferential tariff benefits under the TPPA. This is also known as the rules of origin. The contracting states have set rules that ensure businesses can easily operate across the region of the contracting states, by creating a common system of showing and verifying that goods made in the contracting states meet the rules of origin. Importers will be able to claim preferential tariff treatment as long as they have the documentation to support their claim.

The regulatory framework of the TPPA is addressed in its regulatory coherence chapter. It is expected to ensure an open, fair and predictable regulatory environment for businesses operating in the contracting states’ markets by encouraging transparency, impartiality and coordination among the contracting states’ governments to achieve a coherent regulatory approach. In order to achieve the above, a committee will be established to ensure that the regulatory implementation is carried out smoothly.

Mergers & Acquisitions

The TPPA will open up greater opportunities for the Malaysian market to expand its trade by allowing and facilitating access to the global market. This will result in Malaysian companies being better equipped to compete in a more efficient and effective manner on a global scale.

SMES: Zooming in on the SME sector in Malaysia, it is foreseen that Malaysia’s initiative in negotiating the TPPA will assist in scaling up local SMEs. By itself, an SME may not have the scale necessary to export goods or service and may lack the resources and financial strength required to venture into new markets and take on bigger projects. To enable SMEs to do this, they should either merge or form cooperative alliances so that the scale required for bigger projects and ventures may be more effectively realised.

Efforts to scale up SMEs may be undertaken and pursued through leveraging alliance marketing, which will lead to the enhancement of business networking. Another method of achieving the same objective may be to introduce financial incentives to subsidise the cost of mergers and acquisitions. The TPPA will conveniently allow this to take place as it will have a potential positive impact on SMEs.

Further Market Liberalisation

Malaysia has been well on its way to market liberalisation long before its entry into the TPPA, and has made great strides to open its market to foreigners keen on investing in Malaysia. Malaysia currently ranks 18th out of 189 countries in the World Bank’s “Doing Business” survey, in terms of the ease of doing business, and with the implementation of the TPPA, this ranking is set to improve, which may lead to an influx of foreign investment from other contracting states.

Save for certain key industries of concern, such as the oil and gas sector, which is still protected by the Petroleum Development Act 1974 and is duly recognised by the TPPA, most of the Malaysian market is currently open for foreign investment, with the concept of local companies being fully owned by foreign companies deemed as acceptable and legally recognised per Section 36 of the Companies Act 1965.

Malaysia has also commenced a massive revamp of its company laws, with the recently introduced Companies Bill 2015 set to replace the existing Companies Act 1965. Once the Companies Bill has been implemented into the new Companies Act, it is expected that the ease of setting up and doing business in Malaysia will be further increased, making the country a far more attractive proposition for foreign entities keen on investing in it.

Predictable & Familiar Market

It is also foreseen that the TPPA will create a transparent, secure and predictable global market, which may mitigate the challenges faced by Malaysian firms. To date, Malaysia has been an open trade nation. Trade lines with more than 200 countries around the globe have been established over the years. The country has also signed 12 FTAs with other counterpart nations, most recently with Turkey. Through the execution of FTAs, investments are made upon careful consideration of a more familiar market. Likewise, investors will be better informed – via the TPPA – on the risks and benefits of each contracting state’s market. A familiar market will provide greater assurance, resulting in more Malaysians investing in foreign markets.

Regional & Global Trade Increase

Participation in the TPPA will enhance Malaysia’s involvement within the Asia-Pacific economic landscape and is expected to make it easier for Malaysia to enter into trade with contracting states.

In 2014 Malaysia exported RM215.1bn ($53.2bn) of electrical and electronic products. Accounting for around 28.1% of Malaysia’s total exports, the segment is the county’s single-largest exporter. The contracting states in the TPPA accounted for 40.9% of Malaysia’s electrical and electronic export in 2014. With the TPPA, this portion is predicted to increase and further stimulate the growth of the Malaysian economy. The accounting firm PwC expects the TPPA to add 0.6% to 1.15% to Malaysia’s economic growth from 2018 to 2027.

The TPPA is also expected to serve as a stepping stone for the increase of cross-border mergers and acquisitions between Malaysian entities and the rest of the global community, and provides a better opportunity for Malaysian entities to invest globally and locally.

Employment & Services

With regard to the trade union movement in the country, the ratification of the TPPA by the Malaysian Parliament would mean that, for the first time, Malaysia would have to integrate the principles of the 1998 International Labour Organisation Declaration as law.

Local Labour Reforms

Malaysia’s minister of Human Resources, Richard Riot, has mentioned that eight laws in relation to employment would need to be amended to implement reforms and improvements to labour legislation, in line with the high labour standards requirements of other TPPA member countries.

The laws include the Trade Union Act 1959, the Industrial Relations Act 1967, the Employment Act 1955, the Sabah Labour Ordinance (chapter 67), the Sarawak Labour Ordinance (chapter 76), the Private Employment Agencies Act 1981, the Minimum Standards of Housing and Amenities Act, 1990 and the Children and Young Persons (Employment) Act 1966.

Foreign Workers

The TPPA will also bring significant changes with respect to freedom of association, right to strike and right to collective bargaining of trade unions and labour movements. The ratification of the TPPA could also see foreign workers being able to establish associations or unions to safeguard their interests. It is opined that after the TPPA is signed, foreign workers will have similar rights as local workers.

The government is set to monitor the activities of associations and unions, particularly those led by foreign workers, in order to ensure that they run smoothly and are in compliance with the relevant laws. However, the entry of foreign workers into Malaysia is still subject to domestic policies and laws. This could possibly lead to a hike in the number of foreign workers, which is also expected to include skilled workers and professionals.

Job Creation

In addition, it is expected that with the implementation of the TPPA, Malaysia’s GDP will grow significantly and ultimately lead to an increase in job opportunities. More job opportunities and attractive job offerings is also expected to curb the “brain drain” problem in Malaysia, enticing young professionals to remain in the country rather than migrating to other countries, or even enticing professionals who have left the country to return to Malaysia to contribute domestically.

The Legal Profession

Among the industries in Malaysia that will be affected by the TPPA is the legal profession. In express reference to the Legal Profession (Amendment) Act 2012 (LPAA), Item 7 of Annex 1 of the TPPA on “Cross-Border Trade in Services and Investment Non-Conforming Measures” specifically pertaining to Malaysia (Annex 1), the country has adopted the main gist of the provisions in the LPAA.

Foreign Firms

In effect, the TPPA acknowledges and recognises that the Malaysian legal profession will permit foreign law firms to practice Malaysian law either through an international partnership (IP) or a qualified foreign law firm (QFLF), and will permit certain foreign lawyers to practice in Malaysia provided they are a resident in the country for at least 182 days per calendar year, together with the “flying in and flying out” arrangement for non-resident foreign lawyers.

Challenges For Malaysian Lawyers

The LPAA was passed by the Parliament of Malaysia on June 13, 2012 and gazetted on September 20, 2012 in an effort to liberalise the legal profession. Apart from aims of liberalisation, the LPAA was also aimed at developing Malaysia into an international Islamic financial hub and to expand the work, expertise and specialisation of the legal profession in Malaysia.

LPAA would permit foreign law firms to practice in Malaysia in permitted practice areas and through an IP or QFLF licence. Local law firms will also be able to employ foreign qualified lawyers subject to certain conditions.

The Bar Council has expressed concerns on the level of preparedness of local lawyers once the LPAA comes into force. It has tried to address this by initiating an effort to enhance the clarity of the LPAA through guidelines and regulations.

The TPPA, being a multi-lateral treaty, was originally intended to allow multi-lateral benefits both into and out of Malaysia and contracting countries. However, in as much as Annex 1 mentions foreign lawyers’ rights regarding entry into Malaysia in accordance with the LPAA, Annex 1 is silent on local lawyers’ rights to practice outside of Malaysia and in other foreign jurisdictions. This may be subject to the individual contracting states’ rights to permit foreign lawyers (including Malaysia) to practise, but it remains to be seen whether this would have a profoundly positive or negative impact on Malaysia’s legal profession. What has been anticipated is the influx of deals and projects pursuant to contracting countries that have been interested in investing and entering Malaysia, but were hampered by various factors pre-TPPA.

That being said, the TPPA has spearheaded and acted as an effective catalyst for change in the domestic legal practice, and may be viewed as the first effective step in liberalising Malaysian legal practice and, in doing so, facilitating much more structured, enhanced and liberalised trade. Though such changes will inevitably bring many potential challenges, the ability to overcome such challenges will rely heavily on local lawyers stepping up and rising to the occasion post-TPPA.

Competition Law

The Malaysian Competition Act 2010 (CA) came into force on January 1, 2012 to promote economic development by promoting and protecting the process of competition – thereby protecting the interests of consumers – and to provide for matters connected therewith. The CA was also promulgated with a view to providing a level playing field for all players in the market by prohibiting anti-competitive behaviour.

The CA impacts the conduct of the market players’ businesses, activities and interactions, either with their competitors, suppliers or customers. The CA covers all commercial activities, both within and outside Malaysia, and covers all activities that have negative or anti-competitive effects on any market in Malaysia. The Malaysia Competition Commission (MyCC), was established to implement and enforce the CA in Malaysia.

TPPA & Competition Policy

Unlike traditional FTAs, the TPPA goes beyond providing market access to goods, services and investment, as it also aims to harmonise rules and disciplines for new and emerging trade and competition with SOEs. The Competition Policy chapter in the TPPA requires all TPPA members to adopt or maintain national competition laws that promote economic efficiency and consumer welfare.

The competition laws should also take into account the Asia-Pacific Economic Cooperation’s “Principles to Enhance Competition and Regulatory Reform” (Auckland, September 13 1999). Malaysia is able to comply with the requirements made under this chapter whilst maintaining national competition laws through the CA.

The objective of competition law is to safeguard the process of free and fair competition in commercial markets for the benefit of consumer welfare, efficiency of enterprises and the development of the economy as a whole. The TPPA will provide a positive impact on such objectives by giving a greater competitive advantage to Malaysian exporters in the market, compared to competitors who are not a party to the TPPA, by having fewer tariff restrictions.

There is also an overall positive impact on the cost of living as a result of greater access to, and competition in, Malaysian markets. MyCC has yet to make any formal announcement on the direct effect of the TPPA on the future of the Malaysian competition law. However, with the positive impact of the TPPA, it is expected that MyCC will continue to effectively enforce the CA.

Intellectual Property

Aside from the TPPA, there are other intellectual property-related conventions that Malaysia is a signatory to, namely the Marrakech Agreement, the General Agreement on Tariffs and Trade, and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Furthermore, the World Intellectual Property Organisation concluded two treaties in addition to the Rome Convention, which Malaysia did not ratify, but steps were made to incorporate similar provisions into domestic law. The TPPA will be ratified into the Malaysian legislative framework and will have an overarching effect on how Malaysian entities conduct business, particularly in terms of extensions to time and protection.

Copyright

A simplistic definition of copyright is the right to have control over, and to stop others from, copying one’s work. The Copyright Act 1987 and the Copyright (Amendment) Act 2012 was enacted to oversee copyright laws within Malaysia. Section 7(1) of the Copyright Act 1987 allows for literary, musical and artistic works, films, sound recordings, broadcasts and derivative works thereof to be eligible for copyright protection. The period of protection differs based on the type of work that is produced, i.e. whether it is literary, musical or artistic.

The effect of ratifying the TPPA on Malaysian copyright law will be the extension of copyright terms from the current lifespan of more than 50 years to 70 years after the author’s death. In the case of a non-natural person, the term may be extended to between 95 and 120 years.

Internet Service Providers

According to the Copyright (Amendment) Act 2012, Section 43(E), internet service providers (ISPs) are not required to remove or disable access to infringing material unless they receive notification from the copyright owner. The effect of ratifying the TPPA will potentially require ISPs to expeditiously remove the content deemed as copyrighted material. This may lead to a potentially positive impact on curbing the piracy that has been rampant in the entertainment and software sector in Malaysia.

Trade Mark

Currently, Section 3(2)(a) of the Trade Marks Act of 1987 (TMA) defines the use of a mark as the “use of a printed or other visual representation of the mark”. This definition, which is confined to printed and visual presentations, will expand to include sounds and scents which can be trade marked with the ratification of the TPPA.

Additionally, the TPPA will make it mandatory for parties to include collective and certification marks as trade marks. This is a positive move because collective marks are crucial to business, as organisations are synonymous and identifiable with such marks. The TMA already affords protection to well-known marks outside Malaysia. Therefore, the TMA is compliant with the TPPA. In terms of classifying marks, the “Nice Agreement concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks” will no longer be the sole point of reference as the TPPA requires that the registry scrutinise the details of the specifications to determine the correct classification of the mark.

Pharmaceuticals

A protectionist stance is adopted by the TPPA on extending the duration of patents for medication. The justification is that it is more sustainable and beneficial for corporations to invest in developing new pharmaceutical drugs if their competitors are in a position to replicate cheaper generic drugs. Consequently, intellectual property legislation is used to protect and provide a level of assurance for corporations to invest in developing more effective pharmaceutical drugs.

Patent

The TPPA does not alter the patent term in Malaysia, as Malaysia had already adopted patent protection for a period of 20 years before the TPPA recognised such a duration, per Section 35 of Patent Act 1983. It is interesting to note that the patent protection period implemented in Malaysia is far longer than other contracting states’ patent protection period, which lasted approximately 10 years, prior to the TPPA.

Test Data Protection (Data Exclusivity)

Test data protection is the protection of pharmaceutical test data concerning the safety and efficacy of an innovative pharmaceutical drug. The TPPA grants signatories two ways to meet a stronger standard for effective market protection:

(i) to provide a minimum standard of eight years of data protection; or

(ii) to deliver a comparable outcome through a combination of at least five years of data protection measures with the country’s other measures.

Malaysia has opted to apply for the second option for biological test data, for the benefit of the generic drug market. Additionally, Malaysia provides an “access window” for test data protection, allowing the innovator to apply for the registration of pharmaceuticals in Malaysia within 18 months of the date the products obtained their first marketing approval in other contracting states. The purpose of this access window is to encourage pharmaceutical companies to market new drugs early to Malaysia, carving a path for affordable generic drugs to be marketed later on.

Conclusion

While all of the above provides a speculative insight into the potential impacts of the TPPA in various markets within Malaysia, the general opinion of Malaysian citizens towards the TPPA remains positive. All contracting states to the TPPA – including Malaysia – are gearing up for the upcoming wave, as the floodgates of the large-scale free trade movement begin to open, for the benefit of the world community at large.

OBG would like to thank Azmi & Associates’ Azmi Mohd Ali and Norhisham Abd Bahrin for their contribution to THE REPORT Malaysia 2016

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The Report: Malaysia 2016

Legal Framework chapter from The Report: Malaysia 2016

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