Economists warn that without clear tax rules, the Johor-Singapore SEZ can draw opportunists instead of innovators
[KUALA LUMPUR] Without clear and predictable tax rules, the Johor-Singapore Special Economic Zone (JS-SEZ) could risk becoming a hub for regulatory arbitrage instead of the high-value investment it promises, warned economists and industry leaders.
Their concern follows the launch of a report by boutique consulting firm Center for Market Education (CME) at a policy forum in Kuala Lumpur more than a week ago, which said confusing and inconsistent tax policies erode trust and push investors away.
Although the forum centred on Asean’s wider tax systems and illicit trade, economists later told The Business Times that its findings hit close to home, offering lessons that are directly relevant to the Johor-Singapore SEZ.
Malaysia’s experience with tobacco excise policy, they said, is a cautionary tale. When duties were raised by 43 per cent in 2015, contraband cigarette market share surged from 36.9 per cent to 52.3 per cent within a year, and nearly 73 per cent by 2020.
CME chief executive Dr Carmelo Ferlito said the SEZ must be built on a “generally favourable ecosystem” if it is to succeed. “If it is conceived in isolation, it won’t produce the expected results,” he said. “This should be the occasion not only to harmonise Johor and Singapore – in a virtuous direction – but the entire Malaysian ecosystem.”
Policy alignment is essential
In his April keynote address at the JS-SEZ Joint Business and Investment Forum, Minister for Trade and Industry Gan Kim Yong called the initiative “both important and timely”, citing its role in strengthening supply chains and helping businesses adapt to global volatility.
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He said Singapore and Malaysia would streamline processes and improve connectivity to make the zone more dynamic and resilient, creating good jobs on both sides of the Causeway.
Johor Corporation (JCorp), which is closely involved in shaping the zone, said investors are focused not just on fiscal policy but on long-term clarity around infrastructure, talent and regulatory frameworks.
“Tax predictability is important, but investor confidence also depends on infrastructure, talent, and a supportive ecosystem that enables long-term planning,” said JCorp chief financial officer Rozaini Mohd Sani.
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He added that the zone is about complementarity rather than absolute parity, adding: “Singapore provides access to global capital, advanced services and connectivity, while Johor provides scalable land, future-ready industrial ecosystems and a deepening talent pool.”
Clarity over rates
Tax advisers agree that clarity is more important than low rates for companies weighing SEZ participation.
“It’s important to recognise that the JS-SEZ is a distinct economic zone,” said Dr Veerinderjeet Singh, senior adviser on tax policy at KPMG Malaysia. “What is done there in terms of tax and economic incentives is not reflective of what happens across the two countries. The key is ensuring that the SEZ framework itself provides certainty so that investments are made with confidence.”
He added that Singapore-Malaysia collaboration could serve as a model for Asean. “It’s time Asean looks cohesively at harmonising their tax systems over the long term, as that will surely motivate greater cross-border investment.” Most Asean members remain focused on information-sharing rather than harmonisation, he said, making the JS-SEZ a potential test case for deeper regional coordination.
Dr Ferlito warned that enforcement capacity – not just tax coordination – will determine the SEZ’s success. “Illicit trade is made of an ecosystem which includes public institutions that benefit from it,” he said. “True harmonisation would mean a common enforcement effort. Without that, the SEZ risks creating opportunities for arbitrage rather than closing them.”
For the JS-SEZ, the stakes are high. Done right, a predictable and coordinated tax regime could help the zone deliver on its promise as a magnet for high-value investment and innovation.
Done poorly, it risks opening the door to arbitrage and illicit trade – the same unintended consequences that turned Malaysia’s tobacco excise policy into a cautionary tale.
