Abdullah stated in his 2008 budget speech that in future, companies registering in the Labuan offshore sector will have the option of having their offshore business income taxed under the Income Tax Act 1967, in addition to under the Labuan Offshore Business Activity Tax Act 1990.

"In the light of greater global competition, we need to ensure that Labuan remains competitive as an international offshore financial centre. Given that investors in Labuan undertake a wide range of financial services, a flexible tax regime is necessary," the Prime Minister explained.

The Labuan Offshore Business Activity Tax Act 1990 (as amended 2004) provides for the reduction or complete exemption of income tax in respect of certain business activities carried on by offshore companies in Labuan. Chargeable profits derived by an offshore company from an offshore trading activity are subject to tax at a rate of 3%. An offshore company which carries on an offshore non-trading activity is exempt from income tax altogether.

The Income Tax Act 1967 applies to any activity other than offshore business activity carried on by an offshore company, meaning that they pay normal taxes.

The Labuan IOFC, which celebrated its tenth anniversary in 2006, is home to over 300 financial institutions providing a comprehensive range of financial services, both conventional and Islamic, including offshore banking, investment banking, insurance and insurance-related activities, investment holding, trust, fund management and leasing. These institutions serve more than 5,500 offshore companies registered in the Labuan IOFC. In addition, the Labuan International Financial Exchange (LFX) further complements capital-raising activities in the IOFC, allowing for listing and trading of financial instruments by international issuers, especially from the Asia-Pacific region.

Abdullah also announced in his budget speech earlier this month a number of measures aimed at boosting the competitiveness of Malaysia as a business and investment location. These included an additional 1% cut in corporate tax to 25% effective 2009, and deregulation of the Islamic finance industry in line with the government's stated objective of creating one of the world's leading centres for Islamic finance.