Bersama Malaysia: Microsoft Commits US$1 Billion Investment to Establish Data Center in Malaysia

Posted by Written by Lisa Prodent Reading Time: 5 minutes
  • Microsoft is establishing its first data center in Malaysia, which is expected to create 19,000 jobs and generate US$4.6 billion in revenue for the country.
  • The government hopes this initiative will help skill an additional one million Malaysians for IT, artificial intelligence (AI), and cloud-services jobs by 2030.
  • The government aims to establish a favorable tax system to stimulate foreign high-tech and digital investments. For the time being, companies can benefit from green data center incentives.

The Malaysia Investment Development Authority (MIDA) announced on April 20, this year, that Microsoft will establish its first data center in the Greater Kuala Lumpur area. The project is estimated to cost US$1 billion.

The data center is a core part of the “Bersama Malaysia” (Together with Malaysia) initiative launched by the IT giant to support Malaysia’s economic growth.

What is the MyDigital plan launched by the Malaysian government?

Microsoft’s billion-dollar investment is among the first concrete steps in supporting the Malaysian government’s agenda – “MyDigital” – to digitalize the country’s economic and social sectors and transform Malaysia into a regional leader in the digital economy.

One of the objectives behind the MyDigital plan is to establish a transparent and fit-for-purpose tax framework to broaden the tax base for fiscal authorities, as well as to better capture revenue from the digital economy.

The government plans to issue a fiscal incentives package to lure more digital investments by 2025, in addition to the environmental incentives already granted for green data centers.

Microsoft’s turnkey data center project – based on a public-private partnership – is expected to generate approximately US$4.6 billion in revenues for the ecosystem of cloud-consuming customers and local partners in the next four years.

This should be an encouraging sign for future investors; moreover, for Malaysia, this influx of investment will be welcomed after the pandemic caused FDI to decline by 56 percent in 2020.

How will Microsoft’s data center impact future technology investments in Malaysia?

Allowing the installation of a data center is a way to keep pace with the goals as Malaysia will benefit from Microsoft’s technology transfers.

Besides, the country expects to see a significant increase in the number of skilled Malaysians as a direct consequence of Microsoft’s move.

Under the MyDigital blueprint, the Malaysian government aims to improve digital literacy, create high-income jobs, and enable business sectors to better compete on the global stage through the efficiency of operations.  

The pandemic has strongly accelerated the global transition from brick-and-mortar business to e-commerce. COVID-19 has led to faster Internet penetration worldwide and shifting to cloud and digital activities has become imperative. According to the E-conomy 2020 report by Bain & Co, Temasek, and Google, Malaysia’s internet economy was valued at US$11.4 billion in gross merchandise value (GMV) in 2020, an increase from US$10.7 billion in 2019. By 2025, the country’s internet economy is expected to reach US$30 billion in GMV.

To ensure the smooth continuity of economic activities in Malaysia, the government has supported tech giants to increase expand their local data and cloud technology capacity.

Upskilling local workforce

Malaysia offers significant comparative advantages in terms of its human resources; the labor force is relatively inexpensive and skillsets are continuously improving. However, the lack of skilled talent in the field of digital technology remains an issue to overcome.

Therefore, in addition to the short-term creation of 19,000 jobs, Microsoft should – by 2030 – train one million Malaysians in the cloud, artificial intelligence (AI), and IT services. The government is counting on the growing number of skilled scientists, specialists, and developers in the territory to increase innovation and productivity.

Collaboration with local companies

Microsoft’s data center installation will rely on both public and private sector partnerships, with the government hoping this will lead to a resilient, innovative, and inclusive digital Malaysia.

The collaboration between the government and Microsoft first led to the creation of the MyDigital Alliance Leadership Council – a shared-interests platform whose purpose is to set up digitally-driven policies and recommendations for high-tech enterprises. Its main view will be to transform the Malaysian digital legislative environment while considering the private sector’s demands, concerns, and expertise.

Microsoft is also working alongside Malaysian state-owned companies – such as the oil giant Petronas and the mobile telecommunications provider Celcom – to meet the data center’s energy and other resource needs. Similarly, the electricity required for the structure will be supplied by local companies.

The project will also meet the government’s aspiration to accelerate the digitalization in its state apparatus as Microsoft has already signed contracts with the Malaysian public services for the provision of IT and cloud services.

Malaysia’s potential to become a regional data hub

In the long term, Malaysia plans to become a regional data hub leader, with empowered capacities and abilities in big data, AI, and the internet of things (IoT) to rival Singapore, Thailand, and Indonesia. Such ambition is already supported by specific green incentives and should soon be accompanied by a brand-new incentive package to lure more high-tech investments.

Microsoft’s data center is expected to pave the way for increased foreign high-tech investments. And, as Malaysia pushes to become the next regional digital products and solutions provider, data center investments in Southeast Asia are projected to grow by eight percent between 2021 and 2025.

Given these trends and government-industry objectives, Malaysia is also banking on the entry of more high-tech giants into its territory. Kuala Lumpur was already hosting several data centers belonging to Zenlayer, AIMS, and NTT Ltd, three leading providers of IT and technology services. However, Microsoft’s investment will improve Malaysia’s standing in the highly competitive data center market in the region.  

To ensure fair competition, Malaysia also granted conditional approvals in February this year to Amazon Web Services, Google Cloud, and Telekom Malaysia to set up data centers and cloud services in the country. In addition, Malaysia plans to attract five unicorns – domestic or foreign – to its digital industry cluster by 2030.

However, to become a digital regional leader, Malaysia needs to enhance its attractiveness to foreign investors. The country has a tremendous opportunity to fortify itself as a preferred destination for technology companies and capture some of the region’s US$100 billion internet economy.

What are the current benefits for green data centers? 

There are specific incentives that support green high-tech activities, which benefit the Malaysian economy. Companies undertaking data center projects involving certified green products, energy, equipment, and solutions can benefit from attractive tax deductions on the investment – if the request is made before the end of 2023.

Under the Green Technology Incentive package, investors can receive:

  • A Green Investment Tax Allowance (GITA) of 100 percent of qualifying capital expenditure for three years offset against 70 percent of statutory income over each fiscal year. A company is entitled to the GITA assets when it purchases green assets listed under the MyHIJAU Directory – such as electric vehicles, thermal or solar-air appliances, or an energy-efficient transformer.
  • A Green Investment Tax Allowance (GITA) (GITA) for companies undertaking a green technology project. Such projects must be certified with a “Green Building Certificate” and implies the purchase of green energy or solutions.
  • A Green Income Tax Exemption (GITE) of 70 percent of statutory income for three years for qualifying green service provider companies. The GITE concerns services listed under the MyHIJAU Directory – such as system design, feasibility study, advisory, consultancy, testing, and commissioning services.

Further information can be found in the Guideline for Green Technology Tax Incentive from the Malaysian Green Technology and Climate Change Center.

As a result, Microsoft could benefit from green incentives as the data center is to be run by local electricity companies.

A targeted digital incentive investment plan expected

To overcome the FDI shortfall experienced in 2020, Malaysia plans to overhaul its tax system by 2025, targeting international data companies willing to set up data hosting facilities – as promoted by the MyDigital initiative.

It will encourage enterprises – especially micro, small, and medium-sized enterprises (MSME’s) – to invest in cybersecurity, offering tax reductions.

In addition, by 2023-2025, companies upskilling their Malaysian workforce in cybersecurity, AI, data analytics, system integration, and other relevant digital competencies – will be granted tax benefits.

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