Encouraging the Return of Talent: Evidence on Tax Incentives from Malaysia’s Returning Expert Program

High-skilled workers are continuously migrating. According to the World Bank, in 2010 there were approximately 45 million tertiary-educated migrants globally, which represents a 75 percent increase since 2000. High-skilled workers are essential for research, innovation, and development in international economies. Governments in both high-income and low-income countries recognize the importance of attracting and retaining global talent and have implemented policies to encourage the return-migration of highly skilled and educated individuals.

A common governmental practice is to establish preferential tax schemes for high-skilled workers, offering generous tax incentives to entice their high-skilled diaspora to return. Assessing the effectiveness of these tax-based incentive programs is essential to understanding questions of global movement of talent, brain drain, and efficacy of tax incentives. A new report from the World Bank looks at one example of a program to attract global talent, the Malaysian Returning Expert Program (REP), and assesses the impact of the tax incentive program on the probability that an individual returns to Malaysia.  

Key aspects of the program include a 15 percent income tax for five years and a tax exemption on the import of up to two cars. The main eligibility criterion for the program is whether the applicant has sufficient employment experience abroad. Analysis from the World Bank shows that the program attracts expatriates from the high end of the skill distribution. Approximately three-quarters of those who return through REP are in the top one percent of the Malaysian income distribution. Also, the program is large; the study estimates that the annual application rate for the REP program is around 25 percent of the annual outflow migration from Malaysia.  

Analysts at the World Bank developed a model to identify whether getting approved for REP has an impact on Malaysian expatriates’ decisions to return. Researchers evaluated two different groups of applicants. First, researchers looked at individuals who apply for REP after already receiving a job offer in Malaysia. Analysis finds that the average impact of the REP on the return probability of individuals with existing job offers was around 40 percent, with an impact possibly as large as 60 percentage points.

The second group of applicants pertains to those individuals who apply to REP without a job offer. In this group, benefits of the program only become available if the person finds employment in Malaysia. Researchers find that the REP program has a marginal, statistically insignificant effect on the probability of repatriation.

In order to assess the magnitude of the effect of REP further, researchers quantified the benefits of REP for all applicants. The study estimates an 11 percentage point increase in the return probability for all REP applications, regardless of whether they have a pre-existing job offer or not. These findings were consistent with a 2014 analysis of a similar program implemented in Denmark targeting high-skilled foreigners.

Finally, the report conducts a cost-benefit analysis of REP, and compares the costs of implementing the program to the fiscal benefits. The primary costs arise from foregone tax payments of the accepted applicants who would have returned to Malaysia (and paid full taxes) even without the program. The fiscal benefits occur because individuals return to Malaysia, invest in the economy, and pay income and consumption taxes. This analysis suggests a small net benefit of around $1,700 per applicant. The program is, therefore, relatively cost-effective.

Assessing the effectiveness of tax incentive programs on encouraging return migration is essential to understanding global talent movement and how economies work to attract and retain high-skilled individuals. The motivation for such programs arises from the positive externalities generated by the return of high-skilled expatriates in the greater economy. Looking at Malaysia’s Returning Expert Program, tax-incentives offer a promising solution to governments trying to entice their high-skilled diaspora to return.

Article source: Del Carpio, Ximena Vanessa, Ozden, Caglar, Testaverde, Mauro, Wagner, and Mathis Christoph. “Global Migration of Talent and Tax Incentives: Evidence from Malaysia’s Returning Expert Program.” World Bank Policy Research Working Paper, 2016.

Featured photo: cc/(leungchopan, photo ID: 185293169, from iStock by Getty Images)

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