Monday, June 8, 2009
Tax Insights - A column by Kang Beng Hoe
With revenue collection substantially reduced, bringing in goods and services tax is likely to be sooner rather than later.
I WAS present when Professor Glen Jenkins, as guest of the Harvard Club, spoke on value-added tax (VAT) some months ago.
This is the consumption tax which the Government had announced some years ago and was to be initially implemented in 2007 but was subsequently deferred.
The title of his talk, Controversies, Heresies and Challenges of a VAT, warned me to expect something different from the usual good things to be said of the tax.
Dr Jenkins is an eminent Canadian economist with a distinguished career, which included advising governments on the design and implementation of the VAT system.
The VAT is also known as the goods and services tax (GST) and the Malaysian Government decided to use this terminology probably because consumers at large, who will be the target of the tax, will find it easier to identify with what the tax is about.
The main question that Dr Jenkins addressed is whether the incidence of a VAT is regressive. The widely held view is that the VAT is regressive since the poor pay tax on a higher proportion of their income than the rich.
Put simply, a person who earns say RM3,000 a month has to spend a greater portion of it on living expenses, leaving less for savings and investments than someone who earns say RM30,000 a month.
Since VAT is imposed on consumer items, the impact of the tax as a proportion of income earned is greater on the low-income earner than the high-income earner.
Dr Jenkins disagrees on two counts. The first is premised on the fact that “high income people live longer in retirement than do poor people, hence they consume more and continue paying VAT after they stop earning income. On a life time basis, the VAT may appear not as regressive as it is measured as a share of current income.”
On the second, Dr Jenkins made the following points:
l The share of consumption subjected to tax as a percentage of wealth for wealthy households is much larger than for poor households.
l Due to the existence of a large informal sector that caters to the poor, the burden of the VAT in developing countries is progressive.
l The types of goods consumed by the poor (basic food, local transportation and housing) are often not cost effective for the tax administration to tax.
l Hence the burden of VAT is reduced.
In the Malaysian context, what he is saying is that the low income earner tends to do marketing at the stalls and pasar tani rather than the super or hypermarkets, to eat at stalls and the various hawker food outlets as well as shop at corner shops selling household wares.
These represent the “informal sector” and are outside or should be made to fall outside the tax net. This could be done by setting a high threshold for the tax i.e. by making only those with annual sales of, say RM1.5mil, being required to collect the tax.
Thus the higher the threshold is set, the larger the informal sector becomes and more poor people will be spared the burden of the tax. Dr Jenkins cites evidence from a survey carried out in the Dominican Republic.
The audience at the talk included senior technocrats charged with designing and bringing on board the GST and one can be sure that this message will be conveyed to the policy makers.
Having been sold on the fact that we need both more tax revenue and better revenue systems and GST is the best form of general consumption tax available, these decision makers remain concerned over the often held view that the poor would suffer most under this tax.
All this is well and good but should we be worrying about tax in these difficult times when there are other priorities? Malaysia’s budget deficit for 2009 was initially projected to reach 4.8% of gross domestic product (GDP), the highest since 2003 when it was at 5%.
With the second stimulus package of RM60bil, the deficit is expected to amount to 7.6% of GDP. The Finance Minister, when he was Deputy Prime Minister, was quoted as saying “a deficit of more than 5% is tolerable as long as it is only one or two years.”
Does this not give us a clue that the GST has to be brought in within such a time frame if we are to reduce our deficit?
The need to enhance the Government’s revenue base has become crucial with the economic slowdown being broad-based and the petroleum and palm oil sectors no longer contributing at past levels – GST is the inevitable choice.
·Kang Beng Hoe is executive director of TAXAND MALAYSIA Sdn Bhd, a member firm of the TAXAND Network of independent tax firms worldwide. The views expressed do not necessarily represent those of the firm.
Tuesday, May 5, 2009
Monday, April 27, 2009
Malaysia led the Asian move to embrace REITs in the early 1990s, but the fledgling market of three small "property trust funds" that listed at that time was marred by a lack of tax incentives for investors, relatively low yields and capital gains and asset overvaluation.
A property market crash during the 1997-98 Asian economic crisis, which still left vacancy rates of 18% at Kuala Lumpur offices and 16% at the city's shopping malls eight years later, worsened matters.
But with one look over the shoulder at neighboring Singapore, Malaysia decided in 2004 to try again to foster a REIT market, allowing local investors in trusts to be taxed on dividends at their personal tax rate rather than the previously uniform 28% REITs were also allowed to buy buildings abroad to enhance returns.
Authorities hoped a rush of property trusts would draw money from the Middle East to the market. But analysts said Malaysia, which is trying to carve out a niche for Islamic finance, would have to do away with the 28% withholding tax it charged on dividends paid to foreign investors before that would happen.
"For Arabs, tax is taboo," said Fazlur Rahman Kamsani, head of regional Islamic finance at property consultants DTZ. "They'll just come and say, `I don't pay tax in my country.' They love Malaysia, but the tax regime would have to be tailor-made to be competitive."
In late 2006, the Malaysian government reconsidered the tax issue, and was proposing to cut withholding tax to 15% for individual investors and domestic institutions and to 20% for foreign institutional investors.
With oil profits and much investment pulled from the US in recent years, analysts were saying in 2005 that the Middle East had around $750 billion of private assets scouring the world for new ideas. The Institute of International Finance estimated that Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar and Bahrain would export at least $450 billion of capital just in 2006 and 2007.
REITs, because they essentially pay rent to investors, are an attractive option because the listed securities are a natural fit for sharia, or Islamic law, which shuns interest payments and speculation. Trusts that want to be sharia compliant cannot have tenants involved in manufacturing and handling pork products, banking and insurance, alcohol, tobacco, weapons or pornography. As a result, serviced apartments or industrial trusts tend to present fewer problems than shopping malls and offices.
In Malaysia, the first trust to list after the 2004 rule changes was Axis REIT, which originally owned five commercial industrial buildings in Petaling Jaya and Shah Alam, housing multinational companies such as Fuji Xerox, Johnson & Johnson and Electrolux. Unlike previous Malaysian trusts, Axis set out from the beginning to be an active REIT, promising to increase its assets rapidly after listing on the stock market by buying up warehouses yielding 7-8%.
By September 2006, Axis had seen its share price increase 42% from its IPO in early 2005, with the addition of four buildings to bring its net asset value to 400 million ringgit ($109 million). At that time, the trust was trading at a 7% Yield, about 280 basis points above 10-year bonds.
Stewart LaBrooy, executive director of Axis REIT's management firm, said the trust planned to double its assets by the end of 2007 to about one billion ringgit.
“We've consistently bought below market prices, around 10% below,” LaBrooy said, “ Our directors are well linked and are always finding nuggets.”
Axis would concentrate its acquisition efforts on Malaysia, where business and logistic park properties were yielding about 7%. But Indonesia, where some buildings are giving 15% yields, was also enticing, La Brooy added.
"There are some nice properties in Jakarta and the yields are phenomenal,” he said, "But there's a huge currency risk issue."
Although the Malaysian market is small, worth about $650 million in later 2006, it had some of the most interesting issuance.
The Al 'Aqar KPJ REIT owns hospitals and Boustead Holdings, and its property arm was planning in late 2006 to sell 500 million ringgit worth of palm oil plantation assets into an Islamic REIT. Hotel owner Tradewinds Corp. Bhd. and YTL Land, which owns shopping Centers and the JW Marriot hotel, were both mulling spinning off trusts.
In December 2006 Singapore's CapitaLand also stepped into the fray, saying it planned to raise as much as $42.2 million in a Kuala Lumpur REIT listing of Malaysian commercial buildings The developer had teamed up with Malaysian real estate firm Quill Group to form the Quill Capita Trust, which was expected to generate an initial distribution yield of 7.14%.
“It’s getting to be a reall potpourri,” LaBrooy said.
Monday, April 20, 2009
PETALING JAYA: Malayan Banking Bhd (Maybank) and Permodalan Nasional Bhd (PNB) have jointly launched the country’s first online facility for making additional investments in Amanah Saham Bumiputra (ASB) units.
With this facility, ASB investors can top up their ASB account online via Maybank2u.com, without the need to visit a Maybank branch or Amanah Saham Nasional Bhd office.
The new service was launched by Prime Minister Datuk Seri Najib Tun Razak, after the official opening of the Minggu Saham Amanah Malaysia in Johor Baru yesterday.
A unique feature of this service is that it accepts additional investments to third party ASB accounts, thus allowing family members or guardians to invest for their loved ones.
PNB chairman Tun Ahmad Sarji said in a statement that the new service underscored PNB’s commitment towards making unit trust investment accessible to all. “The digital generation is comfortable with using the Internet for all manner of transactions, so this step is timely in capturing the evolving needs of a new generation of Malaysians,” he added.
Investors who wish to use the online service must register as a Maybank2u.com customer and have an active ASB membership number.
The investor is only required to enter the ASB membership number, a security Transaction Authorisation Code and select his savings or current account to pay for the additional purchases.
The minimum investment amount is RM1 and the maximum is RM200,000.
Monday, April 13, 2009
PETALING JAYA: The first batch of the dual-series RM2.5bil Islamic bonds, which offer returns of 5% per year, is open for sale today.
Applications can be made at any commercial or Islamic bank, or development financial institution in the country from today to May 13. Allocation is on a first-come, first-served basis.
The minimal allocation is RM1,000, while the maximum value is capped at RM50,000.
The first series of this Islamic bond, called Sukuk Simpanan Rakyat (SSR) 01/2009, is part of the Government’s RM60bil stimulus package announced on March 10, where up to RM5bil in saving bonds will be issued this year for people aged 21 and above, and with a maturity period of three years.
This programme is designed for Malaysian citizens as an alternative savings vehicle providing double the current fixed deposit rates, with option for account holders to withdraw their money any time.
Features include flexibility for holders to redeem as early as the first quarterly profit payment, including profits, and without an early exit penalty.
Sunday, March 22, 2009
By YAP LENG KUEN
“The Dow Jones was 14,000 at its highest. Today, it is around 7,000. We expect to recover the bulk of our investments when the Dow Jones goes to 9,000,” said EPF CEO Datuk Azlan Zainol.
The EPF has, so far, invested RM16bil overseas on a staggered basis in the five major financial markets – the US, Britain, Australia, Singapore and Japan.
However, he expects the markets to possibly recover only next year. Yields for Malaysian Government Securities (MGS) have also come off. In 2009, about RM16bil to RM17bil of MGS will mature and be replaced at today’s rate.
Last year, in July-August, it was possible to get 4%-5% for 10-year money, but that has dropped to 3.5%. Companies are also scaling back on dividends.
This year, he said, would continue to be difficult and the fund hopes to be able to maintain its dividend payment of between 4% and 4.5%. “Our policy is to give out everything we earn in the form of dividends. We do not have any reserves,’’ he said.
As far as gross income is concerned, the EPF, which manages RM340bil of funds, performed better than 2007 – gross income was RM19.96bil compared with RM18.24bil.
The big increase is in provisions which was RM515mil in 2007 compared with RM4.69bil last year.
Out of that amount, about RM3bil is provided for overseas investments. “Our policy is to provide in full for every diminution in value in our investments overseas,’’ Azlan said in response to queries from StarBiz.
In Malaysia, if there is a stock with more than 50% loss, the EPF will provide for 25% of it, spread over a four-year period.
“We are more conservative abroad because that is everybody’s market ... anything can happen. Locally, we roughly know (the local conditions),’’ said Azlan.
He expressed disappointment at some of suggestions posted on the blogs. “There is a blog that says the RM4.6bil provision that we made was because we lent to ValueCap Sdn Bhd. That is a gross accusation ... very, very unfair. That is not the truth,’’ he said.
Last year, the EPF had provided a RM5bil loan to government-controlled ValueCap which was set up to undertake investments on the stock exchange.
“As far as our investments are concerned, we are strong internally. What happens outside is a global issue. Our risk management and people are in place. There will be no major changes this year or the next,’’ he said.
In terms of EPF’s asset allocation, it is based on advice from its consultants and its proportion of investments in equity to fixed income is, according to Azlan, a proven formula.
Currently, Azlan as the CEO, assumes direct oversight of the fund’s investments. He is looking for a new head of investments who would probably be an outsider. The former deputy chief executive of investments, Johari Abdul Muid, has moved on to head the strategic planning unit.
“Johari will be responsible for looking into the second phase of transformation for the EPF,’’ said Azlan. The division also looks into retirement benefits and pension fund reforms in the country.
“The retirement money for Malaysians will not be enough. It has been three weeks since he is at the new position and he has done a very good job,’’ Azlan said in response to queries from StarBiz regarding Johari’s move to strategic planning.
Insiders added that it was part of a reorganisation to strengthen certain divisions that also saw new heads for property, withdrawals and call centre.
The dividend of 5.8% for 2007 has come down to 4.5% for last year.
Due to the large provision made, net income has slipped from RM16.87bil in 2007 to RM14.3bil last year. Costs have also gone up – to pay 1% dividend cost RM2.89bil in 2007 compared with RM3.18bil currently.
Gross income from investments in MGS and equivalents was higher by 5% at RM5.75bil last year. Investments in private debt securities and loans yielded a higher gross income of RM5.59bil or 13%.
With the lowering of fixed deposit rates, gross income from the money market went down by 25% to RM694mil.
Gross income from external managers for both domestic and global equities dropped by 43% to RM767mil and by 254% to a loss of RM194mil respectively. External managers were more prepared to cut loss.
However, income from internal managers showed an increase of 33% to RM6.27bil and 123% to RM439mil respectively.
The EPF is heavily invested in local banks with stakes ranging from 13.6% (Malayan Banking Bhd) to 2.8% (Affin Holdings Bhd).
“In Malaysia, big caps like Sime Darby, IOI Corp and Public Bank have all experienced huge drops in market cap. Tell me, how do we pay 7% or 8% dividend?’’ he asked.