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Potential impact of additional taxes
■ Malaysia mulls capital gains tax and one-off higher tax rate on windfall profit.
■ If the government imposes taxes on gains from trading shares in Bursa
Malaysia, this will be negative as it will make Malaysia less competitive.
■ For every 1%-pt in tax rate imposed on KLCI companies, it could reduce our
2022F KLCI EPS by 1% and our end-KLCI target for 2021F of by 15pts.

Potential capital gains tax on shares and windfall tax

Deputy Finance Minister II Yamani Hafez Musa, yesterday in Parliament, said Putrajaya is studying the feasibility of implementing a capital gains tax, which was proposed by several Members of Parliament (MPs) during the latest parliamentary sitting as part of efforts to replenish government funds spent on combating the Covid-19 pandemic. The government is looking at a few ways in which it can increase its revenue, including implementing the taxing of capital gains on shares and also imposing a one-off higher tax rate on companies that have obtained extraordinary profits during the pandemic. He said the extra revenue accrued by the taxes would be channelled towards recovery programmes and activities for selected target groups.

Seeking stakeholders views on the potential taxes

According to Yamani Hafez, the government will consider the views and feedback of affected stakeholders to ascertain the effects of imposing these taxes so that it does not affect Malaysia’s economic standing and competitiveness, specifically in attracting foreign investments. Yamani Hafez added that the government is finding a workable solution to implement an interest-free loan moratorium for borrowers and is still in talks with financial institutions as this involves a commercial decision between bank managements. “The ministry wants a workable solution which would take into account the long-term effects on borrowers, depositors, investors, financial institutions and the economy,” he said.

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Negative for equity market if implemented

The proposals for Malaysia to implement capital gains tax is not new. In Nov 2020, Inland Revenue Board CEO Datuk Seri Sabin Samitah said the government should look at implementing the capital gains tax to broaden its tax base and increase revenues. He added that the introduction of a capital gains tax would be a good measure of ensuring equity and fairness in the tax system. Sabin explained that Malaysia’s existing tax structure base is already relatively narrow as it relies on corporate income tax, personal income tax and petroleum tax; the latter has seen a slight drop due to oil price volatility. We are of the view that should the government decide to impose a capital gains tax on the trading of shares in the Malaysian stock exchange by retail and institutional investors, this will be negative for the Malaysian equity market. This is because Malaysia will become less competitive due to the additional taxes, which could lead to further outflow of foreign funds. We gather that Indonesia, Singapore and Thailand currently do not impose capital gains taxes on the trading of shares on their stock exchanges. There is also the possibility of a capital gains tax being introduced in Malaysia, but exemption will be given for the gain from sale of shares listed on the stock exchange as practiced by other countries to stay competitive. Meanwhile, it is unclear what potential mechanism the government will apply to identify companies/sectors that have achieved extraordinary profit to apply the one-off windfall tax potentially. This is because some companies could be achieving high earnings growth in 2021F due to a low earnings base. However, if this one-off tax is implemented, investors are likely to identify gloves, petrochemicals, and commodity sectors as potential sectors that could be affected by the windfall tax. We estimate roughly that every 1%-pt increase in the tax rate for companies in the KLCI could shave around 1% off our earnings estimate for KLCI for 2022F and 15 points from our end-2021F KLCI target of 1,629 points. These concerns could dampen near-term sentiment on the market till Budget 2022 is announced on 29 Oct 2021. The KLCI has retreated 72 points (or 4.4%) from its recent peak of 1,601 on 30 Aug to 1,529 points yesterday. We attribute the decline to weaker global markets and concerns over the potential implementation of additional taxes.