The news
Windfall tax to help rein in inflation?
Malaysia may impose a windfall tax on industries least affected by inflation to help curb price pressures, Domestic Trade Minister Datuk Shahrir Samad said, as annual inflation climbed to a 15-month high in April. "One of the proposals that we have considered is to impose excess profit tax or windfall tax," he added. "The concept is to make sure that there is a fair distribution from groups whose incomes are not directly affected because of inflation." The minister declined to name which industries would be affected by the proposal."Whoever feels that they have a windfall, they will be taxed. It's part of the antiinflation approach that we have taken.
Additional tax to fund subsidies and development.
The minister said that such additional tax income would allow the government to maintain its development agenda without making a big cut to its subsidies for basic items, which is key to curbing runaway prices. "We want to ensure that government revenue will continue growing and its expenditure could still be channelled to subsidies. Also, we need extra income to fund developments," he added.
Timeline.
Shahrir said the government planned to unveil its blueprint to reform fuel subsidies by the end of this year. The government has estimated that subsidies for petrol and gas will rise to RM45bn in 2008, putting an unsustainable strain on its budget. "I would prefer more subsidies for food. As for subsidies for petrol, they must be better managed so that there is less leakage," Shahrir said.
Potential changes in palm oil taxes.
Shahrir said an anti-inflation committee chaired by the prime minister may also announce a reform to a windfall tax imposed on the palm oil sector to deal with complaints that the industry is overtaxed. He added that the ceiling prices on cooking oil will remain but the tax structure on oil palm planters will become "simpler and fair". He acknowledged that oil palm estate owners are complaining about heavy taxes. The planters are paying a few types of cess to the Malaysian Palm Oil Board and sales tax to the state governments of Sabah and Sarawak," Shahrir said. “There will be a new structure. The preference is that there should be lesser number or types of cess payment but a better one, so we can make it simpler and fairer," he said. However, it does not mean that they will pay less. The government has been subsidising cooking oil makers since last May by collecting a cess payment from big palm oil companies.
Comments
Planters may be hit.
The palm oil sector certainly falls under the category of industries that are least affected by inflation as the rise in CPO price has so far more than offset the increase in production costs stemming from higher fertiliser and operating costs. Furthermore, the listed planters have been reporting record earnings in the current results season.
History of windfall tax on planters.
If the government does impose a windfall tax on the planters, it will not be the first such tax. The 1999 Budget proposed a windfall tax of up to RM50 per tonne when CPO price exceeded RM2,000 per tonne. The windfall tax took effect on 1 Jan 1999 but was scrapped when CPO price went below RM2,000.
Figure 1: Previous windfall tax on crude palm oil and crude palm kernel oil
Price range (RM per tonne) Rate of levy (RM per tonne)
less than RM2,000 Nil
RM2,000 - RM2,050 The difference between the selling price
RM2,050 and above RM50
Not surprised by this news.
We are not surprised by the news of a possible tax. In our 11 Mar plantation report, we underscored the risks of potential additional taxes on planters if the government delays price increases for certain controlled items. In the same note, we lowered our P/E targets for Malaysian planters to account for this risk. However, whether it will be a flat or progressive windfall tax scheme and the potential quantum that the government is considering are unclear.
Windfall tax offset by lower cess collection?
We also believe that there is a high likelihood that the windfall tax may be introduced to offset partially or replace the current cooking oil cess collection scheme. Our belief that the cess may be lowered or modified soon is premised on the following recent newsflows: (1) a statement from the minister that the prime minister is working to reform the cess following complaints that the industry is overtaxed; (2) news that the palm oil industry is pushing hard for the removal of the cess, as highlighted in our 26 Mar sector report; and (3) a comment by Datuk Yong Teck Lee, former Chief Minister of Sabah and the president of The Sabah Progressive Party (SPP), a component party of Barisan Nasional, that one of the issues that they would like to see the federal government resolve is unfair taxes such as the cooking oil subsidy scheme, “an imprudent extension of federal laws to Sabah that are costly to the state”. He added that since the federal government pays for the fuel and rice subsidy, it is only right that it also pays for the cooking oil subsidy.
Potential changes to cess.
From our recent conversation with planters, we gathered that the suggestions for cess scheme modification include raising the current benchmark CPO price of RM1,500 per tonne used in calculating the cess collection. The Malaysian Palm Oil Board (MPOB) currently collects a special cooking oil cess of 2 sen per tonne of fresh fruit bunches for every RM1 per tonne increase in CPO price, as long as the price stays above RM1,500 a tonne. At current spot CPO price of RM3,580 per tonne, this is equivalent to a cess collection of around RM208 for every tonne of CPO produced or around 6% of the selling price. The formula may be modified, as suggested by the planters, to reduce cess collection and offset this through the introduction of a windfall tax. On top of this, the planters with estates based in Sabah and Sarawak pay 7.5% and 5% sales tax on CPO, respectively.
Valuation and recommendation
Potential impact on planters.
Taking into account the recent calls for the government to ease the tax burden on planters and the government’s need to raise funds for development and rising subsidy costs, we are of the view that the government may not significantly burden the planters with higher or additional taxes. Instead, we think that it may reassess the cooking oil subsidy, potentially reducing or replacing this tax with a windfall tax. Best-case scenario would be status quo for the overall tax burden on planters. Worst case, it could mirror Indonesia’s export tax, which is currently equivalent to 15% of selling price.
For Sabah planters, the current total tax burden of 6% on cess and 7.5% on Sabah export tax is only 1.5% (RM54 per tonne at current CPO price), which is less than the 15% export tax imposed on Indonesian planters. We also note that planters with estates in Peninsular Malaysia are currently exempted from state sales tax. If these are standardised by the federal government through the introduction of additional taxes on estates in Peninsular Malaysia and Sarawak, the negative impact on affected players like Sime Darby and KL Kepong will be more as their total planted oil palm estates are concentrated in Peninsular Malaysia.
What if a RM50 per tonne windfall tax is imposed?
We have undertaken a sensitivity analysis of the EPS impact of every RM50 per tonne windfall tax levy for all the planters we track, assuming no change in the cooking oil scheme. Our analysis shows that pure planters and those that have sold forward their crops would be hit most. Overall, the potential dilution of our FY09-10 EPS forecasts is 1-2.5% (see Figure 2). Hap Seng Plantation would be most affected as it is a pure upstream palm oil player while IOI Corp and Sime Darby would be least affected as they would be cushioned by downstream assets and non-plantation divisions. We also estimate that the federal government stands to collect net tax revenue of around RM600m, after deducting the loss in corporate tax collection from the planters and assuming a RM50 per tonne tax on CPO and MPOB’s output projection of 16.2m tonnes of CPO in 2008. Maintain OVERWEIGHT call. The news may weaken sentiment on Malaysian plantation stocks until the market gets more clarity on the new tax regime. We retain our OVERWEIGHT call on the sector as we do not expect the planters to be hit badly by the windfall tax assuming that the quantum is around the previous windfall tax of RM50. IOI Corp remains our top pick among the big-cap planters. Key re-rating catalysts for the sector are higher CPO price, rising oil prices and potential supply shortfall in key planting areas due to adverse weather conditions.
Figure 2: Impact of a RM50 per tonne windfall tax levy on FY09/10 EPS of planters
HSP 2.5%
Asiatic 2.2%
KLK 2.1%
IOI 1.1%
Sime 1.0%
filed: 22may.pdf
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