Wednesday, October 10, 2018

Why Capital Gains Tax Should Not Be Implemented


I have to reiterate why a Capital Gains Tax is a very bad idea for Malaysia.

Unique traits of Malaysia:
a) Very open economy


b) Ringgit has been weak, which actually has helped plenty of exporters but they are being very quiet about it
c) There are very very few safety nets for Malaysians unlike many developed countries, which means we should not overly burden the lower income group
d) We have a very simple tax code, let's not complicate it as its a major plus point for FDI
e) Our stock market has the largest portion of GDP that is listed compared to all the rest of the bourses in the world, that implies that it has a very high multiplier effect for the rest of the economy. Hence efforts must be made to preserve its vibrancy.



 Capital Gains Tax - Categorically no. The entrepreneurial spirit Malaysia is so proud of should never be curtailed, not even with a small capital gains tax. Being an open economy, we must allow the economy to function as freely as it can. This goes back to the (e) factor cited above. 

... in the USA if you sell a stock, you pay 15% (20% for high earners) of any profits you made over the time you held the stock. Those profits are known as capital gains, and the tax is called the capital gains tax. One exception: If you hold a stock for less than a year before you sell it, you'll have to pay your regular income tax rate on the gain - a rate that's higher than the capital gains tax. My gripe is that is you have capital gains tax, then you must also have loss deduction on taxable income ... but that only benefits people with income, what about those with no income (retirees). Please note that the local bourse has one of the highest retail market participation in the world.



The ramifications:

1) A huge amount of liquidity will be sucked out of the system. It will probably take at least 3-5 years for the market participants to get used to the CGT regime.

2) Might be a zero-sum game - You cannot have CGT without a corresponding reduction to taxable income when investors register losses. Who is to say you will get more WINNERS than LOSERS.

3) Cumbersome to report for tax returns and calculations. Do you withhold gains or do we have to save them for year-end? We already can see the problems arising from this.

4) Our local burse has one of the highest levels of retail participation among all global markets. Which is to imply that a substantial number of participants are retirees. You can whack 15% CGT on their stock gains, what about when they make losses? They have no other taxable income to deduct the losses from. Give them a 15% voucher for upcoming funeral services?

5) Like it or not, all markets need some level of "cowboy-ness" in it to generate liquidity and activity. Like it or not, a substantive portion of liquidity in the system emanates from the grey unregulated economy, for want of a better word. You impose CGT, all these funds will disappear overnight... who wants to report all transactions for tax purposes? Imagine a prolonged stock market trading at only 30% of average daily volume ... that would make imposing CGT counter-intuitive and disastrous.

6) Bearing in mind our local market has the highest level of GDP that is listed when compared to other bourses. That means there will be a huge multiplier effect up or down.


Back To The Drawing Board

Instead of imposing 20 new taxes to get a paltry amount... there's no other way than to list Petronas to buy a substantive breathing room for the next 5 years at least. RM200bn will help us a lot. Note - we have to list first before the mega Aramco.

Listing of Petronas - This is a brilliant idea. Last year's profit was RM45bn. Price of oil has climbed steadily this year, can extrapolate profits to RM50bn this year. Using 20x = RM1,000bn market cap. Government sells 20% = RM200bn. Although I am against selling vital resources, but we can get important local funds (PNB, EPF, etc.) to take up 6%, and let retailers take up another 4%. The company pays decent dividends. When our country's balance sheet is better, we may even consider buying back and taking Petronas private later on. 

No comments:

Why Capital Gains Tax Should Not Be Implemented

I have to reiterate why a Capital Gains Tax is a very bad idea for Malaysia. Unique traits of Malaysia: a) Very open economy b) Ringg...