Malaysia eases capital controls with 'exit tax'

Malaysia eases capital controls with 'exit tax'

KUALA LUMPUR (Agencies): Malaysian Finance Minister Daim Zainuddin announced Thursday an "exit tax" to allow foreign investors to take out their proceeds from the sale of securities, in a partial easing of capital controls.

"The new policy will allow portfolio investors to repatriate their capital and profits as well as encourage new capital inflows into the country," Daim said in a statement.

A 30 percent levy would be imposed on funds repatriated within seven months from September 1 last year when the one-year lock-in period was introduced, he said.

The levy is set at 20 percent for a period of between seven and nine months and 10 percent for a period of between nine and 12 months.

Daim said all profits made within the one-year holding period would not be taxed but earnings after the period would be subjected to a 10 percent repatriation levy. Dividends, interests and rentals would not be taxed.

Under the controls, a fixed exchange rate was adopted, external convertibility of the ringgit abandoned and foreign investors who sell securities were forced to wait one year before taking out the proceeds.

Analysts have expected the government to replace the one-year waiting period with an exit tax to prevent a huge outflow of capital in September when the lock-in period expires.

In a measure to woo new investors, Daim said no tax would be imposed on principal capital brought in by foreign investors from February 15 onwards.

But profits made by these investors would be subjected to a 30 percent levy if repatriated within a year from the date of gain, and lowered to 10 percent after the period.

"For purposes of control and monitoring, funds brought into Malaysia on or after February 15, 1999 will be placed in special external accounts to distinguish these funds from the existing external accounts," he said.

Daim said the one-year holding period had contributed significantly to the country's economic stability but the government decided to relax the rule following discussions with fund managers.

He said that the government would not review the present ringgit peg of 3.80 to the dollar.

Foreign funds, mostly from the United States, accounted for some 23 percent of the Kuala Lumpur Stock Exchange capitalization of 300 billion ringgit (US$78.9 billion), he said.

However, fund managers in Singapore said they won't be making a beeline to invest in Malaysia anytime soon despite the policy change.

While the exit tax offers foreign investors more flexibility in when they can take their cash out of Malaysia, fund managers said they're still being penalized for investing in the country.

"It's not going to attract new money," said Hong Kong-based David Chapman, senior manager of Towry Law Asia's asset management division.

"To invest there, you'd have to pay a 10 percent tax at the very best position. So you must view Malaysia as 10 percent better than other markets in Asia, when it's the worst."

A huge sell-off by foreigners in the Kuala Lumpur stock market is also unlikely for now, they added, because the tax doesn't favor short-term investors.

"People who've got money there will leave it there for the time being," Chapman said. "They won't pay the top exit tax."

Citing slowing economic growth and uncertainty over the stability of economic policies, fund managers said the prospects for Malaysia continue to be grim.