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.