Malaysia may impose tax on palm oil to counter budget steps

Malaysia may impose tax on palm oil to counter budget steps

KUALA LUMPUR (Reuters): Malaysia is likely to impose taxes on palm oil, its leading export earner, in its budget this week to help offset an expansionary spending plan, analysts and traders said.

They expect Prime Minister Mahathir Mohamad, who is also first finance minister, to announce an export tax on refined palm oil or a sales tax on crude palm oil when he unveils the 1999 budget to parliament at 4 p.m. on Friday.

"I think there would be some form of tax on palm oil," said Quah Poh Keat, a senior tax partner at KPMG.

"We have to look at two directions. Firstly, palm oil producers have been making very good profits. Also, the government needs a lot of funds at this point and the palm oil sector is one likely area they will look into."

Analysts said the government may re-impose an export tax on refined palm oil lifted a few years ago to boost exports when local prices were low.

"The situation is different now. Prices are currently very high, so there's a possibility it may be re-imposed," said a trader in Kuala Lumpur.

Palm oil has become a convenient target now that the government, which had run budget surpluses for five consecutive years before 1998, is in the red.

Malaysia's crude palm oil prices are trading around 2,300 ringgit (US$605) a ton compared with 1,200 ringgit before the start of the Asian financial crisis, mainly because of a sharp depreciation in the ringgit currency which made local palm oil competitive in the export market.

Greg Feldberg, a plantation sector analyst at ABN-AMRO Asia Equity Research (Malaysia), said he expected the government to impose a 5 percent export tax on refined palm oil.

But some analysts said a sales tax on crude palm oil would be more likely.

"Duties may come in the form of tax on crude palm oil but not on refined products," said Nakul Rastogi, international trading manager at Pacific Inter-Link Sdn. Bhd.

Malaysia's palm oil export earnings for the first eight months of this year totaled 11.5 billion ringgit, up 74.4 percent over the same period in 1997.

Malaysia exported 7.4 million tons of palm oil last year, of its production of nine million tons.

Analysts said that at current prices, crude palm oil producers still stood to make hefty profits even after paying taxes.

Traders said reduced competition from Indonesia, the world's second largest producer and exporter of palm oil after Malaysia, would give the government more reason to impose taxes.

Indonesian palm oil exports have slowed after the government imposed export taxes of 60 percent on crude palm oil, 55 percent on RBD palm oil and palm olein and 50 percent on crude palm kernel oil.