Malaysia plans to introduce 'exit tax' on foreign capital

Malaysia plans to introduce 'exit tax' on foreign capital

KUALA LUMPUR (Reuters): The Malaysian government looks sure to
relax capital controls by introducing an "exit tax" on foreign
portfolio investments that are repatriated, a government official
said on Thursday.

The government favors the introduction of an exit tax but
wants to be sure large sums of foreign investment would not be
pulled out once it is announced, the official, who asked not to
be identified, told Reuters.

"There is a unity of opinion in favor of an exit tax," the
official said. "The government is contemplating it but wants to
be reassured that huge amounts of money will not flow out."

The official said an exit tax had been scheduled to be
announced at mid-month but now looked likely to be delayed to
give authorities time to iron out differences over the
implementation.

"It's possible something will be announced in the first
quarter," the official said.

An exit tax would replace the existing holding period that
bars foreign investors from repatriating the principle of
portfolio investments until September 1, 1999, or 12 months from
the date of investment, whichever comes later.

Long-term investors who meet "most favored investor" status,
yet to be defined, would be exempt from the tax, creating a
disincentive for short-term hot money flows.

The government introduced the 12-month holding period as part
of capital controls that took effect last September and which
were aimed at insulating Malaysia's economy and the ringgit
currency from speculative flows.

The introduction of the holding period put a chill on foreign
investment in stocks and bonds as foreigners were reluctant to
keep their money locked into such investments for a long period.

The government now says the economy, in recession for the
first time in 13 years, has touched bottom, and it is keen to
clear away obstacles to a resumption of foreign portfolio
investment inflows.

Earlier this week, the government tinkered with the capital
controls. The central bank, Bank Negara, announced it would allow
repatriation of profits from "contra" trading, and allow
foreigners margin financing for buying shares.

"Contra" trading is the buying and selling of stock before the
five-day settlement period, allowing players to make or lose
money on the difference in the stock's price. They do not have to
put up money on actual share purchases.

The moves gave an immediate boost to share prices as some
foreign investors, particularly in Singapore, were enticed back
into the market.