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.