Investors Brace for Malaysia Tax on Capital Gains, Consumers

(Bloomberg) -- Malaysia is keeping investors guessing as to what new taxes will be unveiled in next year’s budget. For now, the market is bracing for the worst: capital gains and consumption taxes.

Levies on returns from capital investments may worsen stock declines. The benchmark equity index hasn’t recovered from last week’s steepest plunge in four months, after Prime Minister Mahathir Mohamad announced the tax plans. A consumption levy may further constrain economic growth that had eased to the slowest pace in more than a year.

“Taxes will definitely be introduced especially on the rich and on consumption,” Geoffrey Ng, a director of Fortress Capital Asset Management Sdn., said by phone. Capital gains tax is “definitely a widespread worry among investors,” but it is unlikely as most markets in Southeast Asia do not have such taxes, he said.

Investors Brace for Malaysia Tax on Capital Gains, Consumers

Investors haven’t fully priced in any form of taxes so volatility could increase in the market, Ng said. Clarity may only come on Nov. 2, when Finance Minister Lim Guan Eng is set to reveal his plan to shore up state revenue in the 2019 budget speech.

The Southeast Asian nation is seeking new sources of income as it grapples with filling in the gap left by the replacement of a sweeping consumer tax with a more targeted levy. The government is also saddled with debt and liabilities exceeding 1 trillion ringgit ($241 billion), worsened by state guarantees on notes issued by troubled fund 1MDB.

Slowing economic growth is limiting the country’s options. The central bank lowered its forecast this year to about 5 percent, from 5.9 percent in 2017, after expansion slowed to 4.5 percent in the second quarter, which missed all economist estimates.

The FTSE Bursa Malaysia KLCI Index rose 0.2 percent on Wednesday, the smallest gain in Southeast Asia, compared to 0.8 percent rise in MSCI Asia Pacific Index. The gauge is down 3.1 percent for the year amid $2.4 billion in foreign outflows.

Capital Gains Tax

Thorough feasibility studies on a capital gains tax is necessary given the “massive impact” it may have on financial markets, Cynthia Lum, a Kuala Lumpur-based fund manager at BNP Paribas Asset Management, said by email. “With increased government’s focus on digitization, it will not be surprising to see new taxes introduced in the digital and e-commerce sectors,” she said.

Investors, who are also expecting levies on inheritance, may have some time to decide on what to do with their assets. The government may only introduce taxes on capital gains and bequests over the next few years if they’re found to be feasible, local newspaper The Star reported, citing unnamed sources.

A levy on capital gains “might make Malaysia less attractive and investors would then look for similar opportunities in other markets,” Danny Wong, chief executive officer at Areca Capital Sdn., said by phone from Kuala Lumpur.

©2018 Bloomberg L.P.