Home NATION Reinstate Exemption of Palm Oil Export Tax

Reinstate Exemption of Palm Oil Export Tax

Reinstate Exemption of Palm Oil Export Tax
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By Charles F. Moreira, Editor

We ended our previous article – Minimal impact on Malaysia’s Palm Oil’ …Really? – on an optimistic note that the price of Malaysian crude palm oil (CPO) and fresh fruit bunches (FFB) would soon resume their uptrend after a transient temporary rocky patch.

Coupled with that, our optimism was bolstered by the confidence of Standard Chartered, ASEAN and South Asia Global Research chief economist Edward Lee, that since Malaysia’s exports of refined palm oil to India was relatively small compared to our overall export of close to 4.41 million tonnes of palm oil to India in 2019, India’s recent move would have a ‘minimal impact’ on Malaysia’s palm oil industry and exports.

To recap, after news of India’s restriction on the import of refined palm oil broke on 8 January 2010, the CPO price on the Malaysian Palm Oil Board’s (MPOB) website dipped by RM18 to RM3,043.50 per tonne from RM3,061.50 per tonne the previous day. It then rebounded to RM3,111.00 per tonne on 10 January, then pulled back to RM3,033.00 per tonne on 14 January – a price movement which was consistent with profit taking by commodity speculators.

However, contrary to our expectation that the CPO price would stabilise and return to a regular, mildly bullish uptrend, however the price had continued to drop each day to RM2,971.50  on 17 January.

Meanwhile, FFB prices of three grades across six regions across Malaysia – i.e. Northern, Central, Southern, East Coast, Sabah and Sarawak peaked on 13 January and dropped each consecutive trading day to 20 January.

FFBs are the oil palm fruit bunches from both large corporate and smallholder plantations which are sold to the palm oil mills and palm kernel mills which extract the CPO and palm kernel oil from them and smallholders are especially sensitive to a reduction in price of FFB.

Headwinds

Malaysia palm oil industry, especially the exporters, face challenges three major headwinds – namely:-

  • Reduction in international demand for palm oil due to India’s restriction on refine palm oil imports.
  • The strengthening of the Malaysian ringgit relative to the U.S. dollar from RM4.22 on 3 November 2019 to RM4.06 on 21 January 2020.
  • And, the end of exemption of export tax on CPO after 31 December 2019.

The India effect

According to a comprehensive Reuters article –  India’s import curbs deal big blow to Malaysian palm oil on 16 January 2020, Malaysia palm oil exports to India had dropped from over 500,000 tonnes on 1 August 2019 to under 100,000 tonnes on 1 December 2019 according to shipping data tracked by Refinitiv’s Eikon financial analysis data open platform. Over the same period, Indonesia’s palm oil exports to India rose from over 400,000 to over 600,000 tonnes.

The article also cited India’s Ministry of Commerce and Industry figures of India’s oil palm imports from Malaysia which showed similar quantities of imports from Malaysia and Indonesia as Refinitiv’s, with Malaysia’s share dropping from around 77% in May 2019 to around 15% in December 2019.

Another chart based on data sourced from Reuters News and Refinitiv Eikon showed that Malaysia’s exporters were selling their palm oil at prices US$50 below Indonesia.

Commerce Minister Piyush Goyal had said that India’s government had not imposed any restrictions specifically on Malaysia and neither was it contemplating any.

However, Indian government and industry sources had told Reuters that Prime Minister Narendra Modi’s Hindu nationalist government was seeking to target Malaysia after recent criticism of India by Malaysian Prime Minister Mahathir Mohamed.

According to a Reuters report from Mumbai on 13 January 2020, both Indian industry and government sources had told Reuters that India’s palm oil importers had effectively stopped all palm oil purchases from Malaysia after India’s government had privately urged them to boycott Malaysian palm oil following the diplomatic spat between the two countries.

“We could import CPO from Malaysia, but the government has warned: ‘Don’t come to us if your shipments get stuck,” a Mumbai-based trader told Reuters, adding “no one wants to see their shipments get stuck at ports”.

That trader also believes that in 2020, India’s palm oil purchases from Malaysia could fall below 1 million tonnes, even if some buyers make small shipments to fulfil old orders.

Also, four traders had told Reuters that Indian refiners and traders have shifted almost all palm oil purchases to Indonesia, despite having to pay a $10 per tonne premium over Malaysian prices.

Meanwhile, Malaysian palm oil futures extended losses on Monday after the Reuters story and closed down 1.4%.

A Reuters report on 20 January 2020 said, “Thousands of tonnes of refined palm oil are delayed or stuck at various Indian ports after the world’s biggest edible oil buyer placed restrictions on imports amid a diplomatic row with key supplier Malaysia, multiple sources told Reuters.”

However, a Bernama report of 20 January 2020 said,  “The Solvent Extractors’ Association (SEA) of India said it has not received any reports of refined palm oil cargoes from Malaysia being held up at India’s ports as a result of customs clearance”.

SEA executive director B.V. Mehta had told Bernama, “We have not received any information from our members that their cargoes are being held up”.

“Normally, our members would inform us and seek help, if they have problems with customs’ clearance,” Mehta added.

Stronger ringgit

Since most international trade transactions are paid for in U.S. dollars, a weaker ringgit relative to the dollar or a stronger dollar relative to the ringgit tends to favour Malaysian exporters since they can price their products or services either more competitively on world markets in dollar terms or they can maintain their dollar price and earn more in ringgit terms after conversion.

This latter scenario also tends to favour exporters listed on Bursa Malaysia – the Kuala Lumpur Stock Exchange, since their revenue and profits are quoted in ringgit in their quarterly and annual reports and more revenue and profit in ringgit tends to increase market demand for their companies’ shares which in turn tends to drive up their share price.

Conversely, a stronger ringgit relative to the dollar or a weaker dollar relative to the ringgit tends to result in the opposite for Malaysian companies which mostly sell their products or services overseas, since these will either be priced less competitively in dollar terms or if they maintain their dollar prices, they would earn fewer ringgit.

Export tax

Malaysia’s Ministry of Finance’s export duty exemption on crude palm oil (CPO) from May to December 2019 had expired at the end of last year.

According to the Royal Malaysian Customs’  Notification Of Values Of Crude Palm Oil  Under Section 12 (of the Customs Act 1967) for January 2020, displayed on the Malaysian Palm Oil Board (MPOB) website, the reference export value of CPO for January 2020 was stated as RM2,571.16 per tonne, which falls within the RM2,551 –RM2,700 tax band and subject to 5% export tax.

The Customs’ notice for February 2020 raised this reference value to  RM2,907.63 which falls within the RM2,851 –RM3,000 band which is subject to 6% export tax.

Throughout 2019, the monthly average prices of locally delivered CPO for the months of January through October were below the taxable threshold of RM2,250 per tonne, whilst the average prices for November and December last year were  RM2,493.50 and RM2,813.00 respectively which would have been liable to 5% and 6% export tax respectively if not for the tax exemption.

The Custom’s notices for November and December 2019 respectively listed these values as RM2,066.76 and RM2,193.14 respectively, both of which were below the RM2.250.00 taxable threshold. These values stated in the monthly Customs’ notices are based upon but do not equal the average CPO price for that month of the previous month.

Section 12 of the Customs Act 1967 states – “The Minister may, from time to time, by notification in the Gazette, fix, for the purpose of the levy and payment of customs duties, the value of any dutiable goods”.

So, since the Customs Department comes under the Ministry of Finance, the Minister of Finance has the authority to specify or repeal import and export duties as may be required for certain projects or purposes, especially of national, economic or societal importance, as well as under certain prevailing circumstances which impact an industry, including the reinstatement of export tax exemption on palm oil.

Meanwhile, according to a Bernama report on 17 December 2019, that effective Jan 1, 2020, a 3% windfall tax per tonne of FFB will be imposed on planters in Peninsular Malaysia if monthly CPO prices exceed RM2.500 per tonne, whilst their counterparts in Sabah and Sarawak will pay a 1.5% windfall tax will if monthly CPO prices exceed RM3,000 per tonne.

The windfall tax is calculated based upon the difference between the excess of the monthly average MPOB’s CPO price and the threshold price for Peninsular Malaysia for Sabah & Sarawak respectively.

Planters in Peninsular Malaysia will pay windfall tax based upon the formula:-

3% x Monthly FFB production in tonnes x (MPOB Malaysia Monthly Average CPO Price per tonne minus RM2,500 per tonne.

Their counterparts in Sabah and Sarawak will pay according to the formula:-

1.5% Monthly FFB production in tonnes x (MPOB Malaysia Monthly Average CPO Price per tonne minus RM3,000 per tonne.

However, on March 10, 2009, the threshold was revised to exempt small holders with plantations of below 100 acres or 40.46 hectares from having to pay the windfall levy.

Meanwhile, The Edge Markets of 17 December 2019 reported that Y.B. Puan Teresa Kok, Minister of Primary Industries has said that her Ministry had applied to the Ministry of Finance for the 3% windfall profit levy to be returned to her ministry, which would use the monies received to fund its biodiesel programme and help smallholders.

“All this while, the 3% is channelled to the consolidated fund under the Finance Ministry, we hope to get this fund over as a palm biodiesel stabilisation fund and we also wish to use some of it to do more promotion and help smallholders, so that smallholders benefit from the high price,” the minister said.

Despite the recent drop in CPO and FFB prices, however in the bigger picture, current prices since mid-2019 are in a “golden age” of sorts similar to prices in 2019 where monthly CPO prices ranged between RM2,629.50 and RM3,268.00 per tonne compared to RM1,794.50 in December 2018 and a daily price which was as low as RM1,403 per tonne in November 2008.

So OK. CPO prices are back at the high end right now and on the one hand, lower prices will make Malaysian palm oil more competitive on world markets but on the other would it help palm oil and palm kernel mills, as well as oil palm plantations both corporate and small holder if the Finance Minister would use his executive power granted him to reinstate export tax exemption on palm oil exports, given the current headwinds facing the industry?

Over to you – Y.B. Tuan Lim Guan Eng.

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