PETALING JAYA: The year 2020 has been more than just eventful, which has seen rubber glove companies scoring all time highs in share prices and earnings.
The share prices and net profit of glove makers in Malaysia grew Astronomically as the industry is the main beneficiary of the coronavirus (Covid-19) pandemic.
But with the bounty of profits, the immediate headache for the industry is a potential windfall tax levy, considering their steep jump in net profit.
Maybank IB Research is of the view that a feasible levy structure may be unveiled in the tabling of Budget 2021 on Nov 6.
It said the juxtaposition of supernormal profits being generated by the gloves sector and the government’s extremely challenging fiscal outlook raises the risk of windfall taxes being imposed on the gloves sector.
The research house estimated an increase of 10% in corporate tax payable by gloves manufacturers over the forecast supernormal profit period.
This would raise around RM4.2bil for the government over 2020 to 2022, or RM1.4bil annually.
“The powerful year-to-date share price rally in gloves stocks is fundamentally grounded in sharply higher volume demand and average selling prices (ASPs).
“Resulting supernormal profits are a potential source of revenue for the fiscally-constrained government as per the Windfall Profit Levy Act 1998, ” it said in a strategy note yesterday.
But an analyst with another research house told StarBiz that chances of a windfall tax on the rubber glove sector is highly unlikely at the moment without an official stance from Putrajaya.
“But if it is pushed through, the only advantage here is that it increases the government’s coffers.
“This may, however, hinder expansion plans by the industry players and they will instead move their plans out of Malaysia or worse, allow competitors from other countries to expand and take up some of our market share, ” said the analyst who declined to be named, citing sensitivity on the issue.
He stressed that as glove makers make record high earnings, their tax expenses based on the current rate of 24% would also be at record highs without the windfall tax.
He added that the industry grew around 10% annually, with average re-investments up to RM1bil annually for organic growth.
Maybank IB said the imposition of windfall taxes was not without precedent, being most recently raised by the government in 2008.
It also noted that the act allows the Finance Minister to submit a levy order to the Parliament for approval within 120 days.
The research house said a stumbling block for the government would be the lack of a clear return on capital gauge or product price benchmark as rubber gloves have multiple product grades and widely-varying ASPs unlike the palm oil industry with a single crude palm oil (CPO) price.
Back in 1998, the plantation windfall tax was approved by the Parliament during the stresses of the Asian Financial Crisis and this was justified by the fact that the plantation sector was making “windfall” gains due to the depreciation of the ringgit.
The windfall tax was based on the CPO price being above a specified threshold. Currently, this is RM2,500 per tonne for Peninsular Malaysia planters and RM3,000 per tonne for Sabah and Sarawak planters.
Ten years later during the Global Financial Crisis, the government’s finances were once again under strain, which led it to impose a windfall profit levy on independent power producers (IPPs), structured as a 30% windfall tax on return on asset in excess of 9%, computed based on earnings before interest and tax.
Maybank IB pointed out that this was scrapped after a month, replaced with a one-off payment to the government equivalent to a year’s windfall levy payment.
“On the other hand, the glove companies are all family-owned (moderating political and investment climate repercussions or ramifications) and do not pose a direct negative implication for the broader capital markets in a way the IPP bonds did, ” it said.
It added that a temporary hike in the corporate tax rate covering the forecast peak-pandemic supernormal profit period would be the most straightforward and transparent structure, given the operating and pricing complexities of the underlying business.
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