KUALA LUMPUR (Nov 1): CGS-CIMB Research expects the Budget 2022 prosperity tax to negatively impact 2022 earnings.
It gathered that the one-off windfall tax will be levied at the company level (local subsidiaries) rather than the group and will not impact companies with pioneer status or other tax exemption status.
As such, it pointed out that companies that own multiple subsidiaries with each earning less than RM100 million will not be impacted, while those companies that derive most of their earnings from foreign subsidiaries will be least impacted.
“After considering the 'prosperity tax', FBM KLCI earnings could potentially fall by 6% in 2022 versus our current forecast of a 0.5% growth. Also, there could be downside risk to 2022 earnings if companies decide to front-load expenses, delay progress billings/income recognition and/or raise provisions to lower their tax expenses. Some companies could reduce dividend payments/payouts due to the higher taxes,” it said in a report on Sunday (Oct 31).
CGS-CIMB has identified banks, brewers as well as tobacco, utility, glove, telco, auto, palm oil and technology players as those impacted by this tax.
Its rough estimate, which involved a quick dive into the tax and corporate structure of KLCI constituents, suggested that this could lower CGS-CIMB’s 2022 KLCI earnings forecast by RM4.4 billion or 6.6% (in the worst-case scenario) and cut its end-2021 KLCI target of 1,629 by 108 points to 1,521 (based on 14.5 times 2022 price-earnings).
The prosperity tax is a one-off tax measure introduced by the federal government in Budget 2022, which will see earnings above the RM100 million mark be taxed at a rate of 33% instead of the blanket 24% rate previously.
CGS-CIMB was also negatively surprised by the move to raise the stamp duty rate of contract notes for the trading of shares on Bursa Malaysia to 0.15% (equivalent to RM1.50 for every RM1,000) from 0.1%, and the decision to abolish the stamp duty limit of RM200 (introduced in 2003) for each related contract note effective Jan 1, 2022.
This, CGS-CIMB said, is partially offset by the exemption from the 6% service tax on brokerage services related to the trading of shares.
“We are negative on this as it will raise the transaction cost for the trading of shares. We estimate this could raise total transaction cost from 0.18% to 0.32% of value of trade of RM5 million assuming a brokerage rate of 0.15%. This is because the increase in stamp duty cost to RM7,500 from a max value of RM200 more than offsets the savings from the service tax of RM400. The higher transaction cost could push high-volume stock market traders to venture into other stock exchanges with lower transaction cost and dampen trading activities in the local market. This is likely to be negative for stockbrokers in Malaysia and Bursa,” it added.
See more Budget 2022 highlights here.