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Tuesday, 2 May 2017

Malaysia's battle against Illicit Outflow of Funds and those who want to stop us

One of the biggest benefit of the tax reforms under PM Najib that led to implementing GST as well as the reductions in corporate and personal income tax as well as abolishing sales and service tax is also one that is seldom mentioned by the government and media due to diplomatic sensitivities.

Over the years, our local portals had been highlighting the latest "Illicit Outflows of funds" report by Global Financial Integrity (GFI) which states that in 2014, Malaysia lost between US$26.6 billion and US44.3 billion in illicit outflows for that year.

This is between 7.87% to 13.1% of our 2014 GDP of US$338.1 billion. Taking the midpoint of 10.49% would mean Malaysia losing US$35.45 billion in 2014.

The previous report had said that Malaysia had lost US$48,251 billion in 2013 - or about 14.97% of our 2013 GDP of US$322.34 billion.

Illicit capital outflow does not mean all is corruption or "stolen money".

As GFI had clearly said, the vast majority of illicit outflows is due due to the current rampant practice of trade mis-invoicing or trade mispricing.
The fraudulent misinvoicing of trade transactions was revealed to be the largest component of illicit financial flows accounting for 83.4% of all illicit flows—highlighting that any effort to significantly curtail illicit financial flows must address trade misinvoicing." said GFI in their report
Transfer mispricing is a scam used by MNC to avoid paying high taxes. For example, goods produced by them in Malaysia are 'sold' or UNDER-invoiced to their subsidiaries, conveniently located in a tax haven, at an artificially low price. Or foreign companies OVER-invoicing Malaysian companies on our imports  - also to avoid paying high Malaysian corporate taxes.

Why do you think so many of our local companies still insist on exporting their products out of Singapore's ports despite Malaysia having so many ports itself?

Singapore has always been a re-export hub or "entrepot". It is Malaysia's number one trading partner and trade between us is about RM200 billlion - and this, coupled with Singapore bank's strong privacy rules - leaves a lot of scope for trade mispricing and hence "illicit capital outflow".

The main problem is the big corporate tax difference between Singapore (17%) and Malaysia (26%).

Would a company rather pay 17% tax instead of 26% tax? A no-brainer.

Before Singapore introduced their GST, their corporate tax was even higher than Malaysia at 33% but managed to reduce it gradually over the years to 17%. Even Thailand was at 30% corporate tax just few years ago managed to reduce it to 20% (lower than Malaysia) when they implemented their GST.

These figures are HUGE.

Based on GFI's historical data, during the 2004-2007 period, almost one quarter of Malaysia's entire GDP was illegally diverted overseas with no tax paid and also not re-invested in Malaysia.

How is it possible that any one country can tolerate as much as 25% of our country's income per year being siphoned out to a neighbouring country and benefiting them?

Why should Malaysia allow hundreds of billions of our money flow out of our country illegally without paying Malaysian taxes?

If this money remained in Malaysia, it can also boost our currency's strength as well stimulate local investment and consumption that will greatly benefit our economy. And if the practice of exporting through another country's ports was reduced, it can also boost our Malaysian ports industry too.

Instead it went to benefit some other country's economy.

Somewhere in the period 2010 to 2011, the Najib Govt started taking things seriously and started implementing measures to reduce this daylight robbery.

In past few years, BNM has reported on these measures which includes:
- More stringent monitoring and cooperation with neighbouring countries.;
- Enacting a new Money Services Business Act 2011, and relicensing of all money services businesses.
- gradual reduction in corporate tax to reduce the difference between the neighbouring country to discourage tax evasion.

Already, as you can see from the table, the measures are already working and illicit outflows has gradually dropped to 14.9% in 2013 as compared to 25% in 2005.

With the latest release of GFI numbers for 2014, this figure has dropped further to between 7.87% to 13.1% of 2014 GDP - or 10.49% if you take the midpoint.

Despite the staggering amount involved, it does suggest that govt efforts to reduce the illicit outflows have started to work.

While figures for 2015 are not yet available but moving forward, the trade mispricing issue will also be mitigated with that year's introduction of GST which requires reporting of value-added at various stages of production - making it tougher to under-declare exports or over-declare imports.

In preparing for GST, govt has already committed and announced reductions to our income tax and corporate taxes and will continue to gradually reduce these taxes in coming years.

Further reductions in corporate tax as commodity prices recover or as our GST system becomes more efficient will further reduce these outflows.

Those who want to stop us

Which is why I frequently say that those who protest against GST are traitors to Malaysia who seem to want to benefit a neighbourng country and encourage tax evasion and illicit outflows.
What do Malaysia and these anti-GST people gain by having our neighbor countries make TENS, if not HUNDREDS of BILLIONs of ringgit EVERY YEAR at Malaysia's expense?

Even more ridiculous, At a recent dialogue session in Shah Alam earlier in April 2017, Tun Dr Mahathir Mohamad had suggested that the government should look at increasing corporate tax to generate revenue instead of taxing the general public through GST.

While the whole world wants to be competitive and cut corporate tax, Mahathir wants to increase the corporate tax.

  • The USA wants to cut corporate tax:
Impact of Trump corporate tax cut could be gigantic 
  • Indonesia wants to cut: 
Indonesia president considers cutting corporate tax rate to 17 percent: govt website 
  • Australia also wants to cut:
Australia cannot afford not to cut company tax rates for big companies:

It is certainly strange that our former Prime Minister wants to abolish GST and increase our Corporate tax to move our country backward, become less competitive and encourage even greater illicit capital outflow by increasing the corporate tax difference between us and others.

Why are we allowing our neighbour country to collect tens of billions of taxes every year that should rightly belong to Malaysia? Govt already said many times that GST will help reduce illicit outflow

These people are considered traitors to Malaysia.

Those who are against GST and not allowing Malaysia to reduce our taxes and help reduce these mispricing and illicit outflows are actually trying to deprive Malaysia tens or hundreds of billions of our own money.

1 comment:

  1. The thing is, with GST, Kastam, BNM hemming their dastardly activities now, these corporate owners & businesses are forced & cajoled to keep the money in. Its not on their own free will and that makes them continue to seethe even more at the Gov.

    U & I know that their loyalty is not to MY Gov, but to money and to whichever countries their $$$ "contributions" can give. In fact, the more we continue to lose, the more MYR drops, and the worse an image of MY can be presented to the world. And this, gentlemen, will be the sole reason that the RBA layman gonna use to Ubah the government.

    In another words, what on surface looks like a losing situation for MY in general, is actually a win-win-win-win scenario for the business community that sapots Ubah. A win for their pockets (cuz they make money), a win for themselves & their famili (cuz they ingratiate themselves to the countries they siphon money to), a win for their ego (cuz they can escape paying taxes to the "evil, tyrannical, kleptocratic, blah,blah,blah" Gov), and lastly a win for their cause (an angry population is easily swayed to vote for Daddykasi And Projects party). With one foot in foreign soil and another in Opposition, its easy for them to jump ship when either turns sour.

    MY Gov better have a method to track and clamp down on black money (underground funds not the Nigerian kind), cuz if GE14 goes the way I think it will, there will be a mass exodus of above said people and their entire fortune with them. Discontinuing high value notes like Modi did, wun work in MY. Not when we have bitcoin and other Epayments/ Ewallet/ Ecurrencies. BNM must really start be on top of this.