Palm oil producers have asked the government to reconsider and review the imposition of a 5% sales tax on fresh fruit bunches (FFB) for the palm oil industry as they are already paying several other types of taxes.
The producers, through the Malaysian Palm Oil Association (MPOA) highlighted in a statement that the industry is already currently being burdened by cesses, levies and taxes, including the corporate tax.
“This is a matter of grave concern to the Industry, particularly the smallholders and thus, MPOA appeals to the government to reconsider and review the Sales Tax (Rates of Tax) Order 2018 on FFB accordingly,” its chief executive Datuk Nageeb Wahab, who is also chairman of FELCRA, said in the press statement.
“The imposition of the sales tax on FFB will affect the entire value chain of the palm oil industry, particularly the smallholders as there will be a 5% increase in cost at every stage. We would also like to highlight that previously there was no goods and services tax charged to FFB,” Nageeb said.
He further said that based on the average FFB price of RM460.00 per tonne for Sept 2018 (for the MPOB, Grade A average price for Malaysia), the sales tax on FFB is RM23.00 per ton.
“The palm oil mills in the country received a total of 101.74 million tonnes of FFB in 2017.
“This would translate to a total sales tax of RM2.34bil,” he said.
He noted that this will further dampen the current low palm oil prices with end-Dec 2018 palm oil stocks expected to hit a record 3.0 – 3.3 million tonnes and these are anticipated to remain until early 2019.
“The imposition of the sales tax on FFB will therefore further increase the cost of production and erode the competitiveness of Malaysian palm oil in the international oils and fats market,” he said adding that the association has already highlighted this matter to the government through the Primary Industries Minister.
MPOA said that it has also together with the National Association of Smallholders written to the Ministry of Finance to appeal for an exemption of the sales tax on FFB.
On a separate matter, Moody’s Investors Service said in a statement that crude palm oil (CPO) prices, which have fallen some 14% to RM2,065 per tonne at the end of September, are now at their lowest levels since 2015.
The research house said this will present a ‘credit challenge’ for rated palm oil producers if prices remain at current levels.
“Continued weak CPO prices will challenge the credit metrics of the four palm oil companies that we rate over the next 12-18 months, but the growing demand for palm oil will support their credit profiles over the medium to long term,” said Moody’s analyst Maisam Hasnain.
“We also expect that the governments of Indonesia and Malaysia – which together produce around 85% of CPO globally – will maintain supportive policies towards their respective palm oil industries and this will continue to provide a valuable underpinning for ratings in the sector,” Hasnain added.
The report released by Moody’s is authored by analysts Hasnain and Diana Beketova also highlights that credit quality will of these companies will be at risk if CPO prices continue to stay at such low levels in the price cycle.
It however notes that IOI Corp Bhd (rated: Baa2 stable), is least exposed to CPO price weakness as it derives only 3% of its revenue from external CPO sales.
“The remaining revenue is derived from downstream operations for IOI Corp, which includes refined palm oil and oleochemicals, both of which use CPO as a feedstock,” Moody’s said.
Moody’s highlighted key risks for the sector moving forward which included growing palm oil inventories on the supply side in Malaysia and Indonesia that could further weaken the selling prices of CPO.
It said that this could hurt the revenue and earnings of palm oil producers over the next 12-18 months.
However, Moody’s also added in the report that palm oil consumption will likely grow and stay solid in countries such as Indonesia, India, and China.
That will support the credit quality of producers as these economies grow.