Some write for money. Some write to share. I write to share. Defence, economics, these are my fields. If I err, point out to me, so I will learn.
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Wednesday, April 29, 2015
Malaysia And South China Sea
Monday, April 27, 2015
EPF and Retirement Age
A few years back, when the Govt had decided to increase the retirement age for civil servants from 55 to 56, and then to 60, it was only time before the private sector is being compelled to adopt the same retirement age. When that had happened, there was a mismatch between the private sector retirement age and the EPF's retirement age.
Employees who were supposed to retire at the age of 55, were instead continued to work. Yet they received the fund that they were supposed only to receive upon their retirement. At the same time, they no longer contributed to EPF even though they are going to work for at least another 5 years.
Upon receiving the fund from EPF, many used up the fund within 5 years. With Malaysian life expectancy currently hovers between 75 to 76 years old, this means many of our senior citizens will be left without fund for the next 10 to 15 years.
EPF has its roots in its predecessor, the Employee Provident Fund Board which was formed under the Employee Provident Fund Ordinance 1951. In 1982, the ordinance was upgraded to an act, and in 1991, the law was replaced with EPF Act 1991. The sole reason of setting up the fund was to assist Malaysians to save money for their use when they retire.
The original act, which was an ordinance was created during pre-independence time. Back then, access to healthcare service was not available to most Malaysians. Today, you can find rural clinics at almost every district nationwide. With availability of cheap healthcare services and improving hygiene awareness, life expectancy for Malaysians gradually rose from 60 to 75 today.
The removal of communist threat had also helped this as people can live longer without being worried their lives would be snuffed out be these terrorists.
Unclaimed Monies Act 1965
You would have thought that people would ensure their hard-earned money would only be spent by themselves. However, the opposite is true. Every year, banks around Malaysia had to remit millions of ringgit worth of fund to the Unclaimed Monies unit, which is located at Menara Maybank. What constitute unclaimed monies are monies kept in CASA (current account and savings account) that are inactive for period of more than 7 years (meaning no deposits or withdrawals), non-auto renewal fixed deposits/investment accounts more than 7 years) and unclaimed EPF fund belonging to members who are more than 75 years old. Apparently there are Malaysians who forgotten they had opened EPF account which had accumulated funds for their retirement. Yet they had forgotten (or they had died without informing their next-of-kin.
So what was EPF's actual proposal that got buried under tonnes of misplaced concern that the EPF monies would have been used to bail out the so-called mismanagement of 1MDB?
Far from being used for sinister purpose, the suggestions floated by EPF consist of 2 distinct amendments.
To raise full withdrawal age from 55 to 60.
To increase maximum tenure for members to keep their funds in EPF from 75 to 100. This is to allow the members to continue receiving dividends over their fund in EPF till the member reaches the age of 100.
As always, I would need to state my stance.
I have no problem to wait till 60. So far, EPF had done a good job in their investment. So I am not duly worried. But that is just me.
This is something we should consider on. This would do good to the member and his/her next-of-kin. To prevent this from ever happening to us, make sure we prepare our will to include our EPF savings. Then again, if you don't formalize your will, your funds might end up in the hands of Amanah Raya Berhad. That again, would be something for discussion on another day.
Note - currently I have a deluge of ideas what to write about our socio-economics (my background was in accountancy, with strong flavour of economics), unfortunately my focus would be more towards economics. Once I settle back into my old routine, I will write again about military and defence. One topic is dancing behind my head right now. Will see how it ends up.
Friday, April 24, 2015
End of Sabbatical
The last couple of months, I have not written much any heavy analytical driven articles due to my commitment as a new employee in a new environment. As I am slowly sliding into the new role comfortably (a credit to a great boss and a great team - identities all withheld), I would slowly start my writings again.
The month of May would probably see at least one current issue article, but that is not a promise as I have an exam end of May. So wish me luck!
At any rate, if I have good ideas, or I'm on the heat (means I need to write something to let me have a good night sleep), I would put it down. As promised, I will now focus more on my blog rather than Facebook.
Monday, April 20, 2015
GST, Transfer Pricing and Money Laundering
Before I go any further, allow myself to explain what is transfer pricing. I will try to explain this in the most laymen term as possible.
Transfer pricing is the act of assigning value to a cost of operation, be it in completed product (goods), or services between related companies located in different tax jurisdictions. Th cost assigned to these goods or services should be the based on an arms length deal (meaning the assigned cost should be as if the goods or services are obtained from a non-related business). An illustration of transfer pricing in an ideal environment would be as follows.
Ali owns My Company Sdn Bhd which manufactures frozen putu mayam for export. He also owns Sg Company Pte Ltd which operates in Singapore to sell his product in Singapore. His former partner, Muthusamy owns MutuPutu Sdn Bhd which also sell putu mayam. As MutuPutu is selling putu mayam at RM10 per packet, Ali priced the cost of putu mayam made by his company for sales to Sg Company Pte Ltd at RM9. While the price is RM1 cheaper than what Muthusamy is selling, the pricing can still be considered as at arms length as Ali did not seriously underpriced his putu mayam and the difference can easily be attributed to savings from promotional activities (Ali doesn't need to promote to his own company to sell his own products).
In the real business world, transfer pricing are mostly applied on multinational corporations or MNC. We have lesser concern with MNC's conduct in transfer pricing as they would be very sensitive of transfer mispricing. What we are concerned are small and medium size industry owners, like Ali.
Using the same example as above, now we consider the effect of corporate income tax. The corporate tax rate for Malaysia and Singapore respectively are 24% and 17%. Say Ali receives an order of RM9,000,000 of putu mayam to be exported to China. Instead of selling to China via My Company Sdn Bhd to China at RM9 per packet, he now sells it to China at RM5, which is only RM1 lower than his actual cost. At RM5 per packet, his tax incurred is RM240,000 (assuming 100% of his cost is tax deductible). In Singapore, he bills the Chinese company his putu mayam at RM9 (let's keep it to ringgit to better illustrate it). Thus, he incurs tax of RM680,000. This totals up to RM920,000. Had Ali exported everything from Malaysia, he would have to fork out RM1,200,000 over the same deal.
With GST in place, the government can afford to lower down the corporate tax rate to attract more investment into Malaysia. One of the key reasons MNC are investing in Singapore today is because of its lower corporate tax rate compared to Malaysia. You can say infrastructure and human capital, but infrastructure can be built, while Singapore's human capital are largely powered by Malaysians and other foreign talents from countries like China, India and Philippines.
Money Laundering - The GFI Report
The last five years saw the emergence of an international lobbyist group called Global Financial Integrity. It had twice labelled Malaysia globally as the 3rd highest outflow of funds suffered from purported money laundering. The report had prompted Bank Negara officials to check with the group on how they had derived the figure. The group had sheepishly confirmed that they had obtained the figure from calculating the bill difference of products exported from Malaysia to overseas, and most of the figures if not all are exports via Singapore. Unfortunately, Singapore govt was reluctant to release the figure how much of the exports to Singapore had actually passing Singapore and later being repriced higher. Much like what Ali did in his export of putu mayam to China.
With the corporate tax rate lowered, this would provide disincentive to people like Ali to evade corporate tax in Malaysia via transfer mispricing. Effectively, this is creating a self-imposed barrier to have the products or services exported via Singapore.
How does lowering corporate tax rate helps me? I still pay the same tax.
As mentioned, lowering tax rate for corporation would attract more investment into the country. In fact, we have places like Bayan Lepas Free Trade Zone and Kuantan Free Trade Zone built solely to provide pioneer status for corporate investment into Malaysia, where they get to enjoy pioneer tax status at the rate of 10% for 10 years.
Using the same template as the second scenario, say now Malaysian corporate tax rate is at 19%. Ali would be paying only RM950,000 in tax. If he exports through Singapore and tries to misuse transfer pricing, he would be paying tax of RM870,000. While he still saves RM80,000, his cost of delivery and exposure to 2 to 3 exchange rates (RM to USD to SGD to RMB), would discourage him from using the same method (export to China via Malaysia would only incur 1 conversion rate as Malaysia and China have special trade relationship).
While the scenario that I have explained above shows how GST will help to minimize transfer mispricing, there is another 2 component that would lead to transfer mispricing.
Currency Flunctuation - SGD
While most Malaysians see the strengthening of SGD as proof of a better managed Singapore economy (which in a way is true), many do not realize that SGD is not a fully trade-able currency. It is in fact tightly controlled by Singapore's MAS in order to control inflationary effect in Singapore.
To maintain Singapore's competitive advantages, SGD is being traded based on a basket of currencies, with the weight-age for each currency, including RM being classified as national secret. Thus, the one possible mean for Singapore to sabotage the weakening reexporting from Malaysia is by strengthening her currency against RM, which would still attract transfer mispricing to occur. However, this is unlikely as how far does Singapore is willing to go? The very act is like ingesting a poison pill. This action would only make cost of operating in Singapore far too expensive for companies and might even backfire against Singapore royally.
Lets face it. Corruption is rampant in Malaysia. Some people claim you need to grease some hands for things to move.
Some of these people who are more than willing to pay to grease some hands too are more than likely to be miffed when the enforcement officers do not want to accept their bribe. So whose fault is it?
For corruption to go, don't give. Two wrongs doesn't make one right.
We are all one the same boat. We live and we sink together. For the last 40 plus years (I'm counting from 1973, when Petronas was formed), the burden to fund the development of Malaysia had fell on the shoulders of Sarawak, Sabah and Terengganu. Now that GST is being implemented and petroleum revenue is slowly diminishing, time for the rest of Malaysia to repay back to the 3 states for their contribution.