By Professor Dr Hafezali Bin Iqbal Hussain and Dr Mohsin Ali
RECENTLY the topic of taxing corporate cash holdings has been mooted in the Dewan Rakyat. The idea floated was to introduce a 2.5% tax on cash savings if they are remained untouched for a full year which finds its spirit from the Islamic principle of charging 2.5% zakat on gold or silver which exceeds the determined nisab or uruf (as determined by each state’s Islamic Department in the Malaysian context) and kept for a period of exceeding a year. Amounts exceeding this cut-off is considered as excessive and thus would be taxable as it is not being spent on beneficial ways from the Islamic perspective.
To dissect the idea, it is important to appreciate the spirit behind the zakat which aims to prevent hoarding of gold which historically was utilised as a medium of exchange and is also considered as a symbol of wealth. Looking at Malaysian corporate scenario, recent evidence shows that cash makes up about 17% of total assets which is comparable to the ratio in Singapore but higher than other neighbouring countries such as Thailand, Indonesia, and Philippines. In addition, worldwide evidence further shows that public listed firms tend to have higher levels of cash holdings than private firms, indicating the potential for greater agency problems due to separation of ownership by shareholders and control by corporate executives.
Whilst this may provide some indication of the situation of cash hoarding, a deeper analysis often measures excess cash which is the residual cash after firm operational needs which is of greater interest given that it is an indication of a manager’s expropriation of firm’s assets which are to the detriment of shareholders as well as stakeholders. In-line with international evidence, research in the Malaysian scenario shows that excess cash negatively effects firm value. The findings are a consequence of agency motives of holding cash whereby executives managing firms on behalf of shareholders might not act in the best interest of shareholders and instead use excess cash for maximising their personal wealth.
Hence, firms with an entrenched management would be more likely to hold large amounts of excess cash to maximise their personal benefits. Research also shows that every ringgit in excess cash held by public companies tend to have a significantly lower marginal value. Furthermore, large excess cash amounts often lead to large inefficient investments which area a manifestation of conflicts between management and shareholders where corporate executives can use these investments as a channel for extracting private benefits at the expense of shareholders.
It may seem an issue which is of little interest to the average Malaysian. However, taxing firms on excess cash holdings would encourage increased efficiency from the operational point of view as well as potential increase in pay-out of dividends and share buy-backs. The increased pay-out would benefit institutional investors which include pensions funds and unit trust managers who play a major role managing investment and retirement savings of the average Malaysian.
In addition, there is sufficient evidence to show that increased pay-outs are associated with higher share prices which would further boost returns enjoyed by these institutions. A healthier stock market return would also lead to potential trickle-down effect of wealth into the economy and thus be a desirable outcome from the national perspective.
Taxing excess cash would also serve as a disincentive to waste resources whilst encouraging more reinvestment in capital expenditure, research, and development as well as expansion by firms. The additional investment would lead to increased productivity which comes about due to investment in information technology as well as employee training. These would lead to creation of high paying jobs and consequently increased income levels. Domestic firms would also become more competitive as their productivity rises allowing them to penetrate the global arena.
Furthermore, the disincentive would reduce external financing costs and prevent firms from giving up favourable investment opportunities leading to greater productivity. In addition, given that Malaysia as most Asian countries tends to have a significant number of public listed firms categorised as family controlled or state linked, the introduction of this tax would provide additional protection against the potential use of cash for non-productive or unprofitable ventures.
Reductions in cash holdings are also often associated with increased borrowing from capital markets as well as bank debt, both which act as disciplining tool to control managerial behaviour. The potential for raising additional taxes without burdening the average Malaysian would a be welcome initiative given the need to provide additional revenue for public finances.
Thus, it can be said that the introduction of a tax for excess corporate cash in the Malaysian context would be a welcome move especially given the proposal for a third of the receipts to be channelled to the people as direct cash aid whilst 12.5% is proposed for the purpose of repayment of PTPTN loans. The resulting increase in productivity by the corporate sector would also yield to improved outcomes in the long run. In the words of Nobel Laurette Paul Krugman, “productivity isn’t everything, but in the long run it is almost everything.”
Professor Dr Hafezali Bin Iqbal Hussain is the Head of Research in the School of Marketing and Management, Faculty of Business and Law at Taylor’s University.
Dr Mohsin Ali is a Senior Lecturer at the Department of Finance in The School of Business at Monash University Malaysia.
