KL-Jakarta talks to include CPO tax waiver

KUALA LUMPUR: Prime Minister Datuk Seri Najib Razak and Indonesian President Susilo Bambang Yudhoyono are expected to discuss the waiver of crude palm oil (CPO) taxes in both countries.

If both leaders were to agree to this proposal during their bilateral meeting in Lombok, Bali today, oil palm planters in Malaysia and Indonesia, particularly some six million smallholders, will benefit from higher palm oil prices.

Current high CPO taxes in Malaysia and Indonesia have caused refiners to slash prices in order to compete, and this, in turn, has lowered the CPO prices.

Since February, the global benchmark pricing for palm oil on Bursa Malaysia's Derivatives Market has dropped by more than 25 per cent. Yesterday, the third month palm oil futures closed at RM2,892 per tonne.

"The leaders will deliberate on the proposal to lift the high CPO taxes on both sides. It is on the agenda," a reliable source told Business Times. Oil palm planters in Malaysia and Indonesia supply more than 85 per cent of the world's palm oil. "There are about 1.5 million smallholders in Malaysia and triple that in Indonesia. If the CPO taxes are lifted, higher prices will make many planters happy," the source said.

The scheduled talks between the two leaders is a follow-up to the 11th Joint Commission for Bilateral Cooperation meeting between Malaysia and Indonesia in Kuala Lumpur last week.

Malaysia is the world's second largest palm oil producer, harvesting about 17 million tonnes of CPO a year. This, however, is not enough to feed some 20 refineries here. As a result, they need to import a large amount of CPO from Indonesia. But with the high CPO taxes, supply from Indonesia has become limited and expensive for Malaysian refineries.

Palm Oil Refiners Association of Malaysia chief executive officer Mohammad Jaaffar Ahmad reportedly said high CPO taxes had been detrimental to Malaysian refiners but benefitting refiners in Indonesia, with a price advantage of between US$72 and US$129 (RM223.6 and RM400) per tonne for processed palm oil exports.

He also highlighted that since 2008, Malaysia's annual refining capacity has dropped by almost 300,000 tonnes.

When contacted, the Indonesian Palm Oil Producers Association or Gabungan Pengusaha Kelapa Sawit Indonesia (Gapki) said it is re-iterating its call to the Indonesian government to revise the CPO export tax.

"The progressive tax is hurting producers and reducing competitiveness. Smallholders have no incentive to invest in the replanting and maintenance of their oil palm estates. We want the government to re-evaluate the ruling," said Gapki executive director Fadhil Hasan.

"We have been paying very high taxes whenever there was an increase in international palm oil prices," he told Business Times.

Currently, the Indonesian CPO export tax is set at 22.5 per cent while the maximum export tax on refined, bleached and deodorised palm oil is capped at 13 per cent.

Despite the Indonesian government justifying the high CPO export tax as to encourage the development of palm oil processing industry in the country, the reality is far from that. Fadhil noted that the significant tax gap between CPO and its derivative products seemed to be incentivising rampant smuggling of CPO.

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