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Postponing imposing income tax on the dividends distribution is not a sufficient step

2014-04-03

Weekly Trading Report [30/03-03/04[2014

In a move that contradicted the community claims and charged new burdens on all parties of the Palestinian capital market sector, the government approved a modification law on income tax that hasn’t eliminated the dialogue and participation only, but the efforts of all constituent elements of the Palestinian investment environment over the years.  One of the modifications is imposing 10% tax on profits, whether in the form of stock of cash dividends to be deducted from source. The income tax department in the Ministry of finance circulated later that applying this law will begin from the year 2015. Postponing incurring income tax on the cash dividends for the next year will only result in opening space for migrating of the Palestinian capital abroad and starting to accumulate negative signals on an economy that only lacked a stimulating legislation environment that is able to extract its potentiality amid the occupation discouragement. Over the years, Palestine Stock Exchange PEX, Palestine Capital Market Authority, brokerage firms and the public listed companies gave their efforts to promote the attractive investment environment of the PEX, armed with the competitive financial and operational performance and feasible dividends distributions of the listed companies, and marketing the intrinsic growth factors by considering a harmony between the economic environments. Not suspension of this modified law will contribute in foreign investment exit from the PEX and will discourage any attempt to attract them.

The tax adjustment will not only result in imposing additional taxes on the dividends distributed by the public listed companies only, but will result in reducing the investment attractiveness of the listed shares in the PEX compared with their peers in the regional markets. Over the past years when the PEX trading was characterized with scarce liquidity and relatively nil price movements, cash dividends generally balanced the total shareholders return at the end of the period, and in most cases total shareholders’ equity constituted only from cash dividends. Despite not recording prices growth, the average cash dividends rate in the PEX was competitive compared to the other Arab regions. Imposing income tax on cash dividends will contribute in lowering return on investment, and will contribute in a radical change in the public listed companies’ dividends strategies. This would be an important factor to the lack of success in attracting foreign investment due to the lower yield in addition to the high cost of investments in the PEX. These results will negatively affect the activity in the PEX due to the availability of more feasible opportunities that may be available in local and abroad investment tools.

This week comes within tax queries on one hand, and political queries on another hand, to significantly affect the investors’ appetite in the PEX. Whereby with the latest political developments and negotiations, the anticipation and solidness status by investors increased for what the coming days may hold, however, the door of reaching understandings is still open. These quires affected the trading in the PEX for this week, leading to a decrease in the daily average trading value compared to the beginning of the year, amid a decline in the purchasing orders on the blue-chips, which in turn led to record a declining percentage on Al-Quds Index to erase the entire gains of 2014.  On the other hand, the legal period granted to the listed companies by the PEX to disclose their Q1 financial results has started, to increase the anticipation in the PEX in general and enhance the variation in investment decisions basis for investors, while, there is no doubt that the anticipation is sharply higher for the leading companies due to the growth incentives prediction.