It must be noted that in 2007, the Malaysian government introduced a cooking oil cess under MPOB Cess Order 2007 to subsidise the price of cooking oil. This was subsequently replaced by the reintroduction of WPL starting July 1, 2008. This shift came after a five-year hiatus of the WPL, which had been deactivated since 2003, and followed legal challenges from some planters regarding the cooking oil cess. The plaintiffs challenged the constitutionality, legality and discriminatory taxation, whether ultra vires Federal Constitution, scope of Malaysian Palm Oil Board's (MPOB) roles and exclusion of certain parties in WPL. 

Although the WPL was effectively reintroduced, it resulted in a similar financial impact on oil palm growers, as indicated by it back-of-the-envelope calculations. The WPL imposed a 15% tax on CPO sales that exceed RM2,000 per tonne in Peninsular Malaysia while those in Sabah and Sarawak benefit from a reduced rate of 7.5% due to their respective state sales tax (SST), thus closely resembling the previous cooking oil cess. The collection of the WPL transition from mills to growers' estates excluding smallholders. MPOB continues to provide reference prices for CPO to facilitate the calculation of the WPL, while the Finance Ministry took over as the collection agency. 

WPL is triggered when CPO prices exceed certain thresholds, but it impacts all oil palm growers by affecting the pricing of their FFB while today exempting 450,000 smallholders, those having less than 100 acres or 40 hectares of oil palm trees. While oil palm planters contribute to the WPL to support the government’s fiscal tax revenue, there is growing concern among affected stakeholders. They urge the Ministry of Finance (MOF) through the facilitation by KPK to take into account the current cost dynamics, yield variations, federal-state tax collection and competitiveness within the palm oil sector. Many stakeholders advocate for a review of the WPL's CPO price thresholds and levy rates, with some even calling for its abolition. From the industry’s perspective, these appeals are valid and deserve prompt attention. While the levy aims to generate revenue from higher CPO prices into government’s consolidated funds, the current economic realities for oil palm growers suggest that a reassessment of the levy’s thresholds and rates is necessary to ensure fairness and sustainability in the industry. 

Today, a 3% WPL is applied when CPO prices exceed RM3,000 per tonne in Peninsular Malaysia and RM3,500 per tonne in Sabah and Sarawak — with the levy collected directly from the growers. It is important to understand that this levy affects only on oil palm growers who produce FFB, not the CPO itself, which is then processed in palm oil mills. This distinction is crucial because it helps clarify how the levy impacts tax-paying growers on their FFB directly, rather than other players in the supply chain. As a ball-park figure, the price thresholds for FFB translated from the CPO threshold is approximately RM600 and RM700 per tonne, respectively based on the estimate that five tonnes of FFB produce one tonne of CPO. 

For instance, if the average CPO price reaches around RM3,800 per tonne, the resulting gross profit margin of RM800 per tonne of CPO — or equivalent to about RM160 per tonne of FFB — results in a profit margin of 21%. This is in line with typical profits from many other business sectors rather than extraordinary margin that is subject to the WPL. 

Understanding these details is essential for informed engagement about fair taxation and competitiveness in the palm oil sector. Additionally, rising labour costs are expected especially with the upcoming review of the minimum wage. To manage these increasing expenses, the palm oil industry should focus on improving CPO yields. According to CIMB’s model, each 0.5-tonne increase in yield per hectare could lower production costs by RM462 per tonne of CPO. 

The MOF has indicated that the WPL has been in place since 1999, using the same calculation formula, although there have been periodic adjustments to the levy rate and price threshold. However, the adjustment made in Year 2022, which equalised or "harmonised" the levy rate between Peninsular Malaysia and Sabah & Sarawak, "overlooked" earlier appreciation of the State Sales Taxes (SST) applicable in Sabah & Sarawak. For record, Sabah imposes a 7.5% sales tax on CPO, while Sarawak imposes a 5% tax on CPO and CPKO. There is no sales tax imposed on palm oil in Peninsular Malaysia. This discrepancy means planters in Sabah and Sarawak face a higher overall tax burden, leading to dissatisfaction among growers from both regions. 

The WPL is uniquely targeting oil palm growers because this sector, despite facing numerous challenges, has shown potential for windfall profits. However, it’s important to note that oil palm growers are not the only sector with significant profit potential. The commodity-based industry generally operates as a price taker, influenced by global market conditions rather than setting prices. 

Currently, CPO prices may appear favourable, but the industry is contending with several unabated rising costs. These include increasing wages, higher input expenses and skilled labour shortages, all of which contribute to lower realised yields. Additionally, interconnected factors lead to considerable field losses, ultimately resulting in reduced national yields. Going forward to remain competitive and achieve sustainable cost reductions for improved margins, the oil palm industry must improve overall yield productivity for better unit costing and expedite the replanting of aging and unproductive oil palm trees. 

Legal issues surround the Windfall Profit Levy Act 1998 (Act 592). In early 2023, Parliament discussed the Windfall Profit Levy (Oil Palm Fruit) Order 2023, effective from Feb 1, 2023, intending to impose a levy on "extraordinary profits" in the palm oil sector, though no clear definition was provided. Simultaneously, the Windfall Profits Levy (Validation) Bill 2023 was passed to indemnify the government for collecting the levy from Jan 1, 1999 to Jan 31, 2023, necessary due to non-compliance with the original Act. This bill aims to protect the government from potential refunds of billions in taxes. Concerns arose since ministerial orders for the levy were never officially presented in Parliament in 1999, prompting some industry stakeholders to consider legal action on its retrospectivity.

Parliamentarian Wong Chen sought clarification on the bill's retrospective application and its implications for transparency in tax collection. This concern resonates with many stakeholders who feel the government’s actions are disproportionately punitive towards the palm oil industry. They question whether the retrospective law would hold up under legal challenge. 

Deputy Finance Minister Datuk Seri Ahmad Maslan subsequently confirmed that no refunds would be issued, citing that the revenue funded cooking oil subsidies. This raises questions about why the palm oil sector alone bears this burden while other industries do not contribute equitably. 

Additionally, former minister Teresa Kok mentioned a proposed special committee to manage a WPL trust account projected to hold around RM200 million from the windfall tax, intended to reinvest in the palm oil industry and support Malaysia's biofuel programme. This strategy represents a positive opportunity for targeted taxpayers to see their contributions reinvested back into the sector to promote growth. 

As the palm oil sector faces a multitude of challenges, reviewing the WPL’s equitability and fairness are crucial. A taxation approach that reflects industry realities and fosters sustainability is needed for equitable contributions to the national economy. Instead of burdening the growers with heavy taxes, the industry and government must work together prioritising reinvestment and invigorating declining yields to avert losses and improve it further, sustaining its supply chain and maintain competitiveness vis-à-vis other producers. 

In 2008, the government refrained from applying the WPL to independent power producers (IPPs) due to bondholder backlash. WPL was collected from IPPs once in 2008, and stopped thereafter. Similarly, during the Covid-19 pandemic, glove manufacturers were exempted from WPL fearing operational relocations. Critics may argue that these precedents suggest that if a law cannot be applied uniformly across sectors, it may warrant reconsideration. 

The current WPL application is seen as unfair, as it only assesses windfall profits based on realised commodity-based CPO prices, rather than a complete evaluation of return on investment (ROI). Furthermore, certain legal aspects of the WPL remain ambiguous. Repealing it would free essential funds for reinvestment in the industry, eliminating the levy and allowing for key initiatives like accelerated replanting, promote mechanisation, equipment upgrades, supply chain improvements and compliance with ESG standards. 

It is crucial to clearly define windfall profits separate from regular profits. This clarity will help stakeholders understand extraordinary profits and create a fairer tax framework. If the WPL remains in place for oil palm growers, enhancing its application is essential. The current "one size fits all" approach does not capture industry variability. A tailored framework could set specific thresholds based on ROI percentages after tax and utilise regional reference prices for CPO rather than relying solely on the national MPOB price. The WPL should also reflect the diversity among taxpaying growers, considering factors like regional differences, holding sizes and palm ages. Established players and new entrants also have varying financial conditions, including different loan covenants. 

To effectively determine ROI, it’s important to understand production costs, which can vary significantly. Validating these costs against audited results can enhance credibility. Additionally, the framework should consider actual FFB yields and OER extractions, specific to different Malaysian regions. 

Presently, independent and organised smallholders are exempt from the WPL, representing approximately 27% of the total oil palm area. As a result, WPL collections are primarily drawn from the remaining 73% of FFB production when price thresholds are exceeded. However, MEOA has estimated that only around 55% of FFB production is subject to WPL payments under these circumstances, indicating potential leakages in the system. A viable solution could involve reverting to WPL collection at mills based on CPO tonnage, as was practised prior to July 15, 2008. This adjustment could effectively reduce leakages by ensuring that all growers contribute to the WPL, much like the current collection methods for the MPOB Cess and State Sales Tax (SST). This proposed approach not only simplifies administrative processes but also aligns with existing collection frameworks, thereby creating a more efficient tax collection system for all stakeholders. 

If the WPL remains, it should be uniformly applied across all sectors experiencing "extraordinary" profits. This would align with equitable taxation principles and the Malaysia Madani agenda, creating a level playing field for taxation. 

If the WPL continues, the effective price threshold must be realistically adjusted set against the present production cost. A portion of the revenue from contributing growers should also be reinvested into the palm oil industry to ensure its continuous improvements.

If the WPL persists after the threshold revision, the levy rate for growers in Sabah and Sarawak should also be reevaluated, considering their SST under the Malaysian Agreement 1963. The unique challenges there, including higher input costs and financial pressures, necessitate this reassessment, as they currently bear a disproportionate tax burden compared to Peninsular Malaysia. MEOA estimated that, in 2023, the overall taxation burden on oil palm growers as a percentage of business profitability was 43.6% in Sabah, 43.4% in Sarawak, and 25.7% in Peninsular Malaysia. This is in contrast to the weighted corporate tax rate of 21.0%. The analysis assumes that 43% of planters operate as SMEs and pay an income tax rate of 17%, while the remainder are taxed at 24%. 

The WPL on palm oil in Malaysia poses a significant challenge to an already burdened industry but which has so much potential ahead. The urgent need for reform is echoed by stakeholders across the supply chain, advocating for a comprehensive review that addresses industry realities and fosters sustainable regrowth and growth. As discussions around Budget 2025 unfold, it is imperative for the government to engage meaningfully with industry stakeholders, ensuring that the taxation framework reflects a commitment to the industry’s long-term viability. The focus must shift from collecting levies to collaborative solutions that support equitable taxation, competitiveness and a long-term shared prosperity in Malaysia’s vital palm oil sector with the nation. 

Joseph Tek Choon Yee is a former president of the Malaysian Estate Owners Association (MEOA) and the former chief executive of the Malaysian Palm Oil Association (MPOA)