Introduction of the Single-Tier Corporate Tax System: Its Effect on Share Price

Abstract

Malaysia and Singapore are the first countries to end their 45-year old imputation tax systems by replacing it with the simpler single-tier corporate tax system. Corporations have ceased to keep records of dividend tax credits required under the imputation laws with the implementation of the single-tier tax system. We find evidence from Malaysia and Singapore on how the share prices responded to the announcements in 2007 and 2002 respectively. The Singapore market reacted positively to the announcement; the Malaysian results were influenced by the global credit crunch. Also, we measured the ex-dividend day average price-drop ratio to test if the predicted tax effect on ex-dividend days moved according to theory. In both countries, the average price drop ratio moved closer to 1.00 as predicted by theory. This is due to the absence of capital gains and zero personal tax under the single tax system. Given the world-wide interest in the single-tier tax regime for future corporate tax reforms, our finding is a first to identify a theory-consistent result on this new topic.