For 10 years, proposals to crack down on offshore tax avoidance practices by Taiwanese companies have weighed on Sung Hsiu-ling, the director general of the Ministry of Finance's Department of International Fiscal Affairs. The revelation of the Panama Papers may be the break she has been looking for.

The millions of documents leaked from Mossack Fonseca revealed that at least 2,725 offshore companies were set up in eight tax havens by Taiwanese through the secretive Panamanian law firm. (See below for more details on the findings.)

What has Sung hopeful and may spur action in Taiwan, however, are not specific findings related to Taiwanese individuals and companies in the documents. It is instead the new determination globally to combat tax avoidance and tax evasion in the wake of the leaks.

Nearly three years after they were last considered and shelved, the proposed addition to the Income Tax Act of Articles 43-3 and 43-4, dubbed the "anti-tax avoidance clauses," could be approved by Taiwan's Legislative Yuan during its current session.

Lawmakers from Taiwan's two major parties, the Democratic Progressive Party (DPP), which won an outright majority in the Legislature for the first time in January, and the Kuomintang (KMT), which had controlled the lawmaking body for the previous eight years, were eager to defend themselves from the lack of action on the revisions in the past. 

"Extra sessions were held during the previous three legislative sessions, and the DPP caucus proposed these (anti-tax avoidance clauses) as priority bills, but they were rejected during consultations by the KMT," says DPP caucus secretary-general Wu Ping-jui, barely containing his indignation.

"We won't oppose it. We are now the opposition party. When they (the DPP) want to pass it, they can pass it," says a KMT legislator, speaking on condition of anonymity.

Once Spurned, Now a Hot Issue

When the Legislature reopened for business on April 6 after the four-day Tomb Sweeping Festival vacation, and after the initial publication of the Panama Papers on April 3, lawmakers from both parties held press conferences to voice support for expediting passage of the anti-tax avoidance revisions.

DPP caucus whip Ker Chien-ming said that once the Finance Ministry submitted its version of the amendment to the Legislature, it would be sent to the body's Finance Committee for review.

"It will definitely be completed this session," Ker said, with even the third largest party in the Legislature, the New Power Party, also expressing support for the package of revisions at a caucus meeting.

The measures passed a first reading in the lawmaking body (a bill has to clear three readings to become law) in early 2013 before being unceremoniously shot down by KMT legislators in May of that year and stalled since then, but an opportunity for reform has finally arrived.

According to sources, the revisions to be proposed by the Finance Ministry this time around will be nearly identical to those proposed in 2013 and target "controlled foreign corporations" – entities registered in different jurisdictions than where the controlling owners live – whose "place of effective management" is Taiwan.

The undistributed profits of those overseas entities, including domestic and overseas income, income from financial transactions and transfers of overseas equity, would be taxed as if they were the profits of a company registered in Taiwan at the country's 17 percent corporate income tax rate.

Panama Papers Findings

Taiwanese companies and individuals are believed to be extensively using offshore shelters to avoid or evade taxes, though CommonWealth Magazine, the Taiwanese partner of the International Consortium of Investigative Journalists, concluded after scouring the Panama Papers documents that Mossack Fonseca has not been one of their main conduits.

 Soon after the Panama Papers were made public, Taiwanese media widely reported that 16,000 Taiwanese companies were uncovered. In fact, those reports were repeating the findings of the previous major ICIJ breakthrough, when leaks from Singapore-based Portcullis TrustNet and British Virgin Islands-based CommonWealth Trust first shed light on the inner workings of tax havens.

 CommonWealth Magazine found at the time that 12 major business families in Taiwan, including those running the Want Wang Group, the Fubon Group, CTBC Financial Holdings and the Shin Kong Group, had personal offshore companies or trusts unrelated to their business operations. 

(See Where Taiwan's Billionaires Stash Their Cash,Taiwan's NT$300 Billion Drain)

  This time, it appears that big Taiwanese banks, law firms and accounting firms did not often use the services of Mossack Fonseca, which does not have a presence in Taiwan. The forty-six Taiwanese brokers that did work with Mossack Fonseca were relatively small-scale consulting firms operating in Greater China.

  Most of the Taiwanese entities that set up shell companies through the Panamanian law firm were small, unlisted companies or individuals.

The limited findings do not mean, of course, that Taiwanese are not avoiding or evading taxes through offshore shelters, which is why financial officials believe passage of the anti-tax avoidance clauses could help Taiwan recoup substantial tax revenues.

But would they be enough on their own to cope with the problems of Taiwan’s international tax system?

Global Crackdown on Hidden Cash Flows

The answer is "probably not." In fact, international efforts to crack down on the use of tax havens to avoid paying taxes have entered a new phase for quite some time, and Taiwan is being left behind.

After discovering tax loopholes that are eroding their tax bases, many countries have begun taking aggressive action to cope with the problem. In October 2015, the OECD, sometimes dubbed the "club of rich countries," released a package of measures under its “Base Erosion and Profit Sharing (BEPS) Project” to tackle tax avoidance.

China, meanwhile, has been particularly intent on going after tax dodgers. A big topic of conversation over the past six months among Taiwanese businesses with interests in China was the release of “Implementation Regulations for Special Tax Adjustments” for public discussion by China's State Administration of Taxation on Sept. 17, 2015.  

"China's tax-avoidance draft bill has emerged, and even tougher new regulations (on transfer pricing) will likely take hold," warned professional services firm PwC Taiwan.

Beijing's new regulations would require multinational corporations with operations of a certain size in China to disclose the company's finances, including profit distribution, on a country-by-county basis and even reveal information on vendors in their supply chains.

Soon Yen Chong, tax director at Ernst & Young (China) Advisory Limited, says Beijing is highly likely to approve the new regulations this year after it finishes gathering outside opinions and put them into effect beginning next year.    

Beijing to Work with Tax Havens

Beijing's move to revise its tax regulations is related to its commitment to begin ts first exchanges of information under the Automatic Exchange of Information (AEOI) system in 2018.

The AEOI system, set up under a new international standard for sharing information on residents' assets and incomes called the "Common Reporting Standard," represents the "hired gun" for the BEPS project. Domestic banks of signatory countries must disclose to other participating members information on all cash flows and transfers on a regular basis, and OECD countries have exerted considerable pressure on tax havens to join to better pursue funds parked abroad to avoid taxes.

As of March 2, 2016, 96 jurisdictions had committed to the process, according to the OECD, including the preferred haven of Taiwanese companies, the British Virgin Islands, and other tax paradises or financial centers such as the Cayman Islands, Hong Kong, Switzerland, Macau and Singapore.

In other words, in just two years from now, China will have access to information on flows of money in banks of the other 95 participants through the AEOI system.

"In the future, banks will no longer be able to use confidentiality as an excuse to help corporate entities evade taxes," explains the Finance Ministry's Sung, who often represents Taiwan at international financial meetings.

"There will no longer be any point to corporations evading taxes because information will be exchanged no matter where money is hidden," she argues.

Global companies will be required in the future to report how much tax they have paid country-by-country, and if there is a clearly unreasonable distribution of profits to one of the tax havens, it will be treated as tax evasion.

The new rules "have already been put into effect in South Korea, and the United States and China are currently drafting legislation that should be passed pretty soon," says Chen Ming-chin, a National Chengchi University accounting professor who specializes in tax law and tax accounting.

Isolated Taiwan

Yet while most of the world takes concerted steps to crack down on tax evasion, Taiwan is sinking into ever greater isolation. Marginalized in the international community by Beijing's suppression, Taiwan has little chance of joining the multilateral tax organization promoting the AEOI system. Domestically, the revisions to the tax code to tackle the issue have been thwarted for years by the lobbying of vested interests and the inaction of lawmakers.

If China approves the AEOI agreement, it will be like arming its tax authorities with the fangs of tigers. Taiwan, on other hand, will careen closer to a tax enforcement crisis, hampered by its inability to join anti-tax avoidance organizations and the failure of the Legislature to approve the "Cross-strait Tax Agreement," which was signed by Taiwan and China in August 2015.  

  "Some big companies have told me that what's missing now is China," the Finance Ministry's Sung says with a concerned tone. "That's because without a cross-strait tax agreement, the rules of the game are unclear. They don't know how to go about tax planning."

If Taiwan's tax regulations fail to keep up with international trends, it not only is staring at the prospect of becoming an isolated tax island, but could also face international sanctions. According to Sung, because some European Union countries do not have tax agreements with Taiwan, the EU had Taiwan on its tax blacklist as recently as last year, which deterred some Japanese enterprises from investing in the country.

As the world signs into the AEOI system, the Ministry of Finance is pursuing bilateral tax deals, but the deal signed with the market where most overseas Taiwanese business are concentrated – China – continues to languish in the Legislature. At the same time, Beijing will soon be able to exchange information with tax havens and use it to impose taxes on Taiwanese enterprises in China that have parked profits in those havens.

Passage of the Cross-strait Tax Agreement would help bring some clarity to the tax situations of those Taiwanese businesses, but it is unlikely that even the impetus of the Panama Papers will help push it through the Legislature.

The DPP's Wu Ping-jui argues that the Income Tax Act is a domestic law and not conditioned on Taiwan signing tax agreements with other countries, and he therefore has insisted that the anti-tax avoidance clauses and the cross-strait pact be dealt with separately.

Aside from dealing with China on taxes, another major challenge for Taiwan without access to the international AEOI framework is signing tax agreements with the world's major tax havens. According to a study by Soochow University accounting professor Yang Ye-cheng and others, the five leading places where Taiwanese enterprises set up "controlled foreign corporations" are the British Virgin Islands, Samoa, Hong Kong, the Cayman Islands and Singapore. Panama, which has come under intense scrutiny following the recent leaks, ranks 11th on the list.   

   Only one of those five jurisdictions – Singapore – is among the 29 countries with which Taiwan has signed tax agreements. Yang contends the government should try to sign bilateral information exchange pacts with as many tax havens as possible to help ferret out phony foreign persons or foreign-invested companies and create a fairer tax environment. 

    Even if the release of the Panama Papers has forced the Finance Ministry to work overtime, you would never guess it from Sung Hsiu-ling. Her spirited tone suggests she is welcoming a long-held wish to crack down on tax avoiders that may finally coming true, regardless of the extra stress created.

    "Going through a third place is not necessarily problematic, but once it's exposed, people will put you under a microscope. Do you really want to continue using a third territory (to do business)?"  

Translated from the Chinese by Luke Sabatier

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Defining the ‘anti-tax avoidance clauses'

Anti-Tax Avoidance Clauses = Tax Revenue Boost