Vice Premier Paul Chiu:
A Tax Reform Balancing Efficiency and Fairness
Taiwan's tax system is ailing, and the government is formulating a prescription. Will it prove tonic? Or toxic? Vice Premier Paul Chiu explains the momentous task of tax reform.
A Tax Reform Balancing Efficiency and FairnessBy Yi-Shan Chen, Jerry Lai
From CommonWealth Magazine (vol. 406 )
Riddled with holes and leaking funds, Taiwan's tax system is decidedly in need of an overhaul. To rescue revenues, the Executive Yuan has established a Tax Reform Committee. But achieving a sufficient governmental cash flow while ensuring justice at home and competitiveness abroad is a most delicate balancing act.
Vice Premier Paul Chiu, who also serves as convener of the Tax Reform Committee, recently sat down for an exclusive interview with CommonWealth Magazine, explaining the issues currently being deliberated, the rationale behind reducing estate and gift taxes, and the unending imperative of international competitiveness.
Q: What do you consider the most pressing problems in Taiwan's tax system?
A: The most important tax reform issue is balancing efficiency and fairness under the principle of revenue neutrality. Efficiency means fostering the international competitiveness of our companies; fairness means looking after disadvantaged groups who are left out of economic development.
In Taiwan, just as in the major countries of the world, conflict can occur between efficiency and fairness, mainly because over the past decade our economic development has focused on high-tech. Since that market is very big, you can make a lot of money if the economy is well. As a result you only needed to be connected to the high-tech industry to have a high income, which in return caused problems in terms of fairness.
Taiwan taxes equity trades with a securities transactions tax, but does not levy income tax on capital gains from stocks. Nevertheless, over the past decade, with the redefinition of employee profit-sharing as an operating expense (in January 2008), the implementation of an alternative minimum tax system (in January 2006) and the introduction of an integrated income tax system (in 1998, allowing corporate income tax to be offset against shareholder's individual income taxes), these measures partially have the same effects as a capital gains tax, and this has markedly improved the fairness of our tax system.
Before the introduction of the integrated income tax system, corporate retained earnings were not taxed and there was no capital gains tax on income from stock trades. Companies made money but did not distribute profits. Since they did not distribute profits, their shares rose, so they made money with their shares. It was just as if they had been granted a tax-free dividend. Therefore, the system was not fair.
Under the integrated tax system, companies that do not distribute profits to their shareholders are taxed at 10 percent for their retained earnings. On top of that a 25-percent business tax (or "Profit-seeking Enterprise Income Tax”) can be imposed on the full amount of income. Therefore, shareholders actually pay an income tax rate of 32.5 percent. But shareholders with an income tax rate lower than 30 percent will demand that profits are distributed and will declare dividends in their consolidated income tax reports, because then they will be able to enjoy a tax rate that is lower than 32.5 percent.
Moreover, under the alternative minimum tax system, the future minimum tax rate for high-tech companies would be 10 percent even if the Statute for Upgrading Industries were not sunsetted. But after the Statute for Upgrading Industries is sunsetted, the tax rate for high-tech industries will be the same as for conventional industries. However, in order to maintain the high-tech industries' international competitiveness, we still need to provide functional incentives for R&D and other expenses. Therefore, the high-tech industries' actual tax burden should still be somewhat lower than that of the conventional industries, so that efficiency and fairness are equally taken into consideration.
A pressing issue that the government's Tax Reform Commission has to deal with this time is how to design a tax system that enables all industries to be internationally competitive after the five-year tax holidays under the Statute for Upgrading Industries expire next year.
Over the past two decades of economic development, the Statute for Upgrading Industries as well as our human talent have brought about an enormous transformation of Taiwan's industry. The high-tech industry will remain the backbone of Taiwan's economy – we need to cherish that.
Furthermore, the service industry accounts for 70 percent of GDP, but its investment rate, its per-capita investment, is much lower than in the high-tech industry. We need to let this large service industry develop. Its development is a must. Presently, the business tax rate stands at 25 percent, which clearly won't allow the service industry to thrive. Making the service industry develop by lowering its business tax is a vital task.
That's why (President) Ma Ying-jeou and (Vice President) Vincent Siew said in their election platform that they want to lower the business tax to 20 percent. Of course, this still needs to be discussed by the Tax Reform Commission. Assuming that we are able to realize this tax cut, this would obviously help the service industry's net profits after tax a lot and would be bound to boost future investments and raise productivity.
Q: You were mentioning the Ma-Siew platform. Many people make the criticism that the Tax Reform Commission's answers have already been written and that the commission only serves to give expert backing to the platform.
A: There are no answers yet, we are still involved in discussions, and decisions will eventually have to be finalized by the Tax Reform Commission. Presidential candidates around the globe all have election platforms. But whether a platform can be implemented requires detailed analysis, because platforms usually only contain a few sentences on each topic. An important task within the Tax Reform Commission is to make information clear, to calculate everything and to dispel the public's worries.
Q: Would you consider lowering the maximum income tax rate of 40 percent?
A: Presently, we don't have such plans. But within the Tax Reform Commission some will certainly make such proposals because we have seen a lot of commercials about that.
Q: Many people say if Taiwan is to become a financial center of the Asia-Pacific region as envisaged in the Ma-Siew platform, the estate tax ("inheritance tax”) and gift tax have to be lowered to zero.
A: I don't think we need to lower them to zero, but lowering these taxes is crucial. This is because revenue from estate taxes is not high (about NT$30 billion per year) and our neighboring countries in Asia mostly don't have estate taxes. When the United States repeals its estate tax for one year in 2010, they will also have to discuss whether to permanently repeal their estate tax. Taiwan is only able to levy a high amount of estate tax in the case of sudden deaths, but the Tax Reform Commission has yet to discuss how much the estate tax should be lowered. I can't say anything beforehand.
But since offshore tax avoidance also requires a capital outlay, at around 10 percent, one approach is that there should be a minimum rate for the estate tax. The main objective of reducing the estate tax rate is to provide incentives for overseas Taiwanese businesspersons to repatriate overseas capital to Taiwan for investment, so that they participate in domestic infrastructure projects and economic development. This point is very important.
Q: Will the Statute for Upgrading Industries be completely terminated? What is the stance of the Executive Yuan?
A: By law, the Statute for Upgrading Industries will expire next year. On top of that we will still examine whether to provide functional tax incentives after the Statute's termination as Singapore does. The Tax Reform Commission will thoroughly discuss to what extent we should use incentives that foster international competitiveness such as for promoting R&D or establishing operational headquarters in Taiwan.
Q: What is the Executive Yuan's attitude toward reviving the capital gains tax on income from stock trades?
A: Regarding capital gains tax, from the outset two viewpoints have existed within the Tax Reform Commission. One tends toward the Western system, which imposes a capital gains tax on both individuals and corporations. The other viewpoint favors the system common among our Asian neighbors, in such emerging countries and economies as China, South Korea, Hong Kong and Singapore, which don't impose a capital gains tax on individuals, but only on corporations. In Hong Kong, for example, securities brokerages or companies that mainly engage in equity sales and trading are charged capital gains tax, but companies that don't are not charged.
The viewpoint favoring use of the Asian system contends that if Taiwan's neighbors don't charge a capital gains tax, but we start to impose one, when their stock markets rise significantly, this will easily cause capital from our stock market to flee abroad. Then our stock market index won't be able to rise.
On the other hand, if we look at things from the aspect of fairness, Taiwan last year charged taxpayers a total of NT$128.8 billion in securities transactions taxes. In comparison with the NT$750 billion revenue from corporate and individual income taxes, the weighting of the securities transactions tax is quite high, and this tax is also quite fair.
As it looks now, the Asian system viewpoint does not seem unreasonable. Taiwan originally did not impose a capital gains tax, but if it does now the effect on the capital market will be very big. The viewpoint favoring the Western system is more orthodox. Yet even in the United States foreign investors who buy American securities are not charged capital gains tax. The system of our Asian neighbors uses a securities transactions tax, which is simple in terms of procedure and also generates stable tax revenue.
In its next meeting the Tax Reform Commission will pull out all the facts for discussion. With all the information, we can easily focus on this.
Q: Presently tax rates in Taiwan are quite low compared to other countries around the world. Can this round of tax reforms manage to avoid raising taxes?
A: There are three reasons why the ratio of Taiwan's tax revenue to GDP is low. First, a very big chunk of Taiwan's economy is exports, which are all tax-free, so that they do not directly contribute to tax revenue. Second, about 60 percent of all households that file consolidated income tax reports are exempt from paying income tax or fall in the six-percent tax bracket. (These are classified as disadvantaged groups. In the future, those below or near the poverty line will receive working income subsidies). Third, there are quite high tax exemptions for beneficiaries under the Statute for Upgrading Industries. This point will be improved after the Statute for Upgrading Industries has been terminated.
After the Statute expires, these current tax reforms will lower the business tax for conventional industries, based on a tax neutral position. On the other hand our tax system needs to be internationally competitive. By raising efficiency and promoting economic development, we will be able to expand the tax base and pursue fairness.
(Compiled by Jerry Lai)
Translated from the Chinese by Susanne Ganz
Chinese Version: 遺產及增與稅一定要降