Bank's timing off with call for a reduction in the business tax

Banks are calling for a reduction of the business tax on financial institutions from the current two percent to zero -- but academics and finance experts say the timing of the request is wrong.

Business leaders recently added their voices to those of the banking industry, saying the estimated NT$20 billion to NT$28 billion savings this fiscal year could be used to help banks absorb unpaid housing mortgages in quake-stricken areas.

Ministry of Finance officials have stressed that such a reduction is unlikely at this time, though they haven't officially ruled out the possibility.

However, analysts and academics says the banks' losses as a result of unpaid mortgages will not be as serious as expected.

"Eight banks will bear eighty percent of the estimated total NT$50 billion loss," said Sophia Cheng (程2Q芬), a senior financial analyst at ABN AMRO (2?齠??/CHINESE>).

This would mean that only those banks would lose their profit for about one year, she said, and "the stockholders would not receive their usual annual six to eight percent benefit."

But banks should still not be asked to pay the business tax, said Tsui Wai-Cho (徐偉初), head of the department of public finance at National Chengchi University. According to Tsui, the business tax on banks is a variation of the income tax on banks.

"The business tax is supposed to tax manufacturers on the value-added on to their products," he said. "But banks do not add value to their product [i.e. money]."

However, Tsui said, Taiwan has historically grouped the banking industry among the average profit-making business corporations and imposed the value-added business tax on banks. As a result, "banks in Taiwan are double-taxed," he said.

"Most other countries only impose income tax on banks," he added.

But even Tsui agrees that the timing of the reduction proposal is wrong.

"If the Ministry of Finance decides to eliminate the business tax on banks right now," said Tsui, "those banks which were not affected by the earthquake will also benefit."

This would then lead to a problem of fairness, he said, adding that a reduction in the business tax rate would also worsen the government's deficit.

From a cost-benefit perspective as well, elimination of the business tax would not make sense, said Shea Jia-Dong (31霽?/CHINESE>), an economist at the Academia Sinica and vice-president of the Central Bank.

"As a scholar and from a purely cost-benefit point of view, [if the government eliminated the business tax] that's like spending ten dollars, but the effect may be worth only one or two dollars for the reconstruction."

Yophy Huang (黃耀輝), an associate researcher at the Chung-Hua Institution for Economic Research also said that eliminating the tax may not be fair on other industries. "The tax loss resulting from the business tax elimination would have to come from other sectors of society," he said.

However, if the government wants to provide the domestic banking industry with the ability to compete internationally, one way is to remove the business tax, he said.

"Double taxing banks means that their costs are comparatively higher than the banking industry in other countries," he said.