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BNP Paribas says tax scheme will work, eventually

Despite a possible short-term shock on companies' profitability -- which will depress the local bourse -- the implementation of the alternative minimum tax (AMT) scheme is expected to benefit Taiwan through industrial upgrades and healthier national finances in the long run, BNP Paribas Securities Taiwan said yesterday.

"Given that an average of 14 percent of listed companies' profits came from government subsidies, the implementation of AMT will dent their profitability by the same scale," BNP Paribas' head of research, Jesse Wang, (王嘉樞) said in a telephone interview yesterday.

Upstream technology firms, including foundries, flat-panel display makers and integrated-circuits design companies will be the most-affected group, Wang said.

This is expected to weigh down the stock market, dragging the benchmark index down to a level of around 5,400 points next year when the new taxation mechanism takes effect, the analyst said, while suggesting investors leverage the chance for bottom-fishing.

The TAIEX slid marginally by 11.63 points, or 0.19 percent, to close at 6,111.89 yesterday, after lawmakers passed the first reading of the draft AMT bill on Wednesday.

The latest version of the AMT proposal will impose a tax rate of 10 percent to 12 percent on businesses enjoying annual profits exceeding NT$2 million with government subsidies taken into account, and a tax rate of 20 percent on individuals having annual earnings surpassing NT$6 million (US$178,428), including overseas income of more than NT$1 million.

If the proposal becomes law it would affect about 5,000 companies and between 16,000 and 17,000 households.

"The approval of the AMT means that Taiwan is beginning to remove or reduce the effective subsidies enjoyed by tech exporters and launch tax reforms," Wang said.

Unlike in the past, when the government was willing to subsidize tech exporters because of their contributions to employment and export growth, it is less willing now, as these firms have mostly moved their manufacturing facilities across the Taiwan Strait, hiring Chinese and generating a trade surplus for China, the analyst said.

The removal of subsidies, however, will be good for Taiwan's industries in the long run, by aiding the rationalization of the tech economy, Wang said.

Price competition would ease, as companies will no longer be able to cut prices at the expense of subsidy providers, and industry consolidation will occur, with weaker players more likely to give up management control while the long-term profitability of industry leaders should rise, he said.

This could stimulate industrial restructuring and upgrades, to sharpen firms' competitive edge against their regional rivals, such as South Korean firms, Wang said.

Meanwhile, Taiwan's fiscal deficits of approximately 3 percent of its GDP can be financed with increased tax revenues, the French securities house predicted.
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