Sat, Jan 17, 2009 page12

• ANALYSIS: Experts greet tax reforms with mixed sentiments

  ASSET ALLOCATION PLANS The chief economist at Citigroup Inc Taiwan said tax cuts on inheritance and gift levies would not substantially alter the status quo

  • By Crystal Hsu and Kevin Chen / STAFF REPORTERS
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  The legislature’s approval of a flat 10 percent rate for inheritance and gift taxes is expected to slow down capital outflow but the move may prove inadequate to induce capital repatriation or turn Taiwan into a regional financial center, pundits said earlier this week.

  On Monday, the legislature approved the Cabinet’s proposal to set the inheritance and gift levy at a fixed 10 percent from the current range of 2 percent to 50 percent, depending on the amount inherited or given.

  “We believe this will stop capital outflow in the short-term, while meaningful capital repatriation would require the investment environment to improve,” Andre Chang (張致竑), an analyst at Citi Investment Research, wrote in a client note issued on Tuesday.

  Vice Premier Paul Chiu (邱正雄), who leads the Tax Reform Committee, said in a position paper issued in October that an average of NT$1.2 trillion (US$360 million) in capital fled the country each year over the last five years. Another estimate by Citigroup showed that wealthy Taiwanese are holding roughly US$450 billion in offshore assets.

  With many of the nation’s richest people moving their fortunes abroad in a bid to pay less taxes, the national treasury collects about NT$23.5 billion in inheritance and gift taxes each year, Minister of Finance Lee Sush-der (李述德) said. That number represents a mere 1.5 percent of total tax revenues for last year, when the amount was NT$1.755 trillion, based on a ministry report released last week.

  The ministry estimated a cap of 10 percent would cost the national treasury some NT$20 billion a year, but at the same time the reduction in inheritance and gift taxes could lower the amount of capital drain by 10 percent, or NT$120 billion, raise the nation’s GDP by NT$60 billion and generate an extra NT$8.1 billion in tax revenues each year, Chiu forecast in the paper.

  The change would have a positive effect on market sentiment and was a critical first step to clear barriers for capital repatriation, a Standard Chartered Bank economist said in a telephone interview.

  “More tax reform is necessary before Taiwan can become a regional financial center though opportunity costs will drop considerably following the cuts on inheritance and gift taxes,” Tony Phoo (符銘財) of Standard Chartered said on Wednesday.

  Phoo said the nation’s personal income tax was higher than in Singapore or Hong Kong and the government should address the issue if it wants to attract global talent.

  As far as capital repatriation is concerned, investors expect the local real estate and financial sectors to benefit from rising wealth management and transaction business.

  The building material and construction sub-index, which reflects the general share performance of the real estate sector, rose 2.38 percent in the first two days after the legislature’s approval of the tax cuts, before it was hit by an across-the-board decline on the local bourse on Thursday. For the week, the sub-index dropped 2.48 percent.

  Shares of the financial sub-index also rose 3.3 percent in the first three sessions this week, before Thursday’s plunge. It fell 3.1 percent for the week, Taiwan Stock Exchange’s tallies showed.

  “As the best tax-saving vehicles, properties are likely to benefit from these tax changes,” Chang wrote in his client note.

  The Citigroup analyst cited two reasons why property shares would benefit from the tax cuts in the long term, namely lower property valuation and lower interest rates.

  Chang said properties were considered the best tax-saving vehicle for investors because of the relatively lower property taxes that would be levied, discouraging investors from moving assets abroad.

  “The Taiwan government taxes properties based on building value, land value and appreciation. However, these numbers are usually based on the government’s appraisal, which is consistently lower than the market value,” he said.

  Secondly, a lower interest rate environment foretells a lower investment risk to both buyers and developers, which could leave market participants unscathed at this difficult time.

  “Lower interest rates are unlikely to persuade people to buy properties while prices are dropping, but it reduces default risks for stretched house buyers and property developers and could accelerate demand recovery once prices stop declining,” Chang said.

  To boost economic growth and encourage private consumption, the central bank has cut its benchmark discount rate by 212.5 basis points to 1.5 percent since September. Standard Chartered forecasts that the central bank will cut the discount rate to 1 percent in the first half of this year, while Citigroup predicts the central bank will move faster and lower the rate to 1 percent by March.

  Still, analysts are cautious about the local housing market in the short term, hinting that the problems of oversupply and weak buying interest are still hitting the sector.

  Chang said investors were unlikely to buy properties in the near-term purely because of tax-savings. Investors would wait for the right time to enter the market “as further price declines are expected,” he said.

  Eric Lai (賴建承), an analyst at Marbo Securities Consultant Co (萬寶證券投顧), agreed with Chang.

  “A considerable number of people will probably adjust their wealth management strategy following the tax cut but there is no hurry to do so,” Lai said.

  But for Cheng Cheng-mount (鄭貞茂), chief economist at Citigroup Inc Taiwan, the tax cuts on inheritance and gift levies will not alter the status quo much.

  “With or without the [inheritance] tax cut, people who can afford it have probably already acquired real estate in line with their asset allocation plans,” he said. “I doubt the tax reform will prompt them to buy more.”
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