Financial Supervisory Commission Chairman Chen Yuh-chang (陳裕璋) yesterday voiced reservations about a proposal by lawmakers to raise the business tax on financial institutions, saying the move would further squeeze already-thin profits in the current economic environment.
Chen made the comments after Chinese Nationalist Party (KMT) lawmakers suggested raising the financial sector’s business tax to 5 percent from 2 percent to help boost the state coffers.
“While domestic financial institutions have improved their earnings ability in recent years, they lag behind their international peers in terms of return on assets and equity,” Chen told the legislature’s Finance Committee.
The government should draw up comprehensive measures to strengthen its finances rather than increase the tax burden of any particular sector, Chen said.
More than 50 KMT lawmakers plan to introduce a bill today that would subject financial institutions to a business tax rate of 5 percent, on a par with companies in other sectors.
KMT Legislator Liao Cheng-ching (廖正井) said financial institutions should stop enjoying favorable taxation now that average bad loan levels have dropped below 1 percent for two straight years.
A 1 percentage point increase in the business tax could generate an extra NT$30 billion (US$1 billion) a year for the national treasury, which is struggling to keep different pension funds afloat, Liao said.
In 1999, the government cut the business tax to 2 percent for banking institutions and stipulated that they should use the tax savings to shore up their coverage ratios since a sizable number of lenders were strapped for cash.
The government later set up the Financial Reconstruction Fund to bail out troubled lenders using money from the sector’s 2 percent business tax revenue.
Taiwanese banks score an average return of 0.6 percent on their assets, compared with 1 percent for international peers, Chen said.
Local lenders may achieve a 10 percent return on equity this year, still lower than the international benchmark of 15 percent, he said.
A heavier tax burden could drive financial institutions to raise credit costs for customers, which could affect the nation’s mild economic recovery, he added.
The 2 percent business tax for financial institutions is not low compared with that of other sectors or countries, Bankers’ Association of the Republic of China (銀行公會) chairman Liu Teng-cheng (劉燈城) told local reporters.
Firms in other sectors enjoy various tax breaks not available to banks, which depend primarily on interest income, said Liu, who is also chairman of Taiwan Financial Holding Co (台灣金控).
Meanwhile, financial regulators worldwide have tightened provision requirements in the wake of the 2008 global financial crisis, making it more difficult for the sector to turn a profit, Liu said.