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Editorial: The way forward for tax incentives

Along with the new minimum-income tax scheme expected to come into effect next month, the Ministry of Finance is pushing forward reform plans with a review of the existing mechanism for tax incentives stipulated by the Statute for Upgrading Industries (促進產業升級條例). The ministry holds that it is unfair for companies in the so-called "emerging strategic industries" to enjoy tax-free earnings for five years and, at the same time, receive deductions on selected investment items. Companies in strategic industries may now have to choose either a five-year tax exemption for investments or else deductions on machines and equipment they buy for use in production.

The nation's high-tech sector seems to fall into this category, and several high-tech firm heavyweights including Taiwan Semiconductor Manufacturing Co chairman Morris Chang (張忠謀), strongly criticized the proposed measure last week, saying it would have a negative impact on future investment in Taiwan. After meeting Minister of Economic Affairs Ho Mei-yueh (何美玥) on Wednesday and voicing concerns to Premier Frank Hsieh (謝長廷) on Friday during a breakfast meeting, business executives are planning to visit Minister of Finance Lin Chuan (林全) this week to discuss the cuts to tax incentives.

In view of the mounting backlash, the Cabinet has appeared to reach a compromise by asking the economics and finance ministries to communicate with the industries further before implementing the new measures.

Claiming that the proposed measure will not be retroactive, the finance ministry has stated that it prefers to issue an administrative decree and therefore bypass legislative review. The economics ministry, however, has suggested amending the statute before final implementation.

This difference in opinion between the ministries should be of concern. Taxation is an area of considerable interest for businesses because they rely on government promises to decide whether or not they will place substantial amounts of money in certain territories. A lack of predictability and other uncertainty in the application of tax law is likely to have a negative impact on new investment.

Of course, company executives are singing the blues over possible increases in costs once the new measures are introduced, but the fact remains that the government is facing weaker fiscal flexibility -- which led Standard and Poor's to maintain a "negative" outlook on Taiwan last week -- and will be attempting to increase tax revenues in order to balance the books by 2011.

The government's incentive scheme for technology industries cannot continue indefinitely as there are companies in the high-tech sector that pay greatly reduced amounts of tax. In this light, the government needs to review its incentives from time to time to ensure that the nation's resources are being used wisely and efficiently.

Even so, the business sector does deserve due process from the government if the latter insists on revoking tax incentives. Any changes to the law should come about through a fair process, and there must be an emphasis on consistency in tax law interpretation. Additionally, the government should include the voices of industry representatives and accountants as part of the decision-making process. This can only strengthen trust in the decision-making process.

The government can't please everyone, especially on the thorny issue of tax. But if it can implement these procedures in a more transparent way, take into account the opinions of those affected and make known to the general public that its intentions are benevolent, its decisions on tax will be more likely viewed as just.
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