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Tax integration system must go

When members of the Control Yuan’s Financial and Economic Affairs Committee went on an inspection tour at the Ministry of Finance on Oct. 20, most of them expressed support for the government’s decision to cut the estate and gift tax to 10 percent.

One of the committee members, Hung Chao-nan (洪昭男), offered the view that the tax burden on people in the high-income bracket is too light, and that Taiwan’s system of tax integration may be the main reason. Hung suggested that the government consider abolishing tax integration. At present, academic members of the Tax Reform Commission who advocate a fair and equitable tax system feel that proposed tax cuts are contrary to their ideals. If Hung’s proposal were put on the agenda, however, it would surely be warmly welcomed by the broad middle class.

Why was tax integration adopted in Taiwan? The policy can be traced back to 1996, when then-president Lee Teng-hui (李登輝) was campaigning in Taiwan’s first direct presidential election. In order to curry favor with the business sector, Lee said that income from investment in companies was subject to both profit-seeking enterprise income tax and individual income tax, in effect doubling investors’ tax burden. After he was elected, Lee delivered on his campaign promise. In 1998 the Income Tax Act (所得稅法) was amended with the addition of Article 3, Section 1, which allows profit-seeking enterprise income tax paid by companies to be offset against individual income tax payable by shareholders.

However, if there is to be no double taxation on income from investment in businesses, what about income from investment in real estate, which is subject to individual income tax even after land, house, deed and land value increment tax have all been paid? What about ordinary working people, who have to pay income tax on their hard-earned wages and then pay business tax on the price of anything they buy? If they manage to save a little money, they have to pay tax on the interest from their savings. If they buy a home, they will have to pay house and land tax. How many times over do they get fleeced? Is this not also double — or multiple — taxation? Who will speak up for the common man?

According to figures compiled by the Ministry of Finance, the total loss of income tax revenue because of tax integration was NT$60.4 billion (US$1.8 billion) in 2004, NT$74 billion in 2005 and NT$79.3 billion in 2006. For last year, the projected loss of revenue is more than NT$100 billion.

Taking 2006 as an example, income tax payers in the top bracket — those with an annual income above NT$10 million — accounted for just one-thousandth of all taxpayers in Taiwan. Because taxpayers in this group earned 70 percent of their income from investments, they were between them able to claim deductions on their personal income tax amounting to NT$18.6 billion — 23 percent of the total of all tax deductions claimed in Taiwan. Clearly, tax integration has made the distribution of income in Taiwan more inequitable. It has been a painful chapter in the history of taxation in Taiwan.

On July 23, 1990, the Council of the European Communities, the forerunner of the Council of the European Union, issued a directive on parent companies and subsidiaries, maintaining that the relationship between companies and their shareholders was one between entities with different rights, so there was no question of double taxation. In 1999, Britain became the first country to abandon the concept of prepayment of corporate tax, and also imposed personal income tax on a progressive scale of 10 percent to 32.5 percent on stock dividends. By last year, not one of the 27 member states of the EU had a system of tax integration such as we have in Taiwan.

For reference, among Taiwan’s neighbors, the maximum rates of personal income tax are 17 percent in Hong Kong, 20 percent in Singapore, 35 percent in South Korea and 45 percent in China. If Taiwan were to follow the example of other countries in abolishing tax integration, the state’s annual tax revenue would increase by NT$100 billion.

Given that the Statute for Upgrading Industries (促進產業升級條例), which allows tax cuts to companies to compensate for spending on modernization, is set to expire next year, there will be sufficient financial resources to bring the maximum rate of personal income tax down to 20 percent.

With low rates of taxation, there will be less motivation to evade taxes. An internationally competitive tax regime will come to pass in Taiwan — it is only a question of when.



Huang Chun-sheng is an accountant and university professor.

TRANSLATED BY JULIAN CLEGG
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