The Legislative Yuan on Friday night passed the third reading of the Industrial Innovation Act (產業創新條例), and while the new law aims to help improve Taiwan’s investment environment and increase business competitiveness, the debate over the legislation in the past few months has shown the whole country is still obsessed with the idea of tax cuts rather than industrial innovation per se. The Industrial Innovation Act is designed to replace the Act for Upgrading Industries (促進產業升級條例), which expired at the end of last year. The most noticeable clause in the new law is for the government to provide tax breaks for corporate spending on research and development (R&D).
Under Article 10, a company can deduct 15 percent of its R&D investment from its business income tax, but the amount of tax deductible should not exceed 30 percent of the firm’s business income tax for that year. This is scaled down from the original draft that said 35 percent of a business’ R&D spending would be deductible from its business income tax for five years.
The new law also stipulates that the government needs to establish a national development fund (國家發展基金) to invest in and provide loans to industries involved in green energy, agricultural technology, cultural innovation and branding development. It also enables government agencies and businesses to apply to develop and run an industrial park, as long as the establishment of the park complies with the government’s industrial policy.
What is bizarre and probably unrelated to the spirit of the legislation is that the new law’s Article 11 now offers a legal basis for the government to offer subsidies to small and medium-sized businesses for every new employee they hire.
Next week is likely to see some controversy as lawmakers are expected to vote on a draft amendment to the Income Tax Act (所得稅法) to lower the rate of business income tax as a supplementary measure to the Industrial Innovation Act.
The Cabinet and Chinese Nationalist Party (KMT) hope to cut the business income tax rate from 20 percent to 17 percent, believing this will create a more competitive investment environment at home while encouraging more companies to invest in R&D in the long term. The Democratic Progressive Party suggests a 17.5 percent proposal instead.
Be it 17 percent or 17.5 percent, those who back tax cuts usually argue that lower tax rates are necessary to promote investment and boost economic growth, believing that higher tax revenues will eventually follow. However, no one knows how long it will take to see these benefits materialize from the presumed advantages of tax cuts. More important to a sound investment environment, however, is support from other factors like a stable cross-strait relationship, policy consistency and government efficiency.
Nevertheless, during the legislation process of the Industrial Innovation Act, the debates over the size of the tax cut, a possible tax revenue shortfall and the government deficit have distracted attention from more important concerns about what strategic industries Taiwan needs in the high value-added knowledge economy era. The public is also in the dark about how the law can achieve its goal to promote industrial innovation and increase labor productivity here.
Now that the law has been passed, the challenge the government faces is how to make sure local businesses become more creative and competitive as a result of the tax breaks. The government must also be careful about the use of the proposed national development fund and prevent the establishment of new industrial parks from becoming idle or falling into the hands of land speculators. As for businesses, they need to develop a strategic perspective about their future instead of bargaining just for tax cuts.
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