The nation’s small and medium-sized enterprises (SMEs) are feeling nervous these days.
On the one hand, the government is weighing a plan to raise the salaries of civil servants while large companies such as Taiwan Semiconductor Manufacturing Co and Formosa Plastics Corp are planning pay raises for their employees this year, leaving SMEs with a dilemma because they want to hold on to talent, but they also want to increase profits.
On the other hand, the government is proposing to increase the tax on companies’ retained earnings, also known as undistributed earnings, in the belief that this would encourage companies to share more earnings with shareholders and raise salaries for employees. However, SMEs argue a higher tax rate would weaken their cash flow and make future investments less viable.
The legislature’s Finance Committee last month approved an amendment to the Income Tax Act (所得稅法) that would increase the tax rate on companies’ retained earnings to 15 percent from the current 10 percent, and subjected the amendment to the second and third readings in the legislature. However, after opposition from several lawmakers, the legislature on Friday referred the amendment for further cross-party negotiation, which means it will be stalled for a maximum of one month unless lawmakers reach a consensus before that.
Whether or not the amendment clears the legislature, the idea of imposing a higher tax on companies’ retained earnings illustrates something very specific to businesses today: the need to share profits with employees, many of whom feel no benefit from the recovering economy because of their stagnant salaries.
It goes without saying that as economic fundamentals improve, businesses now have more capacity to share profits with employees, especially after Taiwan in May last year lowered the business income tax from 20 percent to 17 percent — among the lowest in the world.
It is also very striking that the nation’s top personal income tax rate of 40 percent is more than twice that of the business income tax rate. The higher rate for personal income tax has naturally led companies to choose to park more of their earnings in the firms instead of distributing them to shareholders, especially when major shareholders are owners of the firms as well.
To the government, the plan to impose a higher tax rate on retained earnings is a convenient way to kill three birds with one stone: taxation fairness, social justice and boosting tax revenue.
However, the situation is not as simple as it seems. Retained earnings are like corporate savings, which companies rely on heavily to finance their investments or when they are in urgent need of capital injections while avoiding bank loans.
In the business world, not all firms are able to raise funds through public offerings whenever they are experiencing financial and operational difficulties. Furthermore, in Taiwan, many SMEs are not publicly traded companies.
There is no absolute answer as to whether a higher tax on retained earnings will hurt companies’ competitiveness, but it is certain that the proposed tax increase will have a more adverse impact on SMEs than on large, listed companies.
Looking ahead, SMEs are likely to follow suit in doling out small pay raises and may have to pay higher taxes on retained earnings if the government enacts the amendment.
While the government wants businesses to share profits with employees to reflect the nation’s improved economy, does it offer SMEs, which account for more than 90 percent of Taiwan’s businesses, a better year or a more difficult one?
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