In media interviews published last week, Premier Lin Chuan (林全) said that income tax would be the focus of tax reform this year. He said that, on condition that total tax revenue remains unchanged, the business tax would be raised and individual income tax cut. He said that the difference in tax rates between Taiwanese and foreign residents would be eliminated and the issue of high tax burden on senior white-collar workers would be resolved. Overall, these changes are a move in the right direction, but giving priority to adjusting tax rates could create a backlash, because it involves many unconnected issues that could obstruct the progress of tax reform.
Below are some suggestions that could be taken into consideration.
A broad tax base is the eternal mainstay of tax reform. If total tax revenue is to remain unchanged, it is only possible to cut rates if the tax base is broadened. If that can be done, it would enable the public as a whole to enjoy the tangible benefits of a lightened tax burden.
The first thing that the government should consider is the widespread nature of preferential tax legislation. The approach has made Taiwan into a place where every kind of business enjoys preferential treatment and incentives. The system should be changed to allow different ministries to draw up their own budgets and provide financial assistance where needed, because healthy financial administration can only exist when there is complete clarity about revenue and expenditure.
Taiwan’s outmoded integrated taxation legislation, which integrates business tax and individual income tax, needs to be reconsidered. There should be a separation between the two kinds of income tax applied to corporations, while a pass-through tax system should apply to partnerships. Together, these measures would cut the tax burden on innovative start-ups and the cost of tax collection, increasing the state’s tax revenue.
The government should strengthen inspections of philanthropic institutions’ and foundations’ preferential tax treatments and require that these entities make their finances fully transparent. All those who meet the requirements for preferential taxation and actually enjoy the benefits thereof, i.e. those who enjoy the benefit of having other people bear the tax burden for them, should be subject to government and public oversight. They can no longer be allowed use the excuse of secrecy to retain their unfair taxation benefits.
After broadening the tax base and cutting taxes the next task is to simplify tax administration. This does not only mean simplifying tax collection, it also means codifying and rationalizing tax collection procedures using effective legislative, as well as administrative and judicial means, to substantially improve the function and results of tax relief procedures, so as to avoid taxpayers being affected by disputes over back taxes and related penalties remaining unresolved while sacrificing taxpayers’ due protections.
At the same time, the government must ensure the effective exercise of the state’s tax-creditor rights. Key points for the state to focus on in legislation aimed at simplifying tax administration and making tax remedy procedures more effective include: taxpayers’ and third parties’ duty to assist in tax collection; evidential and factual procedure in professional authority investigations; and perfecting the procedure for resolving disputes between the collector and the payer.
Finally, prevention of tax avoidance and establishing a comprehensive legal system regarding tax avoidance and evasion are essential links in constructing a comprehensive legal procedure for taxation. There have been some achievements in this regard over the past few years, including the completion of legislation on transfer pricing, thin capitalization and foreign-registered companies that are controlled by domestic taxpayers.
However, there are many challenges ahead concerning cross-border transactions, e-commerce taxation, international exchange of tax information and so on.
Taiwan’s legal system regarding tax avoidance and evasion needs to be perfected, putting the emphasis on penalties for failure to declare. The tax authorities need to cooperate with the Ministry of Justice’s subordinate agencies all over Taiwan to conduct raids and audit accounts. This applies to all kinds of economic crimes and related illegal activities, such as gambling, narcotics, fraud, money laundering and infringements of food safety and environmental protection laws.
Mechanisms need to be set up for early reporting between different agencies. Adhering to the security seizure system would make sure that unlawful profits made through criminal and unlawful activities can be taxed, with the proceeds paid into the treasury, as well as those involved being subject to due penalties. All these goals depend on the premier coordinating between ministries, before drawing up legislation to construct a fixed system.
Ko Ke-chung is an associate professor at National Taiwan University’s College of Law.
Translated by Perry Svensson and Julian Clegg
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