The set of amendments to the Income Tax Act (所得稅法) that cleared the legislative floor on Thursday last week represents the most ambitious tax reform plan the nation has had in two decades. However, the US’ overhaul of its taxes is a wake-up call for Taiwan over the need to compete for talent and investments.
The Taiwanese tax reform plan removes the highest marginal income tax rate of 45 percent from the individual income tax rate brackets and halves the tax rate on corporations’ undistributed earnings to 5 percent, but raises the corporate income tax rate from 17 to 20 percent, with the rate for small and medium-sized enterprises to rise in annual increments of 1 percentage point over three years.
To narrow the gap between tax rates for domestic and foreign investors, the amendments include a 1 percentage point increase in foreign investors’ dividend income tax rate and provide two options for domestic investors to calculate their dividend taxes.
The plan also increases various tax deductions for wage-earners, parents of preschoolers and disabled people, which is expected to benefit 5.42 million people with a reduction of NT$10,000 to NT$15,000 (US$340 to US$510) on average in income taxes, according to government estimates.
Overall, the nation’s tax reform focuses more on tax fairness and wealth redistribution, compared with the US tax cut that makes a tremendous effort to increase domestic investment.
However, even though the government is likely to lose about NT$56.2 billion in tax revenue over the first three years, because the latest tax cuts should benefit wage-earners and domestic stock investors, average disposable incomes might increase by NT$38.8 billion a year and that should give a modest boost to domestic demand, Minister of Finance Sheu Yu-jer (許虞哲) said on Friday.
In other words, even though the reforms could inflict short-term pain, they cannot be a bad thing in the long term. Given the constraints the government faces and considering the nation’s needs, the tax reforms overall appear wise.
However, Taiwan should rethink the competitiveness of its corporate tax structure after the US’ tax overhaul reduced its taxes to among the lowest in the developed world.
Following the 3 percentage point increase, Taiwan’s corporate tax rate remains low compared with the US’ 21 percent, the average rate of 24.7 percent in European nations, South Korea’s 22 percent and China’s 25 percent, but it is still higher than Hong Kong’s 16.5 percent and Singapore’s 17 percent.
Moreover, the US tax overhaul offers a one-off tax break on cash held overseas in addition to a dramatic reduction in the corporate tax rate, which could lead large US companies, such as Apple Inc, Microsoft Corp and Pfizer Inc, to return US$1.6 trillion to US$2 trillion in offshore deposits to the US, according to DBS Bank’s estimates.
As openness to trade, capital flows, movement of labor and the exchange of technology have made the world more interconnected than ever, the US’ tax reforms are certain to have an effect on other economies. The Taiwanese government needs to consider more tax incentives to stem the outflow of talent and protect local industries, while looking at structural changes in the tax base.
Meanwhile, whether the US’ tax reforms will attract more investments by Taiwanese companies and whether they will relocate some of their production to the US depends on the firms. An improved manufacturing environment in the US after the tax overhaul could trigger a global supply chain reshuffle to which local businesses need to pay attention.
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