EDITORIAL: Tax fix would not end brain drain

Wed, Mar 05, 2014 - Page 8

Taiwanese firms face tougher battles to nurture and retain talent, particularly in the technology sector, amid escalating competition. Apparently, following discussions in situation rooms, local executives and industry representatives have decided to seek government help. Business leaders want the relaxation of an employment compensation tax rule as the “brain drain” continues.

In the latest global talent-scouting competition, Apple Inc is launching a hiring spree in Asia, aiming to shrink product development time and beef up its regional presence, the Wall Street Journal reported on Monday. The effort focuses on China in particular, which is seen as the company’s new growth engine.

Apple wants engineers and managers from local rival HTC Corp and its Asian supply chain, including Taiwan’s Inventec Corp and Quanta Computer Inc, to build a bigger regional team, the report said.

A million engineers would kill for a job at Apple. It is almost impossible for local firms to compete with companies like Apple, or Google Inc, given their better salaries, growth potential and employee benefits.

Local firms have a very slim chance of stopping talent drain, as most cannot equal the salary packages of their global rivals, given weaker profitability and much smaller operations. It will become a vicious cycle: The less the companies earn, the less they can pay employees; that will lead to loss of core staff and, thereby, corporate competitiveness. This is what companies are striving to avoid.

The question is how to create a sufficient talent pool by nurturing home-grown talent, retaining that talent and recruiting experts from overseas.

Amid limited resources, local electronics companies are considering the old trick of attracting core employees by resuming stock bonuses. However, the income tax problem has to be tackled first.

Local firms hope the government will lower the income tax on stocks granted to employees as year-end bonuses by restoring a rule taxing stocks at their NT$10 face value, rather than at market value.

In the past, delivering stocks as bonuses was an important approach and a major part of retaining skilled employees because those stocks usually entailed a lock-in period of one to three years. Stock bonuses were also seen as a good way to compensate underpaid employees.

Back then, employees did not have to pay tax on the bonuses until they sold the stocks.

Now, employees are immediately taxed for the market value of the stock bonuses, rather than on face value, as the law allowed six years ago.

Most technology firms now pay bonuses in cash instead of stock to cope with the new accounting rule of booking stock bonuses as expenses rather than earnings, which is part of the government’s efforts to boost local listed firms’ financial transparency.

However, executives complain that it becomes harder to retain talent, as some employees jump ship right after receiving cash bonuses.

However, there is abundant doubt about loosening the income tax on stock bonuses. First, it will cut tax revenue. To minimize the tax erosion, the Ministry of Economic Affairs is considering proposing a minor revision to the tax rule by allowing employees to pay the income tax after they sell the shares.

Second, it will be a regression in the government’s tax reform toward a fair system. Third, relaxing the tax cannot resolve the fundamental problem of talent shortages, but just grants a little grace period for firms to stop additional brain drain.

Local firms should look to the fundamentals to fix the talent-retention issue; higher salaries are certainly attractive, but are not the only way to keep employees. Corporate lack of vision and lack of innovation, alongside a lack of hope for growth potential, may be additional important reasons behind talent drain.