The government is considering a proposal to impose a 20 percent tax on the net income earned by local branches of foreign companies, a local Chinese language media report said yesterday, citing a Ministry of Finance tax proposal.
The tax would be tacked on to a tax of 25 percent already imposed on foreign firms' pretax profit, which would bring the total tax rate to 40 percent, it said.
While the report said the new tax might deter direct foreign investment in Taiwan, one pundit disagreed.
"The possible change should be aimed at equal tax treatment for foreign companies' business structure in Taiwan. It will not become an obstacle preventing foreign investment in Taiwan," said Tseng Chu-wei (曾巨威), a professor of public finance at National Chengchi University.
The report quoted Minister of Finance Yen Ching-chang (顏慶章) as saying that the proposal is not yet final, and would require Legislative approval.
"Currently the proposal was made by ministry staff and has to be discussed thoroughly by the tax reform committee before a final decision is made," Yen reportedly said.
The report said since there is a different tax rate for branches of local companies compared with the rate for branches of foreign firms, some local companies establish shell companies abroad and then open branches in Taiwan in order to take advantage of the lower tax rate.
Currently the total tax rate for a local company is 40 percent, the same amount as for a foreign company's subsidiary, but much higher than the 25 percent tax rate for a branch of a foreign company, Tseng said.
The difference could become an incentive for tax evasion, Tseng said.
"We should remove the tax difference [between branches and subsidiaries of foreign companies] and make it a uniform tax system. Besides, foreign companies enjoy preferential tax treatment."
Tseng said the proposed tax hike added that foreigners could be waived from their personal income tax in their own countries through bilateral tax treaties with Taiwan. Currently, Taiwan has signed over 20 bilateral tax treaties with its major trading partners," Tseng said.
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