The government is likely to step up auditing efforts as a number of major tax amendments come into effect this year, diminishing the effectiveness of tax shelter companies, consulting firm Ernst & Young warned.
Major tax amendments coming into force this year include the revoking of the much-maligned capital gains tax on stock trading, which has been seen as a cause for uncertainty and tepid momentum on the local bourse, and the introduction of an integrated land and housing tax system based on properties’ actual value.
The government has taken a step backward in tax reform efforts for the stock market, as revenue agencies are expected to shift focus to dividend income, as opposed to trading profits,” Ernst & Young business tax services partner Yang Chien-hua (楊建華) said at a media briefing last week.
As many investors have delayed large stock transactions until this year, Yang said that dividend income might become the focus of tax authorities this year.
He said that if stock holdings have not gone through certification, they are considered to be assets, and, therefore, gains derived from asset sales would be subject to obligations under the individual income tax category.
Beginning this year, the tax rate for stock dividend income for individuals is to range from 5 percent to 45 percent, compared with 20 percent for offshore institutions, while domestic institutions are exempted.
However, investors who are set up institutions to take advantage of lower tax obligations might be put under heightened scrutiny by tax authorities, Yang said.
Yang said that, although dividend income from shares held by domestic institutions, such as a company, is exempt from taxes upon payout, the amount is still subject to taxes when earnings are distributed among the company’s stakeholders.
In addition, investors utilizing the option might be at risk of penalties over suspected tax evasion, Yang said, adding that the government is likely to step up auditing of companies that have little purpose other than as a tax shelter.
Meanwhile, the new integrated land and housing tax comprises tax rates of 45 percent on real-estate transactions for domestic home owners and 35 percent and 45 percent for foreign institutions and home owners who are not selling their primary residence respectively, with the figure set at 17 percent for domestic for-profit corporations.
Yang said that investors could evade real-estate transaction taxes through tax shelter companies.
Theoretically, a seller might transfer the shares of a tax shelter company that holds real estate to another tax shelter company owned by the intended buyer, voiding the sale tax, as stock transaction taxes have been waived beginning this year, Yang said, adding that tax authorities are not likely to plug this loophole.
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