Thu, Nov 26, 2015 page8

• Levying capital gains tax difficult

  • By Schive Chi 薛琦
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  With the exception of property tax, perhaps the most controversial tax in Taiwan is the capital gains tax. It distinguishes itself in the way it has been a story of stops and starts, it has never been properly implemented and nothing has ever come of all the effort put into it. All the stops and starts have been damaging for the government and the public’s faith in it.

  There are three types of securities taxes.

  First, there is the tax on the gains made from buying and selling securities, generally known as the capital gains tax. This includes the tax on gains made from the first time shares are sold on the market, referred to as the initial public offering (IPO) tax.

  Second, there is the tax on cash or stock dividends generated by share holdings within a portfolio, which is included as part of the overall income tax.

  Third, there is securities transactions tax, also known as stamp duty.

  There have been at least three attempts to levy a capital gains tax in Taiwan since a centralized trading market was established.

  The first attempt was, according to former head of the Industrial Development Bureau Wang Ya-kang (汪雅康), scrapped at the time because of a slew of technical problems and was replaced in amended form, incorporated as part of a securities transactions tax. This was a practical arrangement that made a significant contribution to the stock market and tax revenue.

  Then, in September 1988, the Ministry of Finance announced that it was planning to levy a capital gains tax the following year.

  The market reacted to this news by closing limit down for the next 19 days, even though the government halved the securities transactions tax after the new tax was implemented in an attempt to soften the blow.

  The result of this attempt was a return to square one, scrapping the tax on income from stock in non-listed companies in the process.

  The third attempt at a capital gains tax was the reintroduction of the tax through legislation passed in April 2012.

  The tax included a rather unique clause that placed a lid on levying the tax if the TAIEX fell below a 8,500-point threshold, which gave a strong impression that this tax was not yet ready for implementation.

  Sure enough, in June 2013, the law was revised to include the similarly curious “big investors clause,” according to which, a 0.1 percent tax would be levied on the portion of investments of big investors that exceeded NT$1 billion (US$30.63 million) in a year. Legislators appear to have a blind spot when it comes to this tax.

  Consider some of the problems.

  First, with the exception of the UK, all of the major nations in the world that levy a capital gains tax have, at different times, did not levy a securities transactions tax.

  Second, all of the nations that levy a capital gains tax have measures in place to offset losses.

  In Japan, investors can carry capital gains forward for up to three years and use them to offset losses for the next three years. The tax rate is levied as separate taxation, that is, at a rate of 15 percent, with an additional 5 percent residence tax. However, Japan does not levy a securities transactions tax.

  The US does not levy a securities transactions tax, either, but it does levy a capital gains tax of between zero and 39.6 percent, depending on the length of time the securities were held and the tax bracket the individual is in.

  It also allows losses to be carried forward to subsequent years. The nominal top corporate tax rate is quite high at 35 percent, but it can be offset toward losses for the following three years.

  South Korea only levies capital gains tax on major shareholders with stock holdings of more than 3 percent of a company, and the South Korean government is not concerned with investors making large volume transactions.

  In Hong Kong and Singapore, capital gains tax does not really exist. In Hong Kong, both parties to a transaction are subject to a transactions tax of 0.1 percent, whereas transactions are tax exempt in Singapore.

  It is evident that there exists a problem in levying a capital gains tax in Taiwan.

  First, the government wants to be seen to be levying a capital gains tax, which seems to be a fair and just way to obtain tax revenue, but at the same time, is reluctant to scrap its beloved tax on securities transactions.

  Second, it discriminates against big investors, a rare thing anywhere in the world.

  Third, it does not want to give serious consideration to allowing gains to be offset against future losses for a certain number of years.

  Finally, taxes should of course be levied on IPO income. This tax was removed in connection to a 1989 tax reform, and it would only be reasonable to now introduce a minimum tax.

  Those who advocate taxation according to the ability to pay as a sign of fairness and justice should take a look at how much revenue European nations, the US and Japan have received from their capital gains tax over the past decade.

  If they, like Taiwan, could have tax revenues upward of NT$100 billion every year from their capital gains tax, they probably would not hesitate to abandon demands that the capital gains tax meet fairness and justice requirements.

  Schive Chi, a former minister without portfolio and chairman of Taiwan Stock Exchange Corp, is a visiting professor at Shih Hsin University.

  Translated by Paul Cooper and Perry Svensson
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