Taiwan Considers Tax Increase on High-Income Earners

Taiwan Considers Tax Increase on High-Income Earners

Government Also Looking at Boosting Taxes on Financial Institutions

ARIES POON And FANNY LIU

Feb. 24, 2014 6:11 a.m. ET

TAIPEI—Taiwan’s government, running a deficit budget for the sixth straight year, is considering increasing taxes on high-income earners and financial institutions, as the export-dependent economy is showing more signs of picking up.

Finance Minister Chang Sheng-ford said Monday the government is looking at raising the top rate of income tax to 45% from 40% on individuals whose annual taxable income exceeds 10 million New Taiwan dollars (US$329,161).

Additionally, the administration is considering an increase in the business-tax rate on banks and insurers to 5%, a level it was at before the 2008 financial crisis, from the current 2%. The government is also looking at reducing tax credits individuals can claim if they are subject to both income and dividend taxes.

“This is only fair,” Mr. Chang said at a news conference. “The government is trying to establish a concept of ‘feedback tax’, and let a small number of high-earning individuals and sectors give back to the community and propel the economy forward.”

Taiwan is joining other economies in raising taxes on the wealthy. France’s constitutional court in December approved President François Hollande’s “millionaire tax,” a 75% tax rate on individuals who earn more than one million euros. U.S. President Barack Obama is also expected to unveil a proposal to increase taxes on high-income earners in his 2015 budget, The Wall Street Journal reported Thursday.

Taipei has been spending more than it collected since 2009, pumping dollars into infrastructure projects and social-welfare programs while the economy was weighed down by weak exports.

Mr. Chang said tax revenue, if all proposed increases kick in, should be boosted by up to 90 billion New Taiwan dollars a year, around 5% of the government’s tax income last year.

The plans come after the government last Tuesday projected a 2.82% economic growth for this year, the fastest in three years but still below the average 3.3% annual growth over the past five years. Improving exports to developed economies has led companies in Taiwan to increase investments and raise wages in recent months, although a slowing Chinese economy remains a continuing concern.

Taiwan has no external debt, but the central government owes its own citizens 5.192 trillion New Taiwan dollars (US$171 billion) as at the end of January. Rolling government notes and bonds are about 36.8% of the average gross domestic product over the previous three years, according to government data.

The island’s public debt level, already close to its statutory ceiling of 40.6%, is sanguine relative to many Asian countries such as Japan and Singapore. Mr. Chang said Monday the government has no plans to raise the debt limit.

Ratings firms in general are comfortable with Taiwan’s fiscal position, in part because of the island’s ample foreign-exchange reserves. As of the end of last month, Taiwan central bank’s reserve assets totaled US$416.94 billion, among the 10 highest in the world.

A high domestic savings rate, strong outbound investments, the lack of external debt and improving relations with Beijing have also led to favorable credit ratings for Taiwan. Moody’s Investors Service in October raised the island’s local-currency country risk ceiling—the highest rating a foreign-currency-denominated security from Taiwan can be assigned—to Aa2 from Aa3. Standard & Poor’s has Taiwan’s foreign-currency rating at AA-minus and Fitch Ratings’ long-term foreign-currency issuer default rating is at A-plus.

Taiwan’s government has in the past year rolled out new measures and proposals to boost income or reduce spending, but met with limited success.

In June, the lawmakers passed a long-stalled amendment to water down a new tax on capital gains from stock trading, as the original version met with vehement opposition from the investment community. The government last year also decided to cut its subsidies on fuel and electricity in phases, after its plan for a one-off withdrawal drew criticism from the public.

The government is also considering reducing pensions for civil servants, which has attracted fierce opposition.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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