Identifier
Created
Classification
Origin
05TAIPEI3150
2005-07-26 08:10:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
American Institute Taiwan, Taipei
Cable title:  

Taiwan Tax Reform Proposals

Tags:  EFIN ECON TW 
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This record is a partial extract of the original cable. The full text of the original cable is not available.

260810Z Jul 05
UNCLAS SECTION 01 OF 03 TAIPEI 003150 

SIPDIS

SENSITIVE

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR TWINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/ZELIKOW AND WISNER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS,
AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EFIN ECON TW
SUBJECT: Taiwan Tax Reform Proposals


Summary
-------

UNCLAS SECTION 01 OF 03 TAIPEI 003150

SIPDIS

SENSITIVE

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR TWINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/ZELIKOW AND WISNER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS,
AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EFIN ECON TW
SUBJECT: Taiwan Tax Reform Proposals


Summary
--------------


1. (SBU) This cable will be the first in a series on
Taiwan tax reform proposals drafted by summer intern David
Craig. This first cable will examine the problems related
to Taiwan's current tax regime. Taiwan's regressive tax
system places a burden on a narrow-base of tax-paying
individuals and companies. Furthermore, continued increases
in government expenditures and increasingly insufficient tax
revenues have forced the central government to explore
measures to improve the fiscal situation. End Summary.

National Deficit
--------------


2. (SBU) The steepness of the rise in government debt
over recent years has been an increasing concern. For
2005, Taiwan expects central government debt to rise by
8.8 percent, reaching NT$3.7 trillion, while total
(central and local) government debt is projected to grow
7.7 percent, reaching NT$4.2 trillion by the year's end.
According to the Cabinet-level Directorate General of
Budget, Accounting & Statistics (DGBAS),outstanding
government debt equaled 35.9% of Taiwan's average GNP of
the past three years. Financial experts predict this
percentage will reach 39.1% by 2009, nearing the ceiling
of 40% set by Taiwan law. (U.S.' total government debt is
65% GDP; Japan's total government debt is 164% GDP).

Tax Revenues
--------------


3. (SBU) According to the DGBAS, from 1990 to 2002,
government expenditures nearly doubled from NT$1.097
trillion to NT$2.139 trillion. During this period, Taiwan's
annual growth rate of GNP averaged 7%; Taiwan's annual
growth rate of GDP averaged 8%. In contrast, tax revenues
have grown only marginally, 2.8% annually, failing to keep
pace with economic growth. The 2004 tax burden ratio (tax
revenues to GDP) was 12.3%, one of the lowest in the world.
When compared with the 27.6% average among OECD countries,
it is evident Taiwan is among the least-taxed of developed
economies.

Political Ramifications

--------------


4. (SBU) Premier Frank Hsieh has stated repeatedly the
fiscal problem is serious and cumulative. According to
Hsieh, the fiscal system, established under the
authoritarian Kuomintang (KMT) regime, remains outdated in
a democratic system. As a result of numerous political
and economic decisions during the KMT era, the Democratic
Progressive Party (DPP) government has inherited an
outstanding debt of NT$2.4 trillion since it assumed power
in 2000.

Preferential Treatment
--------------


5. (SBU) Under the current tax system, citizens
experience two entirely different tax policies - a
burdensome tax for mainly the middle class, individuals
and medium-size companies that pay taxes, while the
wealthier enjoy substantively discounted taxes.


6. (SBU) Finance Minister Lin Chuan recently reported
that among the top 40 richest people of Taiwan, only four
or five pay taxes "normal" to their income, while eight
have never paid any tax and another seven pay taxes
equivalent to less than 1% of their income. Similarly,
this past year the top 30 Taiwan electronics companies,
using income tax reductions or exemptions offered by the
government to encourage domestic investment, experienced a
tax rate of virtually zero (in terms of annual total
revenues).


7. (SBU) Since 1955, nearly 40% of adult citizens have
been exempted from paying personal income tax. Among
these are military servicemen and elementary and junior
high school teachers who continue to benefit from an
outdated policy that grants them exemption from paying
personal income tax.

Policy Reform Agenda
--------------


8. (SBU) During its assessment of the fiscal crisis, the
Ministry of Finance clearly identified the primary goal of
reform: fairness. Finance Minister Lin indicated that
currently the purpose of tax reform is not necessarily to
increase revenues, but to expand the tax base and make the
tax burden more equitable. On May 30, following a meeting
of the Presidential Economic Advisory Committee (PEAC),
President Chen Shui-bian proposed the following reforms to
the current tax policy.

Alternative Minimum Tax (AMT)
--------------


9. (SBU) As a result of the Statute for Industrial
Upgrading, which provides tax incentives that cover 71% of
high-tech manufacturing firms, over 4,000 companies have
enjoyed a zero tax bill. The Ministry of Finance
estimates the government has lost tax revenue of NT$70.9
billion per year. To resolve this matter, the government
will adopt a minimum tax system, which will be applied to
business firms as well as high-income individuals. The
proposed minimum tax for businesses is 10%. For
individuals, those earning at least NT$10 million before
taxes, the proposed minimum tax is 20%.

Value Added Tax (VAT)
--------------


10. (SBU) The business transaction tax will increase by
one or two percentage points, from its current 5% to 6-7%.
An increase of one percentage point would bring added
revenue of NT$30 billion a year. The Ministry of Finance
will delay the implementation of this reform until 2006.
As Finance Minister Lin indicates, ".the government has to
show its will to achieve fairness before it can ask the
public to pay more consumption [business] tax."


11. (SBU) Unlike the minimum tax, this move does not
require new legislative measures. Current law gives the
executive branch power to set the value added tax level
between 5 and 10 percent.

Military Servicemen & Teachers
--------------


12. (SBU) The tax exemption for military servicemen and
elementary and junior high school teachers will be
eliminated. The salaries of these recipients are no
longer as far below average as they once were. Therefore,
the exemption's contemporary application has become an
issue of tax fairness. The new policy will add
approximately NT$13 billion to annual tax revenue.

Estate & Gift Taxes
--------------


13. (SBU) In an effort to promote fairness, these taxes,
paid primarily by the middle class, will be reduced from
50% to 40%.

Proposed Reform Benefits
--------------


14. (SBU) The Ministry of Finance estimates these
measures will increase tax revenue by NT$60 billion per
year, with the average national tax rate increasing from
13.6% to 15% of GDP in three years.

Comments
--------------


15. (SBU) Though these measures will increase tax
revenues, they will not immediately improve the
government's strained fiscal condition. Academic
specialists view overhaul of the fiscal structure as a
grand project that must be undertaken by the whole
government, not just the Ministry of Finance. To view it
merely as an issue of tax reform is over-simplification.


16. (SBU) To win support for increasing taxes, Taiwan's
government must demonstrate its commitment to reform by
practicing fiscal discipline, limiting expenses and
holding true to those limits. In the past,
recommendations have been submitted, but little progress
has been made. The key to success lies in the degree of
commitment and leadership shown by executive and
legislative officials. It is the actions taken by the
government, rather than the immediate results, that will
have profound implications.

KEEGAN