Taiwan Begins Tax Overhaul with an AMT System

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SUBJECT: Taiwan Begins Tax Overhaul with an AMT System

Ref: Taipei 3298


1. (SBU) Summary: On December 9, Taiwan passed a tax reform
bill establishing an alternative minimum tax mechanism
(AMT). The AMT will affect only about 0.9% of individual
taxpayers and 0.3% of business firms, but will have a
disproportionate impact on high-tech industries because of
the tax incentives they currently enjoy. Business leaders
warn that the AMT may prompt further industrial relocation
offshore and emigration of high-income people. End summary.

First New Tax in 20 Years
--------------


2. (SBU) On December 9, Taiwan's Legislative Yuan passed
the Alternative Minimum Tax Law. The AMT will become the
first new tax since 1985 (when Taiwan adopted the 5%
business transaction tax, VAT). The AMT will affect only
businesses whose annual income exceeds NT$2 million (about
US$60,000) and individuals whose annual income exceeds NT$6
million (about US$ 180,000). The AMT tax rate will be 20%
for individuals and 10-12% for businesses and will be
applied to income earned in 2006. Taxpayers must start
filing the AMT tax in May 2007. According to the new law,
offshore income earned by individuals will be subject to the
AMT starting in 2009. The Ministry of Finance (MOF) is
authorized to delay the implementation date for offshore
income to 2010.

Effects
--------------


3. (SBU) The MOF estimates the AMT will have very limited
effect on most taxpayers. Investment projects now enjoying
a five-year tax holiday and new projects already approved by
the Ministry of Economic Affairs to receive a five-year tax
holiday will be exempt from the AMT during their tax holiday
period. Projects entitled to tax credits, however, will be
subject to the AMT. The AMT will not apply to capital gains
by foreign portfolio investors in Taiwan. The MOF estimates
that some 6,000 business firms will be affected by the AMT,
or 0.9% of total business firms in the MOF's tax payment
records. The MOF estimates that AMT tax revenue from
businesses will be NT$12.8 billion (or US$0.38 billion) or
5% of total corporate income tax in 2004.


4. (SBU) The Economic Daily News (EDN) estimates that some
16,000 individuals, or only 0.3% of total taxpayers, will be
subject to the AMT. The MOF said that it could not estimate
the expected AMT tax revenue from individuals because of
insufficient data on non-cash charitable donations and life
insurance premiums (currently tax exempt items that will be
included in the AMT calculations). However, it is very
clear that high-tech industries and employees of high-tech
companies will suffer the biggest hit because they currently
enjoy significant tax benefits. On December 15,
representatives from high-tech companies told AIT that their
companies and employees currently pay less than 5% of income
in taxes. Estimates vary, but firms and individuals are
likely to be paying twice that rate under the new AMT
system.

Business Leaders Complain
--------------

5. (SBU) Passage of the AMT has prompted business
complaints. Theodore Huang, Chairman of the National
Federation of Industry and Commerce, and Hsu Sheng-hsiung,
Chairman of the Taiwan Electrical and Electronic
Manufacturers' Association, have made public remarks
condemning the legislation. General Chamber of Commerce
Chairman Wang Ling-ning warned the AMT could further dampen
domestic investment. Hsu suggested that both the Executive
Yuan and the Legislative Yuan should be held responsible for
the negative impact on Taiwan's economy. He stated that the
AMT would encourage investors to move offshore and noted the
contrast to Singapore's efforts to attract investors with a
5-10 year tax holiday. Hsu said a 10% AMT exceeded the
level tolerable to the business community and urged the
government to phase out the 10% tax on retained earnings to
reduce the tax burden on businesses.


6. (SBU) Yeh Kong-liang, Chairman of Fubon Securities
Company, said that the AMT could cut profits of listed
companies, and could erode 10% of high-tech firms' profits,
which, in turn, would lead to a decline in high-tech share
prices. Yeh noted that the AMT could force high-tech firms
to relocate offshore or reduce their profitability and wages
for employees.


7. (SBU) Chairman Yeh predicted the AMT would put pressure
on stock prices to fall every September and October, when
high-tech firms usually distribute dividends to their
employees. Yeh explained that the AMT would apply to the
market price of the stock the day after the issuance of the
dividend. Consequently, high-tech employees are expected to
immediately sell the dividend stocks to avoid paying the
AMT, resulting in a decline in share prices.

Private Complaints More on Style than Substance
-------------- --


8. (SBU) High-tech companies privately told AIT December 15
that while they are generally opposed to any new taxation
measures the new AMT system does not pose an undue burden in
terms of their competitive position. Further, the firms
generally acknowledge that the privileged tax position for
their firms and employees imposes a burden on other Taiwan
taxpayers. However, the firms did object to being singled
out by political and government leaders as unfairly
benefiting from the existing system. They would have wished
for the AMT regime to simply be touted as a needed tax
reform to more equally share the tax burden without pointing
the finger at any one industry.

Other Analysts Less Pessimistic
--------------


8. (SBU) Other analysts expect the financial impact of the
legislation will be slight, less than what had been
expected. CLSA (the Asian investment banking arm of Crdit
Agricole, the world's fifth largest bank) estimates the hit
will only be about 2.4% of high-tech firms' earnings.
According to Yang Wen-chien of Yuanta Core Pacific
Investment Research the AMT will have little impact on
traditional industries, which pay an average of 16% tax,
much higher than the 3-5% paid by high-tech firms. Taxes
paid by iron & steel companies averaged 20%.

COMMENT
--------------


9. (SBU) AIT believes the AMT will not have as much impact
as some business leaders fear because Taiwan's current tax
burden is a relatively low 12-13% of GNP and existing tax
holidays for high-tech investments will be preserved.
Senior executives from some of Taiwan's leading information
technology (IT) companies have told us that they have long
supported expanding taxation to high-tech firms as a matter
of social equity. They believe that Taiwan's industry is
well able to absorb what they perceive to be a fairly modest
tax increase. The AMT will be a starting point for Taiwan
to levy tax on offshore income and a starting point for a
capital gains tax on securities trading (AMT will not apply
to trading of listed stocks but will cover trading of
unlisted stocks.) A recent Gallup poll for CLSA showed
broad support for the AMT, which is perceived as a system to
share more equitably the tax burden. The measure will also
address the growing government budget deficit.


10. (SBU) Whether or not Taiwan will be able to tax income
from overseas is debatable. Taiwan has tax treaties with
only 15 countries, which do not include its major trading
partners, the United States, Japan, and China. Taiwan
authorities would be largely dependent on data supplied by
the taxpayers regarding any overseas income.

PAAL