Taiwan’s proposed securities gains tax claimed a high-profile scalp May 29 with the resignation of Finance Minister Christina Y. Liu. The loss of this talented and hardworking public official signals tough times ahead for the ROC government as it strives to revise the Income Tax Act and build a more just and equitable society.
For Liu, the decision to throw in the towel over the tax was not an easy one. Since taking over as head of the Ministry of Finance Feb. 6, the former Council for Economic Planning and Development minister had been burning the midnight oil in an attempt to draft legislation that would keep everyone relatively happy while adding much-needed revenue to the state coffers.
On April 12, Liu unveiled a bill that at first glance appeared fair and reasonable. It called for the tax to be introduced in two years with individual investors levied 15 percent to 20 percent on annual securities gains over NT$4 million (US$135,560). The rate was to be set after taking economic and market circumstances into consideration.
The legislation also allowed for 50 percent of annual securities transaction taxes to be claimed as a post-assessment deduction, and losses over the past three years offset against gains. In addition, tax rates for corporate investors were to be raised from between 10 percent and 12 percent to a maximum 15 percent, with the exemption threshold slashed from NT$2 million to NT$500,000.
One measure of note, designed to encourage positive investment behavior, was a clause enabling individual and corporate investors to report taxes on only half of their gains from securities held for three-plus years.
After the ROC Cabinet approved the bill April 26, Premier Sean C. Chen came out in support of the tax, describing it as moving the nation closer to the principle of fair taxation while cushioning the stock market from potentially adverse effects. He added that it was the first step in overhauling the country’s taxation system, and one that shapes the future development of the local securities market.
This legislation was not drafted by Liu alone. It was given the green light by an MOF tax reform task force, which also took into consideration the opinions of more than 50 experts such as accounting and finance professors, industry representatives and heads of civic groups. Though divided on certain parts of the bill, the majority of the task force recommended that the policy take effect starting 2013, with the first payments on the new tax coming due in May 2014.
But shortly after getting the nod from the Cabinet, the wheels began to fall off the legislation. Those who stood to lose significantly ratcheted up the pressure on Liu, with nary a day going by when she was not forced to defend her actions and those of the MOF before a horde of reporters. Polished and confident on most occasions, the minister began looking a little frayed around the edges as the debate dragged on and the media began working itself into a frenzy.
Subsequent hoo-ha over the tax was blamed for triggering market instability and weak trading on the local bourse. The ruling Kuomintang caucus moved to restore investor confidence May 28 by introducing a fundamentally different bill that proposed imposing the tax in the form of additional transaction levies. These are set between 0.2 percent and 0.6 percent depending on the level of Taiwan’s benchmark TAIEX index.
This proposal was the final straw for Liu, prompting her to take a page from the book of legendary boxer Roberto Duran and declare “no mas.” She said that under the KMT bill, those who make substantial profits from securities trading will not have to pay taxes on their capital gains, an approach that runs counter to the MOF’s policy goal.
Since Liu’s unexpected departure, heads have been knocked together and a preliminary consensus was hammered out between the Cabinet and KMT caucus. On May 30, the Presidential Office said the stipulation allowing corporations to enjoy a tax deduction of 50 percent on earnings from stocks held for more than a year would be revised to a three-year period, while the rules for individual investors would be maintained.
The new version of the securities gains tax incorporates a two-stage approach. In the first, individual investors can choose at the start of the year to have their capital gains from securities taxed when the TAIEX climbs above 8,500 points. Alternatively, such gains can be included in the calculation of annual income taxes at a rate of between 5 percent and 40 percent.
In the second phase, which takes effect in 2017, the first option is scrapped and individual investors can claim a 50 percent tax deduction on capital gains from stocks held for more than a year. Losses can be offset against earnings over a three-year period when calculating income.
News that everyone appears to now be on the same page is undoubtedly music to the ears of new MOF Minister Chang Sheng-ford, who said May 31 that that implementing the government’s proposed securities gains tax is his top administrative priority. He has made it abundantly clear that all income should be taxed, and expects the revised bill to clear the legislative floor before the current session wraps up June 15.
But Taiwan is not out of the woods yet on the proposed securities gains tax. Although publicly committed to the initiative, the government will have to walk a very fine line to ensure the legislation comes into force and is revised accordingly if found to be ineffective. The legislative task ahead is now reasonably clear but as with any policy initiative of this magnitude, the devil is in the details.
Ed Zacapa is a freelance writer based in Kaohsiung. These views are the author’s and not necessarily those of Taiwan Today. Copyright © 2012 by Ed Zacapa
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