US embassy cable - 05TAIPEI3298

UNCLAS SECTION 01 OF 03 TAIPEI 003298 
 
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, Finance 
SUBJECT: Taiwan Tax III - Alternative Minimum Tax 
 
REF: Taipei 03150, Taipei 03221 
 
Summary 
------- 
 
1.  (SBU) This cable examines Taiwan's proposed Alternative 
Minimum Tax (AMT).  Premier Frank Hsieh has stated the 
purpose of the proposed AMT is to establish a fair taxation 
system.  The proposed AMT is set at 10% for corporate 
entities with income exceeding NT$2 million and 20% for 
individuals with income exceeding NT$8 million.  Taxpayers 
subject to the proposed AMT will be required to pay the AMT 
if it is higher than the regular income tax. 
 
2.  (SBU) Recently, the Ministry of Finance finished 
drafting the Statute of Income Basic Tax Amount (IBTA), 
which proposes that tax-exempt income be added back when 
calculating basic income amount.  The AmCham and ECCT have 
drafted a joint position letter to Minister of Finance Lin 
Chuan warning that the IBTA Statute will definitely affect 
foreign companies' intention to invest or continue to invest 
in Taiwan.  End Summary. 
 
Intro 
----- 
 
3.  (SBU) This is the third cable in a series on Taiwan tax 
reform.  The first cable (ref A 03150) outlined Taiwan tax 
reform policy proposals.  The second cable (ref B 03221) 
examined Taiwan central government's revenues and 
expenditures.  The fourth and final cable in this series 
will focus on the proposed adjustments to Taiwan's Value 
Added Tax. 
 
History 
------- 
 
4.  (SBU) Since 1955, nearly 40% of adult citizens have been 
exempted from paying personal income tax.  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 
many others enjoy substantively discounted or no taxes. 
 
Statute for Industrial Upgrading 
-------------------------------- 
 
5.  (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 in previous years.  The Ministry of 
Finance (MOF) estimates the government has lost tax revenue 
of NT$70.9 billion per year.  Upon implementation of the 
proposed AMT, the AMT will take precedence over any 
exemptions enjoyed under this Statute. 
 
Affected Taxpayers 
------------------ 
 
6.  (SBU) The proposed AMT will affect businesses with 
incomes exceeding NT$2 million with a 10% minimum tax rate; 
individuals with incomes exceeding NT$8 million will be 
subject to a 20% minimum tax rate.  These taxpayers will be 
required to pay the AMT if it is higher than the regular 
income tax. 
 
7.  (SBU) According to the Ministry of Finance, personal 
income earned overseas will not be subject to the proposed 
minimum tax.  Corporate entities excluded from the AMT will 
include sole proprietorships, partnerships, educational, 
cultural, public welfare, charitable organizations or 
institutions, public-owned enterprises and cooperatives, and 
foreign portfolio investors without offices or agents in 
Taiwan.  The proposed minimum tax will, however, apply to 
capital gains earned by institutional investors having 
offices in Taiwan. 
 
Principle of Trust Protection 
----------------------------- 
 
8.  (SBU) In accordance with the Principle of Trust 
Protection, the central government will grandfather any 
unexpired five-year tax holidays and investment tax credits 
that have received government certificates before the 
implementation of the proposed AMT (unlike the tax 
incentives of the Statute for Industrial Upgrading, which 
will not be grandfathered upon implementation of the AMT). 
Enterprises will continue enjoying these pre-existing tax 
incentives until they expire, which will drastically reduce 
the number of businesses liable for the proposed minimum tax 
to 1,000, a substantive decrease from the original estimate 
of 5,000 businesses.  Finance Minister Lin Chuan originally 
announced the minimum tax would bring additional annual 
revenue of NT$10 billion.  However, due to the Principle of 
Trust Protection's continuation of pre-existing tax 
exemptions, insiders speculate the contributions of the 
proposed AMT to the central government's tax revenue during 
initial years of implementation will be less than NT$2 
billion a year.  After the initial four to five years, the 
expiration of these pre-existing tax incentives will cause 
the number of enterprises subject to the AMT to increase 
substantially; revenue from the AMT will increase 
correspondingly. 
 
Legislation 
----------- 
 
9.  (SBU) The proposed AMT will be regulated under a special 
law, superior to general laws.  The procedure is that the 
new laws/amendments are drafted and proposed by the Ministry 
of Finance.  The Executive Yuan (EY) reviews the proposals 
for submission to the Legislative Yuan (LY).  Following 
clearance from the EY, the proposal must pass through three 
readings by the LY.  During the LY screenings, the bill may 
encounter opposition from the Kuomintang (KMT) and People 
First Party (PFP) parties.  After approval from all parties, 
the President signs the new law/amendment into effect. 
 
Approval Rating 
--------------- 
 
10.  (SBU) According to Premier Hsieh, over 90% of business 
firms support the minimum tax system.  However, despite his 
claims of this high percentage, the general belief among 
business leaders is the proposed tax rates will be too high. 
China's tax rate ranges between 3.5% and 7.5%.  Hsu Sheng- 
hsiung, Chairman of the Taiwan Electrical and Electronic 
Manufaturers' Association, believes that in order to 
maintain the country's competitiveness, the AMT should not 
exceed 7.5%.  Concurrent with the implementation of the AMT, 
business leaders have suggested the government abolish the 
10% tax rate on the undistributed profit of businesses. 
 
11.  (SBU) Furthermore, the proposed AMT may dampen both 
local and international companies' willingness to invest in 
Taiwan.  Higher tax rates will create more difficulty 
attracting international investors.  Economic Minister Ho 
Mei-yueh iterates this, stating the proposed minimum tax 
will weaken Taiwan business firms' capability to raise 
capital in international markets. 
 
Comment 
------- 
 
12.  (SBU) On July 15, Premier Hsieh offered to address 
industry complaints that the AMT rate is too high by 
gradually raising the proposed tax rates over a number of 
years.  Professor Ge Ke-Chang of National Taiwan University, 
however, believes a gradual increase in tax rates has never 
been successful. 
 
13.  (SBU) Recently, the Ministry of Finance finished 
drafting the Statute of Income Basic Tax Amount (IBTA). 
This bill could significantly impact the tax incentive for 
foreign investment in Taiwan.  In its current form, the IBTA 
Statute proposes that tax-exempt income be added back when 
calculating basic income amount, which contravenes the 
Principle of Trust Protection.  The IBTA Statute contains a 
grandfather clause exempting unexpired five-year tax 
holidays that have already been approved by the MOF. 
However, the Statute does not include future investments, as 
well as current investments that have been announced but not 
yet approved in this grandfather clause.  Upon 
implementation, all investments not yet approved by the MOF 
will be included in the calculation of basic tax amount. 
This statute is currently under review in the EY, but will 
undoubtedly change form before it is passed.  Some U.S. 
companies have expressed concern to AIT over the impact of 
this proposed new tax law.  The AmCham and ECCT have drafted 
a joint position letter to Minister of Finance Lin Chuan 
warning that the IBTA Statute will definitely affect foreign 
companies' intention to invest or continue to invest in 
Taiwan.  End Comment. 
 
DPAAL 
 
(This cable drafted by AIT Economic section summer intern 
David Craig)