Cablegate: Taiwan Tax Iii - Alternative Minimum Tax

This record is a partial extract of the original cable. The full text of the original cable is not available.

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
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)

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