I. Background
Capital and people are the driving forces behind a nation's economic development. As capital markets become highly liberalized and competition intensifies for skilled workers, governments around the world are implementing tax reform and creating friendly tax environments to boost national competitiveness.
As an open economy, Taiwan must resolve key issues with its tax system before it can compete effectively with other countries for capital and talent. This includes easing the heavier income tax burdens on Taiwan's top talent and investors, balancing tax burdens between domestic and foreign investors, and addressing the negative impact that taxes on undistributed surplus earnings may have on the ability of small and medium-sized enterprises (SMEs) and new businesses to transform and upgrade.
To build a fair and equitable tax system that is internationally competitive and on par with global standards, the Executive Yuan on October 12, 2017 approved the Ministry of Finance's amendments to the Income Tax Act, which were promulgated by the president on February 7, 2018 and put into effect retroactively from January 1, 2018. Measures for optimizing the tax system include redistributing income tax burdens more reasonably; easing taxes on wage and salary earners, low and medium-income taxpayers, and families with children; and creating a tax environment that encourages investments in Taiwan while helping to recruit and retain professional talent. A set of complementary measures is also being rolled out to deliver the benefits of tax optimization to all taxpayers.
II. Summary of amendments and benefits
A. Ease burden on wage and salary earners, low and medium-income taxpayers, and families with children
1. The standard deduction for individuals has been raised by NT$30,000 (US$1,022)— from NT$90,000 to NT$120,000 (married couples filing jointly may deduct twice this amount)—or 33 percent. Approximately 5.17 million taxpayers are expected to benefit from this measure.
2. The special deduction for wage and salary earners and persons with disabilities has been increased by NT$72,000—from NT$128,000 to NT$200,000—or 56 percent. This will benefit 5.42 million income-earning and 620,000 disabled taxpayers.
3. The special deduction for parents with preschool children has been raised significantly by NT$95,000 per child—from NT$25,000 to NT$120,000—or 380 percent. This measure will encourage childbirth and benefit an estimated 610,000 families.
4. After these changes are implemented, a new member of the workforce with an annual salary of NT$408,000 (monthly salary of NT$30,000) or less, for instance, will be exempt from paying taxes, as will a dual-income household with an annual salary of NT$816,000 or less, or a dual-income four-member household (two children aged 5 or under) with an annual income of NT$1.232 million or less.
B. Help recruitment and retention, boost Taiwan's competitiveness
The highest income tax rate for individuals has been lowered to 40 percent, eliminating the 45 percent tax bracket on the portion of individual income over NT$10 million. This measure is expected to help recruit and retain talent while attracting investment.
C. Simplify tax system to align with international trends
The dividend imputation tax system has been eliminated. The requirement that profit-seeking enterprises set up shareholder tax offsetting accounts has also been abolished—along with related provisions on account recordkeeping, calculations, distribution and penalties—in order to lower taxpayers' compliance costs and reduce the incidence of tax collection disputes.
D. Increase investor willingness, create jobs
1. Establish a new dividend earnings tax system (offering two options):
♦ Dividends may be taxed as part of individual income while qualifying for an 8.5 percent tax deduction (deduction amount limited to NT$80,000 per taxpayer). This option will lower the payable tax amount, and any excess or unused dividend deductions may be claimed as a tax refund.
♦ Dividends may be treated separately from other taxable income and subject to a flat tax rate of 28 percent.
2. Reasonable adjustments to the corporate income tax structure:
♦ The corporate income tax rate has been raised from 17 to 20 percent, but if the corporation's taxable income does not exceed NT$500,000, this rate can be gradually increased over three years, by 1 percent per year.
♦ The surtax on undistributed surplus earnings has been lowered from 10 to 5 percent.
♦ The dividend income tax withholding rate for foreign investors has been increased from 20 to 21 percent.
3. Earnings by a sole proprietorship or partnership business will be taxed not as corporate income but as individual income of the investor.
III. Conclusion
The purpose of these income tax system optimization measures is fourfold: to create an equitable tax system, improve Taiwan's economic efficiency, simplify tax administration, and ensure sustainable fiscal revenue. Ordinary taxpayers will benefit from tax cuts and keep more of what they earn as tax burdens are eased for wage and salaried workers, low and medium-income households, families with children, as well as SMEs and new businesses. Meanwhile, major investors in corporations will see dividends taxed at a reasonable rate, and companies will have more incentive to invest, which in turn will create jobs, spur economic development, and create a tax environment that encourages investments in Taiwan while recruiting and retaining talent. All of these measures are expected to optimize the tax system where wealth is distributed more fairly for the benefit of all.