Income Tax Act amendment to encourage investment in Taiwan, benefit taxpayers

  • Date: 2017-10-25

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 approved draft amendments to the Income Tax Act on October 12, 2017. Proposed by the Ministry of Finance, the amendments are designed to optimize the tax system, redistribute income tax burdens more reasonably, ease taxes on wage earners and low and medium-income taxpayers, and make Taiwan an attractive tax environment for investors. A set of complementary measures will also be rolled out to ensure that all taxpayers enjoy the benefits of tax reform.

II. Summary of amendments and benefits

A. Ease burden on wage and salary earners, low and medium-income taxpayers

1. Raise the standard deduction for individuals by NT$20,000 (US$661), from NT$90,000 to NT$110,000 (married couples filing jointly may deduct twice this amount), or an increase of 22 percent. Approximately 5.17 million taxpayers are expected to benefit from this measure.

2. Raise the special deduction for wage and salaried employees and persons with disabilities by NT$52,000, from NT$128,000 to NT$180,000, or 41 percent. This will benefit 5.42 million income-earning and 620,000 disabled taxpayers.

3. Lower the highest income tax rate for individuals 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.

B. Alleviate taxes on SMEs and new businesses

1. Earnings by a sole proprietorship or partnership business will be taxed not as corporate income but as individual income of the proprietor or partner.

2. The 10 percent surcharge on undistributed corporate surplus earnings will be lowered to 5 percent, easing the burden on companies that rely on retained earnings to accumulate capital.

C. Establish an internationally competitive dividend income tax system

1. Replace the dividend imputation tax system with a new dividend earnings tax system (offering two options):

(1) 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.

(2) Dividends may be treated separately from other taxable income and subject to a flat tax rate of 26 percent.

2. Reasonable adjustments to the income tax structure:

To pay for the tax cuts described above, the government will raise the corporate income tax rate from 17 to 20 percent and the dividend income tax withholding rate for foreign investors from 20 to 21 percent. These adjustments will narrow the tax gap between domestic and foreign investors, and for corporate shareholders reduce the tax difference between retained and distributed earnings.

III. Conclusion

The purpose of this tax reform package 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 salaried workers, low and medium-income households, 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 in Taiwan, which in turn will create jobs and spur economic development. All of these measures are expected to optimize the tax system where wealth is distributed more fairly for the benefit of all.