Taiwan's Tax System, Past and Future

When Taiwan first implemented its imputation ("two-in-one") tax system, designed to eliminate double taxation of business income, it represented a merger and simplification of two preceding systems. Now, with the difficulty involved in calculating tax-exempt income and investment tax credits under the "Statute for Upgrading Industries", added to the complexity of filing business income taxes under the new minimum tax system, a worthwhile topic of investigation is how Taiwan's tax system ought to evolve in order to lower the time and cost it takes taxpayers to file taxes, increase the efficiency of tax collection by the Tax Administration, and add to Taiwan's fiscal revenues.

The guiding principle in income tax collection is "substance over legal formality". However, Taiwan's audit standards require auditing so much accounting evidence and adjusting so many accounting items that the result easily becomes "documents over substance". Very few nations' tax systems have audit standards like Taiwan's. Most countries have three main types of tax evasion provisions to keep tax avoidance behavior by taxpayers in check: namely, provisions dealing with transfer pricing, controlled foreign companies and thin capitalization. These are complemented by audit techniques directed at those that would seek large reductions in taxes by counting personal expenses as deductible company expenses. This approach greatly simplifies business income tax filing and does not require that every accounting item be audited.

Given the differences between countries in terms of their market economy models, Taiwan can learn from the tax systems of countries facing similar circumstances, such as the Netherlands, Belgium and Luxembourg (small EU countries), Switzerland, Singapore, etc. These countries all use highly creative and flexible tax systems to both encourage domestic and foreign investment in their economies and gather greater treasury revenue. The ingenuity they exhibit is often very simple, as the following will attempt to show using Belgium and the Netherlands as examples:

• In order to establish itself as a financial and research center, the Netherlands has no withholding on outward-bound payments of interest and royalties. Beginning in 2007, taxation of interest and royalties will be by simple separation tax rates of 5% or 10%.
• In Belgium, which promote itself as an investment center, interest may be imputed on paid-in capital and used to reduce tax burdens. Beginning in 2007, there will be a 0% withholding rate on dividends given to recipients in countries that have signed mutual tax agreements with Belgium.
• Both countries, in order to establish themselves as logistics hubs, have relatively loose rules on permanent entities, and are willing to remit VAT to foreign businesses, thereby lowering barriers to the flow of goods across their borders.
• The tax administrations of both countries are very willing to discuss advance pricing agreements and tax rulings with corporate taxpayers.