Estate and Gift Taxes in Taiwan - analysis and suggestions
Taiwan's estate taxes are levied for the purpose of redistributing wealth, and taxes on gifts are meant to help achieve the redistributive objective behind levying taxes on estates by preventing individuals from using gifts while still alive to evade taxation of inheritance transfers. However, the fairness and reasonableness of estate and gift taxes have long been disputed, and many in the business community have publicly advocated abolishing estate and gift taxes altogether in order to attract back investment funds from abroad.
Forbes Magazine estimated in September 2004 that, for a certain high-net-worth individual (HNWI) who had about NT$150 billion while alive, the estate tax calculated under the prevailing tax rates would have amounted to approximately NT$70 billion, but the actual amount collected in estate tax after his death - just NT$0.5 billion - was far less. Although Taiwan's estate and gift tax rate is as high as 50%, Ministry of Finance statistics show that of the NT$1.5 trillion in taxes collected in 2005, only NT$30.45 billion, or 2% , was from estate and gift tax. From this we can infer that the design of the estate and gift tax, the collection of information on the object of the tax, and its tax collection methodology are far from perfect. But, beyond that, an important factor for the inability to raise the share of tax revenue from estate and gift tax lies in the loss of the tax base and the inability to expand it.
The "Income Basic Tax Act", which took effect on January 1, 2006, has a provision requiring overseas income to be entered into the calculation of an individual's minimum tax, and that provision will become effective on January 1 of 2009 or 2010. However, in the absence of supporting complementary measures, such as a large decrease in the estate tax rate at the same time that tax is imposed on overseas income, the law is already having a major effect on HNWIs. As is well known, the government's goal in including overseas income in minimum tax calculations is not to impose minimum tax on such income. Rather, it is to get at the assets that generate that income, and the ultimate goal is to levy estate and gift tax those assets. In other words, the effect of taxing overseas income on estate and gift taxes is far greater than its effect on income taxes.
According the Central Bank's statistics on foreign exchange, the net outflow of foreign exchange in the first and second quarters of 2006 showed a large increase over the same period in 2005 and earlier periods, and the trend appears to be strengthening. This outflow of share capital may be related to taxation of overseas income. At any rate, the announcement of the law has clearly generated much anxiety among HNWIs, many of whom have consulted with tax experts in search of strategic options to lower the tax impact. Taxpayers should also watch closely how "Regulations Governing the Audit Overseas Income Included in the Calculation of Minimum Tax" evolves in order to respond as early as possible.
Looking at the tax systems of comparable tax jurisdictions in Asia, we find that Hong Kong scrapped its inheritance tax in February 2006; while Singapore divides its estate taxes into two rate brackets: 5% for up to 20 million Singapore dollars and 10% beyond that. The governments of Hong Kong and Singapore use low tax rates or tax exemption purposely to attract international capital inflows, stimulate financial activity, and promote economic development and prosperity. In fact, overall tax revenues tend to increase after tax reductions and exemptions are offered. In Taiwan, where the government cut the capital gains tax on land by 50%, the result was that land tax revenue increased from 2002 to 2004. This shows that large-scale cuts in tax rates need not lead to less revenue collection. If tax cuts are complemented by a set of supportive measures that promote the development of economic activity, an overall increase in tax revenues can be expected.