Taiwan’s stocks hurt by gains tax row

For Asia Times Online www.atimes.com

TAIPEI – An attempt by the Taiwanese government under President Ma Ying-jeou to impose a capital gains tax on share transactions has turned into a fiasco. The plan, enthusiastically proposed by then finance minister Christina Liu, was butchered by the legislative caucus of her own colleagues in the ruling Kuomintang (KMT), leading to her tearful resignation. 

Investors, too, feel like crying, not only because the ugly debate has cost the local exchange more than NT$2 trillion (US$66 billion) in value and counting, but also because signs for a quick fix are conspicuous by absence. 

Little did even keen observers of Taiwan’s benchmark index know that things would come this thick and fast. Ma’s re-election in January promised ever more lucrative ties with mainland China, which together with somewhat upbeat US economic data of that



time encouraged such rose sentiment that the benchmark TAIEX stock gauge gained 10% in the first quarter. 

But when Ma, in a rare outburst of social conscience, assigned Liu with to draw up a stock gains tax, the tide turned decisively against the exchange. In late March, Liu proposed that individual investors who annually secure a net gain of more than NT$3 million (US$99,000) pay 20% on their capital gains, prompted a 2.1% drop in the TAIEX. 

Liu drew a volley of criticism – not least, that if her tax came into being, it would be disastrous for market sentiment and brokerages, with many of the latter being put out of business. According to others, the estimated NT$10 billion annual increase in tax revenue would be tiny compared with the loss of major shareholders to other markets without a similar tax – such as Singapore and Hong Kong. Some said it would be almost impossible to calculate the levy in the first place. 

Many low and medium-income earners in Taiwan – in particular housewives – are eager stock traders, so Liu’s ill-starred brainchild quickly became a hugely prominent matter. The minister raised the tax exemption amount to NT$4 million, but pundits were unimpressed. The more vociferously they lamented the whole issue on TV screens, the more panicky investors of every category became, so that by late April, the weighted share price index of the TAIEX had dropped about 6% from the end of March.

The controversy also started taking a political toll. The Ma administration was also seeking unpopular energy price increases, causing the president’s approval ratings to drop to as low as 20%. By early May, Finance Minister Liu was assessed as a burden and effectively handled as an outcast by her fellow ministers, KMT lawmakers and President Ma. At one point, KMT legislators even refused to discuss her revised proposal in a legislative committee. 

Then, one competing draft of the stock gains tax after another was submitted, and in late May, the KMT caucus came up with a proposal featuring a “dual-track mechanism”. According to this, individual investors have to decide at the beginning of the year whether they want to pay a tax on the value of trades but only when the TAIEX rises above 8,500 points, or if they want to report their gains – or losses – on the stock market with the rest of their income on their annual tax returns. 

Critics didn’t like that one, either. They called out the obvious, namely that in the past 20 years, the TAIEX stayed above the 8,500-point mark only for a handful of weeks. The proposal was decried as a “victory of business groups” and a “fake”. Minister Liu thought likewise. She resigned, reportedly in tears. 

“The KMT caucus’ version was against the ‘ability to pay’, a vital principle of tax fairness,” she said. 

The local media reached back into history in their reaction to Liu’s resignation – two decades earlier, Liu’s mother, Shirley Kuo, was required also to stop down as finance minister, and also over a botched attempt to implement a stock gains tax. 

Back in the present, Chang Sheng-ford has been appointed finance minister and the KMT caucus has fine-tuned its proposal. Under what is now referred to by the fancy term “dual-system, two-stage gains tax”, a payment method based on the TAIEX’s 8,500-point level would be in place from next year to 2015, while “rich people” would not be allowed to use it in the first place. 

“Rich people” are considered to be shareholders who own more than 3% of a company; people whose annual income excluding income earned from shares transactions exceeds NT$5 million; and folk who live in Taiwan less than 183 days a year. 

The tax is expected initially to affect 20,000 people and twice as many in its second stage, according to the drafters of the proposal. 

Still, this this revision has also been criticized by commentators across the political and social spectrum. Taiwan’s “rich people” have clear reasons not to like it, but nor do advocates of fair taxation. Three months into the heated controversy, investors are longing for hints on a compromise that might help reverse the continued fall in stock values. The TAIEX is now down 15% since early March to just below 7,000. 

An early resolution of the issue is reasonably likely according to Yang Yungnane, director of National Cheng Kung University’s Department of Political Science & Institute of Political Economy. 

“The stock tax reform has been publicly announced. The KMT has to bring an end to the ‘game’ – otherwise, a failure to do so will imply the are unable to handle the crisis,” Yang said. 

Jens Kastner is a Taipei-based journalist. 

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


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