This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 TAIPEI 004898 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
Sensitive 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Begins Tax Overhaul with an AMT System 
 
Ref: Taipei 3298 
 
¶1.  (SBU) Summary: On December 9, Taiwan passed a tax reform 
bill establishing an alternative minimum tax mechanism 
(AMT).  The AMT will affect only about 0.9% of individual 
taxpayers and 0.3% of business firms, but will have a 
disproportionate impact on high-tech industries because of 
the tax incentives they currently enjoy.  Business leaders 
warn that the AMT may prompt further industrial relocation 
offshore and emigration of high-income people.  End summary. 
 
First New Tax in 20 Years 
------------------------- 
 
¶2.  (SBU) On December 9, Taiwan's Legislative Yuan passed 
the Alternative Minimum Tax Law.  The AMT will become the 
first new tax since 1985 (when Taiwan adopted the 5% 
business transaction tax, VAT).  The AMT will affect only 
businesses whose annual income exceeds NT$2 million (about 
US$60,000) and individuals whose annual income exceeds NT$6 
million (about US$ 180,000).  The AMT tax rate will be 20% 
for individuals and 10-12% for businesses and will be 
applied to income earned in 2006.  Taxpayers must start 
filing the AMT tax in May 2007.  According to the new law, 
offshore income earned by individuals will be subject to the 
AMT starting in 2009.  The Ministry of Finance (MOF) is 
authorized to delay the implementation date for offshore 
income to 2010. 
 
Effects 
------- 
 
¶3.  (SBU) The MOF estimates the AMT will have very limited 
effect on most taxpayers.  Investment projects now enjoying 
a five-year tax holiday and new projects already approved by 
the Ministry of Economic Affairs to receive a five-year tax 
holiday will be exempt from the AMT during their tax holiday 
period.  Projects entitled to tax credits, however, will be 
subject to the AMT.  The AMT will not apply to capital gains 
by foreign portfolio investors in Taiwan.  The MOF estimates 
that some 6,000 business firms will be affected by the AMT, 
or 0.9% of total business firms in the MOF's tax payment 
records.  The MOF estimates that AMT tax revenue from 
businesses will be NT$12.8 billion (or US$0.38 billion) or 
5% of total corporate income tax in 2004. 
 
¶4.  (SBU) The Economic Daily News (EDN) estimates that some 
16,000 individuals, or only 0.3% of total taxpayers, will be 
subject to the AMT.  The MOF said that it could not estimate 
the expected AMT tax revenue from individuals because of 
insufficient data on non-cash charitable donations and life 
insurance premiums (currently tax exempt items that will be 
included in the AMT calculations).  However, it is very 
clear that high-tech industries and employees of high-tech 
companies will suffer the biggest hit because they currently 
enjoy significant tax benefits.  On December 15, 
representatives from high-tech companies told AIT that their 
companies and employees currently pay less than 5% of income 
in taxes.  Estimates vary, but firms and individuals are 
likely to be paying twice that rate under the new AMT 
system. 
 
Business Leaders Complain 
------------------------- 
¶5.  (SBU) Passage of the AMT has prompted business 
complaints.  Theodore Huang, Chairman of the National 
Federation of Industry and Commerce, and Hsu Sheng-hsiung, 
Chairman of the Taiwan Electrical and Electronic 
Manufacturers' Association, have made public remarks 
condemning the legislation.  General Chamber of Commerce 
Chairman Wang Ling-ning warned the AMT could further dampen 
domestic investment.  Hsu suggested that both the Executive 
Yuan and the Legislative Yuan should be held responsible for 
the negative impact on Taiwan's economy.  He stated that the 
AMT would encourage investors to move offshore and noted the 
contrast to Singapore's efforts to attract investors with a 
5-10 year tax holiday.  Hsu said a 10% AMT exceeded the 
level tolerable to the business community and urged the 
government to phase out the 10% tax on retained earnings to 
reduce the tax burden on businesses. 
 
¶6.  (SBU) Yeh Kong-liang, Chairman of Fubon Securities 
Company, said that the AMT could cut profits of listed 
companies, and could erode 10% of high-tech firms' profits, 
which, in turn, would lead to a decline in high-tech share 
prices.  Yeh noted that the AMT could force high-tech firms 
to relocate offshore or reduce their profitability and wages 
for employees. 
 
¶7.  (SBU) Chairman Yeh predicted the AMT would put pressure 
on stock prices to fall every September and October, when 
high-tech firms usually distribute dividends to their 
employees.  Yeh explained that the AMT would apply to the 
market price of the stock the day after the issuance of the 
dividend.  Consequently, high-tech employees are expected to 
immediately sell the dividend stocks to avoid paying the 
AMT, resulting in a decline in share prices. 
 
Private Complaints More on Style than Substance 
--------------------------------------------- -- 
 
¶8.  (SBU) High-tech companies privately told AIT December 15 
that while they are generally opposed to any new taxation 
measures the new AMT system does not pose an undue burden in 
terms of their competitive position.  Further, the firms 
generally acknowledge that the privileged tax position for 
their firms and employees imposes a burden on other Taiwan 
taxpayers.  However, the firms did object to being singled 
out by political and government leaders as unfairly 
benefiting from the existing system.  They would have wished 
for the AMT regime to simply be touted as a needed tax 
reform to more equally share the tax burden without pointing 
the finger at any one industry. 
 
Other Analysts Less Pessimistic 
------------------------------ 
 
¶8.  (SBU) Other analysts expect the financial impact of the 
legislation will be slight, less than what had been 
expected.  CLSA (the Asian investment banking arm of Crdit 
Agricole, the world's fifth largest bank) estimates the hit 
will only be about 2.4% of high-tech firms' earnings. 
According to Yang Wen-chien of Yuanta Core Pacific 
Investment Research the AMT will have little impact on 
traditional industries, which pay an average of 16% tax, 
much higher than the 3-5% paid by high-tech firms.  Taxes 
paid by iron & steel companies averaged 20%. 
 
COMMENT 
------- 
 
¶9.  (SBU) AIT believes the AMT will not have as much impact 
as some business leaders fear because Taiwan's current tax 
burden is a relatively low 12-13% of GNP and existing tax 
holidays for high-tech investments will be preserved. 
Senior executives from some of Taiwan's leading information 
technology (IT) companies have told us that they have long 
supported expanding taxation to high-tech firms as a matter 
of social equity.  They believe that Taiwan's industry is 
well able to absorb what they perceive to be a fairly modest 
tax increase.  The AMT will be a starting point for Taiwan 
to levy tax on offshore income and a starting point for a 
capital gains tax on securities trading (AMT will not apply 
to trading of listed stocks but will cover trading of 
unlisted stocks.)  A recent Gallup poll for CLSA showed 
broad support for the AMT, which is perceived as a system to 
share more equitably the tax burden.  The measure will also 
address the growing government budget deficit. 
 
¶10.  (SBU) Whether or not Taiwan will be able to tax income 
from overseas is debatable.  Taiwan has tax treaties with 
only 15 countries, which do not include its major trading 
partners, the United States, Japan, and China.  Taiwan 
authorities would be largely dependent on data supplied by 
the taxpayers regarding any overseas income. 
 
PAAL