The tax reform plan proposed by the Ministry of Finance is to encourage more local retail investors to enter the equity market and facilitate the development of the bourse, analysts and academics said.
The plan aims to ease equity investors’ financial burden by cutting their taxes on dividends they receive from investments in locally listed companies, Capital Securities Corp (群益證券) president Chao Yung-fei (趙永飛) said.
Once the dividend income tax is lowered, the local equity market is to become more attractive to retail investors, who will be more willing to raise their equity holdings, Chao said.
That could boost daily turnover in the local bourse, Chao said, adding that as long as turnover increases, securities brokerages will also benefit.
As part of the government’s efforts to make the nation’s tax system more equitable, the ministry on Friday proposed the elimination of the imputation tax system.
Ratified in 1998, the system awards local investors who receive dividends from credits for taxes paid by the company.
However, the system was revised in 2015, halving the tax credits and angering local investors who then had to pay higher taxes than the 20 percent foreign institutional investors have to pay on their dividend income.
With such an uneven dividend income tax system, many major local players who trade more than NT$500 million (US$16.58 million) in equities in a single quarter have left the trading floor.
As a result, the local equity market has been dominated by foreign institutional investors.
In addition to eliminating the imputation system, the ministry has proposed two alternative tax plans.
Plan A would allow investors to enjoy tax-free status on 37 percent of dividends they receive, while the remaining dividends would be counted as personal income tax.
Plan B would include two options: Option one would allow equity investors to be taxed at a flat rate of 26 percent, while the second choice would tax all dividend income as personal income taxes, but would give taxpayers a deduction of up to NT$80,000.
As for foreign investors, the ministry has proposed a 21 percent tax on their dividend income, up from 20 percent.
If the government adopts the first plan, retail investors would see their tax rate cut to about 25.2 percent, which would come closer to foreign institutional investors’ 21 percent, National Taipei University of Business professor Sun Keh-nan (孫克難) said.
The second plan would be good for high-income earners if they choose to pay a flat rate of 26 percent, Sun added.
To pursue a fairer tax system, the government should consider raising the tax rate for foreign investors to 25 percent, while under Plan A for local investors, the tax deduction ceiling should be raised to 40 percent from the proposed 37 percent, he said.
Chien Hung-ming (簡宏明), chief secretary of the Securities and Futures Bureau of the Financial Supervisory Commission, said that he has faith that the dividend income tax reform would pave the way for more retail investors to buy equity and improve the local equity market.
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