Taiwan's stocks hurt by gains tax
row By Jens Kastner
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.
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.
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
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
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.
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
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.
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.
Kastner is a Taipei-based journalist.
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