Taiwan slashes estate tax from 50% to 10%

The cut is yet another heavyweight punch by the new government aimed at bolstering the local asset management industry.
Taiwan's Legislative Yuan has approved a bill to cut estate tax from its present 50% level to just 10%.

The bill was proposed by the Ministry of Finance and backed by leading economists on the island and the domestic asset management industry. It is yet another move by the new government under president Ma Ying-jeou aimed at bolstering the competitive edge of the local asset management industry.

The new government is losing no time in implementing financial reforms, despite the global financial crisis now wreaking havoc around the world. It wants to regain its regional standing against Hong Kong and Singapore, and has its sights set on turning Taiwan into a regional asset management hub.

According to finance minister Lee Sush-der, the bill will cost the government NT$20 billion in lost tax revenue each year. But the loss will pay for itself in the form of a more vibrant economy.

At 50% of all final estates, the government's previous tax policy was poor and resulted in many Taiwanese families sending their wealth offshore to wealth management service providers in Hong Kong and Singapore.

The policy also ensured that there was zero incentive for Taiwanese merchants with offshore businesses to repatriate their capital back to Taiwan. This created a long-term capital flight and caused the island's asset management industry to stagnate over the years.

Steven Billiet, CEO at ING Investment Funds in Taipei, says the total AUM could easily triple over the course of the next few years under the government's new tax rule. While it may not immediately induce Taiwanese individuals to repatriate overseas assets, it will at least lower the financial incentives for outward remittances that the Taiwanese systematically use to avoid tax.

Chiu Shean-bii, chairman of the local Pension Fund Association and a professor at National Taiwan University, says the 10% level is set to an assumed total sum that a citizen might spend on fees for lawyers, wealth management advisory services, stamp duties and withholding tax if the same money is invested in a foreign asset management hub, say Hong Kong or Singapore.

The association has united with the local fund industry and formed a policy think-tank in lobbying the government to further reform its pension model.

Actuarial calculation performed by the Labour Pension Fund notes, based on its existing payout policies, guaranteed returns to participants and assumed assets growth, it could go bankrupt in 19 years.

The industry hopes the government can turn the pension system into a true defined contribution system where participants will be given a choice on their investments, not unlike the 401k plan of the United States or the Mandatory Provident Fund system in Hong Kong.

The move would provide a second important source of capital, after inheritance assets, in further strengthening the industry's financial base.
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