Taiwan’s national debt reached a record NT$5.46 trillion (US$180.5 billion) in January, nearly 37 percent of the island’s annual gross domestic product. That was equal to NT$234,000 for each member of the population, compared to NT$197,000 in November 2010.
Meanwhile, rich individuals and companies have evaded tax worth billions of dollars by hiding their incomes in offshore havens like the Cayman Islands, Bermuda, British Virgin Islands (BVI) and Samoa.
Data uncovered by the International Consortium of Investigative Journalists (ICIJ) found that 13,607 Taiwan families held 15,856 accounts, based on customer figures up to 2008 from Singapore-based Portcullis TrustNet, Asia’s biggest trust company. That is significantly more than the number held either by citizens of Hong Kong or mainland China.
Business magazine Commonwealth, which had access to the data, has estimated that 800 publicly listed companies had evaded NT$300 billion in taxes over the last 10 years. “That may be the tip of the iceberg, considering that official Chinese statistics show 88,000 Taiwan companies with investments in China. Corporate offshore tax avoidance is recognized as Taiwan’s biggest tax loophole.”
There are several reasons for this tax evasion. One is that the people who own and manage the corporations consider the level of tax too high – 25 percent tax on company income, 40 percent in personal income tax and 50 percent of their estate on death.
Another is that global companies like Lenovo, Apple and Dell that are major customers of Taiwan suppliers require them to set up independent shell companies for their accounts, to ensure confidentiality and to block access by their competitors.
A third is the complex relationship between Taiwan and mainland China. In the early days of Taiwan investment, companies set up vehicles and holding companies in the Cayman Islands, BVI and other jurisdictions to avoid scrutiny by the governments of both sides of the Straits and facilitate initial public offerings. The two governments imposed different and often restrictive currency and regulatory regulations; to avoid these, companies found it easier to operate out of a third country.
Under Taiwan law, the profits of a company’s offshore subsidiary cannot be taxed until they are distributed to shareholders and remitted to Taiwan. While the money remains overseas, the tax authorities cannot reach it.
The data showed some of the wealthy Taiwan conglomerates with offshore assets – the Want Wang Group, Fubon Group, Ting Hsin International, Kings Group, Delta Electronics, the Koo family, Chinatrust Financial Holding and United Daily News. They used offshore trusts, offshore holding companies and offshore investments. The ICIJ database contains only information on 100,000 companies created by two offshore service firms – Portcullis and BVI-based Commonwealth Trust Ltd; so it gives only a part of the picture.
This massive evasion of tax will continue.
Taipei and Beijing are close to a taxation agreement under which Taiwan-invested entities in the mainland which had paid taxes in Taiwan would not have to pay taxes in China — but it has not been signed yet.
During its last session which ended in mid-January, the Legislative Yuan killed revisions to the Income Tax Act that would have allowed the Ministry of Finance to go after tax liabilities of overseas subsidiaries of Taiwan firms.
For many, the legislators gave in to the pressure from big business, favoring special interests over those of the public and the country at large.
“How are Taiwanese supposed to believe that all these policies are not the result of clandestine work by interest groups?” said Huang Shih-chou, associate professor at the Taipei College of Business. “The way in which the wealthy pretend to pay their taxes as required by law and use legal means to save on taxes is highly insulting to the nation’s hard-working wage and income earners who pay their taxes honestly.”
While the rich are salting money overseas, government debt has increased rapidly over the last 20 years. In 1996, it stood at 16.1 percent of GDP, rising to 29.59 percent in 2006 and nearly 37 percent now.
The widening wealth gap is a major political issue in Taiwan. Public surveys show that a majority do not resent the rich and believe that entrepreneurs deserve a reward for their hard work and the risks they take; what they resent is the inequality of treatment.
“If lawmakers continue to condone such tax avoidance schemes and fail to close the tax loophole for foreign-earned income, social antagonism fuelled by this wealth disparity is sure to escalate,” Commonwealth magazine warned.