Economic Overview
The economy has performed well in recent months, following solid growth in the first quarter. The manufacturing sector regained momentum in June after four months of decelerating growth, according to survey data. The sector expanded faster in June than in May due to new orders from abroad. Furthermore, industrial production expanded at a healthy pace in May due to strong output of electronic parts and components, and unemployment fell to a four-month low.
On the political front, the Legislative Yuan passed amendments to the Company Act on 6 July aimed at improving corporate governance, making it easier to raise funds and reducing money laundering. On the same day, rules were also amended to make it easier for domestic companies to be listed on the Taiwan Stock Exchange. Both developments in July are encouraging for business confidence.
A tight labor market should drive household spending this year. Momentum in the external sector should remain solid but will likely moderate from last year. A main downside risk is the escalating trade feud between China and the U.S., as electronic products—Taiwan’s flagship export—are heavily integrated into both countries’ supply chains. Other risks include higher cross-strait tensions, given Taiwan’s dependence on China as its main export market, and the increased migration of high-skilled workers to China.
Focus Economics panelists forecast GDP growth of 2.6% this year, which is unchanged from last month’s forecast. GDP growth is seen at 2.4% in 2019.
Key Sectors in Taiwan
The following export product groups represent the highest dollar value in Taiwanese global shipments during 2017. Also shown is the percentage share each export category represents in terms of overall exports from Taiwan.
- Electrical machinery, equipment: US$141.5 billion (44.5% of total exports)
- Machinery including computers: $36.6 billion (11.5%)
- Plastics, plastic articles: $20.3 billion (6.4%)
- Optical, technical, medical apparatus: $16.4 billion (5.2%)
- Mineral fuels including oil: $10.9 billion (3.4%)
- Vehicles: $9.7 billion (3.1%)
- Iron, steel: $9.7 billion (3%)
- Organic chemicals: $9.6 billion (3.0%)
- Articles of iron or steel: $7.7 billion (2.4%)
- Copper: $4.7 billion (1.5%)
Fastest-growing in dollar value among the top 10 export categories from 2013 to 2017 were: copper (up 37.3%), iron or steel products (up 25.3%), organic chemicals (up 21.8%) then machinery including computers (up 21.4%).
- Copper: Up by 37.3% (US$4.7 billion)
- Iron, steel: Up by 25.3% (US$9.7 billion)
- Organic chemicals: Up by 21.8% (US$9.6 billion)
- Machinery including computers: Up by 21.4% (US$36.6 billion)
- Plastics, plastic articles: Up by 15.5% (US$20.3 billion)
- Articles of iron or steel: Up by 14.8% (US$7.7 billion)
- Electrical machinery, equipment: Up by 14.0% (US$141.5 billion)
- Mineral fuels including oil: Up by 11.2% (US$10.9 billion)
- Optical, technical, medical apparatus: Up by 10.7% (US$16.4 billion)
- Vehicles : Up by 4.2% (US$9.7 billion)
- The lagging category for Taiwanese exporters was vehicles via its 4.2% increase.
Taxes in Taiwan
Residence – A profit-seeking enterprise is resident in Taiwan if its head office is in Taiwan.
Basis – Taiwan companies (including Taiwan subsidiaries of foreign companies) are subject to income tax on their worldwide income. A profit-seeking enterprise with its head office outside Taiwan (such as a branch of a foreign company) is considered nonresident for tax purposes. Such an enterprise is subject to profit-seeking enterprise income tax on only its Taiwan-source income, at the same rate as applies to domestic companies.
Taxable income – Taxable income of a profit-seeking enterprise is net income, which is defined as gross annual income after the deduction of costs and expenses, losses and taxes.
Taxation of dividends – Dividends received from Taiwan companies, as well as business profits of limited partnerships, are not considered taxable income in the hand of resident corporate taxpayers. The imputation system was abolished as from 1 January 2018. As a result, corporate taxpayers no longer are required to maintain an imputation credit account and resident individual shareholders can no longer claim imputed tax credits against their individual income tax liability on dividend income.
Losses – Assessed tax losses of business entities (including corporations and branches of a foreign company) may be carried forward for 10 years, provided the entity keeps accounting books, files a “blue return” or files an annual corporate tax return that has been examined and certified by a local CPA within the prescribed period in the year the losses are incurred and the year the losses are utilized. The carryback of losses is not permitted.
Rate – 20% for fiscal years starting on or after 1 January 2018 (increased from 17%). For enterprises with taxable income not exceeding NTD 500,000, the corporate income tax rate is 18% in 2018 and 19% in 2019.
Capital gains – Capital gains are treated as ordinary income and taxed at the standard profit-seeking enterprise rate. Gains derived by a profit-seeking enterprise from the sale of land acquired on or before 1 January 2016 and the sale of shares of a domestic company are exempt from income tax but are subject to land value incremental tax (LVIT) and alternative minimum tax (AMT), respectively (see below under “Alternative minimum tax” and “Real property tax”).
Under the tax regime that applies to the sale of real estate (including land and houses) acquired after 1 January 2016, resident companies are subject to corporate income tax at 20% on capital gains from the sale of real estate.
Nonresidents (including companies and individuals) will be subject to a 45% income tax on capital gains from the sale of real estate that has been held for less than one year, or 35% if the property has been held for more than one year. The incremental net value of the real estate sold still will be subject to LVIT, but the incremental net value of the land can be deducted from the taxable capital gains when calculating the income tax.
Surtax – To neutralize a company’s dividend distribution decision, a surtax is imposed on undistributed profits. For the first fiscal year starting on or after 1 January 2018 the rate is 5% (reduced from 10%) on 2018 earnings not distributed in 2019. From 1 January 2019, the surtax no longer will be available as a credit against withholding tax on dividends paid to nonresident shareholders.
Alternative minimum tax – A profit-seeking enterprise with a fixed place of business or business agent in Taiwan is subject to a separate alternative minimum tax (AMT) calculation if it earns certain income that is tax exempt or enjoys certain tax incentives under the Income Tax Act or other laws, and the enterprise’s basic income exceeds NTD 500,000. The AMT rate is 12%.
Foreign tax credit – A foreign tax credit is available for income tax paid in other countries on income derived outside Taiwan. The credit may be used to offset the enterprise’s Taiwan income tax liability, but it may not exceed the incremental tax liability that would result if the foreign-source income was added to Taiwan taxable income and taxed at the applicable domestic rate.
Participation exemption – Taiwan companies are not taxed on dividends received from investments in other Taiwan companies, but foreign dividends are subject to income tax at a rate of 20%.
Incentives – The Statute for Investment by Foreign Nationals provides for a number of tax and nontax incentives for qualifying direct investors, such as the right of foreign investors to hold up to 100% of Taiwanese companies; the ability to remit all net profits and interest without being subject to the foreign exchange control rules; the right to repatriate up to 100% of investment capital and profits at any time after incorporation or upon dissolution of the company; and the same access to incentives and privileges enjoyed by domestic investors.
The Statute for Industrial Innovation provides an income tax credit for innovation-related R&D expenses incurred by Taiwan-based enterprises and limited partnerships at their Taiwan facilities. The enterprise must obtain approval from the tax authorities of its R&D projects for each year to benefit from the tax credit and, if approved, the company can take a credit against its tax payable for up to either: (1) 15% of its total R&D expenditure for the current year which cannot be carried forward, or (2) a credit of up to 10% of R&D expenditure that can be utilized in the year incurred and carried forward for the next two years. In either case, the tax credit is capped at 30% of the taxpayer’s corporate income tax payable for the current year.
Profit-seeking enterprises that qualify as small and medium-sized enterprises also may deduct salary expenses of up to 130% of the salaries paid to employees newly hired during the current year, provided certain requirements are met.
Foreign investors are pulling cash from Taiwan stocks as a range of concerns makes them skittish.
Foreigners have sold a net $3.9 billion of the island’s stocks from end-March to Tuesday, in line for the most quarterly outflows since June 2012. That has the benchmark Taiex in line for its worst quarter since September 2015 and caused the currency to erase its advance for the year.
The likelihood the U.S. will raise interest rates, weak revenue forecasts by chipmaker Taiwan Semiconductor Manufacturing Co., concern over iPhone sales and the China-U.S. trade tensions are all worrying overseas investors, Capital Investment Management Corp. vice president Alan Tseng said by phone. He added that they’re also concerned that foreign-exchange losses will erode any gains from equities.
The outflows have punished TSMC and iPhone assembler Hon Hai Precision Industry Co., which have seen their shares retreat more than 7 percent this quarter. Meantime, Apple delivered better-than-expected results because of services it provides to device users. Overseas investors were net buyers of stocks on Wednesday, adding $21.3 million worth to help the Taiex add 0.1 percent.