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MOF Proposes the Draft Amendments of the Income Tax Act

Josephine Peng/Chien-Chih Hung

To establish a fair and competitive income tax system that is aligned with international trends, and ease the income tax burden on wage earners, mid/low-income earners, small and medium-size enterprises, and start-ups, the Ministry of Finance (MOF) proposed the Draft Amendments to the Income Tax Act based on international trends and public opinion and submitted the Draft Amendments of the Income Tax Act to the Executive Yuan for approval on September 1, 2017.
The draft of the income tax reform is divided into three main areas as summarized below:
A.     Easing the income tax burden on wage earners and mid/low-income earners
1.   The standard deduction will increase from NT$90,000 to NT$110,000 for single taxpayers and from NT$180,000 to NT$220,000 for married taxpayers.
2.   The special deduction for salary/wages and special deduction for disability will increase from NT$128,000 to NT$180,000.
3.   The number of income tax brackets for individuals will be amended from six to five, with the highest tax bracket being 40%.
B.     Easing the corporate income tax burden on small and medium-size enterprises and start-ups
1.   Income earned by sole-proprietorships and partnerships will no longer be subject to corporate income tax ("CIT").  Such income will instead be passed through to the sole-proprietor or partner and be subject to individual income tax ("IIT").
2.   The surtax on undistributed earnings will decrease from 10% to 5%.
C.     Establishing a competitive income tax system which is in line with international trends
1.   The imputation tax system will be abolished.
2.  A new tax system on dividend income for individual residents (i.e., domestic individual investors) will be established.
(1) Plan A – proposes to allow individual investors to be exempt from income tax on 37% of dividends they receive, with the remaining 63% to be included in their IIT return and taxed at the taxpayer's tax rate.
(2) Plan B – proposes to allow individuals to choose from either having all of their dividend income taxed as part of individual income ("Option 1") or having their dividend income taxed separately ("Option 2"), whichever is more favorable to the taxpayer.
(a) Option 1 proposes to tax all dividend income as part of individual income.  Individual investors can recognize 8.5% of the dividend income as tax deductible, with the maximum allowable deduction amount for each household being NT$80,000.
(b) Option 2 proposes to tax individuals' dividend income separately at a flat rate of 26%.
3.    Adjusting the structure of tax rates
(1) The CIT rate will increase from 17% to 20%.
(2) The surtax on undistributed earnings will no longer be able to be used to offset against the withholding tax ("WHT") imposed on dividends distributed to non-residents (i.e., foreign investors).
(3) The WHT rate on dividend income will increase from 20% to 21% for foreign investors.  However, WHT rates under tax treaties can still be applied.