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Draft Amendments to the Income Tax Act



The Ministry of Finance (MOF) announced and submitted the Draft Amendments to the Income Tax Act ("Amendments") to the Executive Yuan for approval on September 1, 2017. The Amendments were approved by the Executive Yuan on October 12, 2017 and submitted to the Legislative Yuan for approval on October 13, 2017. The Amendments are a step forward for Taiwan's tax system to become more in line with global tax developments and to be more competitive, equitable and reasonable. The Amendments are expected to take effect on January 1, 2018 if approved by the Legislative Yuan. The major changes to the current tax system are as follows:
 
A.  Individual Income Tax
 
1.  The Amendments will increase the standard deduction (from NT$90,000 to NT$110,000) and the special deductions for salary/wages and the disability allowance (each from NT$128,000 to NT$180,000) in an effort to reduce the income tax liability of wage earners and mid/low-income earners.
 
2.  Hoping to help companies attract and retain high-level talent, the Amendments will abolish the highest tax rate bracket under the current tax regime, thus decreasing the highest tax rate bracket from 45% to 40% and reducing the income tax liability of individuals with more than NT$10 million of net taxable income.
 
3.  Under the new tax system, the income earned by sole proprietorships and partnerships will be passed through to the sole proprietor or each partner and subject to individual income tax. As corporate income tax will no longer be levied on such income, the Amendments will reduce the corporate income tax liability of sole proprietorships and partnerships.
 
B.  Corporate Income Tax
 
The corporate income tax rate will increase from 17% to 20% and the surtax on undistributed earnings will decrease from 10% to 5% under the Amendments.
 
C.  Taxation of Dividends Income
 
1.  The Amendments will abolish the imputation tax system and imputed credit account ("ICA") under the current tax system with the aim of simplifying income taxation in respect of dividends.
 
2.  The Amendments will increase the dividends withholding tax rate from 20% to 21% for foreign investors. Furthermore, foreign investors will no longer be allowed to apply 50% of the surtax paid by the company as a tax credit against his/her dividends withholding tax. However, if the investor's home country and Taiwan have entered into a tax treaty with a preferential dividends withholding tax rate, the investor may continue to apply such preferential tax rate (Taiwan has entered into tax treaties with 32 countries).
 
3.  To promote a fairer tax system and to reduce the difference in tax liability that currently exists between resident individual investors and foreign investors, the Amendments will launch a new tax regime in respect of resident individual investors' dividends income.  Under the new regime, there are two options for taxing dividends income that a resident individual investor may choose from:
 
(1)  Under Option 1, an investor's dividends income is combined into his/her gross income and the investor can apply 8.5% of the dividends income as a tax credit ("Dividends Tax Credit") against his/her income tax liability. However, the Dividends Tax Credit is limited to NT$80,000 for each household.  The investor is entitled to a tax refund if the amount of Dividends Tax Credit is greater than his/her income tax liability. Option 1 would likely be preferential for investors with individual income tax rates that are lower than 20%.
 
(2)  Option 2 applies a flat 26% tax rate on dividends income and would likely be preferential for investors with individual income tax rates that are higher than 30%.

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