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Commercial Times: Pros and cons of capital gains tax

2012/04/24 17:42:05

A plan by the Ministry of Finance (MOF) to reintroduce a capital gains tax on stock investments has drawn criticism from brokerages, which held a special meeting Monday to discuss ways of coping with the situation.

According to the Taiwan Securities Association, domestic brokerages suffered a net loss of NT$403.9 billion from stock trading in Taiwan over the past 10 years, although they managed to make more than NT$1 trillion in profits in 2003, 2006 and 2010.

As a whole, stock investors in the Taiwan market suffered losses of NT$5.2 trillion in 2008 and NT$2.7 trillion in 2011, with a profit of NT$4.3 trillion registered in 2009. This demonstrates that even if the tax were introduced, it would not generate any revenue for the government because of loss carryover.

In addition, the imposition of a capital gains tax will lead to an exodus of day traders and short-term speculators, who contribute 15- 20 percent of the daily turnover in Taiwan's stock market. This is the reason why the daily turnover of the stock market has shrunk by 30 percent to NT$70 billion since the MOF's plan was unveiled.

The worst part of the plan is the tax-exempt status for foreign institutional investors. Based on an estimate by experts, foreign institutional investors have earned a net profit of NT$10 billion from Taiwan's futures market, while domestic investors have been net losers. If a tax is imposed on domestic investors, they are bound to fail. The government must not promote policies that will spark accusations of "discrimination against locals."

We are afraid the planned capital gains tax can only achieve superficial, fragmentary fairness, will decrease tax revenue and stock liquidity and increase tax collection costs. The government should reconsider the plan and heed the voices of the various sectors on the matter. (Editorial abstract -- April 24, 2012)

(By Y.F. Low)