Introduction to Taiwan’s Taxation System:
Major Problems and Reform

By Ting-An Chen

President
Chunghua Association of Public FinanceTaipei, Taiwan
January 19, 20081

1. Introduction

The prevailing tax system in any country reflects its socio-economic development
status and characteristics. The tax system, the tax burden, and the tax structure in adeveloping country will differ from its developed partners. Going along with theprocess of economic development and social progresses of a nation, changes in taxes
and taxation happen constantly.

The purpose of this paper is to provide an overall, concise yet comprehensive
introduction to the tax system in Taiwan, as to provide a background for more in-depth
discussions on different aspects related to the business income tax and other taxes inthis island economy which is the top capital exporting country to mainland China. In
addition to introduction focusing on the tax systems, problems and issues of thecurrent taxes, possible directions of major reforms will also be given in this paper tosolicit for more meaning discussions and exchanges of opinions.

2. Overview of the Current Tax System, Tax Revenues and Tax Burden

2.1 Characteristics of the Taiwan Tax System

As in most of other countries, Taiwan’s taxes consist of internal taxes andcross-border taxes, and are assigned to as national government taxes and local
government taxes. As shown in Figure 1, national taxes includes (1) income taxes, thatis profit-seeking enterprise income tax (business income tax) and consolidated incometax (individual income tax); (2) custom duties; (3) valued-added and non value-added
business taxes; (4) commodity tax; (5) tobacco and alcohol taxes; (6) securities
transaction tax ; and (7) futures transactions tax. Local taxes are comprised of (8)2agricultural land tax1; (9) land value tax; (10) land value increment tax; (11) house tax;(12) vehicle license tax; (13) deed tax; (14) stamp tax; and (15) amusement tax.

A major difference of the business income tax implemented in Taiwan from thecorporate tax system in other c
ount
r
i
e
s
’is the coverage of taxpayers2. Business income
taxes are imposed on companies, corporations, as well as business organizations in theforms of sole proprietorship, and partnerships where in most of the cases, only
companies or corporations, the so-called judicial personal, are subject to this tax inother countries. The broader coverage of the profit seeking enterprise income tax in
Taiwan can be traced back to the mid-1950 when the income tax law was stipulated. In
its early stage of economic and business development, very small number of taxpayers
would exist if the business income tax had been administered as a corporate income tax.

Broader tax coverage also occurs in Taiwan’s commodity tax system. In 2007, a
total of seven categories of manufactured products, including rubber tires, cement,
non-alcoholic beverage, glasses, gasoline, electrical appliances, and automobiles are
subject to different rates of taxes. Due to revenue objective, Taiwan’s commodity taxes
are excises, or special sales taxes, on specific commodities, with a much broader
coverage of taxable items than the excise tax system in other countries imposing a VAT.

The VAT system applies differential rates to various transactions and even different
tax bases. Values-added is the base for VAT on general transactions, but gross receipts
for financial transactions. The 5% tax rate does not apply to financial transactions,wholesale markets transaction on agricultural produces, and selected dinning and
1

The government had suspended the collection of agricultural land tax since the second installment
1977. Formally, this tax is still an individual item in Taiwan’s tax system and not legally abolished.
2
The scope of business income tax, taxpayers covered, is broader than other countries. In 1955 when
this tax was introduced, there were few business organizations in the form of company or corporations.
To secure the collection of tax, other forms of business entities were put into the tax net.
3

drinking businesses.

Agricultural land tax is the oldest tax in Chinese tax history3. Taiwan retains thisspecial form of land tax. Since 1985, the collection of this tax has been suspended tolower the tax burden on farming sector. Capital gains from land transactions are
generally treated as a type of income in countries applying a comprehensive income
concept in grossing up the taxable income. Contrarily, we impose a specific capitalgains tax on land transactions or taxable transfers, the land value increment tax, as ameasure to capture and distribute the benefit from land value appreciation and the land
right. The most notable characteristic of this tax is the base for tax liability calculation.
Rather then based on the real market transaction gains, a publicly assessed value
system is used which is called the Officially Assessed Prevent Value (OAPV).

Finally, the real property tax system in Taiwan works with separate taxes applied
to buildings and land. House tax is collected on buildings, structures and constructions
while land value tax is imposed on the value of land, or land related to the taxable
buildings subject to house tax. To further complicate the matter, a different publicly
assessed value of the taxable land, the Government Announced Public Value (GAPV),
significantly lower than the OAPV in land value increment tax (LVIT), is used for land
value tax. Reassessment of the GAPV is done once every three years while a new
OAPV is provided every year for all taxable land.

2.2 Tax Revenue

Table 1 gives the collection of all taxes in Taiwan from 2001 to 2005. It shows thattax revenue increased, unsteadily, from NT$ 1,258 billion to NT$ 1,567 billion within
3

See Yu and Wang (2007), pp. 36-37.
4this five year period. Income taxes, business and individual income tax combined,
contributed the biggest share which in 2005 amounted to 39.9% of total tax revenue.
Business tax was the second most important revenue generating item. Also in 2005, acollection of NT$ 237.5 billion from business tax contributed 15.2% to total taxes. It
followed by commodity tax with NT$ 168.4 billion and a share of 10.7%.

The item of monopoly revenues in Table 1 is excises charges on tobacco andalcohol production or consumption. Beginning 2003, this special excise charge system
was replaced by tobacco and alcohol tax, a term accepted by our government during
the negotiations with the World Trade Organization (WTO) and its members when
Taiwan was applying for the membership. Finally, an earmarked surcharge on healthand welfare is added on tobacco tax.

The land value increment tax, according to international tax classification standard,
is an income tax on capital gains from land transactions. Adding revenue from land
value increment tax to income taxes, all three types of income taxes had total proceedsof NT$ 725.9 billion, or 45.1% of total tax collection in year 2005.

Land value tax and land value increment tax are local government taxes. Total
receipts from the two land tax items was lower than the commodity tax, however, they
are the most important local government tax revenue.

Following the process of liberalization in economic development, the importanceof custom duties as a revenue means declined. In the 1950’s, custom duties was always
the top revenue producing tool. In 2005, the government collected NT$ 82.37 billion
on imports, or 5.3% of total tax revenue, lower than those from land taxes.

5

2.3 Tax Structure

We can group all tax items into the four categories as (1) income tax; (2) property
tax; (3) sales tax; and (4) other taxes. Table 2 shows changes in shares among thedifferent categories of taxes over the years. Within the ten year period, income tax
increased from 28.6% to 39.4%, property tax slid from 16.5% to 11.8%, sales tax from
39.8% to 31.7%, and the remaining other taxes pushed up from 15.1% to 16.6%.

A comparison of Taiwan’s tax structure with developed nations may reveal that theincome tax share is lower in Taiwan, yet it has been increasing, and the shares of sales
tax and property tax are both declining.

Ta
i
wa
n’
si
ndi
r
e
c
tt
a
xde
c
r
e
ased from 48.2% in 1996 to 40.6% in 2005, whereas
direct tax increased from 51.8% in 1996 to 59.4% in 2005. By observing the change
trends, indirect taxes have been basically falling, while direct taxes have been rising(see Figure 2).

2.4 Tax Burden

There are two internationally recognized indicators for tax burden. One is the ratio
ofac
ount
r
y
’
st
ot
a
lt
a
xr
e
ve
nuet
oGNP
,na
me
d national rate of tax burden. Another isthe ratio of total tax revenue to population, named tax burden per person. The tax
burden per person is a nominal indicator, so it becomes the real tax burden after being
deflated.

Figure 3 shows t
heweightofTa
i
wa
n’
st
a
xr
e
ve
nue(
e
xc
l
udi
ngs
ocial security
surcharge) in GNP from 1980 to 2004. The weight reached the peak 20.1% in 1990
and had been falling to 11.9% in 2003 that was the lowest burden rate of tax in
6

Ta
i
wa
n’
shi
s
t
or
y
.I
twa
sa
l
s
ot
hel
owe
s
tonei
nc
ompa
r
i
s
onwi
t
hmos
tc
ount
r
i
e
si
nt
he
world (see Table 3).

Ass
howni
nFi
gur
e4,
Ta
i
wa
n’
st
a
xbur
de
nper person increased from NT$ 15,000
in 1980 to NT$ 64,000 in 1998. It had been falling since the year 1998 (except 2000)
and had dropped to NT$ 61,000 in 2004. On the other hand, the national rate of tax
burden fell first and then raise later; it fell from 19.6% of the year 1981 to 15.12% of
the year 1986 and then raise to the peak 20.1% in 1990. However, the rate has kept
falling afterwards. All of rates have been below 15% since the year 2000. Based onthese change trends, we observe the unusual phenomenon that individual tax burden
and national tax burden have been lighter and lighter since 1990s.

At
o
ol
owt
a
xbur
de
ni
ndi
c
a
t
e
sTa
i
wa
n’
st
a
xr
e
ve
nuedoe
snotg
r
ows
i
mul
t
a
ne
ous
l
y
with the GNP. This phenomenon reflects the fact that Taiwanese government overuses
the policies of tax reduction. For instance, t
heg
ove
r
nme
nti
mpl
e
me
nt
e
dt
he“
St
a
t
ut
eof
Encouraging Investment”in 1960, and its main intension was tax reduction. Thirty
years l
a
t
e
r
,t
heg
ove
r
nme
ntus
e
dt
he“
St
a
t
ut
eofPr
omot
i
ngt
heI
ndus
t
r
i
a
lUpgrading”
as the substitute. Though the government claimed the new statute provides incentives
based on functions rather than industries, but it still uses tax reduction as a device in
one
’
she
a
r
tofhe
a
r
t
s
.
Thi
sc
ha
ng
e
sonl
yt
hef
or
m butnott
hec
ont
e
nt
.I
te
ve
ng
e
t
s
worse when the incentives cover more industries and wider categories.

I
nt
e
r
na
t
i
ona
l
i
z
a
t
i
ona
ndl
i
be
r
a
l
i
z
a
t
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vef
or
c
e
dTa
i
wa
n’
sc
us
t
omdut
i
e
st
of
a
l
l
constantly; its average rate was 30.8% in 1984 and fell below 4% in 2005. The highest
rate of profit-seeking enterprise income tax was 35% in 1985 and then dropped to 25%,
while the highest rate of individual income tax also dropped from 60% to 40%.
Moreover, integration of individual and business income taxes was implemented in7

1998 in order to avoid double taxation on dividend incomes. The government stopped
levying taxes on farm lands in 1987, so the revenues of local government were out at
the elbows. Besides, the government proclaimed the statue of small and medium
enterprise development in 1991. Similarly, it used taxes as favorable tools. The
government once again sacrificed tax revenues to handle the financial crisis of the year
1998. It lowered the rate of business tax for financial service industry from 5% to 2%4.
In 2002, the government decided to cut half the rate of land value incremental tax for
three years using recovering the real estate as the excuse. However, the half rate policy
finally develops to the forever reduction policy without any modification or reform ofreassessment method.

3.I
s
s
ue
sandPr
obl
e
msi
nTai
wan’
sTax System

3.1 Income tax

3.1.1 The side effect after integrated income tax system

Beginning from the year 1998, the integration of individual income tax andprofit-seeking enterprise income tax has reduced the double taxation issue of dividend
income to a certain extent. But the businessmen still complain about the additional ten
percent profit-seeking income tax levies on undistributed surplus earnings. The main
purpose is to avoid the firms use undistributed surplus earnings as tax shelter.

3.1.2 The issue of profit -seeking income tax

If the total taxable income of a profit-seeking enterprise is less than NT$ 100,000,

4The government had decided to exempt financial transactions from business tax in 2008. The decision
had reverted afterward because of tax revenue and equity consideration.
8the income tax rate will be 15%.If the total taxable income is more than NT$100,000,
the income tax rate shall be 25% on the portion of taxable income more than NT$
100,000. In order to enhance the international competitiveness and compete with Hong
Kong’
s17.
5% a
ndI
r
e
l
a
nd’
s12.
5%,t
hee
c
onomi
ca
f
f
a
i
r
sa
ut
hor
i
t
yof
f
i
c
e
r
sa
ndt
hebi
g
owners of private enterprise suggest adopt lower flat rate.

3.1.3 High tax burden on individual income tax

Beginning from the tax reform of 1986 in the U.S., there is a tendency toward
lower income tax rate around the world. Although individual income tax bracket has
been reduced from 13-tier to 5-tier classes and the highest marginal tax rate has been
reduced from 60% to 40%, it still has space to simplify bracket and lower tax rate.

3.1.4 Taxation on securities transaction gain

Income tax on gains derived from the securities transactions ceased to be imposedwith effect from 19965. Based on the data from Financial Data Center Ministry of
Finance, among the 40 top income individuals, 8 of them do not pay individual income
tax at all6. Most of them have higher proportion of securities transaction gain.

3.1.5 AMT

Owing to some tax preferential treatments, a lot of high income individuals and big
private enterprises do not pay income tax7. To uphold tax equity, to ensure tax revenue
for the country, and to establish the basic requirements of corporations and individuals
5

On June1st, 1996, the legislature passed the bill on restoration of capital gains from security
transactions as taxable income. A special 14% tax rate was introduced to collect the taxes on this type ofincome. Consequently, the Taiwan stock market dived heavily which made the legislature freeze thepassed bill.
6
See Chu (2006).
7
See Yang et al. (2007).
9

in regard to their obligation to fulfill their income tax burden as a contribution to
public finance. Income Basic Tax Act came into force on January 1, 2006.

3.2 Sales Tax

3.2.1 VAT tax rate

Beginning from 1985, Taiwan enforced value-added business tax. The government
set business tax rate to the lowest level as 5%8. For enterprises engaged in banking,insurance, investment trust, securities, futures, commercial paper and pawnshops, thebusiness tax rate went down to 2%. The business tax revenue collected from thefinancial industries shall be supplied exclusively to the Financial Reconstruction Fundand shall be used for the improvement of financial institutions with financial crises.

3.2.2 Tax Scope of commodity tax

In 1969,
Ta
i
wa
n’
sf
i
r
s
ttax reform proposed to integrate business tax, commodity
tax and stamp tax as VAT. The more taxable goods of commodity tax are included inthe VAT, the lower the VAT tax rate could be, vice verse However, the officials worried
about huge scope tax reform will cause price to fluctuate significantly; thus, a graduate
reform was suggested. Taiwan currently does not change too much on the commodity
tax system except the cosmetic commodity tax was repealed and the tobacco andalcohol tax was imposed independently. Now taxable commodities include sevencategories which are rubber tires, cement, beverage, flat-glass, oil and gas, electric
appliances, vehicles unde
rt
het
r
a
di
t
i
ona
ls
a
l
e
st
a
xs
y
s
t
e
m.Be
c
a
us
eoft
he“
doubl
e

8

The Business tax Law stipulates that the business tax rate be between 5 to 10%. It is the up to thediscretion of the Executive Yuan to determine the actual collection rate. The 5 % rate has been applied
for the last twenty some years since the administration of the VAT.
10

t
a
xa
t
i
on”a
nd“
t
a
xont
a
x”pr
obl
e
ms
,it is indeed to reconsider the taxable objects ofcommodity taxes along with the tax rates of the VAT.

3.2.3 Commodity tax vs. energy tax

One of the taxable commodities is oil and gasoline9. The tax amounts are gasoline(NT$6,830 per 1000 liter (KL)), diesel oil(NT$3,990 per KL), kerosene(NT$4,250 perKL) fuel oil for aircraft(NT$ 610 per KL), fuel oil (NT$ 110 per KL), dissolving oil(NT$ 720 per KL), liquefied petroleum gas( NT$ 690 per metric ton). Taiwan is an oil
imported country but after tax oil price lower than other countries. During energy
shortage and crude oil price rising period, Taiwan government should use oil
commodity tax as an energy saving and pollution prevention policy tool.

3.3 Property Tax

3.3.1 Should the estate and gift tax be abolished or not?

Estate tax has the function to moderate uneven distribution of wealth10. In order toavoid those who transfer his wealth during his lifetime, gift tax is an accompaniment.
There are a lot of methods to avoid estate tax burden. Besides, estate tax and gift tax
revenue only has NT$ 30 billion which is about 2% of total tax revenue. Therefore,
employing estate tax as an income distribution policy tool is fruitless.

3.3.2 Land tax and house tax issue

Property taxes include agriculture land tax, land value tax, land value increment
tax and house tax. Agriculture land tax is based on the annual yield or value per unit
9
10

Status of Commodity Tax, Article 10.
See Chen (2007), p.7.
11

area of land. Agriculture land tax ceased to be imposed twenty years ago. The land
value between agriculture land and non- agriculture land has huge difference. Most of
the urban nearby agriculture land owners wish to change their land category fromagriculture purpose to residential or commercial purpose. The tax base for land value
increment tax is assessed present value of land. Land value increment tax based on the
total amount of land value increment at the time of transfer of land title. Because theassessed present value of land is much lower than the market value of land, most of
the land capital gain was belonged to the land owner.

4. The Features and Difficulties of Tax Reform in Taiwan

4.1 The Reform of Income Tax

“
Fl
a
t
ne
s
s
”be
c
ome
st
hei
nt
e
r
na
t
i
ona
lt
r
e
ndoft
hei
nc
omet
a
xr
e
f
or
m.
Ta
i
wa
nha
s
been the member of the WTO; thus the income tax reform in Taiwan also goes alongon this direction. However, according to the past experiences, there is still a gap toreach the tax system with a flat tax rate. The business income tax in Taiwan only has
two tax rates, 15% and 25%; besides, it is in fact not too high compared to othercountries. Thus, it is not impossible to amend it to a flat rate system, like a rate of
17.5% in Hong Kong or 12.5% in Ireland. However, the reform in which we canchange from a multiple-rate schedule with higher rates to a flat rate system with alower rate has one condition, that is, we are now able to have a broader tax base than
before. The current challenge is that some business leaders11 only advocate a flat anda lower tax rate without supporting a broader tax base accordingly12.

11

The three influential industrial and commerce associations in Taiwan: the Chinese National
Association of Industry and Commerce, the Chinese National Federation of Industries, and the General
Chamber of Commerce of the Republic of China.
12
The Ministry of Economic Affairs commissioned a project to Chunghwa Institute of Economic
12

The same situation also exists in the reform of the individual income tax. Somepeople suggest that we can decrease the current highest marginal tax rate from 40% to25%. However, they disagree to repeal some exclusions or tax benefits under thecurrent tax codes. For example, the income of military personnel and teachers, and thegains derived from the securities transactions are all exempted in Taiwan. It is wellknown that the revenue neutrality is the fundamental principle when a state undertakes
a tax reform. Therefore, lowering the tax rate should be accompanied by a broader tax
base; otherwise, it will make the fiscal situation worse instead.

Taiwan adopted Imputation Tax System to integrate its business income tax andindividual income tax in 1998. However, an additional 10% tax on retained earnings
was also imposed to soak up part of the potential tax loss of the tax system change,
and to curb tax avoidance activities via accumulating corporate earnings. This retained
earnings tax has been widely criticized by the public. The implement of additional
10% on retained earnings in fact results from the situation where the difference of tax
rates between the business income tax (25%) and individual income tax (40%) is toolarge. Thus, the essential solution is to narrow the difference of them. However, thedifficulty in practice is that it is impossible to increase the business income tax rate
and also implausible to decrease the individual income tax rate without enlarging thetax base.

4.2 The Reform of Sales Tax and Energy Tax

After enacting the VAT system, most commodity taxes should be integrated with
Research to draft the “Three Laws for Industries.”The Statue for Industrial Innovation and Value-added,
among the three drafted laws, will be established as replacement for the current Statue for Upgrading theIndustries, which will be expired in 2009. In a seminar held by the institute, the author had a feeling thattax preferential provisions were even more generously provided in the new law than the one being
replaced.
13the VAT system. Compared to other countries, the VAT tax rates in Taiwan are at a
relatively low level. Therefore, it is difficult to improve its fiscal role by collecting
more revenues due to low tax rates.

Some scholars and legislators recently speak in favor of the energy tax13. Actually,
Taiwan already has imposed taxes on energy under different tax laws. For example,
the fuel user fee, the air pollution control fee and the commodity tax on oil andgasoline. The efforts that need to be undertaken for the energy tax in the future are: (1)we should levy on more types of energy, like coal and nuclear energy; (2) we should
enact a special energy tax law which incorporates all existing taxes with the nature of
the energy tax. By doing so, it will be in reality as well as in name. The difficulty of
proposing the energy tax in Taiwan is that it will involve too many reforms interactedwith other taxes, especially with the commodity tax.

Some researchers propose that we could use the revenues collected from theenergy tax first to improve the environment, and secondly to cover the tax loss due toa decrease of the individual income tax rate. With a lower tax rate, not only tax burden
can be lessened but saving and investment can be encouraged. Thus, we can gain the
14
“
doubl
edi
vi
de
nd”ore
ve
n“
t
r
i
pl
edi
vi
de
nd”
.

4.3 The Reform of Estate and Gift Tax

Compared to the income tax rates, the tax rates of estate and gift tax are too high in
Taiwan. Currently, the highest marginal tax rate of the individual income tax and estate
a
ndg
i
f
tt
a
xa
r
e40% and50%,r
e
s
pe
c
t
i
ve
l
y
.Hi
g
ht
a
xr
a
t
e
swi
l
la
f
f
e
c
thous
e
hol
ds
’
saving incentives. Thus, Taiwan government plans to lower the tax rate of the estate
13
14

See Huang and Lo (2006), pp. 65-88.
See Huang (2007), p.8.
14

tax to the level of the individual income tax. It also plans to change the 13-tier tax
rates schedule under the estate tax to the schedule with only 5 classes. On the other
hand, a fixed amount of exemption is also suggested for the gift tax; in addition, it canbe used multiply before or after death.

Lots of business leaders15 argue that if the estate and gifts tax is abolished, it will
attract more foreign capital back to Taiwan. We have some concerns on this argument.
First, it is lack of empirical evidence to support the hypothesis. Second, Taiwan does
not have enough foreign investment currently but still have high foreign exchange
reserves. Thus, Taiwan is not short of capital; instead, it lacks good investment
environment and plans for foreign investors. Third, although the U.S government
plans to annul the estate tax in the future, it still maintains the gift tax and imposes thewealth transfer tax alternatively16. In other words, it does not simply repeal the estate
tax only.

4.4 The Reform of Land Tax

The levy of the agriculture land tax is now suspended in Taiwan, and it is notexpected to become in force again in the future. If it is the case, we suggest that theagriculture land tax could be replaced by the land value tax, where allowing a certain
exemption amount and a relatively lower tax rates on the land for the agriculture
purposes only.

For the long-term reform, it would be better that we can integrate the land value
tax and the house tax as the real estate tax. The tax base is the assessed current value

15
16

The three influential associations support this argument.
See Ho (2005) and Chen (2007).

15

of the real property along with a proportional tax rate. In order to have an appropriate
tax base, the span of reassessment periods should not be too long.

In terms of its nature, the land value increment tax is a form of income tax. Thus,
we suggest that the capital gains from the sales of lands could be titled as one sourceof income. Thus, the land value increment tax can be incorporated with the income tax.
In order to reflect the proper capital gains, the real market exchange price should be
adopted instead of the assessed present value. In order to eliminate the possibility of
“
l
oc
k-i
n”e
f
f
e
c
t
,aproportional tax schedule is suggested.

5. Conclusion

The special format of various land taxes in Taiwan owes to Taiwan’s Chinese
heritage, and its specific socio-economic and cultural background, while income andsales taxes are basically affected by modern tax system in industrial countries such as
the States and European Union.

Leading by the process of liberalization and internationalization, and within theframework of a global village, tax systems in individual countries tend to harmonize
and more homogenized. Following this tendency, the unique element within Taiwan’s
tax system will fade out gradually. To improve its international competitiveness,flattening of the income taxes is an indispensible objective in future tax reform.
However, to reduce the degree of progressivity, or the top marginal income tax rates,
the complementary measure of broadening the tax base must also be adopted. It will
be rather unrealistic to advocate a policy of tax reduction without at the same time tohold a firm position on eliminating those over-generous preferential treatments. It can
only be done if the further impounding effect on hurting the already troubled
16

government financial position is ignored. To narrowing the gaps between the nominal
rates and the effective rates of the income tax system will certainly be one of the mostimportant aspects of Taiwan’s tax reform. Removing the preferential provisions in theincome taxes, the necessity of the supplemental alternative minimum tax imposedsince 2006 will cease to exist. Furthermore, we can expect for a much less complicatedincome tax system and lowering tax administration costs.

To adjust the current tax structure which skews more toward the income taxes forrevenue goal, a readily available means is to increase the collection of sales tax,
especially the value-added tax. Other reform measures related to the consumption taxes
involve changing the petroleum and gasoline taxation within the commodity tax tospecific taxes, i.e., taxes based on quantity, and the integration of these two taxable
goods with other energy resources into an energy tax system. Finally, all remaining
commodity taxes should be eliminated with the reform of the value-added business tax.

As regards the estate and gift taxes, even though the two contribute to a rather
insignificant share to total tax collection, it is still a major financial source for the local
governments. A fundamental change of these two taxes may call for a merge of thetwo into a lifetime wealth transfer tax where a deduction of fixed amount is provided
for transfers before or after death, without any restriction on number of transfers. Taxchanges take time and the proposed changes in estate and gift taxes will not be an
exception. Before the changes are implemented, re-shaping the elements of tax base,tax rates, and provisions on exemptions and deductions, is a much more pragmatic
policy option than a blunt abolishment of the taxes.

For the land taxes, the desirability of incorporating the land value increment tax
into the income taxes has long been discussed and advocated. However, given the fact
17

that this tax is stipulated in our constitution, the first best reform choice is politicallydifficult which can by no means be used as an excuse for failing to correct the caveatsof the tax in its current format. For example, as having been discussed for a very long
period of time, the system of GAPV, significantly under-assessed compared to themarket value, must be improved in order to enhance the equity and efficiency
performance of this unique tax. Merging the house tax and land value tax into a realestate or immovable property tax with a more realistic assessment on land value is also
among the front-running items for reforming the property tax system.

18

Table 1: Total Tax Revenues by Years (2001 — 2005)

Source: Guide to ROC Taxes 2007, Ministry of Finance, R.O.C., p.9.

19

Table 2：Tax Structure in Taiwan (1996 v.s 2005)

Source: Guide to ROC Taxes 2007, Ministry of Finance, R.O.C., p.3.

20

Table 3: Total Tax Revenues as Percentage of GDP (Excluding Social Security Contributions)

Unit：％

Year

R.O.C

1965

14.2

21.7

1970

17.2

1975

Australia Canada

France Germany

Japan

Korea

Singapore

UK

USA

24.2

22.7

23.1

14.2

--

--

25.7

21.4

22.1

27.8

21.5

22.5

15.3

--

--

31.9

22.7

17.3

26.5

28.1

21.1

23.3

14.8

14.9

--

29.1

20.3

1980

19.2

27.3

27.7

23.1

24.6

18.0

17.1

--

29.3

20.6

1985

16.0

29.1

28.7

24.0

23.6

19.1

16.1

17.4

31.0

19.1

1990

20.1

29.3

31.5

23.6

22.3

21.4

17.9

15.7

30.3

20.5

1995

17.7

29.8

30.6

24.5

22.7

17.7

18.1

16.5

28.9

20.9

2000

12.9

32.1

30.8

28.4

22.7

17.2

19.6

15.8

31.1

23.0

2003

12.1

31.6

28.6

27.0

21.1

15.6

20.4

12.8

29.0

18.8

Source: Yearbook of Financial Statistics 2005, Ministry of Finance, R.O.C.

21

Figure 1: The Tax System of Taiwan

Source: Guide to ROC Taxes 2007, Ministry of Finance, R.O.C., p.8.

Figure 2: Direct Taxes and Indirect Taxes

Source: Guide to ROC Taxes 2007, Ministry of Finance, R.O.C., p.10.

22

Figure 3: The Ratio of Tax Revenus to GDP

Source: Yearbook of Financial Statistics 2005, Ministry of Finance, R.O.C.

Figure 4: Tax Burden Per Capita (Tax Revenues/Population)

Source: Yearbook of Financial Statistics 2005, Ministry of Finance, R.O.C.

23

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