Tax treats tempt capital back home
One of the benefits of this trade war so far is that NT$615.2 billion (US$19 billion) of wealth, as of October 3 2019, has already been repatriated, according to the Ministry of Economic Affairs’ InvesTaiwan Service Center.
Crippling trade war-related export tariffs on Chinese manufactured goods, rising labour, sourcing and land costs, tougher regulations and reduced subsidies are making China less attractive for labour-intensive manufacturers as China moves up the value chain. In fact, companies have been relocating to more cost-effective countries long before the trade war.
This repatriation of offshore wealth is divided into two categories: that of Taiwanese corporates or large companies, and that of individuals.
The capital of these companies, originally placed in China, is moving to other places in Southeast Asia, such as Vietnam, Malaysia and Indonesia, where they are setting up alternative manufacturing sites.
Good for banks
Chang-Ken Lee, president of Cathay Financial Holding Company, sees this repatriation of wealth, whether it be that of companies or individuals, as fortuitous for the island’s banks, in particular their private banking and wealth management sectors.
“It’s good timing for Taiwan’s financial sector,” he notes, adding that the current turmoil in Hong Kong has investors considering a Plan B and the Taiwanese government is offering returnees tax incentives.
“This is a pretty good chance to serve customers we couldn’t serve in the past,” he says in an exclusive interview with The Asset.
Enquiries have been made by high-net-worth individuals to Taiwan’s financial institutions asking for details about how they can move their assets back, what kind of products and vehicles are available, and whether they should move quickly or in different stages, he notes.
“We will try very hard to consolidate all our internal resources into one platform to serve our customers’ needs,” he adds.
Though there is opportunity in the fallout of the trade war, Lee doesn’t feel it will have a significant impact on their revenue in China, which is relatively small for Cathay.
The short and long of it
Jerry Harn, president of Fubon Financial Holdings, sees short-term benefits for Taiwan from the trade war, but has long-term worries, feeling no country can be exempt from it.
“Obviously if you look at it from a short-term perspective, we are not a victim of the trade war,” he says. “We are beneficiaries of this trade tension.”
He notes that a few orders have been transferred to Taiwan, which will probably increase the output of factories. Second, there is capital inflow, but it is unsubstantial because banks are only part of the economy. Third, investment projects have increased.
“Even if half of these projects are completed, they will have had a very positive impact economically on Taiwan,” he says. But because Taiwan is a “small, sort of open-to-the-world economy” with links to the rest of the world that are proportionally much larger than most other economies, he has concerns.
Over 70% of Taiwan’s GDP is related to trade in one way or another, making its economy susceptible to the rise of protectionism.
Even though Taiwan is one of the few countries enjoying increased GDP growth, in the long term, nobody is exempt from this trade war, Harn warns.
“We are closely monitoring the process and the impact is very small to us,” Daniel Wu, president of CTBC Financial Holding, says in reference to the trade war. “Most of our clients don’t have very big exposure [in mainland China] because of cross-strait politics.”
CTBC does have about 38,000 clients in China, he explains, mostly Taiwanese manufacturers who went there 30 years ago. Some of them have been impacted, and have started looking to Vietnam – or elsewhere in Southeast Asia - as a second manufacturing centre, while others are moving back to Taiwan.
These clients, he notes, are part of a trend that has seen people returning to Taiwan. Now, with the tax breaks and incentives offered by the government there is even more incentive to return.
“We have calculated that in terms of business you can do to generate profit, it’s like NT$10 billion,” Wu says. “It’s not that big, but for a corporation like us, we can do some of the wealth management and some of the trust business.”
Motivation to return
Joseph Huang, president of E.SUN Financial Holding and E.SUN Commercial Bank, says the trade war has sent Taiwanese money and corporates with long-term worries back home, causing changes in the production chain.
E.SUN Bank estimates that Taiwanese corporates will directly invest NT$700 billion in the island this year, and over a two-year period this figure will rise to NT$1 trillion, higher than the NT$800 billion estimated by Wellington Koo, chairman of the Financial Supervisory Commission, in an interview with The Asset.
“As long as the government’s taxes and fees drop a lot,” Huang adds, “corporates will have the motivation to return to Taiwan.” The Ministry of Finance is also providing preferential policies for corporates and individuals if they meet certain guidelines and regulations, he points out.
“5+2” = 4 and 5
The requirements and guidelines are set out in President Tsai Ing-wen’s government’s “5+2” initiative in which it seeks to boost and upgrade the island’s economy by urging corporates and individuals to repatriate their factories and funds to Taiwan and invest in specific sectors of the economy deemed to be drivers of future sustainable growth and employment.
The “5+2” refers to five industries and two projects: internet of things (IoT), biomedical, green energy, smart machinery, national defence, new agriculture, and recycling.
At the moment, a 20% alternative minimum tax rate applies to all overseas income declared or repatriated. Some investors had called for a one-off tax reduction that would be applied to repatriated cash.
This year, the government introduced a law, not yet passed but referred to by some as an amnesty law, that in broad terms involves a reduction of this standard corporate 20% rate to 8% in the first year and 10% in the second, if 70% of the incoming assets are invested in the “5+2” industries, then investors will enjoy a 50% tax rebate.
This will drop the tax paid on the incoming assets to 4% in the first year and 5% in the second.
CRS and shrinking tax havens
Apart from the trade war, and troubling costs and regulations in mainland China, another factor pushing the repatriation of wealth is the adoption of common reporting standard (CRS) around the world.
As reported last year in The Asset’s 2018 Taiwan report, under CRS, financial institutions have begun to share account details of their individual and corporate customers with tax authorities.
Taiwanese corporates have a history of structuring their business operations through low-tax offshore jurisdictions to reduce tax and as a way to invest in mainland China.
So, with the authorities nosing in, more and more Taiwanese corporates with cash abroad will be concerned about paying higher taxes than those being offered by the government under its new repatriation-friendly incentive plans.