Implementation Of The Fairness Of Income Tax In Taiwan

Fairness is the fundamental spirit of income tax systems, and an ideal to be realized. Tax preferential policies lead to a violation of the Ability-to-Pay Principle, as well as a breach of fairness. These measures have long been policy instruments heavily relied upon by the government institutions in Taiwan, aiming to facilitate various development plans or to achieve the policy objectives. This however has caused unrestrained utilization of the tax preferential measures and, consequently, the deficiency in government tax income and unfair tax allocation. Other factors, such as defects in the design of tax systems and different views on the definition of income, etc., also affect the fairness of the income tax system. The most effective method to achieve an ultimate solution to these problems, no doubt, is to review and amend the regulations comprehensively. The regulatory review and amendment process, however, involves considerable difficulties and barriers, considering the high complexity of the existing income tax preferential measures in Taiwan. In terms of time efficiency, therefore, it would be relatively easier to set up a minimum tax system for income tax.Taiwan's minimum tax for income tax was implemented in 2006.The main purpose for implementing the system for business income tax is to minimize the unfairness caused by overuse of tax preferential policies, e.g., excessive lower tax payment or even full tax exemption. In this research, an innovative approach was adopted to test and prove the influence of the minimum tax system, when implemented, on taxation fairness, using the actual tax-filing information of all listed companies in Taiwan. The finding is that the implementation of the minimum tax system is helpful to the maintenance of a fair taxation system. The existing minimum tax system for business income tax, nevertheless, was designed purely to address the abuse of tax preferential policies. On the other hand, excessive protection has been provided to tax-free income to comply with the Principle of Legitimate Expectations. The system, furthermore, does not address other factors which may affect the fairness of the taxation system as well. In spite of its merits, the system is deemed defective in terms of its effectiveness in maintaining taxation fairness. In the simulation tests of this research, it has been proved that the most integrated and fair minimum tax system is the one that uses the taxpayers'financial income recorded in the final accounting books as the basis for computing the minimum tax. This approach saves the efforts to calculate the basic income amount for the minimum tax system and brings in increased tax income, regardless of the potential reduction in the tax rate. It also improves the fairness in tax allocation, therefore it can better conform to the renovated tax concepts of a broad tax base, low tax rate and simplified tax system. The main purpose of the minimum tax for individual income tax is to correct the tax-evading behaviors by individual taxpayers, in the meantime enabling tax levying on the difficult-to-tax income at the present stage. Compared with those business income taxpayers, personal income taxpayers are entitled to less tax preferential treatments. They are not applicable to the principle of "Legitimate Expectations", either. In terms of the effectiveness in maintaining the fairness of the taxation system, therefore, the minimum tax system for personal income tax is superior to the one for business income tax. Currently, it would be rather difficult to amend the regulations and convert the existing income tax system to a "Worldwide Tax System", taking into account the Principle of Substance over Form and the Principle of Pervasiveness. The minimum tax system enables tax levying on offshore incomes, which signifies a step forward in the pursuit of taxation fairness. This system, though imperfect, can be considered as an intermediate and expedient approach, or a temporary compromise for the Principle of Substance over Form. The ultimate goal is to directly incorporate offshore income into the regular income tax system through legislative procedures.The research paper is organized in the following manner:The first and second parts of the paper underline the premise that, to ensure fairness of the taxation system, the authorities should adopt fair and scientific methodologies to measure the real tax affordability and ensure a reasonable tax allocation among all taxpayers. Even for those who are entitled to tax preferential treatments, a reasonable tax amount should still be paid. Excessively low tax liability or complete tax exemption should be discontinued. The third part provides an introduction and analysis on various measurement instruments on the fairness of tax systems, which are used as a reference for the selection of measurement instruments in this research. The fourth part of the paper explores the causes of unreasonable income tax allocation in Taiwan. Through a focused analysis on the defects of the existing income tax systems, the researcher endeavors to identify an integrated minimum tax system through a process of logical thinking. The fifth part explains the contents of the existing minimum tax system and provides preliminary opinions on the effectiveness of this system in protecting the fairness of the tax system. In the sixth part, the researcher conducted an empirical study on the specific achievements of the minimum tax system for business income tax in improving the taxation fairness, using the actual taxpaying information. The researcher has, in the meantime, recommended a fairer and more efficient design for the minimum tax system. Finally, based on the results of the empirical research, the researcher made a conclusion for the research and provided innovative recommendations which can be used as a reference for lawmakers in the future when amending the relevant tax regulations to improve the taxation fairness.