by domestic corporations would result, potentially discouraging outward investments. Also, individuals as well as domestic corporations would be encouraged to make direct foreign investments. This issue presents a conflict between domestic policy objectives and international efficiency, a conflict that cannot be resolved unilaterally by adjusting domestic tax policy. Another point to be considered is the effects of adjustments in tax policy on investment in other developing countries. In keeping with the policy of tax neutrality, nontax measures such as information collection and risk insurance should have more practical value than tax incentives. In the case where tax incentives are introduced, provision for a reserve for overseas investment loss should be made or tax deferrals should be granted to direct investment.
The basic proposition of this chapter is that, following recent economic development, particularly foreign trade expansion, Taiwan has become a net capital-exporting country, and the corresponding adjustment of tax policy requires that the international aspects of taxation be an integral part of the wholesale reform of the current tax system.
Along with the required adjustment of domestic tax policy, four major changes in the international income taxation of both business and individual entities are suggested: (1) tax the income of residents on a worldwide basis; (2) tax the income of foreign subsidiaries of Taiwanese corporations located in low-tax jurisdictions on an accrual basis and allow direct and indirect foreign tax credits while exempting foreign-source income of operations located in high-tax jurisdictions; (3) apply a single withholding tax rate to all forms of income accruing to nonresidents; and (4) levy an extra tax on the profits expatriated by the local branches of foreign corporations. Because this chapter focuses on fundamental design concepts, for further understanding it is also suggested that empirical studies on the effects of domestic tax policy on capital flows be made.
Although this chapter is based on the Report of the Tax Commission, Ministry or Finance, ROC, the views expressed should not necessarily be identified with those of the commission.