Repatriated cash revs up Taiwan's economic engine

AUO

14/08/2019 02:46

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own. Refiles to fix subheadline formatting.)
    By Robyn Mak
    HONG KONG, Aug 14 (Reuters Breakingviews) - Taiwan has a
$350 billion chance to rev up its stuttering economic engine.
The self-ruled island has been battered by a U.S.-China trade
war and stalled diplomatic relations with Beijing. In response
President Tsai Ing-wen is urging local companies that left
decades ago in search of cheaper, larger markets to come home,
bringing offshore riches with them. It’s an achievable ambition;
a lasting impact, though, will depend on deeper reforms.
    Exports unexpectedly shrank 0.5% in July from a year earlier
to $28 billion, as global demand for Taiwanese electronics,
high-tech gadgets and components fell. The threat of new tariffs
on $300 billion worth of Chinese goods entering the United
States jeopardises a hoped-for recovery. Taiwanese exports
account for 70% of the economy: shipments of electrical
equipment to mainland China make up nearly a fifth of GDP.
    To make matters worse, Beijing, which regards Taiwan as a
renegade province, has curbed tourist flows to the island since
August. It is the latest salvo aimed at the independence-leaning
Tsai, who is seeking re-election in January - and another
economic blow.
    And yet sentiment in Taipei, a city of 2.7 million, remains
optimistic. Among finance and business executives, hopes of a
capital return are increasing. Indeed, trade ructions and rising
costs in mainland China are pushing companies from Apple
 AAPL.O  to Nike  NKE.N  to rethink supply chains. Tsai's
government is betting its policies and benefits can lure back
Taiwanese manufacturers, like iPhone-assembler Foxconn
 2317.TW , that for years outsourced production to China.
    Estimates of how much could actually come home vary, but the
potential is unquestionably huge. Taiwan's overseas direct
investment amounted to $350 billion as of the end of last year,
according to Fitch Ratings.
    TAXMEN
    A major initiative is a one-off preferential tax programme
for repatriated funds. Under a two-year scheme, set to go into
effect later this year, companies and individuals will be taxed
8% in the first year, and 10% during the second year. If a
business chooses to invest in specific new economy sectors like
biotech, it is also eligible for a 50% tax rebate. The tax
savings can add up, especially given the island’s standard 20%
corporate income rate. 
    The catch is that the use and management of the repatriated
funds is highly regulated. For example, the government does not
allow the funds to be invested in real estate or stocks to avoid
inflating bubbles.
    Early signs look promising. Since the start of the year,
regulators have approved over 100 applications from local
companies looking to repatriate $17 billion worth of capital –
more than twice what the government has set aside for
infrastructure projects this year. Officials have estimated that
initially, repatriation inflows could hit up to $28 billion a
year.
    Notable returnees include Apple-supplier Quanta Computer
 2382.TW  as well as panel-maker AU Optronics  2409.TW . In the
first six months, Taiwan's gross capital formation, an indicator
for investment, jumped 6.5% year on year, well above the 10-year
average of 2.2%, DBS economist Ma Tieying notes.
    But money is only part of the solution. The bigger challenge
will be to transform Taiwan into an attractive permanent
residence, for both foreign and domestic capital. 
    Tsai is already pushing ahead with other incentives, from
offering businesses easier access to bank financing to
preferential land agreements and leases. Yet the local economy
has been hollowed out for years, thanks to an exodus of talent
and business to mainland China. Structural issues abound,
including shortages of workers, water, land and electricity.
Cutting red tape for businesses and easing restrictions on
things like hiring overseas workers are crucial. Deeper reforms,
such as improving energy efficiency and increasing the use of
renewable sources, will be much harder to tackle. 
    For Tsai, the moment is now.
    On Twitter https://twitter.com/mak_robyn
    
    CONTEXT NEWS
    - Taiwan's government has approved 106 applications from
local businesses planning to repatriate T$537 billion ($17.09
billion) worth of overseas capital, local newspaper Taipei Times
reported on Aug. 13, citing official statements.
    - In July, the self-ruled island's legislature approved a
special bill granting tax benefits to Taiwanese companies and
individuals who transfer overseas earnings back. As part of the
scheme, companies and individuals will be taxed 8% in the first
year, and 10% during the second year, on the repatriated amount.
That compares with a standard corporate income tax rate of 20%.
    - The bill, which is expected to go into effect this year,
requires repatriated funds to be held in special bank accounts
for at least five years, subject to certain restrictions.
    - For previous columns by the author, Reuters customers can
click on  MAK/   
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 (Editing by Pete Sweeney and Katrina Hamlin)
 ((robyn.mak@thomsonreuters.com; Reuters Messaging:
robyn.mak.thomsonreuters.com@reuters.net))