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FSC may establish a contingency fund using business tax

TAIPEI, Taiwan -- Financial Supervisory Commission Chairman Tseng Ming-chung (曾銘宗) stated that 2 percent of revenues collected from the business tax on financial services will be allocated towards a specialized contingency fund designed to mitigate the impact to Taiwan's banking sector in the event of catastrophic international financial crisis, during a Legislative Yuan session yesterday.

Previously, the Ministry of Finance had outlined its plans for sweeping reform designed to improve Taiwan's fiscal soundness, which includes a move to raise the business tax on financial services from 2 percent to 5 percent.

According to Tseng the special contingency fund will have a maturity of ten years, and will be able to provide aid to distressed banks in the event of extraordinary upheavals without requiring additional resources from the national budget.

Tseng remarked that in 2001, the government had established the Resolution Trust Company (RSC, 融重建基金) as a mechanism to aid distressed financial institutions. The RTC was funded by the collection of business taxes on financial services and deposit insurance payments from financial institutions. Tseng however stated that the RTC's resources have been depleted after aiding more than 50 distressed financial institution throughout the past decade since its founding. As a result the RTC has since been absorbed into the Central Deposit Insurance Corporation (中央存款保險公司).

The proposal to establish a special contingency is technically and procedurally sound, said Tseng, adding that both the banking and insurance sectors will be protected by the measure against extraordinary circumstances.

For the next decade following the completion of the forthcoming fiscal reform, the special contingency fund will garner about NT$22 billion to NT$25 billion per year, and accumulate up to NT$250 billion in ten years, an amount deemed capable of aiding distressed financial institutions should the need arise, said Tseng.

Tseng also stated that Taiwan's banking sector remains robust and sound, and that the condition of three distressed insurance companies is expected to improve shortly following the adherence of regulatory guidance.

Meanwhile, lawmakers voiced opposing opinions over the cabinet's plans to return the business tax on financial services from 2 percent to 5 percent. An opposition party lawmaker stated that the increased tax obligation imposed on Taiwan's financial companies will hamper their efforts in expanding towards international markets, adding that it may be too soon after a sector-wide recovery. A ruling party lawmaker stated that the financial sector enjoys a 1.5 percent average profit margin, a figure much higher than the 0.01 percent average of the technology sector; therefore, an extension of favorable terms is not required.

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