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Business tax may lead to higher interest rates: experts

TAIPEI, Taiwan -- If the government raises the financial sector's business tax, banks may have to shift the burden to their debtors by hiking interest rates, observers said yesterday.

The government has spelt out a fiscal reform package that includes the reassessment of the business tax.

The financial sector currently sees only a 2-percent business tax, far lower than the 5 percent for others. The government is reportedly looking to increase the business tax rate for the financial sector.

Finance authorities have remarked that “reassessment” is not just about raising or reducing taxes, as there will definitely be related measures to minimize the impact.

But the financial sector is worried that a rise in the business tax will dent their profits. The Central News Agency (CNA) cited estimations by the Financial Supervisory Commission (FSC) indicating that a 1-percent rise in the business tax will reduce the overall profits for all banks by NT$9 billion.

A 3-percent increase will incur a loss of NT$30 billion, which is equivalent to about 20 percent of the bank's profits, CNA said.

Observers said if banks look to offset the reduced profits by raising interest rates, their debtors will suffer.

According to CNA, FSC Chairman Tseng Ming-tsung and his predecessor, Chen Yu-chang, have both warned against raising the business tax on financial services.

The business tax for banks was reduced to 2 percent from 5 percent in 1999 in the wake of an Asian financial crisis. The move was meant to reduce the banks' burden in the face of increasing bad debts.

The government also stipulated that when the nonperforming loan ratio drops below 1 percent, the business tax reduction will cease to apply, CNA said.

Many lawmakers have shown support for an increase in the business tax for banks, as their operations have improved. Banks generally see high profits, low non-performing loan ratios, and they no longer need the money from the tax reductions to write off bad debts.

But observers said the financial sector works very differently from others. Unlike other sectors, banks do not have input taxes, and the calculation of their business tax is mostly based on their revenues, meaning the 2-percent business tax for banks is actually much higher than the 5 percent of other sectors, the observers said.

A rise in the business tax will have a greater impact on bigger banks than on smaller ones, the observers said, adding the worst hit banks would be Taipei Fubon Bank, Cathay Pacific Bank, Cathay United Bank, First Commercial Bank, Taiwan Cooperative Bank and Chinatrust Commercial Bank.

The observers said many countries, such as Great Britain, France, Japan, South Korea and Singapore, exempt their banks from business taxes and only impose taxes on their profits.

A rise in the business tax will undermine the competitiveness of Taiwan's banks, the observers said.

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