Updating readers since the September TOPICS report.

By Don Shapiro

In the September issue of Taiwan Business TOPICS, the Industry Focus section on financial services reported on regulatory issues currently affecting three sub-sectors of the industry. Here is an update on subsequent developments:

INSURANCE – The Ministry of Finance (MOF) has confirmed its intention to adopt a recommendation from the advisory Tax Reform Committee to make investment-link life insurance products subject to taxation on new insurance policies that come into effect from 2010. In so doing, the Ministry dismissed the arguments of the AmCham Insurance Committee and other industry organizations that investment-link products should still be fundamentally regarded as insurance – and therefore continue to be accorded tax-free status in accordance with both the Insurance Law and the Income Tax Law.

In response to the MOF action, the AmCham Insurance Committee is now taking the position that taxing these insurance products without first going through the legislative process to revise the law constitutes a violation of constitutional procedures. It plans to raise the issue first with the Executive Yuan and if necessary with members of the Legislative Yuan.

ASSET MANAGEMENT – In another tax matter scheduled to be implemented from January 1, the MOF is preparing to treat capital income and redemption earnings from Offshore Funds as “overseas income” for purposes of calculating Alternative Minimum Tax. But that treatment will not apply to equivalent earnings from another category of mutual funds known as Overseas SITE Funds. The two types of funds are virtually the same except for the nature of the issuer. The AmCham Asset Management Committee maintains that the proposed tax interpretation will discriminate against the local subsidiaries of the major international companies offering these Offshore Funds, skewing the market in favor of funds domiciled domestically.

In response to an AmCham request to the Financial Supervisory Commission (FSC) to confirm the equal status of the two types of funds, the regulatory body stated that both should be regarded as securities under the definition in the Securities & Exchange Act. The Committee is preparing to appeal to the Executive Yuan to urgently review the issue before the new policy takes effect.

INVESTMENT BANKING – The September report discussed uncertainty within industry circles about what now constitutes proper behavior for offshore representatives of financial institutions when dealing with Taiwanese customers about sophisticated instruments that need in-depth explanation by experts. TOPICS posed several questions to the FSC on this matter and received a written reply that primarily cited existing law without offering any additional guidance as to the kind of communications or conversations offshore representatives may have with Taiwanese clients.  

In addition, one question referred to “a perception in the market that the Taiwan authorities are now more aggressively interpreting and enforcing prohibitions on cross-border banking activity compared with past practice” and asked whether that perception is accurate. The reply cited the recent multitude of investor disputes arising from investment banking, offshore funds, and structured instruments sold through illegal distributors, with resulting losses to some investors. The FSC said it is reminding the public to invest only through legal distributors.

Reading between the lines, said a financial-sector observer, “I think they are saying (a) the law says what the law says and they are not giving any hints as to interpretation, (b) they do not like the fact that there are ‘disputes’ with Taiwan investors, and (c) they do not intend to do anything  to change the status quo.”

 — By Don Shapiro