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Data show Taiwan's luxury tax more a failure than success

Publication Date : 14-05-2012

 

The luxury tax, which seeks to add tax revenue to the national coffers and drive down home prices, has failed to achieve those purposes as it has added only NT$3.26 billion (US$110 million) to the treasury as of the end of April, far below the NT$15 billion (US$505 million) the government had hoped it would bring annually, data from different sources showed.

At the same time, a home price decline that was hoped to come from the tax has not happened. In fact, prices in many areas have risen instead.

Miscalculation

Taiwan's Ministry of Finance (MOF) in February last year announced its plan to levy the luxury tax to tame public anger over home prices that had spiralled out of control. The tax officially took effect on June 1 last year, an act that many thought would significantly hurt the home market.

The tax charges a rate of 10 to 15 per cent on persons who sell their non-residential properties within two years of purchase to keep them from making a short-term gain, in the process driving up home prices. The government had expected the luxury tax, as well as another tax that charges 10 per cent on luxury items such as top-class automobiles, would inject annual revenue of NT$15 billion into the national coffers.

But by the end of December 2011, the tax only brought in NT$2.08 billion, according to data released by the MOF. From January to April, it contributed another NT$1.18 billion, a total of NT$3.26 billion, or just 21 per cent of the government's forecast.

Meanwhile, the tax was hoped to drive down home prices, with experts predicting a 10 to 20 per cent decline after the tax went into effect. Yet, according to the polls by trade publication My Housing Magazine, pre-construction home prices in Greater Taipei have continued to increase, with unit prices averaging NT$800,000 (US$27,000) a ping (3.3 square metres) in the first quarter in Taipei and NT$340,000 (US$11,500) in New Taipei City, both breaking previous records.

As for used homes, prices grew 7 to 8 per cent in both Taipei and New Taipei City over the past year, while prices increased by 10 per cent in Taoyuan and 4 to 5 per cent in the southern Tainan and Kaohsiung.
Southern Taiwan Recovery

Many had predicted that the southern Taiwan housing market would take a huge toll after the tax's implementation. Southern Taiwan real estate, however, saw a price decline only for a quarter and quickly recovered afterwards. Over the past one or two months, the southern Taiwan market grew by an even bigger margin than northern Taiwan.

Meanwhile, it was expected that the markets in Linkou, Sanxia, Tamsui and Xinzhuang Districts of New Taipei City would collapse in the wake of the tax. As it turns out, only Xinzhuang saw a price decline of just 5 per cent after the tax's implementation. Prices in Linkou, Sanxia and Danshui grew 8 to 13 per cent over the past year, higher than the average of New Taipei City as a whole.

Ways to evade tax

According to real estate experts, there are many ways to evade the tax, all tried by speculators at different times. For example, since the luxury tax code stipulates that the tax will be levied on those who already own two properties and sell the third one within one to two years, some sellers have faked divorces so that the husband and wife may each keep one property and sell the third one tax-free.

Some, meanwhile, have sold their properties owned less than two years to buyers and have them sign the contract and close the deal after the statutory period expires. According to real estate experts, this method has gained popularity among speculators, and the government needs to fix this loophole.

Experts say Taiwan is not the only country in the region that levies a luxury tax. Hong Kong and Singapore have launched similar measures to keep home prices down, only to see limited effects in the midst of inflation and abundant capital flowing in the region.

China's efforts has produced more substantive results in keeping prices in check, analysts said. China, which has a centrally planned economy, requires that people in first- and second-tier cities own one home per family. Home loans meanwhile cannot exceed 50 percent of the price. These measures have caused home prices on the other side of the Strait to loosen up, experts said.

 

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