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As Nobel Laureate in Economics Mr. Melton M. Miller points out in his book On Derivatives that “derivatives have made it possible for firms and institutions to deal efficiently and cost effectively with risks and hazards that have plagued them for decades, if not for centuries”. Indeed, in response to the demands from international financial markets and individuals, derivative financial instruments have become so sophisticatedly devised that they are diversified into various new forms of derivatives to meet the needs of better risk management and efficient money management. In addition, these complicated transactions pose a big challenge to our tax system. In Taiwan, currently, transactions of financial products are subject to 10% separate tax. However, since our income tax systems adopt territoriality principle and gains derived from securities and futures are not subject to tax, the taxation among different financial instruments still remains inconsistent. This study investigates the taxation controversy of call warrant issued from securities dealers, the reasonableness of the separate taxation of structured notes, the problems deriving from the tax exemption of securities transactions, and the competitiveness issue of separate tax rate.
The research method of this paper is to refer to the tax systems in the USA, Japan, Singapore, apply secondary data to analyzing financial instruments market and tax structure, adopt quantity research methods to interview accountants, officials from Department of Finance, tax bureau, and managers of securities firms to examine every perspective of the problems from current financial products. In conclusion, this paper intends to offer some suggestions to address these problems as follows. (1) As for defining derivative risk management of call warrant and the disputes of warrant tax, the tax bureau should respect the opinion from the Competent Authority and refer to the recognition for hedging transactions in the USA and Japan. (2) Concerning the separate taxation of structured notes, the loss should not be deductible, but the capital gains should be taxed separately. Moreover, this paper further suggests that the capital gains derived from transactions of structured notes should be defined as “securities” by means of the amendment of law, and thus are tax-exempt. (3) With regard to the fairness of taxation, the policy of tax-free capital gains from securities transactions remains controversial. Therefore, given that the minimum business income is included as part of basic income, there is no difficulty calculating the loss or gains from securities transactions. In this case, capital gains from securities transactions should be levied. (4) Regarding 10% separate tax rate, if we compare our taxation with our neighboring countries such as Hong Kong and Singapore, we find that earned interests and dividends are tax-exempt and bond interests are taxed 8% in Hong Kong, whereas bond interests and dividends are tax-free in Singapore. Referring to the taxation in these two countries, our government needs to adopt a tax policy based on fair and comprehensive principles to lower the rates of separate tax so as to make our financial market prosperous and booming.
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