August 14, 2019 / 6:13 AM / 6 days ago

Breakingviews - Repatriated cash revs up Taiwan's economic engine

HONG KONG (Reuters Breakingviews) - Taiwan has a $350 billion chance to rev up its stuttering economic engine. The self-ruled island has been battered by a U.S.-China trade war and stalled diplomatic relations with Beijing. In response President Tsai Ing-wen is urging local companies that left decades ago in search of cheaper, larger markets to come home, bringing offshore riches with them. It’s an achievable ambition; a lasting impact, though, will depend on deeper reforms.

REFILE - QUALITY REPEAT Taiwan President Tsai Ing-wen smiles during an interview with Reuters at the Presidential Office in Taipei, Taiwan April 27, 2017. REUTERS/Tyrone Siu - RC1D8C3D4A00

Exports unexpectedly shrank 0.5% in July from a year earlier to $28 billion, as global demand for Taiwanese electronics, high-tech gadgets and components fell. The threat of new tariffs on $300 billion worth of Chinese goods entering the United States jeopardises a hoped-for recovery. Taiwanese exports account for 70% of the economy: shipments of electrical equipment to mainland China make up nearly a fifth of GDP.

To make matters worse, Beijing, which regards Taiwan as a renegade province, has curbed tourist flows to the island since August. It is the latest salvo aimed at the independence-leaning Tsai, who is seeking re-election in January - and another economic blow.

And yet sentiment in Taipei, a city of 2.7 million, remains optimistic. Among finance and business executives, hopes of a capital return are increasing. Indeed, trade ructions and rising costs in mainland China are pushing companies from Apple to Nike to rethink supply chains. Tsai’s government is betting its policies and benefits can lure back Taiwanese manufacturers, like iPhone-assembler Foxconn, that for years outsourced production to China.

Estimates of how much could actually come home vary, but the potential is unquestionably huge. Taiwan’s overseas direct investment amounted to $350 billion as of the end of last year, according to Fitch Ratings.

TAXMEN

A major initiative is a one-off preferential tax programme for repatriated funds. Under a two-year scheme, set to go into effect later this year, companies and individuals will be taxed 8% in the first year, and 10% during the second year. If a business chooses to invest in specific new economy sectors like biotech, it is also eligible for a 50% tax rebate. The tax savings can add up, especially given the island’s standard 20% corporate income rate.

The catch is that the use and management of the repatriated funds is highly regulated. For example, the government does not allow the funds to be invested in real estate or stocks to avoid inflating bubbles.

Early signs look promising. Since the start of the year, regulators have approved over 100 applications from local companies looking to repatriate $17 billion worth of capital – more than twice what the government has set aside for infrastructure projects this year. Officials have estimated that initially, repatriation inflows could hit up to $28 billion a year.

Notable returnees include Apple-supplier Quanta Computer as well as panel-maker AU Optronics. In the first six months, Taiwan’s gross capital formation, an indicator for investment, jumped 6.5% year on year, well above the 10-year average of 2.2%, DBS economist Ma Tieying notes.

But money is only part of the solution. The bigger challenge will be to transform Taiwan into an attractive permanent residence, for both foreign and domestic capital.

Tsai is already pushing ahead with other incentives, from offering businesses easier access to bank financing to preferential land agreements and leases. Yet the local economy has been hollowed out for years, thanks to an exodus of talent and business to mainland China. Structural issues abound, including shortages of workers, water, land and electricity. Cutting red tape for businesses and easing restrictions on things like hiring overseas workers are crucial. Deeper reforms, such as improving energy efficiency and increasing the use of renewable sources, will be much harder to tackle.

For Tsai, the moment is now.

Breakingviews

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