By Sean Geary
A newly proposed capital gains tax by Taiwan’s finance minister may put pressure on the Taiwanese stock market leading to opportunity for long term value investors.
The government had claimed earlier in the week that discussions pertaining to a tax increase were mostly academic and that it was only trying to discern public opinion on the matter.
According to the Financial Times, the new program would levy a flat tax on domestic retail investors at a rate of 20% if an investor earned more than T$3m ($2,632) in annual profits in stocks and futures. There are also provisions for deducting losses and lower rates for long term capital gains.
The implementation of capital gains taxes in Taiwan is never an easy prospect. A proposal to increase taxes in 1988 sent the Taiwanese market down for 19 consecutive days. Fears that a similar pattern could emerge may soon weigh on the TAIEX.
Long-term investors should treat any pullback related to the new capital gains tax in the TAIEX as a buying opportunity in EWT. While this could pose some problems for the exchange in the short-term, an additional capital gains tax would have little relevance on the fundamental macroeconomic thesis driving the Taiwanese economy: the smartphone boom.
Further, this capital gains tax does not affect foreign institutional investors, such as iShares which runs EWT.
EWT is up on the day, but could see pressure over the next few weeks if the capital gains proposal is ratified by the Taiwanese government.