A comparative study of Taiwan's and Korea's tax systems: VAT (Essay Sample)

A comparative study of Taiwan's and Korea's tax systems: VAT Name of Student Institution Affiliation The History Of Taxation In Taiwan Taxation has been integral to Taiwan's society since its earliest recorded history. During the Qing Dynasty, when Taiwan was still under Chinese rule, it imposed taxes on goods, land, and commodities and a poll tax on the general population. The tax system was further developed during the Japanese colonial period in Taiwan. During this time, the current Value Added Tax (VAT) system was established. The VAT system has been in place since 1935 when Japan first introduced the law in Taiwan. It was later adopted by the Republic of China in 1945 and became a cornerstone of the taxation system in Taiwan. Under the law, businesses are required to pay a set percentage of their total revenue to the government as a tax. The tax rate depends on the business's nature and can range from 5% to 17%. On April 1, 1986, the Taiwanese government implemented VAT to increase productivity and create better investment opportunities (Yeh, 2020). The 1986 tax reform sought to reduce the significance of the stamp tax and commodity tax within the indirect tax system by lowering tax rates or the tax base, as well as integrating the stamp tax and the bulk of items subject to the commodity tax into the VAT system. The administration claimed that the reform's primary goal was to reduce the drawbacks of turnover taxation rather than to raise more money for the government. Today, the VAT system remains an important source of revenue for Taiwan's government. It provides a stable funding source for government programs and is used to fund public projects such as roads, bridges, and other infrastructure. The system also helps reduce income inequality and has contributed to Taiwan's economic development. In 2020, the VAT rate was set at 5%, with a maximum rate of 15%. General Features And Structure Of The Regime VAT, or Value-Added Tax, is a form of indirect tax levied on goods and services consumed in Taiwan. The general features and structure of the regime, along with the tax calculation, filing, and exemption items, are all important aspects to consider when analyzing the country's taxation system. The VAT system in Taiwan generally applies to all businesses whose annual sales exceed a certain threshold. The rate of VAT applied is typically 5%. Depending on the type of activity, some goods and services may be exempt from the tax, while others may be subject to reduced rates. When calculating the amount of VAT due, the taxable value is determined based on the cost of goods sold, including any duties and other taxes that may have been paid. The tax is then calculated as a percentage of this total value. The resulting tax amount must be included in the seller's final sales price. The VAT calculations in Taiwan follow a relatively simple process. In theory, anything considered an input for the production process would not be subjected to VAT, whereas anything seen as output would. Some products, such as motor oil and natural gas, are exempted according to their types. With regards to inputs, businesses can either invoice directly without charging the customer VAT on top of what they have charged their suppliers, or they can issue invoices with a lower price which includes VAT charges (Hsu,2020). Calculations follow two steps: determining costs using invoices minus discounts given and adding 0% (for example, 20% - 10% = 10%) plus input tax deductible percentages. Governmental VAT to be paid = Output VAT - Input VAT. Input VAT is the VAT paid by a business entity at the time goods or services are purchased. The amount of output VAT that must be collected at the time that products are sold or services are rendered Taxpayers must file VAT returns at the end of each accounting period to declare their taxable income and any taxes paid. When filing returns, it is important to include all relevant information regarding the transaction and any exemptions that apply. The exemption items for VAT in Taiwan vary depending on the nature of the item. Most raw materials used by manufacturers and producers are not subject to VAT but rather are taxed under specific provisions for particular industries. However, many foodstuffs fall under the scope of VAT because they often go through several stages before being purchased by consumers; therefore, they can be classified as partly processed products with a higher added value (Yoon, 2020). Moreover, suppose the manufacturer does not charge VAT for these items and sells them to retailers not registered for VAT purposes. In that case, these retailers will have to pay the applicable tax themselves. Business entities that are eligible for 0% VAT rates can submit an application to the tax office to having monthly VAT returns submitted for them. One major benefit of using VAT to raise government revenue is that it provides an incentive to reduce consumption. If people had to pay more upfront when buying something, they would think twice about purchasing such an item if they could buy a similar one cheaper elsewhere. Comparison Of Taiwan's And Korea's Tax Systems Comparing Taiwan's Value Added Tax (VAT) system with Korea, a few noteworthy differences exist. The VAT tax rate in Taiwan is 5%, whereas the rate in Korea is 10%. This difference in rate is also seen in the calculation of the VAT. In Taiwan, the amount of VAT payable is calculated by multiplying the purchase price of goods or services by the applicable VAT rate. However, in Korea, the VAT is calculated as a percentage of the total taxable value of the purchase, which includes both the purchase price and any other applicable taxes. The two countries also differ in their rules regarding who is responsible for paying the VAT. In Taiwan, domestic businesses and foreign companies must pay the VAT, although certain foreign companies may be exempt if they meet certain criteria. In contrast, only domestic businesses are required to pay VAT in Korea. Regarding zero-rating systems, Taiwan offers some exemptions to certain types of supplies, such as those used in education, medical care, and social welfare services. In Korea, however, these supplies are typically subject to full taxation (taxsummaries.pwc.com, 2021). The list of items exempted from VAT taxation differs between the two countries. In Taiwan, necessities such as rice and grains, newspapers, books, educational materials, and materials for charity purposes are generally exempt from taxation. In contrast, most necessities are fully taxable in Korea. Finally, there are differences in how VAT taxes are returned. In Taiwan, VAT taxpayers must submit their tax returns to the National Taxation Bureau of their municipality by the 15th of each month. In contrast, taxpayers in Korea must submit their tax return to the National Tax Service by the end of the month following the date on which the tax was collected. Overall, there are several key differences between the tax systems of Taiwan and Korea regarding VAT taxation. Challenges Of The Taiwan Vat System Taiwan's Value Added Tax (VAT) regime has been fraught with challenges since its inception. One of the most serious problems that have plagued the law's implementation is a need for uniformity and consistency across the different sectors. This has caused difficulties for businesses operating within Taiwan as they have to comply with various VAT regulations depending on their particular industry or sector. Additionally, due to the complex structure of the system, businesses need help understanding the rules and regulations, leading to confusion and non-compliance. Another challenge is that the current system must effectively support small and medium-sized enterprises (SMEs). SMEs often lack the resources and capacity to properly understand and comply with the law, resulting in a high risk of penalties and other compliance issues. Furthermore, the need for more clarity surrounding applying the law in different industries has made it difficult for businesses to accurately calculate their tax burden and identify potential deductions or exemptions (www.ipp.hit-u.ac.jp, 2021). Finally, the system lacks adequate enforcement mechanisms, further undermining its effectiveness. Without effective enforcement, businesses can evade taxes, creating an unfair advantage for those who do not comply with the law. The current VAT regime in Taiwan thus suffers from several shortcomings that require addressing to ensure a fair and equitable system for businesses operating within the country. Recommendations Taiwan's tax system is complex and contains a variety of levies, but the core of its revenue comes from the Value Added Tax (VAT). This levy is paid by businesses on the sale of goods or services and is ultimately passed on to the consumer. While VAT has been an important source of revenue for Taiwan for many years, there is still room for improvement. In this section, we will discuss some proposals for improving Taiwan's VAT Law to make it more efficient and effec...