A proposal by Taiwan's Ministry of Finance to scrap a 0.1% transaction tax on corporate bond issues might seem like a welcome and long overdue boost to the local market. However, local bankers are unanimous in claiming that the measure is at best half-hearted and will have no real impact unless it is followed by more comprehensive changes to bond legislation.
Restrictions on accessing direct bank finance and the belief that funding will be difficult to secure through other means, should mean corporates will be looking towards bond issues, but so far this year, the market has been relatively quiet. On the face of it, the ministry's move should encourage companies to try the debt capital route.
Chi-Hsien Lee, director of corporate finance at the Securities and Futures Commission (SFC) - part of the Ministry of Finance - confirms that the plan to scrap the transaction tax is under discussion. "Its true that we are drawing up draft legislation, but it's still pending so we don't know when it could actually happen," he says. "We are trying to make an effort to help this market grow and we believe a cut in tax will definitely be an advantage to potential bond issuers."
The 0.1% transaction tax currently charged on the trading of bonds has closed the possibility of secondary market in Taiwan, a vital component in the development of any debt capital market.
"There's no doubt that the transaction tax restricts secondary trading, so if it's removed it will help," comments one local analyst. "And no secondary trading has meant there is no yield curve, or benchmark from which capital costs can be compared. It generally means that there is very little liquidity in the market."
Another local banker, though, was scathing at the government's commitment to the bond markets and doubted even that this would come to fruition. "I've heard this all before - they've been saying it for the last 10 years," he fumes. "Also, there are many more issues that need resolving before the market can really take the next step forward."
More important than transaction tax, in the banker's opinion, is the 20% withholding tax which is passed along to investors, lowering absolute yields and therefore the attractiveness of corporate bonds. "That's the real problem, because it's really hard to find institutional investors, especially foreign investors who will buy when there is this restriction," he argues. "Fund managers and insurance companies are cautious enough - typically looking for at least a local rating of single-A - and they need more value than what they are currently getting."
Another banker remains slightly more positive on the idea, but agrees that it was only a small step in the right direction. "Lower taxes are always a good thing - if this legislation is approved," he says. "But the Taiwanese market is still very small and needs its full support if it is to grow. The ball is very much in the government's court."