The Committee would like to thank the Taiwan regulators for addressing our suggestions from the 2019 Taiwan White Paper. In particular, we are happy to learn that, with the regulators’ support, the Virtual Matching Utility (VMU) system developed by the Taiwan Depository & Clearing Corp. (TDDC) will soon to be fully implemented. We are also grateful for the efforts made by the National Development Council, Financial Supervisory Commission (FSC), and Central Bank toward permitting foreign institutional investors (FINIs) to invest in Exchange Traded Notes (ETNs). We have seen good progress toward this goal and would like to follow through this year to bring about an ultimate solution.
We hereby provide our suggestions aimed at preparing Taiwan’s capital markets and financial industry for the challenges and opportunities lying ahead. The Committee looks forward to working together with the Taiwan authorities to stay abreast of common international practice and critical international developments arising from the current crisis.
Suggestion 1: Enhance efficiency on FINI tax-related activities.
1.1 Develop electronic withholding & non-withholding tax statements for FINI income. The Committee highly appreciates the efforts of the Ministry of Finance (MOF) to facilitate data reporting and collection by establishing a platform for custodian banks and tax guarantors to access FINI’s tax and earning information. However, even though the platform was ready on July 1, 2019, the information for 2018 has not yet been fully recorded. Users have been unable to take advantage of one-time downloading of required annual information for all FINIs’s tax auditing and timely tax reclaim purposes. The Committee urges the MOF to ensure that 2018 data is stored on the platform as soon as possible, and that, going forward, yearly data is available by the end of March of the following year.
1.2 Facilitate the application of tax-treaty rates on dividend payments from issuers. According to the recently amended Taiwan Company Law, issuing companies are allowed to pay quarterly dividends – and in fact some issuers have already implemented quarterly dividend payments since 2019. However, foreign investors from countries having tax treaties with Taiwan are unable to obtain the required double taxation treaty (DTT) supporting documents – the Beneficiary Ownership Letter and Certificate of Residence – by March of the year in which they receive dividend payments. When going through the tax deduction process for Q1 payments, these investors therefore cannot use the DTT rate to which they should be entitled. The result is extra work for both the Taiwan tax bureaus and foreign investors. To remedy this situation, the Committee suggests that the MOF extend the validity of foreign investors’ DTT supporting documents for three months. In other words, for the current year the documents would remain valid until the end of March in the following year.
Suggestion 2: Establish e-platforms and a paperless environment.
Taiwan has always been viewed around the world as a country with advanced technology. The Committee strongly urges regulators to promote a digital environment in the financial market and encourage market players to leverage available technology to improve operational efficiency and create a paperless environment. The COVID-19 phenomenon has only magnified the existing importance of digitalization. Starting from the beginning of the year, practices requiring the physical delivery of documents, face-to-face interaction at the counter, two or more signatures on fax instructions, etc. have increasingly come under question as financial institutions more and more rely on staff working from home or at an alternative site. Under these difficult conditions, many of our institutional clients abroad as well as staff in Taiwan may be unable to process fax instructions or receive physical documents by courier at the original business site.
The financial industry has long made use of fax communication to supplement physical delivery of documents by courier or post. The Committee suggests that regulators now encourage the use of e-platforms among financial institutions to serve this purpose. E-platforms not only facilitate the exchange of information but also enhance information security in the market.
We hope that the regulators will look into the following possibilities:
2.1 E-platforms between fund management companies and other financial institutions. The Committee suggests that e-platforms be built under TDCC’s aegis to facilitate information exchange between fund management companies and other TDCC participants. Coverage should start from the account opening process and include the confirmation of mutual fund orders for subscriptions, redemptions, and the reconciliation of dividends for mutual funds, exchange-traded funds (ETF), etc.
2.2 E-notices from issuing companies. The financial industry has been striving to become paperless in a number of ways, most notably through electronic statements to customers. However, notices of shareholder meetings, dividend issuance, and other events are still delivered by post. The Committee suggests using electronic notices as a faster and a more convenient option for investors, given that many investors are now trading through electronic devices.
2.3 E-confirmation and records for central government securities. In late 2019, TDCC announced an initiative to digitalize the trade confirmations and records for TDCC-eligible fixed-income securities. We believe that a similar platform or methodology can also be applied to the settlement process for outright purchase/sales as well as repurchase agreements (repo) of central government securities. Currently, the trade confirmations and records of outstanding repo are still delivered physically to bond dealers, clearing agent banks for central government securities, and investors’ custodians.
2.4 E-transfers of tax payments. Withholding tax is currently paid by check in many situations, such as DR (depositary receipt) re-issuance, securities lending fees, etc. We suggest that payment could alternatively be made by wire transfer to the collecting bank to reduce the amount of manual work, especially for FINIs.
2.5 E-withholding & non-withholding tax statements. Currently, issuing companies send hard-copy tax statements to investors regarding dividend payments, which is both inefficient and costly. The Committee suggests that regulators allow issuers or their company registrars to send e-tax statements to investors who use custodian bank services or have email boxes.
2.6 E-FINI ID registration with digital supporting documents to the Taiwan Stock Exchange (TWSE). Current practice calls for the FINI applicant to provide physical documents for online ID registration with the TWSE and after registration to physically submit the original documents for the record. Considering the trend toward digitalization, the Committee suggests that regulators allow applicants to submit e-signed supporting documents via the current ID registration platform instead of physical documents.
2.7. E-requests for trading account opening between foreign investors and brokers. Per the current practice, brokers are required to execute a hard-copy trading account agreement with FINIs and receive supporting documents from the FINI’s local custodian. As the agreement format as well as terms and conditions are standardized in the market, the Committee suggests that regulators build up a platform to allow e-signing between brokers and investors and the delivery of supporting documents through the platform.
2.8. E-transaction statements and/or demise at investor’s discretion. In line with current market practice and regulatory requirements, brokers send monthly transaction statements to investors. For FINIs and their brokers, however, current market practice is to use electronic devices for trading and communication. FINI investors, therefore, do not need paper transaction statements, as brokers and custodian banks daily pre-match and affirm FINI trades before settlement. It is redundant to produce the monthly transaction statements. The Committee suggests that regulators give brokers the flexibility to provide e-statements or demise paper statements at the investor’s discretion.
In the interest of market efficiency and to establish a paperless environment, the Committee also urges regulators to encourage the financial industry to minimize the use of fax instructions and fax delivery of original documentation. At the same time, we urge the building of infrastructure for common platforms for information exchange. The most remarkable digital achievement in Taiwan has been the e-voting platform launched by the TDCC. The platform allows domestic and foreign investors to vote by electronic means, reducing the need for physical attendance. Unlike Taiwan, many other countries experienced a disruption in shareholder meetings and proxy services because of the pandemic.
Suggestion 3: Exempt exchange-listed convertible bonds from the 30% limit on total net-remitted-in capital.
Since April 22, 2015, the FSC has included corporate bonds and bank debentures within the 30% limit for total net-remitted-in capital, in addition to the previously included government bonds, money market instruments, and premiums paid and net settlement amounts for certain derivatives. The Committee understands that the purpose of the policy is to encourage FINIs to invest more in Taiwan equity securities rather than in fixed-income products and to reduce the possibility of New Taiwan Dollar currency speculation. However, convertible bonds, which can be converted into equity and are not a tool for currency speculation, are also caught up in the scope of the 30% limit because they are considered a type of corporate bond. Convertible bonds in Taiwan are exchange-listed and are traded and settled in the same way as stocks. They generally carry much lower interest rates and the price movements are more closely correlated to those of the equity rather than fixed-income market, and thus would be better treated as equity-type securities and permitted to be invested in outside the 30% limit.
Moreover, as small- and medium-sized enterprises (SMEs) are under pressure to raise capital to fund their plans to move production back to Taiwan or to other locations, it is increasingly important for these firms to be able to call upon investors to help fund such capital needs including via issuance of convertible bonds. Foreign investment can provide an important source of funding for the convertible bond offerings of such smaller firms, whose credit ratings may not be so attractive to local investors, while allowing foreign investors greater access to convertible bond instruments that are comparable in risk to treasury bonds yet offer an equity component that corporate bonds do not. Supporting such foreign investment will also help Taiwan’s SMEs, which are seeking to diversify their shareholder structure to reduce an overconcentration of shareholders.
The Committee therefore suggests exempting exchange-listed convertible bonds from the 30% limit so as to benefit the liquidity of the Taiwan market.
Suggestion 4: Allow FINIs to invest in Exchange Traded Notes (ETNs).
The continuing efforts of the FSC and the Taiwan Stock Exchange led to the introduction of ETNs to the market in April 2019, allowing investors to diversify instruments for asset allocation and investment strategy purposes. FINIs, however, are not yet allowed to invest in ETN.
The Committee recommends inclusion of ETNs as one of the applicable financial instruments for FINIs’ domestic investment, in line with our belief that expanding participation will help increase ETNs’ liquidity and further enhance the momentum of the stock market. FINI participation has always been an important force in the development of Taiwan’s capital market. While the Committee understands that the FSC is currently in discussion with the other authorities on this issue and is in the process of evaluating the ETN trade volume, we would appreciate a continuous effort to expand the investor scope to enhance the capital market’s momentum.