Structured products (SPs hereafter) such as Equity-Linked Notes (ELNs) and Principle-Gurananteed Notes (PGNs) and many other newly innovated derivative financial products, have been new in Taiwan’s financial market, yet the inconsistent treatment of income tax system has different impacts among them and caused unfair competition and efficiency loss. Due to the fact that interest incomes from SPs issued by banks enjoys a maximal of NT$270,000 tax exemption, and capital gains from security transactions and overseas incomes are income tax exempted, SPs issued by local security firms are most heavily taxed, relative to other SPs imported from foreign issuers, or those issued by local investment trustees or banks.
This study examines how the imbalanced tax treatment affects the market ratios of different types of SPs by various issuers, and verifies with our very preliminary simulation model. Based on OECD’s reserved position about “bifurcation” method, and very limited information and experience of tax structures by other countries, we find the way that Canada and the United States tax their SPs as interest income when they are realized or deemed realized are more practical and suitable for Taiwan’s new SP market. Corresponding short run and long run policy suggestions are then proposed to meet the “fairness” and “efficiency” goals. A relatively simple method such as taxing on the “interest income” independent of the comprehensive income tax system at a flat rate of 10% seems to be the middle ground acceptable for the tax administration, the financial authority and the financial firms.