Taiwan initiated the integrated income tax system (IITS) in 1998. There were two parts in IITS including the dividend imputation tax credits (DITC) and 10% tax on the undistributed retained earnings (URE). The DITC provided the shareholders with a credit to offset personal tax on dividend income and eliminated the double taxation on corporate income. We examined the IITS impacts on the capital investments between Taiwan and Mainland China. We found that the companies with higher DITC ratio decreased the capital cost and resulted in more capital investments in Taiwan rather than Mainland China. However, the companies with higher URE bared extra 10% tax burden and deteriorated the fund accumulation. The companies with higher URE ratio demonstrated higher capital investment in Taiwan opposed to the research hypothesis. The authority charging 10% tax on URE was intended to avoid the big shareholders tax evasion and reluctant to distribute to the shareholders. The tax addition policy did not accomplish the original policy mission. The retained earnings were still not distributed to the shareholders and maintained for internal fund needs. Compared to investment in Taiwan, the higher URE ratio presented less capital investment in Mainland China without statistics significant. Taiwanese policy of 40% net worth ceiling limitation on Mainland China investment was the possible reason for less investment. The ceiling limitation triggered the subsidiary company in Mainland China to not incline to wire the profit to the parent company in Taiwan and reinvest the profit in the plant expansion and 100% fully tax reimbursement. This tax addition charge did not affect the investment in Mainland China. Our empirical study supported that the DITC led to negative influence to the capital investment in Mainland China but not the only determinant of investment consideration. Our authority might modify the dividend wire back mechanism and cancel the 40% net worth ceiling of investment in order to attract more capital back to the efficiency market.
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