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Taiwan's government has approved plans to cut the country's corporate tax rate from 25% to 20%.

Ministers hope the cut will encourage investment in the country and stimulate growth in the economy, despite reducing the government's annual tax revenues by an estimated NT$80.9 billion ($2.3 billion). The country fell into recession late last year.

"This move will be welcomed by everyone in Taiwan," said Richard Watanabe, a tax partner with PricewaterhouseCoopers in Taiwan. "There were even plans to reduce the rate further. This would have been a bad idea and would have been just too aggressive."

Josephine Peng, of Lee and Li, a law firm in Taiwan, disagreed. She said the new rate should have been lower. "Businesses were expecting a tax rate of 17.5% so to be competitive with Hong Kong and Singapore," Peng said.

The government hopes to limit the revenue lost from this cut by abolishing a number of tax incentives.

Technology companies had previously enjoyed five-year tax holidays, but now these have been scrapped as have nearly all the country's R&D tax credits.

"The government was wise to remove these incentives, but it will still be the case that the losses in revenue from this cut will be higher than the revenue generated from it," Watanabe said.

The government also outlined that the period for loss carry forwards will be extended from five to 10 years.

The government is also expected to bring in other reforms of the tax system over the next 12 months with the introduction of a raft of anti-avoidance provisions as well as the adoption of thin-capitalisation rules. If passed, the thin-capitalisation rules would grant a debt-to-equity ratio of 3:1 for general institutions and 6:1 for financial institutions.

There will also be work towards introducing controlled-foreign companies' rules in the long-term.

"The government is going in the right direction but I feel that more work should be done in creating a double-tax treaty with China. This would increase our competitiveness greatly," said Watanabe.

These measures form part of the country's NT$858.5 billion ($25 billion) stimulus package announced last year.

The steps will be implemented in 2010, subject to parliamentary approval.

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