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Notes To Financial Statements (unaudited)
February 29, 2020
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1. Organization
The Taiwan Fund, Inc. (the “Fund”), a Delaware corporation, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a diversified closed-end management investment fund.
The Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services - Investment Companies.”
The Fund concentrates its investments in the securities listed on the Taiwan Stock Exchange. Because of this concentration, the Fund may be subject to certain additional risks not typically associated with investing in securities of U.S. companies or the U.S. government, including (1) volatility of the Taiwan securities market, (2) restrictions on repatriation of capital invested in Taiwan, (3) fluctuations in the rate of exchange between the New Taiwan Dollar and the U.S. Dollar, and (4) political and economic risks. In addition, Republic of China accounting, auditing, financial and other reporting standards are not equivalent to U.S. standards and, therefore, certain material disclosures may not be made, and less information may be available to investors investing in Taiwan than in the United States. There is also generally less regulation by governmental agencies and self-regulatory organizations with respect to the securities industry in Taiwan than there is in the United States.
2. Significant Accounting Policies
The financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. Management has evaluated the impact of all events or transactions occurring after period end through the date these financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure. The following summarizes the significant accounting policies of the Fund:
Security Valuation. All securities, including those traded over-the-counter, for which market quotations are readily available are valued at the last sales price prior to the time of determination of the Fund’s net asset value per share or, if there were no sales on such date, at the closing price quoted for such securities (but if bid and asked quotations are available, at the mean between the last current bid and asked prices, rather than such quoted closing price). These securities are generally categorized as Level 1 securities in the fair value hierarchy. In certain instances where the price determined above may not represent fair market value, the value is determined in such manner as the Board of Directors (the “Board”) may prescribe. Foreign securities may be valued at fair value according to procedures approved by the Board if the closing price is not reflective of current market values due to trading or events occurring in the valuation time of the Fund. In addition, substantial changes in values in the U.S. markets subsequent to the close of a foreign market may also affect the values of securities traded in the foreign market. These securities may be categorized as Level 2 or Level 3 securities in the fair value hierarchy, depending on the valuation inputs. Short-term investments, having a maturity of 60 days or less are valued at amortized cost, which approximates market value, with accrued interest or discount earned included in interest receivable.
15
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Notes To Financial Statements (unaudited) (continued)
February 29, 2020
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2. Significant Accounting Policies — continued
The Fund has adopted fair valuation accounting standards which establish a definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion in changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
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●
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Level 1 – quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement.
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●
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Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
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●
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Level 3 – model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.
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Investments
in Securities
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Level 1
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Level 2
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Level 3
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Total
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Common Stocks^
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$
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153,930,034
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|
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$
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—
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|
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$
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—
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|
|
$
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153,930,034
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|
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Total
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$
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153,930,034
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|
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$
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—
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|
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$
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—
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|
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$
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153,930,034
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^
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See schedule of investments for industry breakout.
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The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Repurchase Agreements. In connection with transactions in repurchase agreements, it is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral by the Fund may be delayed or limited. As of February 29, 2020, the Fund was not participating in any repurchase agreements.
Foreign Currency Translation. The financial accounting records of the Fund are maintained in U.S. Dollars. Investment securities, other assets and liabilities denominated in a foreign currency are translated into U.S. Dollars at the current exchange rate. Purchases and sales of securities, income receipts and expense payments are translated into U.S. Dollars at the exchange rate on the dates of the transactions.
Reported net realized gains and losses on foreign currency transactions represent net gains and losses from disposition of foreign currencies, currency gains and losses realized between the trade dates and settlement dates of security transactions, and the difference between the amount of net investment income accrued and the U.S. Dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included in realized and unrealized gain or loss on investments.
16
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Notes To Financial Statements (unaudited) (continued)
February 29, 2020
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2. Significant Accounting Policies — continued
Forward Foreign Currency Transactions. A forward foreign currency contract (“Forward”) is an agreement between two parties to buy or sell currency at a set price on a future date. The Fund may enter into Forwards in order to hedge foreign currency risk or for other risk management purposes. Realized gains or losses on Forwards include net gains or losses on contracts that have matured or which the Fund has terminated by entering into an offsetting closing transaction. Unrealized appreciation or depreciation on Forwards, if any, is included in the Statement of Assets and Liabilities. The portfolio could be exposed to risk of loss if the counterparty is unable to meet the terms of the contract or if the value of the currency changes unfavorably. As of February 29, 2020 the Fund had no open Forwards.
Indemnification Obligations. Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business the Fund enters into contracts that provide general indemnifications to other parties. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.
Taxes. As a qualified Regulated Investment Company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its investment company taxable income and net realized capital gains for its fiscal year. In addition to federal income tax for which the Fund is liable on undistributed amounts, the Fund is subject to federal excise tax on undistributed investment company taxable income and net realized capital gains. The Fund is organized in Delaware and as such is required to pay Delaware an annual franchise tax. Also, the Fund is currently subject to a Taiwan security transaction tax of 0.3% on sales of equities and 0.1% on sales of mutual fund shares based on the transaction amount. Security transaction tax is embedded in the cost basis of each security and contributes to the realized gain or loss for the Fund. Security transaction taxes are not accrued until the tax becomes payable.
The Fund’s functional currency for tax reporting purposes is the New Taiwan Dollar.
The Fund recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Fund’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for prior three fiscal years. The Fund identifies its major tax jurisdictions as U.S. Federal, Delaware and Taiwan where the Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
Investment Income. Dividend income is recorded on the ex-dividend date; except, where the ex-dividend date may have passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date.
Taiwanese companies typically declare dividends in the Fund’s third fiscal quarter of each year. As a result, the Fund receives substantially less dividend income in the first half of its year. Interest income, which includes accretion of original discount, is accrued as earned.
Dividend and interest income generated in Taiwan is subject to a 21% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 21% of the par value of the stock dividends received. Beginning with the fiscal year ended August 31, 2019, the withholding tax is treated as a reduction of investment income.
17
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Notes To Financial Statements (unaudited) (continued)
February 29, 2020
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2. Significant Accounting Policies — continued
Distributions to Stockholders. The Fund distributes to stockholders at least annually, substantially all of its taxable ordinary income and expects to distribute its taxable net realized gains. Certain foreign currency gains (losses) are taxable as ordinary income and, therefore, increase (decrease) taxable ordinary income available for distribution. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the “Plan”), stockholders may elect to have all cash distributions automatically reinvested in Fund shares. (See the summary of the Plan described later.) Unless the Board elects to make a distribution in shares of the Fund’s common stock, stockholders who do not participate in the Plan will receive all distributions in cash paid by check in U.S. dollars. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. No capital gain distributions will be made until any capital loss carryforwards have been fully utilized or expired.
Tax components of distributable earnings are determined in accordance with income tax regulations which may differ from the composition of net assets reported under GAAP. Book and tax basis differences, if any, are primarily due to differing treatments for foreign currency transactions, net operating loss and post October capital and late year ordinary loss deferrals.
Permanent book and tax basis differences relating to stockholder distributions will result in reclassifications between components of net assets. Accordingly, for the year ended August 31, 2019, the effects of certain differences were reclassified. The Fund increased distributable earnings by $27,782,936 and decreased paid in capital by $27,782,936.
Security Transactions. Security transactions are accounted as of the trade date. Gains and losses on securities sold are determined on the basis of identified cost.
3. Purchases and Sales of Securities
For the six months ended February 29, 2020, purchases and sales of securities, other than short-term securities, aggregated $163,192,980 and $183,263,536, respectively.
4. Management Fees and Other Service Providers
Management Fee. The Fund entered into an Investment Management Agreement (the “Agreement”) with Allianz Global Investors U.S. LLC (“AIIianz”). Under the terms of the Agreement, Allianz receives a fee for its services, computed daily and payable monthly in U.S. dollars, at the annual rate of 0.70% of the Fund’s average daily net assets (“Base Fee”). Effective September 1, 2019 the Adviser’s compensation will be increased or decreased from the Base Fee by a performance adjustment (“Performance Adjustment”) that depends on whether, and to what extent, the investment performance of the Fund’s shares exceeds, or is exceeded by, the performance of the TAIEX Total Return Index, expressed in U.S. dollars (the “Index”). The Performance Adjustment is calculated and accrued, according to a schedule that adds or subtracts an amount at a rate of 0.0005% (0.05 basis points) of the Fund’s average daily assets for the current fiscal year through the prior business day for each 0.001% (1 basis point) of absolute performance by which the total return performance of the Fund’s shares exceeds or lags the performance of the Index for the period from the beginning of the current performance period (“Performance Period” ) through the prior business day. The Performance Period is initially from September 1, 2019 to August 31, 2020 and thereafter each 12-month period beginning on September 1 immediately following the prior Performance Period through August 31 of the following year. The maximum Performance Adjustment (positive or negative) will not exceed an annualized rate of +/-0.25% (25 basis points) of the Fund’s average daily net assets, which would occur when the performance of the Fund’s shares exceeds, or is exceeded by, the performance of the Index by 5 percentage points (500 basis points) for the Performance Period. This Performance Fee will be calculated daily and paid at the end of the Performance Period.
18
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Notes To Financial Statements (unaudited) (continued)
February 29, 2020
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4. Management Fees and Other Service Providers — continued
Prior to June 1, 2019, the Fund was managed by JF International Management Inc. (“JFIMI”) pursuant to an Investment Management Agreement. Under the terms of the Investment Management Agreement, JFIMI received a fee for its services, computed daily and payable monthly in U.S. dollars, at the annual rate of 0.75% per annum of the value of the Fund’s average daily net assets.
For the period September 1, 2019 through February 29, 2020, the management fee was equivalent to an annual rate of 0.95% of the Fund’s average daily net assets which reflected a 0.25% Performance Adjustment (annualized), based on the Fund’s net asset value outperforming the Fund’s benchmark by more than five percentage points.
Administration Fees. State Street Bank and Trust Company (“State Street”) provides or arranges for the provision of certain administrative and accounting services for the Fund, including maintaining the books and records of the Fund, and preparing certain reports and other documents required by federal and/or state laws and regulations. State Street also provides certain legal administrative services, including corporate secretarial services and preparing regulatory filings. State Street also serves as the custodian (the “Custodian”) to the Fund. For these services, the Fund pays State Street both fixed fees and asset based fees that vary according to the number of positions and transactions and out of pocket expenses. The expenses related to legal administrative services have been reclassified on the Statement of Operations from legal fees to administration and accounting fees to better align the fees with the services provided.
Director’s and Officer’s Fees and Expenses. The Fund pays each of its directors who is not an “interested person” of the Fund, as the term is defined in the 1940 Act, an annual fee of $20,000 ($30,000 for the Chairman) plus a fee of $2,500 for each Board meeting or Committee meeting attended in person or by telephone. Effective March 1, 2019, the fee paid to Directors for attendance at Board and Committee meetings was reduced to $2,000. In addition, the Fund will reimburse each of the directors for travel and out-of-pocket expenses incurred in connection with Board meetings.
Other Service Providers. Pursuant to a Compliance Services Agreement, Foreside Fund Officer Services, LLC (‘‘FFOS’’) provides the Fund with a Chief Compliance Officer. FFOS is paid customary fees for its services. Foreside Management Services, LLC (“FMS”) provides the Fund with a Treasurer. Neither FFOS, FMS, nor their employees that serve as officers of the Fund, have a role in determining the investment policies or which securities are purchased or sold by the Fund. During the year ended August 31, 2019 FFOS and FMS agreed to waive a portion of their fees.
General. Certain officers of the Fund may also be employees of the aforementioned companies that provide services to the Fund, and during their terms of office, receive no compensation from the Fund.
5. Discount Management Policy
The Board has approved a Program which authorizes management to make open market purchases in an aggregate amount up to 10% of the Fund’s outstanding shares. Under the Program, shares may be repurchased at differing trigger levels that will not be announced. Any repurchases will be disclosed in the Fund’s stockholder reports for the relevant fiscal periods and updated in the Fund’s monthly reports when repurchases are made. Any repurchases made under the Program will be announced on Monday of each week for repurchases made during the prior week.
For the period ended February 29, 2020, the Fund repurchased 212,058 of its shares at an average price of $20.13 per share (including brokerage commissions) at an average discount of 13.98%. These repurchases had a total cost of $4,348,827.
The Board will continue to review the Program and its effectiveness, and, as appropriate, may make further enhancements as it believes are necessary.
19
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Notes To Financial Statements (unaudited) (continued)
February 29, 2020
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6. Fund Shares
At February 29, 2020, there were 100,000,000 shares of $0.01 par value capital stock authorized, of which 7,480,750 were issued and outstanding.
For the period ended February 29, 2020, the Fund repurchased 212,058 shares of its common stock, valued at $4,348,827, including commission and trading fees of $14,844, from stockholders under the Program.
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For the
Period Ended
February 29, 2020
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For the
Year Ended
August 31, 2019
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Shares outstanding at beginning of year
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7,679,198
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8,112,169
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Shares issued from reinvestment of distributions
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13,610
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1,777
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Shares repurchased
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(212,058
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)
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(434,748
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)
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Shares outstanding at end of year
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7,480,750
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7,679,198
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7. Federal Tax Information
The tax character of distributions paid by the Fund during the year ended August 31, 2019 is as follows:
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Year Ended
August 31, 2019
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Capital Gains
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$
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13,716,845
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Ordinary Income
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$
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427
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Total
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$
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13,717,272
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As of August 31, 2019, the tax components of accumulated net earnings (losses) were $9,510,409 of undistributed ordinary income, $21,174,058 of unrealized appreciation and $4,235,482 of short term capital loss carryovers which don’t expire. For the year ended August 31, 2019, the amount of capital loss carryover utilized was nil.
The difference between book basis and tax basis unrealized appreciation and depreciation is attributable primarily to the tax deferral of losses on wash sales and passive foreign investment company adjustments. At February 29, 2020, the aggregate cost basis of the Fund’s investment securities for income tax purposes was $127,249,389. Net unrealized appreciation of the Fund’s investment securities was $26,680,645 of which $30,763,854 was related to appreciated investment securities and $4,083,209 was related to depreciated investment securities.
In order to determine for U.S. federal income tax purposes currency gain or loss realized when the Fund repatriates funds from Taiwan, for example to pay dividends, pay expenses or repurchase shares, the Fund is required to make a complex calculation based on a compilation of financial information from the inception of the Fund in 1986. A recent review of that compilation suggested that certain financial activity in the first several years of the Fund was not reflected in the compilation and this now has the effect of causing any repatriation from Taiwan to be treated as a currency gain that is reportable as ordinary income. The Fund is in the process of seeking copies of its early tax returns and consulting with tax advisers to determine if in fact this activity should have been reflected and, if so, whether it can now be reflected for purposes of future calculations. The Fund anticipates that this process will be completed in the next several months and will report on the result at that time. There can be no assurance that the conclusion reached will result in a more favorable tax treatment for the Fund’s repatriations from Taiwan.
8. Subsequent Events
On April 7, 2020, the Board announced that it would continue the temporary suspension of repurchases under the Fund’s Discount Management Program (the “Program”). The Board noted that the impact of the COVID-19 pandemic on global economies and stock market was creating excessive volatility in stock prices. Under such conditions, the Board determined that
20
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Notes To Financial Statements (unaudited) (concluded)
February 29, 2020
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continued repurchases under the Program were not in the best interests of the Fund or its stockholders. The Board will continue to monitor the situation and look to reinstate repurchases under the Program as soon as it is in the best interests of the Fund and its stockholders to do so.
On April 21, 2020, stockholders of the Fund approved the Agreement of Merger, which provides for the Fund’s change in domicile from Delaware to Maryland (the “Reincorporation”). The primary purpose of the Reincorporation is to eliminate the Fund’s annual franchise tax payment. The state of Maryland has no franchise tax. We anticipate the change to be effective on or about April 22, 2020.
21
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Other Information (unaudited)
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Federal Tax Information. The Fund has made an election under Internal Revenue Code Section 853 to pass through foreign taxes paid by the Fund to its stockholders. For the year ended August 31, 2019, the total amount of foreign taxes paid that was passed through to its stockholders for information reporting purposes was $ 1,018,342 (representing taxes withheld plus taxes on stock dividends).
In addition, for the year ended August 31, 2019, the Fund paid distributions of $13,716,845 which were designated as long term capital gains dividends.
Privacy Policy
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Privacy Notice
The Taiwan Fund, Inc. collects non-public personal information about its stockholders from the following sources:
☐ Information it receives from stockholders on applications or other forms;
☐ Information about stockholder transactions with the Fund, its affiliates, or others; and
☐ Information it receives from a consumer reporting agency.
The Fund’s policy is to not disclose nonpublic personal information about its stockholders to nonaffiliated third parties (other than disclosures permitted by law).
The Fund restricts access to nonpublic personal information about its stockholders to those agents of the Fund who need to know that information to provide products or services to stockholders. The Fund maintains physical, electronic, and procedural safeguards that comply with federal standards to guard it stockholders’ nonpublic personal information.
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Proxy Voting Policies and Procedures
A description of the policies and procedures that are used by the Fund’s investment adviser to vote proxies relating to the Fund’s portfolio securities is available (1) without charge, upon request, by calling 1-800-426-5523; and (2) as an exhibit to the Fund’s annual report on Form N-CSR which is available on the website of the Securities and Exchange Commission (the “Commission”) at http://www.sec.gov. Information regarding how the investment adviser voted these proxies during the most recent 12-month period ended June 30 is available without charge, upon request, by calling the same number or by accessing the Commission’s website.
Quarterly Portfolio of Investments
The Fund files with the Commission its complete schedule of portfolio holdings on Form N-Q for the first and third quarters of each fiscal year. The Fund’s Form N-Q’s are available on the Commission’s website at http://www.sec.gov. The most recent Form N-Q is available without charge, upon request, by calling 1-800-426-5523.
22
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Other Information (unaudited) (concluded)
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