A bipartisan group of US senators on May 4 introduced a bill that authorizes US President Joe Biden’s administration to begin negotiations with Taiwan to conclude a tax agreement, aiming to avoid double taxation and tax evasion in both countries while promoting bilateral economic and trade relations. The Taiwan Tax Agreement Act marks a step in US lawmakers’ efforts to call on Washington to address the tax issue with Taipei, after the US Senate reached a similar resolution in March. In the past few months, US Secretary of Commerce Gina Raimondo, US Secretary of the Treasury Janet Yellen and US Trade Representative Katherine Tai (戴琪) have remarked on a potential trade agreement that would bolster the bilateral economic relationship.
Taiwan has inked 34 income tax agreements with countries including Australia, France, Germany, Japan and the UK, as well as 13 transportation income tax agreements with places such as the US and EU nations. The treaties signed are based on the Organisation for Economic Co-operation and Development model, while taking into consideration each country’s political, fiscal, economic and trade situations, the Ministry of Finance said. On the other hand, the US has signed tax agreements with 66 countries, but has no such accord with Taiwan, its eighth-largest trading partner.
For years, Taiwan and the US have failed to achieve a comprehensive and reciprocal tax treaty that includes the reduction or elimination of double taxation on individuals and businesses with operations in each place. Taiwan has been looking to sign a tax treaty with the US for decades, but a major obstacle has been the lack of formal diplomatic relations between the countries, the Ministry of Finance said. This means an agreement would not be regarded as an official treaty, as would normally be the case when concerning Taiwan’s sovereignty, considering China’s claims to the nation.
However, with growing tensions between the US and China since 2018, along with geopolitical developments and the realignment of global supply chains, there is a growing interest in Taiwanese companies investing in the US, as Washington is encouraging domestic manufacturing and job creation with incentives. It is in this context that a US-Taiwan tax agreement would reduce double taxation, and would facilitate more Taiwanese investment in semiconductors and other high-tech goods in the US.
Taiwanese businesses with investments in the US face a corporate income tax rate of 21 percent, and a 30 percent withholding rate on dividends, with the real tax rate climbing as high as 44.7 percent. This has to some extent affected the willingness of Taiwanese firms to invest in the US. If Taipei and Washington can sign a tax agreement, the estimated withholding tax rate could be reduced, and Taiwanese and US businesses can avoid being double-taxed. This would reduce the tax burden and enhance the competitiveness of the investment environment in each place.
A comprehensive tax agreement also includes clauses on exchanges of tax information, dispute resolution and combating tax evasion. For instance, the US government could obtain information on all offshore accounts held by US citizens in Taiwan through the US Foreign Account Tax Compliance Act. If Taipei and Washington sign a tax agreement, Taiwan could also obtain tax information on Taiwanese in the US, as it would have a reciprocity mechanism. Considering the benefits of easing the tax burden and increasing information transparency, a bilateral tax agreement would create a win-win situation for Taiwan and the US.
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